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?
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.
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?
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.
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.
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.
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).
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.
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).
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.