
Uncertainty and the Welfare Economics of Medical Care (1963) - mgdo
http://fermatslibrary.com/s/uncertainty-and-the-welfare-economics-of-medical-care
======
woodandsteel
Libertarians and conservatives believe that health care is or could be a well-
functioning market, like buying a refrigerator.

But there are many basic differences. You know when you need a refrigerator,
but often are not sure if you need a given test or health treatment.
Refrigerators are bought one at a time, but tests and treatments are often
whole bundles. Refrigerators of a given brand and model are basically
identical, not so health treatments. If you get a bad refrigerator you can
exchange it under warranty, a bad health treatment can cause you permanent
damage.

You can get reliable information on refrigerators from Consumers Reports, not
nearly so much for health care. You can generally get along without a
refrigerator for a while, taking time to get information before making a
decision which one to buy, often that is not the case with important health
care.

There are many sellers of refrigerators with public prices and lots of price
competition, not the case for health care. The prices for refrigerators are
standard around the country, not at all the case for health care. The majority
of health expenses are in the last few years of life, when people are in poor
mental shape to make decisions. You can buy a refrigerator at a reasonable
price without insurance, but not individual health treatments.

In these and i would guess other ways, a purchaser of health care services is,
by the very nature of things, in a far weaker position than a buyer in a
normal market. And of course, the health care providers like it that way.

Can anyone suggest any other basic differences?

~~~
danieltillett
I was under the impression that under the current US medical system that it is
impossible to get a pre-purchase price on a lot of medical care. If you are
going into hospital for a knee replacement you can't get anyone to tell you
the total bill in advance.

One major difference is the actual price paid for a medical service by an
insurance company is much lower (often 10%) of the cash price.

Another is that the you don't know what the insurance company will cover until
months afterwards. None of these apply to normal consumer items where markets
work.

The most efficient USA healthcare system would probably be to just expand the
VA system to cover everyone and put a tax to pay for it.

~~~
ashark
> One major difference is the actual price paid for a medical service by an
> insurance company is much lower (often 10%) of the cash price.

It is often much lower, but it also varies by insurance provider and _the
specific plan you are on_ , which can itself (AFAIK) vary depending on _when
you joined said plan_ , your group, _et c_.

The hospital can't even guess at a price until they figure out which procedure
codes they're going to bill, which itself isn't always clear, then to know
what you'll actually pay they have to apply the effects of your _specific_
insurance. It's often quite difficult to get them to do this. Often it will
end up being wrong anyway.

Bonus: you can't be _really really_ sure your insurance will pay their part
until the bill goes out and they do. Sometimes they deny claims. They _may_ be
wrong to do so (it's sometimes hard to tell) but even if they are you're in
for 100+ hours of work (much of it waiting on hold) to get them to do what
they were supposed to.

~~~
danieltillett
All I can say is I am glad to be Australian. We might have some nasty
wildlife, but at least I know that if I am bitten or stung I am not going to
end up bankrupt.

------
krapht
This is a little long to commit to close reading. Summary, anyone?

~~~
guelo
It's a classic in economics that explains why health care doesn't fit the free
market ideal. The basic problem is that, unless you know as much about
medicine as your doctor, you can't evaluate the quality of advice you're
getting.

It's heavy reading, I don't know why it's getting upvoted here.

~~~
ErikVandeWater
This is a bad argument.

Does anyone know as much as the contractor who made their house? Then why
don't houses crumble, long after they are built?

A free market would have various accrediting bodies, and doctors would
advertise the quality of their accreditation as evidence of their skills and
qualification.

~~~
jfoutz
It doesn't work out that way though. Asymmetric information inevitably leads
to market collapse [1]. The only reason healthcare "works" is because we're
not rational actors. I mean those more as mocking quotes rather than scare
quotes. Perhaps it's more accurate to say, the only reason healthcare works is
because many actors are not motivated solely by money. Which, a decent MBA
would consider a sucker.

[1]
[https://en.wikipedia.org/wiki/The_Market_for_Lemons](https://en.wikipedia.org/wiki/The_Market_for_Lemons)

~~~
witty_username
Sure, but forcing healthcare on everyone makes the market failure a government
failure--if "failure" means someone paying much more for insurance than it
actually costs for that person.

~~~
jfoutz
There is a pretty easy calculation, but the numbers are hard to come by.

People pay about $3000 for health care in the us, per year. people pay $750
for medicare. To be fair, half is by the employee, half is by the employer, so
let's say $1500, because theoretically you would make more if the employer
didn't have to pay that tax. On the flip side, high paying jobs, the employer
pays the lion's share of health insurance premiums - but let's just ignore
that.

