Health – A Market Like No Other

As part of my economics degree and my wide reading of economics books, I have had the idea of the market drilled into my head. The market is continually praised and idealised as the best way to organise resources in society. When then is health the major exception? Why do we not pay for medical treatment the same way we pay for a house or hire a doctor like we hire a plumber? Why is health treated in such a completely way, and why is this differential so widely accepted?

Emotion

The first and most obvious reason is that health is a very emotional issue for most people. Now economics usually derides decisions based on emotion as opposed to cold hard facts and often I agree with this treatment. However, not every issue can be easily quantifiable and it is emotions that after all make us human. Regardless of what economists think, people view health emotionally as well as purely financially, so this must be taken into account. Life is the most important issue to people and the one guaranteed the get the strongest reaction (view debates on war and abortion for example). People feel that life is a universal right that must be valued; hence they are abhorred at the thought of people needlessly dying. Hence while most markets will leave some consumers without certain goods, to leave people to suffer or even die due to lack of money, is a notion that few will stand for.

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Lack Of Information

Health is a very confusing and complicated matter which is why it takes so long to become a doctor. There is an almost limitless possibility of the diseases and illnesses that you can suffer and a likewise almost limitless number of ways the deal with them. Due to this sheer complexity, it is impossible for consumers to be fully informed of their health state and what to do about it. This means that if the market was left unregulated, there would be massive opportunities for abuse. An example is the snake oil salesmen who used to travel around America selling “magical” remedies that would cured people of all their ailments, despite being little more than flavoured water. Of course the people buying it had no idea what were the ingredients of the remedies or their effects. Likewise, nowadays people have no idea what the medicine they are taking contains, and therefore have to rely on trusting the doctor. People cannot make rational decisions unless they have enough information and in the health market they are shooting in the dark.

It is due to lack of information that people cannot shop around like they do in other markets. Most people go to a doctor feeling bad, but unsure of what exactly is wrong with them. It is hard to shop around for the best deal when you don’t know what you are looking for. One doctor may say you have a slight illness and a second say you have a serious illness, how are you to know which one is right? It is impossible to judge the quality of the doctor before you book an appointment nor can you rely on the opinions of past customers (due to the variance of illnesses and the desire for privacy). Likewise even after you see a doctor, it is hard to judge their skill. Did you get better or worse because or despite their treatment? Did the doctor speed up the process or would the illness have gone away by itself? Could another doctor have done the same procedure for a better price?

Risk

One of the crucial differences between health and other markets is the element of risk. In any given year there is a (small) chance that you will be badly injured or become seriously ill. This risk is quite small for most people, but it is still there. Psychologists have found that we are risk averse people and therefore try to avoid such gambles. You may be safe and healthy or you may get unlucky and have to pay a large amount in hospital fees (while you are too sick to earn). This risk scares most people and so they try to protect themselves from it. After all most of us don’t have thousands of dollars sitting around to pay for surgery and so we take precautions against this. This is why hospitals don’t have a menu of options like a restaurant, we simply can’t afford one.

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Economies Of Scale

Health is one of the industries most affected by economies of scale. Hospitals are large and expensive buildings that few private companies can afford to build. The sheer cost of the building as well as the necessary machines and infrastructure means that there will be a very limited number of hospitals (many of whom will be monopolies in their town). As competition is necessary for a market to function, the enormous start up costs prevent the health market from being treated the same as any other. Hospitals also need a large pool of highly skilled doctors into whom a large investment must be made. When most businesses view the world on a quarterly basis it is hard to make a decade worth of investment into one person before a return is made (and with the risk that the person may leave and join another company). The development of new medicines too needs an enormous investment over many years that clashes with private enterprises drive for maximising profits.

Why Prices Don’t Work

People sometimes judge doctors based on the price they charge (reasoning that the most expensive must charge high prices for a reason) but the system is open to abuse (any doctor could just charge a very high price and people would presume they were highly skilled). Research in psychology has documented the famous placebo effect where the mere thought that people are receiving treatment is enough to cure them, even if the treatment is useless. This means that a very poor doctor could run a very successful business with plenty of satisfied customers. Research has also found that when people pay high prices for medicine they claim it worked better than cheap medicine. In this way an overpriced doctor of low skill, could make a fortune and be viewed as high quality.

Crucial for markets and prices to work, there must be freedom of choice. People must be able to accept or reject various options in order to choose the best one. However, choice is luxury in the health market that is not always available. People are told you must take X pills or have Y surgery. Attempts to choose your own cheaper option usually end in disaster. Patients cannot choose between a range of hospitals providing the same service close to them (especially if they have a rare condition or live far from urban areas) and hence prices resemble monopoly more than free competition. There is also the fact that in a medical emergency, no one is going to pause to shop around for the best price, nor does anyone want to be seen as cheap when their loved one’s life is in danger.

 

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So where does that leave us?

So if those are all the reasons that health is different to most other markets, what do we do about them? How do we cope with the emotional view of health, the lack of information, the element of risk and uncertainty and the large economies of scale? There are three main responses, namely insurance, regulation and nationalisation.

