Organizations, Markets, and Health Care Reform
| Russ Coff |
Amidst the fierce debate about the U.S. health care system is a raving lack of clarity. At the core, is whether organizations and markets fail to produce an optimal solution. Even the most neoclassical of economists these days acknowledge that market externalities exist and that these should be the focus of government intervention. Unfortunately, I don’t feel that the debate has been rigorous or well-informed in defining the market failure or why a government run system would be superior.
Liberal Economist Paul Krugman explains why markets fail summarizing Kenneth Arrow’s arguments (here). Basically, the third-party payee system and the information asymmetries render comparison shopping ineffective (and hence competition fails to yield an optimal solution).
Indeed, there is a good bit of inefficiency in the current U.S. system. A recent NY Times article notes that health care costs the average U.S. household $6,500 more each year than other comparable wealthy nations. Unfortunately, looking at many of the important outcomes, it appears that consumers are not getting much for their money on many dimensions (e.g., chronic disease outcomes). So it should be possible to lower costs and improve outcomes. Of course, this ignores the question of whether costs are higher to subsidize R&D that ultimately spills over into other countries.
Unfortunately, the article continues to point out how the reform efforts seem to ignore this low-hanging fruit. For example, the Mayo Clinic achieves much lower costs and exceptional outcomes, at least in part, by compensating physicians with low-powered incentives (salary instead of fee-for-service). Ironically, this is something most good students of organizations could have suggested (Holmstrom & Milgram demonstrated how weak incentives are preferred over perverse incentives — of course, any OB scholar could have confirmed that 40 years ago).
The focus has been on implementing a government-run system. There may be reasons to do this. However, is it not obvious (to me) how this would allocate resources more efficiently. Along these lines, it is ironic that Krugman was stunned on camera by a group of Canadians who would not argue in favor of their own government-run health care system: Oops!
So, I ask, how would a government run health care system really allocate resources more efficiently? Clearly the system needs a kick start. . . .