4 ms·

Kenneth Arrow's seminal 1963 paper[1] is what started this line of argument. It's not very long, and most of the technical details are left to the appendix. [1

Kenneth Arrow's seminal 1963 paper[1] is what started this line of argument. It's not very long, and most of the technical details are left to the appendix. [1] https://web.stanford.edu/~jay/health_class/Readings/Lecture01/arrow.pdf https://web.stanford.edu/~jay/health_class/Readings/Lecture0... Classical economics mostly assumes that all participants in the market have access to relevant information to make the right decisions. Arrow's work on signaling theory really started economics on thinking about what happens when that assumption is broken. As anyone who's worked with large distributed systems knows, putting information where it's needed is key to making it work. The economy happens to be a large distributed system.

matt_wulfeck 9y ago
Why isn't that information from other countries, which does publish it, enough to alter prices here?
- smallnamespace 9y ago
  There is a burgeoning medical tourism industry (e.g. fly to India to do your surgery for a fraction of the price), but since the cost of airfare, lodging, food, etc. is at least a few thousand, there's competition with other countries only for well-understood procedures with large out-of-pocket expense. Otherwise, how is the information relevant? Let's say you know that some medicine in the US is $1000 per month , but only $20 per month in India. Well, if a patient is insured, then they don't care about the cost. If that drug is medically necessary, then the insurer has to pay for it even if they're getting gouged by the manufacturer. We're getting the worst of both worlds in a way -- regulations to protect patients make it very difficult for insurers to negotiate on price, but then we also don't generally allow the government to step in and force lower drug prices directly. So in the pharmaceutical market, the US just pays higher prices than everyone else days; American consumers basically subsidize drug research for the rest of the world, including other developed countries.
acslater00 9y ago
This is definitely true, so far as it goes. For many types of medical care it is unreasonable to expect a patient to act in a price setting capacity on the demand side. However there are many types of medical care where that is very reasonable! LASIK and cosmetic surgery are classic examples because they elective and have historically not been covered by any insurance. You can see cosmetic surgery prices on ads in the NY city subway. Other kinds of care, such as dentistry, orthodontia, and vision services, also have very well-functioning markets, largely because insurance has historically not covered these things. Lots of non-urgent care (primary medicine, pediatrics, dermatology, psychiatrics, orthopedics, many surgeries) would probably have well-functioning markets if they were separated from the insurance system. Now, that's all the cheap stuff. The expensive stuff (hospitalizations, cancers, chronic disease) that makes up the bulk of the US health expenditure - yeah. You can't expect a patient to come in and argue with the doctor about whether they really need that saline drip. But in a properly functioning market, there is another entity that can and should (and does) act as a price-setter mechanism on the demand side, and that is the insurance company. The problems show up when 1. there is only one supplier in a market 2. the insurer is required by law to cover a certain thing 3. the supplier does not face a price control, and through (1) and (2) has unlimited pricing power This is very acute with prescription drugs. Even generic drugs sometimes only have one supplier because the process of getting FDA approval is so onerous. It is also very acute when you have hospital and physician consolidation within markets, so that medical suppliers can effectively act as a cartel. So - deal with the supply side problems. Stop the cartel behavior. Make it easier to sell prescription drugs and open hospitals. Allow consumers to act as consumers when it makes sense (by excluding basic medical services from the insurance system) and reserve insurance for the risky, expensive, hairy stuff. This is the path forward, and it all follows very neatly from basic supply and demand.
- speedplane 9y ago
  I like your comparison to LASIK and cosmetic surgery, which I agree are functioning markets. But I'm not sure I agree with the rest. There are two components to healthcare funding: (1) insurance which protects from the serious unforeseen health expenditures; and (2) healthcare, which includes routine health checkups, preventative care, and also, the very common ailments as one gets older. The two are somewhat inter-related (if you're generally unhealthy, you're more likely to have serious ailments), but makes sense to separate the two as separate products. Even for relatively wealthy people, it's difficult to afford serious medical care out-of-pocket (it can cost >$20k/day in the hospital). So that's one product people can buy, with its own deductibles. However, routine medical care that everyone needs no matter what is a different product, and the cost of that product could be more closely tied to the value of the services received. Separating these two products may bring about more competition in each, and perhaps more efficiencies.