Insurance

People respond to the risk and uncertainty inherent in the system by purchasing health insurance. This acknowledges the fact that the probability of any one person falling ill is quite small, and while it can be disastrous for that individual if spread among enough people, the risk is manageable. Hence people pool their money together into a common pot which is paid out to whoever falls ill. Most people are happy to pay a small annual premium rather run the risk of being hit with a massive bill. Insurance is by its nature a collectivist notion designed to spread the risk and ensure that the lucky healthy support the unlucky sick. This is why it is funny to see the vehemence in which insurance is defended in America by conservatives despite it being the opposite of individuals freely choosing the best option in a free market (which is how conservatives usually view the market). The irony is that even private health is socialized medicine.

Health insurance is based on economies of scale with the more people contributing money, the more reliable (and cheaper) the system is. This is why governments often run health insurance schemes which are subsidised to ensure that everyone can afford them. Private insurance companies are always in danger of going bankrupt as their membership ages. Older people require more treatment and have less money to pay. This often forces insurance companies to raise their premiums which drive away younger healthy people, forcing the companies to raise their premiums even more. The paradox of insurance is that company’s want the people who need insurance the least while try to get rid of the people who need it the most. This is why governments often bring in a form of mandatory insurance so that the young support the old and economies of scale are fully maximised (plus money is saved on administration and advertising costs).

Regulation

In response to the lack of information that consumers suffer from, the government regulates the health market. The most obvious and necessary part of this is to prevent fraud and protect the victims. So all medicines must first be tested on their claims and examined for risk to health before they are released on the market. The government adds protections to prevent unscrupulous doctors from exploiting the information gap between them and them patients. In fact governments go so far to protect against emotionally manipulative claims that in some countries doctors cannot advertise anymore than the most basic information (their name and address) to prevent against unsubstantiated claims. Dying people are desperate to believe in a cure and are thus prime targets for scams.

As choosing a doctor is such an uncertain business, the government imposes certain regulations to ensure a basic standard is met. So while you may not know the exact level of skill that your doctor posses, you at least know that she has been properly trained, passed rigorous tests and therefore (probably) won’t kill you (or at least won’t get away with it). By standardising both the training of doctors and the treatment they provide, the risk and uncertainty is minimised, as is the dangers from the lack of information.

Nationalisation

Some (European) governments respond to the above problems by running hospitals themselves (the NHS in Britain is a good example).  This is done to fully benefit from economies of scale from having one hospital in every geographical area and protecting against private monopolies (which never end well). It is usually only the government who can afford the large expense of building a hospital, training enough doctors and conducting research (even in America these activities are heavily subsidised). Having one universal system hugely simplifies bureaucratic procedures and cuts down on administration and advertising costs. It carries all the benefits of an insurance system but with less administration and the largest possible pool of contributors. Consumer’s lack of information is less damaging in a system where everyone is receiving the same treatment and there is little room for exploitative profiteering. As the price system does not work, it is replaced with a general fund supported by taxation which is fairer and easier to manage.

Universal state healthcare has a strong emotional appeal. Proponents use the slogan “Health is a right, not a privilege” and believe that all people are equal and should therefore receive equal treatment. It is seen as unfair that rich people should have premium healthcare treatment for even minor issues, while the poor are forced to sleep on trolleys in the corridors of overcrowded hospitals. It is not socially acceptable for rich people to skip hospitals queues just because they have more money even though they do not need the procedure as badly as someone who has less money. The inequality of having a two-tier system where the rich receive the best treatment and live much longer, while the poor receive inadequate treatment and suffer more, is derided as unfair (especially as so much of wealth is dependent on the luck of birth).

Scenes like this where patients are forced to wait on trolleys in hallways because they cannot afford a private room are outrgeous
Scenes like this where patients are forced to wait on trolleys in hallways because they cannot afford a private room are considered outrageous

Conclusion

So that is a broad (and more comprehensive that I had initially intended) view and explanation of healthcare and why it is the way it is. It is widely accepted by all health economists (bar the extreme libertarians) that health is a market unlike others and cannot be treated the same way. Consumers choosing among competing firms may work well for other markets, but due to emotion, lack of information, economies of scale and risk, health must be treated differently. This is why the government is far more involved in health than almost any other market and why even private enterprises mimic collectivist actions.

20 thoughts on “Health – A Market Like No Other”

  1. Interestingly, the Swiss have a private system, heavily regulated. They create risk pools to limit the risk of any one company. They have government oversight of care, you are only allowed to use proven methods, and a cap is set on insurance company profits that is quite low compared to this country’s (the U.S.). And they have 8000 companies participating! The reason is that health insurance has always been a high volume, low profit business until just lately. Having to set aside 20% of premium dollars for overhead and profit which is the law here now, just to shuffle paper is outrageous. Having the government managing risk for you (to some extent) makes health insurance a little like a casino: guaranteed small profits if you aren’t a total fool.

    Keep up the good work, young man; well done!

  2. Hello. Writing from the archon mind controlled patriarchal mormon center of Salt Lake City Utah. (also center for NSA..yikes). Series of medical mistakes, which I cannot file suit on because of two yr limintation, by the male controlled medical community; who will not testify against one another or admit to mistakes… have left me dis-abled. Mistakes brought to light, could bring knowledge.
    Doctors are like Bankers. They have set up the system to get away with murder…
    Robert…have you read the Nag Hammadi? Those who control our herstory control. “He who controls the present controls the past. He who control the past control the future…. the past was rewritten. The rewriting was forgotten. The lie became the truth.” George Orwell, 1984
    Have you read Virus of the Mind? Meme Science, by R. Brodie.
    “You never change things by fighting the existing reality. To change something, create a new model that makes the old model obsolete.” Buckminster Fuller.
    Will the real reality please stand up?
    Thanks. Susan M.K

  3. My first time visiting this blog in a while. Lots of work continues to be carried out, which is great. I’m afraid I’m going to have to expose some familiar fallacies.