Old people (medicare patients) get sick all the time. Heart attacks, cancer,
whatever. Young people rarely get sick, but there are more young people -
perhaps 15,000,000 70-74 year olds, and perhaps 21,000,000 20-24 year olds. If
the cost of medicare for everyone is less than $3500, it's cheaper to just
cover everyone at some basic level via medicare.

Very few 22 year olds get cancer. It's expensive. lots of 72 year olds get
cancer. That is also expensive. Medicare pays for the expensive part of
people's lives (the end of their lives). I'm pretty sure if the medicare tax
rate doubled, 3% to 6%, $1500 to $3000 it'd still be cheaper than what we're
doing now.

I dunno. It's late. It's a complicated topic. I have no problems with well off
people paying a whole lot to get special care, extra insurance, or whatever. I
think it would be a good thing for people who get in car accidents, have heart
attacks, or get cancer to know they're not financially ruined.

It's nothing more than a linear programming problem. Right now people pay X.
If everyone was taxed more they would pay Y. If Y < X, we should do Y. If not,
what we have now is the best we can do. So be it.

~~~
witty_username
> If Y < X, we should do Y.

This depends on whether you're fine with some people subsidizing other people.
The average cost by forcing everyone to get insured is less because you're
forcing some people to buy plans for whom it's not worth it. See adverse
selection.

~~~
jfoutz
> some people subsidizing other people.

This is called insurance. Historically some deeply religious groups were
opposed to insurance, because they felt it was gambling.

> he average cost by forcing everyone to get insured is less because you're
> forcing some people to buy plans for whom it's not worth it.

It's really a timeframe question. A 20 year old, generally, needs less care
than a 50 year old, who needs less care than an 80 year old. one approach is
to provide lifetime care, and hope that technology improves (as it has for all
of human history) and assert that care today for an 80 year old will be less
expensive in 10 years than it is today.

Now, of course, actual payments for health care is more expensive year to
year, because, as you say, adverse selection.

In any case, as you point out adverse selection (the problem of information
asymmetry) means the payer must be as knowledgeable as the payee. An obvious
solution (but maybe not the best solution) is something like medicare.

I'm not sure i understand what you're advocating. Perhaps you mean each person
should set aside some portion of their cash for whatever expenses they might
have, and the odd 20 year old with leukemia should take on a few hundred
thousand dollars of debt. of course if you're unlucky enough to have one of
those 10% survival variations, the cost will of course be multiplied out by
10.

The average american only makes about $2,000,000 over their lives, and they
have to eat and have a place to live and stuff, and only half will beat the
average, what sort of return could an actual care provider expect? perhaps
$200,000? So your model becomes pretty clear, if cost to treat @ 18 >
$200,000, the person shouldn't be treated. That number will change with
education, but of course decline with age.

Seems like not a good solution, but i see where you're coming from.

~~~
witty_username
> This is called insurance. Historically some deeply religious groups were
> opposed to insurance, because they felt it was gambling.

No. I'm saying it's a subsidy NOT because randomly you roll the dice of risk
and you get lucky; but because the expected value or utility of health risks
is less than the cost of insurance (for example, you wouldn't buy health
insurance for 1 billion dollars a month).

I'm not saying it's a subsidy because some people don't end up "using" their
insurance plan; I'm saying if you repeat the scenario a billion time healthy
people will be on average worse off so it's a subsidy. They wouldn't take the
insurance unless government forces them.

> I'm not sure i understand what you're advocating. Perhaps you mean each
> person should set aside some portion of their cash for whatever expenses
> they might have, and the odd 20 year old with leukemia should take on a few
> hundred thousand dollars of debt. of course if you're unlucky enough to have
> one of those 10% survival variations, the cost will of course be multiplied
> out by 10.

I didn't advocate anything; I'm just saying the issue is a normative question;
it doesn't have an absolutely objective answer.

Sidenote: maybe the 20 year old should be in debt. If we want to save as many
lives as possible, it's cheaper to put money into clean water, stopping open
defecation, vaccines, etc (depends on whether you value someone outside your
country as much as someone inside).

The leukemia case is convenient for your viewpoint but what about nonsmokers
subsidizing smokers? Should I have to pay for the treatment of the cancer of a
smoker or the AIDS of someone who injected drugs or the measles of someone
didn't take vaccines?

It's a normative question on altruism.

------
oli5679
If anyone wants an accessible summary, this is good:

[http://hspm.sph.sc.edu/courses/econ/Classes/Arrow.html](http://hspm.sph.sc.edu/courses/econ/Classes/Arrow.html)

This is the key paragraph:

" The basic problem is that, unless you know as much about medicine as your
doctor, you can't evaluate the quality of advice he or she (mostly "he" in
1963) gives you. "