matt_wulfeck 9y ago

Why isn't that information from other countries, which does publish it, enough to alter prices here?

smallnamespace 9y ago
There is a burgeoning medical tourism industry (e.g. fly to India to do your surgery for a fraction of the price), but since the cost of airfare, lodging, food, etc. is at least a few thousand, there's competition with other countries only for well-understood procedures with large out-of-pocket expense. Otherwise, how is the information relevant? Let's say you know that some medicine in the US is $1000 per month , but only $20 per month in India. Well, if a patient is insured, then they don't care about the cost. If that drug is medically necessary, then the insurer has to pay for it even if they're getting gouged by the manufacturer. We're getting the worst of both worlds in a way -- regulations to protect patients make it very difficult for insurers to negotiate on price, but then we also don't generally allow the government to step in and force lower drug prices directly. So in the pharmaceutical market, the US just pays higher prices than everyone else days; American consumers basically subsidize drug research for the rest of the world, including other developed countries.

acslater00 9y ago

This is definitely true, so far as it goes. For many types of medical care it is unreasonable to expect a patient to act in a price setting capacity on the demand side. However there are many types of medical care where that is very reasonable! LASIK and cosmetic surgery are classic examples because they elective and have historically not been covered by any insurance. You can see cosmetic surgery prices on ads in the NY city subway. Other kinds of care, such as dentistry, orthodontia, and vision services, also have very well-functioning markets, largely because insurance has historically not covered these things. Lots of non-urgent care (primary medicine, pediatrics, dermatology, psychiatrics, orthopedics, many surgeries) would probably have well-functioning markets if they were separated from the insurance system. Now, that's all the cheap stuff. The expensive stuff (hospitalizations, cancers, chronic disease) that makes up the bulk of the US health expenditure - yeah. You can't expect a patient to come in and argue with the doctor about whether they really need that saline drip. But in a properly functioning market, there is another entity that can and should (and does) act as a price-setter mechanism on the demand side, and that is the insurance company. The problems show up when 1. there is only one supplier in a market 2. the insurer is required by law to cover a certain thing 3. the supplier does not face a price control, and through (1) and (2) has unlimited pricing power This is very acute with prescription drugs. Even generic drugs sometimes only have one supplier because the process of getting FDA approval is so onerous. It is also very acute when you have hospital and physician consolidation within markets, so that medical suppliers can effectively act as a cartel. So - deal with the supply side problems. Stop the cartel behavior. Make it easier to sell prescription drugs and open hospitals. Allow consumers to act as consumers when it makes sense (by excluding basic medical services from the insurance system) and reserve insurance for the risky, expensive, hairy stuff. This is the path forward, and it all follows very neatly from basic supply and demand.

speedplane 9y ago
I like your comparison to LASIK and cosmetic surgery, which I agree are functioning markets. But I'm not sure I agree with the rest. There are two components to healthcare funding: (1) insurance which protects from the serious unforeseen health expenditures; and (2) healthcare, which includes routine health checkups, preventative care, and also, the very common ailments as one gets older. The two are somewhat inter-related (if you're generally unhealthy, you're more likely to have serious ailments), but makes sense to separate the two as separate products. Even for relatively wealthy people, it's difficult to afford serious medical care out-of-pocket (it can cost >$20k/day in the hospital). So that's one product people can buy, with its own deductibles. However, routine medical care that everyone needs no matter what is a different product, and the cost of that product could be more closely tied to the value of the services received. Separating these two products may bring about more competition in each, and perhaps more efficiencies.