    1) If everybody wants to prevent others from needlessly dying, then we know that they will act to prevent that from happening even if there are no government policies on the subject. It remains to be proven that charity is inferior to government action. This is related to the state-worshipping principle which holds that if you want something to be done, it is necessary for you to support the government doing it. The way things work now, it seems as if people vote for socialist healthcare so that they don’t have to feel guilty about not wanting to make a serious effort to help the poor. Since they perhaps don’t actually care about the poor as much as they pretend, they continue to vote for socialist healthcare even though it continues to not help the poor.

    2) Lack of information. Another state-worshipping fallacy at play here, namely that people are too stupid to be able to choose their own doctors, but they are smart enough to be able to responsibly choose a government which will impose medical regulations and standards upon them.

    The fact is that the market is self-regulating, and people will voluntarily choose to obey those rules and standards which assist in gaining the trust of consumers. There is simply no need for a monopoly of medical standards to be imposed on us. Those standards boards which succeed in proving the integrity of their qualifications to consumers will continue to be relied upon. Private standards, since they do not have the force of legislation backing them up and hence rely only on their ability to prove their worth, are likely to have far greater integrity than the government standards. See http://www.iso.org/ to see examples of what private standards look like.

    In general, market participants bend over backwards to demonstrate that they offer a better service than their competitors. Some businesses exist purely to help customers find the best choice out of a range of options (e.g. comparethemarket.com). Without the ability of customers to actually make a choice, however, there is little incentive for the government-chosen monopoly provider to do anything to improve their services or cut costs. We don’t really know what possibilities might exist now in healthcare markets for services to be improved, prices to be lowered, and consumer choice to be expanded, because consumers are basically slaves to the government monopolies.

    3) “Hospitals are large and expensive buildings that few private companies can afford to build.” I’m saddened to say that there is more state-worshipping blindness here. Governments don’t have any resources at all beyond those which they extort and steal from others. Perhaps if they didn’t use up 40-50% of the economy every year, the private sector would be strong enough to build the number of hospitals which you think are required?

    Your complaints about the lack of competition between hospitals doesn’t work because you are happy to impose a government monopoly where there will be no competition at all. Again, this is the state-worshipping reflex to demand that the government controls something, merely because the world will be imperfect if the government doesn’t control it (never mind that there is no reason to think that the government offers any improvement at all). It’s the exact same as the person who says that science can’t explain everything, and therefore it is logically defensible to believe in God.

    “When most businesses view the world on a quarterly basis it is hard to make a decade worth of investment into one person before a return is made.” Do you really think that you have the knowledge of business to make this sort of criticism? In any case, this is just more state-worshipping again, because there is no evidence that the state is more committed to long-term thinking than anybody else. Given that politicians are motivated to think in terms of electoral cycles, and don’t have any reason to worry about the devastation which their wasteful borrow-and-spend mentalities cause to a country’s long-term wellbeing, I’d gladly take anybody in the market ahead of them. It is actually government’s policies of taxation, unpredictable inflation and ever-changing regulation which makes long-term planning in the private sector so difficult, if not impossible.

    4) Doctors can’t just charge whatever they want. Again, private standards would exist without the government. Your next points are just variations on the same theme of saying that choices are difficult sometimes, with the unproven implication that choice should therefore be taken away. This is the mentality of a slavemaster.

    5) To describe insurance as “collectivist” is to sow the seeds of confusion. Market-based insurance is the outcome of voluntary cooperation, like every other market-based relationship. “Collectivism” usually refers to the government threat of violence to force people to hand over their resources. A private insurance company will not kidnap and imprison you if you refuse to have a relationship with it, but that is exactly what the government will do.

    Older people are usually richer than younger people, so it doesn’t make sense to say that they are less able to afford health insurance. In any case, it is an inescapable fact of life that healthcare needs increase as we age and that if we do not wish to be a burden on others, we must therefore make provisions for our future healthcare needs. There are different health insurance options which could potentially take care of these issues, but it is obvious that none of them will get around the fact that older people cost more than younger people. Insurance companies understand this and plan for it. Again, it is unproven that there is any need for governments to get involved. There are more honest ways of providing welfare for the elderly (who often don’t need it), than by regulating the health insurance market so that it is useless for younger people.

    6) Given our first-hand knowledge of how nationalised systems like the NHS and the HSE actually work, it’s remarkable that you don’t attach any scepticism at all to your bold claim that a unversal system “simplifies bureaucratic procedures and cuts down on administration and advertising costs”. Besides the lack of any logical reason to think that this would be true (given the lack of incentives for state-subsidised bureaucrats to be efficient), the socialised healthcare systems are widely acknowledged, even partially among those who lean to the left and those who work inside them, as monuments of waste and inefficiency.

    A socialised healthcare system carries none of the benefits of an insurance system, since the whole point of insurance from an economic point of view is to manage and to transfer risk. A nationalised healthcare system simply dumps all risks onto the taxpayer. The consumers have no alternatives and are incentivised to take whatever they can from the system, regardless of the cost to the taxpayer, and the taxpayer pays for everything. Healthcare worker compensation becomes a political tool instead of an economic signal. Instead of a system of co-operation, entrepreneurialism, innovation, integrity, trust, flexibility, and progress, we get a system of slavery, stagnation and ever-rising costs.

    You’re right that this is an emotional issue. Because of the strong emotions attached to it, most people are unable to think rationally about it and understand what would be in their and in the general interest. State-worshipping fallacies abound, and in particular the notion that the government is capable of distributing equitably a large supply of high-quality healthcare. It’s not understood that if high-net-worth individuals pay for something in the marketplace, they are actually contributing to the demand which makes that thing exist in the first place. Without their demand, there would have been no incentive for the supplier to produce it. And taxing these high-net-worth individuals to help the government provide the same high-quality services to the general public won’t work, since the essential link between freely expressed consumer demand and supply has been broken, to be replaced by whatever seems politically useful.

    1. “It remains to be proven that charity is inferior to government action.”
      So hospitals would have to rely on donations and charity buckets? Does that not strike as an incredibly unstable method of operating as donations vary (sometimes by a lot) year to year, but hospitals cannot cope with such fluctuations (their reliance on long term investment and the fact you can’t be laying off and rehiring doctors every year)

      Without a doubt far less money would be given if hospitals had to rely on donations alone (charging for services is also unworkable)

      You seem to distrust people’s voting intentions but trust their spending intentions. What is to stop people spending out of guilt if they will vote out of it?

      “2) Lack of information. Another state-worshipping fallacy at play here, namely that people are too stupid to be able to choose their own doctors, but they are smart enough to be able to responsibly choose a government which will impose medical regulations and standards upon them.”
      That is misrepresentation so gross that it must be deliberate. I never blamed anything on stupidity and only someone who didn’t read my post would think so. What I said was that people lack information to diagnose themselves. In essence I am pointing out what I considered the obvious fact that not everyone is a doctor. To claim that saying someone has less medical knowledge than a doctor is the same as calling them stupid is absurd.

      It is (or so I thought) an obvious point that people agree to pay before they see the doctor and regardless of the service provided. Hence they don’t know what they’ll receive before they agree to pay. In the waiting room the patients don’t know if the doctor will tell they are seriously ill or whether it is only minor. Hence there is a lack of information but not stupidity.

      Also if the doctor diagnosis me, there is little way of knowing whether or not this diagnosis is correct (due to lack of medical experience on my part not stupidity). I could get a second opinion but few people go to this expense or hassle. Instead people must trust the doctor which can lead to agent-actor problems

      “The fact is that the market is self-regulating, and people will voluntarily choose to obey those rules and standards which assist in gaining the trust of consumers.”
      Wasn’t the exact same argument made for the financial sector? Wasn’t it supposed to be self-regulating and protected by private standards?

      The problem with private regulators is that they are paid by the companies they are supposed to regulate so they have an incentive to say whatever will keep their clients. Why bite the hand that feeds you?

      Likewise there is little way for consumers to check the job of private regulators as we are all too busy with our lives and plus without a medical degree we lack knowledge. There is also a cause and effect problem inherent in medicine. Lets say a patient dies after treatment from a doctor. How do we know if that is the doctors fault? What if the patient was going to die anyway? What if the doctor delayed the death? What if the doctor was just unlucky? How can we tell? How does the average consumer tell the difference between an unfortunate doctor and a negligent one?

      There is also the psychological point I touched on that the price is not always a reliable guide.

      “Governments don’t have any resources at all beyond those which they extort and steal from others.”
      Do you realise that if you replace the word government with big business, you sound just like a Communist?

      “Perhaps if they didn’t use up 40-50% of the economy every year, the private sector would be strong enough to build the number of hospitals which you think are required?”
      Probably still wouldn’t as it would require a major corporation to build hospitals, which may be common in America but not in Ireland. Hence if Ireland had no government healthcare there would be a lacking of hospitals and a loss of economies of scale.

      “Your complaints about the lack of competition between hospitals doesn’t work because you are happy to impose a government monopoly where there will be no competition at all.”
      My point is that there would be some form of monopoly even without government intervention, therefore a government monopoly is preferable to a private one.

      “Given that politicians are motivated to think in terms of electoral cycles,”
      Even if they are as short termed viewed as you suggest, every 4 years is still a tenfold improvement on quarterly vision.

      “It is actually government’s policies of taxation, unpredictable inflation and ever-changing regulation which makes long-term planning in the private sector so difficult, if not impossible.”
      Actually no that is caused by competition. If a company chooses long term investment, then its rivals can undercut it in the short run. Likewise if any individual in a company aims for the long run, their rivals can undercut them with short term profit (financial crisis is a good example)

      Also inflation has been very stable the last few years, few new taxes have been introduced and no major new regulations (I am speaking of Ireland as I can’t remember where/if you said you are from)

      “This is the mentality of a slavemaster.”
      Can we please drop these silly exaggerations?

      “To describe insurance as “collectivist” is to sow the seeds of confusion.”
      I wasn’t sure what term to use to describe group action as opposed to individual action. I debated between collective and communal, but found they were pretty much the same.

      “A private insurance company will not kidnap and imprison you if you refuse to have a relationship with it,”
      Well if you don’t pay what you owe them they will, but that’s another issue.

      “Older people are usually richer than younger people,”
      Not if they are retired. In fact poverty among the retired was traditionally very high, at least until the introduction of public pensions

      “if we do not wish to be a burden on others, we must therefore make provisions for our future healthcare needs. . . . Insurance companies understand this and plan for it.”
      One of the main problems I have with Libertarianism is that it focuses on how things should be rather than how they actually are. People should save for their retirement, but this is an extremely difficult thing to do. It is incredibly difficult for people to plan for events decades in the future, so it is not realistic to expect this will happen easily and painlessly. Likewise to expect that CEOs will voluntarily forfeit profits so that their successor decades in the future will profit, is naive in the highest.

      “Given our first-hand knowledge of how nationalised systems like the NHS and the HSE actually work,”
      Calling the HSE a nationalised system is pushing the term to breaking point. It is a semi-private system with enormous inequalities and massive underfunding. I don’t suppose you consider Mary Harney a socialist? I don’t have first hand experience of the NHS, but I do know that the majority of British people like it, so much so that the Conservatives dare not criticise it.

      “(given the lack of incentives for state-subsidised bureaucrats to be efficient)”
      Hate to break it to you but private systems too have bureaucrats (though they are usually called administrators) who also have no share in profits and therefore are as unincentivised.

      “the whole point of insurance from an economic point of view is to manage and to transfer risk.”
      Exactly and the wider the base the more manageable the risk is. Hence a universal system is the most stable and cost effective as it includes the highest number of healthy contributors.

      Welcome back. I missed our ridiculously long debates, long may they continue.

      1. “So hospitals would have to rely on donations and charity buckets? Does that not strike as an incredibly unstable method of operating as donations vary (sometimes by a lot) year to year, but hospitals cannot cope with such fluctuations (their reliance on long term investment and the fact you can’t be laying off and rehiring doctors every year)”

        You are a smart fellow. I don’t think I’m going to respond to everything since you could probably answer most things for yourself anyway if you really wanted to.

        In this case, you might have noticed that most major charities ask for monthly donations: problem solved.

        “What I said was that people lack information to diagnose themselves. In essence I am pointing out what I considered the obvious fact that not everyone is a doctor.”

        You said “This means that a very poor doctor could run a very successful business with plenty of satisfied customers.” It’s a stronger claim than that they can’t diagnose themselves; it’s the claim that they don’t know how to choose a doctor. But you also advocate a system which relies on them choosing a government. My point stands.

        “Governments don’t have any resources at all beyond those which they extort and steal from others.”
        “Do you realise that if you replace the word government with big business, you sound just like a Communist?”

        Replacing the word with “big business” would turn it into an absurdity,

        Your arguments appear to have suffered a decline in quality…. I think I want a refund!

        “My point is that there would be some form of monopoly even without government intervention, therefore a government monopoly is preferable to a private one.”

        It’s the same old “the market’s not perfect, therefore the government”.

        “Given that politicians are motivated to think in terms of electoral cycles,”
        “Even if they are as short termed viewed as you suggest, every 4 years is still a tenfold improvement on quarterly vision.”

        Do you realise that most companies are privately owned and don’t produce quarterly results? And do you realise that most investors have much longer timeframes than quarters?

        “It is actually government’s policies of taxation, unpredictable inflation and ever-changing regulation which makes long-term planning in the private sector so difficult, if not impossible.”
        “Actually no that is caused by competition. If a company chooses long term investment, then its rivals can undercut it in the short run. Likewise if any individual in a company aims for the long run, their rivals can undercut them with short term profit (financial crisis is a good example)”

        Which would be great for consumers in the short-run and, if the long-term plans have been soundly financed, will not kill the long-term business plan either.

        I definitely want a refund!

        1. “In this case, you might have noticed that most major charities ask for monthly donations: problem solved.”
          Please tell me you are joking? Surely it is exceedingly obvious that private charities would still raise money but this would be far less than under the government. They would also have to greatly increase their advertising budgets leaving less money for the actual cause. There are diminishing returns to sympathy and after a while people will get tired and stop listening to the latest charity case. Furthermore the most photogenic charities will get the most money. So sick puppies will have more money than they need while rare or less emotionally heart wrenching charities will have little money.

          “But you also advocate a system which relies on them choosing a government. My point stands.”
          I don’t think you understood my point. The government can establish recognised standards that doctors must meet and be judged on. I’m not suggesting that the local politician must go around picking doctors for their constituents. For someone who constantly complains about my lack of understanding of Austrian economics, you don’t really get Keynesian economics.

          “It’s the same old “the market’s not perfect, therefore the government”.”
          I know you probably rolled your eyes as you wrote this, but that is my point. The market doesn’t work in this case, so we must rely on the government. Your argument is in essence the reverse, the government doesn’t work, therefore market.

          “Do you realise that most companies are privately owned and don’t produce quarterly results? And do you realise that most investors have much longer timeframes than quarters?”
          Your right, the private sector never displays horrendous short term thinking with disasterous economic results. Oh wait they do and it lead to the 2008 crash.

          “Which would be great for consumers in the short-run and, if the long-term plans have been soundly financed, will not kill the long-term business plan either.”
          For someone who harps on about the need for investment as oppossed to consumption, its strange to see you so casually defend short term profits at the expense of investment. My point is that this strategy has no long term plan.

          1. This is pointless now. I don’t feel like walking you through every single point and will hope that you can think about things for yourself soon.

            1. This comment is unnecessary and undeserved. Rather than comment on Robert’s ability to “think about things for yourself soon,” you should take your own medicine. From my perspective, Robert has been very patient with you. He clearly understands your points and arguments, but, you clearly don’t understand his.

              All of the empirical evidence about behavior of buyers and sellers in the market for medical services supports Robert’s point of view. There are no efficient markets as depicted in the fantasy tail told by classical and neoclassical economists. The necessary conditions aren’t satisfied de facto and can’t be satisfied in principle. Thus, markets don’t respond as price takers to consumer preferences. In fact, sellers have all the market power for many reasons, including, asymmetric information (for example, do you know your doctor’s success/failure rate or the difficulty of his case load?) and local market monopolies or oligopolies/cartels that are supported by governments (plans to open a hospital de novo or expand an existing hospital must be submitted to local and state authorities to get a certificate of need, i. e., the state/provincial government has to determine that the service area needs more hospital-provided medical services. This requirement is a huge barrier to entry and costs existing hospitals next to nothing, especially if they are non-profit or affiliated with a religion, or both, and don’t pay taxes). Note that the structure of incentives for hospital and physician behavior are all wrong and 180 degrees (pi radians) from the structure you assume in your argument. Hospitals have powerful incentives to lobby for higher prices and exclusion of competition than to improve service effectiveness and efficiency. In general, at the level of the firm, companies have powerful incentives to exclude new entrants from their markets and limit competition in order to maintain higher prices and greater profits. We find that companies that the economic benefit of the leverage they obtain through lobbying and co-opting their regulators and elected officials frequently exceeds the economic benefit from investments in capital or procedural improvements. Most large companies pursue both strategies as a risk-reduction tool (diversification of their investment portfolio).

              In particular, the fact that the doctors and hospitals have a lot of crucial information that they don’t or can’t (HIPA regulations) share with consumers reduces consumers’ abilities to influence the quality and prices of the services they buy. Add to that the fact that, even if you are doctor, simply because you chose a different education, occupation and life path, you don’t know as much about your condition as the specialist doctor who treats you. There’s more to say on this matter, but, I’ve said enough.

              If you (GM) actually looked at any studies (you know, that nagging problem you have with empirical evidence) of the differences between universal, single-payer systems and market-driven systems you might get a clue. In particular, a very large and widely cited study of the health care system in Allen County, Texas (the southern-most and among the poorest counties in Texas or the U. S.) confirms (but does not “prove” in the mathematical sense) the hypothesis that “market-driven” health care is less efficient, less effective and more expensive than single-payer systems. Allen County government takes a “laissez faire” approach to regulating hospitals and physician practices, preferring to let “the market” work with less interference than in other counties. Hospital and physician services prices in Allen County average about 50% higher than in neighboring counties and than the national averages (per service basis) with prices ranging from about 20% of national averages to greater than 300% of national averages. Such discrepancies wouldn’t exist in an efficient market. Neither would they exist locally in a local oligopoly or cartel, where prices would be set by collusion or signalling.

              Ask yourself, “Which market is competitive in the sense of textbook economics?” Name one; I dare you. Get out of your armchair fantasy ideology and look at some empirical evidence and at the actual structure of markets. Also, take note that there are no (repeat, “no”) reputable economists who share your view.

              I’ve adopted this tone because of your patronizing remarks to Robert. He is sincere and thoughtful and quite capable of thinking many things through on his own. He and I disagree from time to time and rarely agree entirely, but, I don’t doubt his sincerity or the quality of his intellect.

              1. One comment that you made in your post, GM, is telling. By characterizing Robert’s position as assuming that consumer are “too stupid to know what’s best for them” you conflate stupidity with ignorance. First, both factors influence consumer behavior, but, they influence them differently and to varying degrees depending on their profundity. Second, neither condition is deplorable. Ignorance is unavoidable (surely we don’t and can’t know “everything”!) and stupidity is distributed among the population by genetic accidents of birth according to a normal distribution. Another factor to consider is that we (you, me, Robert, “science”, “religion”) don’t understand “stupidity” or “intelligence”. We test people for what we think it is (moment-to-moment folk tests such as articulation, subject matter knowledge, appearance, attitude/confidence, etc. or scientifically with such tests as the WAIS or the WISC-R or the Stanford-Benet Intelligence Test or…) This fact of normal distribution means that half the population is of, at least, average intelligence and half the population is of, at most average intelligence. Depending on where you demarcate stupidity on this distribution, the fact that some people are stupid is unavoidable (unless you draw no such line, in which case a table is not stupid, even with its 0 IQ), although unfortunate. I intend “unfortunate” to be understood literally as “unlucky”. We, each of us, is smart, average or stupid by accident of birth.

                By offering the conjecture that consumers are influenced unduly by advertising, false statements (see the tobacco and financial services for the lengthy litany of lies they’ve propagated) and peer behavior is hardly offensive, ignorant, stupid, unreasonable or fattening. Robert has been clear about his assumptions. You have not. You have not been honest with yourself about your assumptions. Scrutinize them, please.

      2. As another neat little example of “the market’s not perfect, therefore the government”, here’s another piece of information in response to your point regarding the instability of charitable donations, in the form of a chart:

        Just another example of how you are biased to find errors in the market and then automatically demand government intervention, without asking any hard questions about whether there is really an improvement.

        The reason you assumed that government would provide funding stability is because of your socialist and general pro-government tendencies, not because of any empiricism.

          1. Hint: collapsing government revenues = instable source of funding for healthcare => lazy assertion regarding superiority of government to the market wrt healthcare funding stability.

            1. GM:
              Hint: shrinking GDP => decreasing government revenues => shrinking personal income => collapsing charitable giving => unstable funding source for health care => jumping to conclusions about the relative stability of tax revenues and charitable donations.

              You are too clever – by half, my friend. And too patronizing – by a whole.

              If you want an example of an inefficient, ineffective and unfair health care system, look at the private market in the U.S. If want examples of efficient, effective and fair systems, look at the national health systems of Japan, Taiwan, Canada, the U. K., France, The Netherlands, Luxembourg, Germany and Switzerland, among others.

        1. Again to GM:

          A graph of Ireland’s GDP for a period of time says nothing, by itself or in any theoretical setting, about the efficacy of charity as a foundation for hospital finances. This appeal to empiricism is baloney. I can supply you with any number of graphs, charts or data tables that illustrate the long-term expansion or shrinkage of every developed economy. To begin to understand the comparison you suggest, you must, at the very least compile data on the volume, volatility and direction of country GDP with the volume, volatility and direction of charitable giving on a country-by-country basis. Then, look for patterns in the data (graphs are a great tool for this activity). When you’ve identified apparent patterns in the data, you must, next, test these patterns for their significance individually and, then, test their correlations for significance. You must also be wary of Simpson’s Paradox and of the probability that high correlations should be suspect (stocks rise together; the Sun and I rise each morning; the moon rises and I sleep each evening, except once each month).

          In a broader sense, the real issue that Robert raised – the comparative stability of commercial profits, charitable giving and tax revenues – is quite different from the volatility and direction of the GDP of Ireland. The underlying logic is different, so, the hypotheses one might generate to explain the data one sees will contain very different information and have very different criteria for what would count as relevant data and investigative outcomes.

          Let me explain. We could evaluate the volatility and direction of Ireland’s GDP simply by calculating the five basic statistics that summarize the quarterly or annual change – mean, median, range, standard deviation and middle-fifty range – in GDP and running a least-squares regression on this data to estimate the direction and rates of change. This simple analysis would enable us to discuss the behavior of GDP with greater precision than simply describing its graph qualitatively. To compare these results with charitable giving in Ireland or with other countries’ GDP or with Ireland’s tax revenues or other countries’ GDP and charitable giving, we would perform the same analysis in each individual case. Then we would aggregate our data and analyze it in toto with the same tests. Next, you would compare each of the sample countries’ statistics with the global statistics for significance of differences between them pairwise and between them and the aggregate. This is called ANOVA (analysis of variance); you might perform a simple hypothesis test of the difference between two means or two standard deviations before comparing variation within the data sets with variation among the data sets (ANOVA). Of course, you would have to account for the fact that data is discrete and there are finitely many data points.

          As you can see, looking at a graph hardly constitutes data analysis and scientific hypothesis testing. We learned, while children, from that great philosophical text, “The Phantom Tollbooth”, that there is no returning to the mainland after jumping to the Isle of Conclusions. Common sense, dumb questions and organized data raise questions that beg for answers. But, deeper analysis leads slowly, but, surely, to more accurate conclusions. While questions beg for answers, be wary of begging the question (assuming your conclusion). When we assume the conclusions of our arguments is not always easy to identify.

  4. Nice post. I’d like to add a couple of ideas and contest a couple of Robert’s (in reverse order). First, regarding “economies of scale”, hospitals are service businesses and, as such, don’t benefit from the ability to add rooms or services (ambulatory, birthing centers, surgical theaters/rooms, etc.) or to automate jobs in the way that a manufacturing facility benefits from expanding a facility or automating a process or job. Neither do they benefit much from consolidating accounting, administration and compliance; the rules and data management requirements for all three functions are extremely complex and adding patients and services adds comparatively more such work (as a step function with small increments that smooths easily to a regression line, over a lengthy expansion period). For example, building a surgical wing with, say, eight new operating rooms, requires building a support infrastructure with prep rooms, post-op rooms, adding nurses, staff doctors, and such “overhead” as maintenance people and equipment, compliance workers and managers, accountants and managers, and data entry clerks. By adding eight new rooms, the hospital may increase capacity by 24 surgeries/day. assuming capacity utilization, this appears to be good money, but the costs of surgery are high and the margins can be quite thin, especially on a full-cost basis.

    Second, you’ve used “risk” and “uncertainty” as if they are synonymous (or equivalent, at least). In my reading of economics, I find that they are sometimes conflated and sometimes not. Let me distinguish between them. “Risk” refers to the notion of “assigning probabilities to possible outcomes”, whereas, “uncertainty” refers to “the possibility of unpredictable or unpredicted events that impact possible outcomes significantly.” Examples of risky activities are casino games, traffic accidents, traffic fatalities, and surgical outcomes of procedures that have been used successfully many times and considered “standard” or, better, “conventional”. Risk assessment can work in such conventional situations. Examples of uncertain events (note that they are not activities), are shifts in basic technologies, regime change, earthquakes, bad decisions by central banks, revolutions, well, you get the picture. Uncertainty assessment for economic purposes is impossible. The financial evaluation of the outcomes of “decisions under uncertainty” consists of a known suite of tools employed in the “capital budgeting” decision. This nomenclature is misleading. “Decisions under uncertainty” should be rendered as “risky decisions” in that they involve listing possible outcomes and assigning probabilities and expected returns to them in order to achieve an expected value of each outcome and, summarily, to the project (the weighted average of the expected values of the possible outcomes). In the case of surgery, the possible occurrence of an earthquake or power outage during your surgery is an uncertainty (although in someone’s surgery a virtual certainty), but you can estimate with some confidence the probability that you will die from an anesthetist’s error, a doctor’s surgical error or a misdiagnosis and subsequent treatment error. Going to the doctor is like going to the casino in the sense that you could, in principle, estimate the probabilities of possible outcomes. It differs from it in that you know the rules and the probabilities in the casino games, but, you can’t perform this estimate because the medical profession doesn’t share its rules and data with you. As the authors of the book, “The Anti-economics Textbook” (which I read on your recommendation) point out, perfectly competitive markets require that buyers and sellers have exactly the same information about the transacted product or service and the market in which the transaction occurs. Thus, the market for hospital services is not perfectly competitive due to the complexity of its services and the opacity of its data, both of which points you make in your post.

    Third, your commentary on price is incisive, yet, incomplete. In the U. S., prices for medical services are local. The price of an appendectomy in Houston is different from the price of one in Chicago (or Dallas for that matter). Hospital regulations and enforcement differ among the states. Other costs (land, for example) differ as well. Different regulatory structures imply different prices. Prices for a given service differ by who pays for them as well by who regulates the service. Uninsured patients are frequently charged 5-10 times as much as insured patients; prices to Medicare patients are the lowest of all prices. The dimension I add here is that of “market power.” Consumers can’t shop around for alternatives; many consumers must buy services from a single institution (especially when hospitals buy the surrounding medical practices) for several reasons. As hospital systems acquire other hospitals and physicians’ practices, the ratio of sellers to buyers decreases. Finally, even those who can afford to shop around (have the money and the time) don’t have the data to make an informed decision.

    Fourth, barriers to entry are enormous. First, to build a hospital, one must obtain a “certificate of need,” which is awarded by a local commission or board and must be approved by state/provincial commission or board of oversight. This certificate of need says that these commissions or boards agree with the applicant/supplicant that existing hospital-based medical services are inadequate to the needs of the local population. Only then, can you build a new hospital. This process is lengthy, expensive and risky; legislative/governmental consultants are always involved (I worked for one such consultant many years ago). This requirement is equivalent to forming a government-sanctioned cartel or, in some cases, monopoly. As you point out, the cost to build a hospital is enormous and the period is lengthy. These two factors combine to favor entities that are already in the market by increasing the risk of entry to potential competitors (the local guys know the local certification process, and they know and are on favorable terms with the commission members). Add to these risks (not uncertainties), the degree of horizontal and vertical consolidation in these markets (which confer market power on existing competitors) renders the risk of building a new hospital that is “just another hospital” and without some special competitive advantage (say, a federal-funded Veterans Administration hospital or “children’s” hospital), too risky for almost any company.

    One other factor that may be unique to the U. S. is that hospitals owned by tax-exempt religious and educational institutions are tax exempt. This status provides existing university teaching hospitals and hospitals with religious affiliations another distinct competitive advantage. In Florida in the U. S. the Church of Seventh Day Adventists owns, Florida Hospital, the largest hospital chain in central Florida (Orlando-Daytona-Melbourne metro area). The only surviving competitors are the Orange County hospital (Orlando Regional Medical Center) and Bert Fish medical center (which Florida Hospital is in the process of buying). Florida Hospital is buying local medical practices and clinics at an accelerating rate as well.

    There is no question that for the reasons you cite in your post and for the additional reasons I’ve supplied, here, that the market for medical services and products is like no other market. Thus far, the best solution is a national health services (Canada, U. K., Japan, Taiwan, France, Norway and Sweden, I believe). The next best solution seems to be national health insurance (Germany, Switzerland, Finland, Spain). The worst solution is so-called free-market competition. This solution is so bad because it is neither free-market nor competitive.

  5. Thank you for such a detailed reply.

    To the contrary I would argue that hospitals, due to the expense of building them and the equipment necessary have significant economies of scale. I would disagree and say that there are benefits in consolidating administration. In fact the difficulties you mention would be much harder for a small hospital to cope with than a larger one.

    My mistake if I gave the impression that risk and uncertainty are the same as I aware of the damage conflating those two ideas are (particularly in the Financial Crisis). You are right in explaining the difference, as a coin toss has a 50% risk you will lose, whereas the price of oil in five years is uncertain, as it cannot be known.

    (Side note, glad you valued my recommendation and read Economics Anti-Textbook, hope you liked it as much as I did)

    I lack enough information about the American health market to properly discuss it without research (its quite different from the Irish one). However, your point on market power is correct and should be taken into consideration.

    The barriers to entry are indeed enormous and renders the health market an oligopoly. The enormous difficulties in merely setting up an hospital dissuades most companies and as a result few businesses go through the hassle and risk even if they would have made a profit.

    I completely agree with your conclusion that a universal national health system is the best way. Ireland is roughly a national insurance system (in that while there are private insurance companies, the state insurance company is bigger). There has been talk about moving towards an universal system and I hope the politicians fulfill their promise (as unlikely as it is)

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