Medical Care and Market Forces
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Russell Roberts teaches economics at George Mason University in Fairfax, Virginia. His latest book is The Invisible Heart: An Economic Romance (MIT Press).
I’ve heard it argued that market forces don’t apply to health care because there isn’t anything close to a free market in health care. There are all these government programs, and there’s insurance, and patients don’t have as much information as doctors. The list of market “imperfections” is a long one. Supply and demand just don’t function in such an environment, says the skeptic.
Part of that kind of talk is rhetoric—a way to frame the debate. But it’s more than rhetoric. To a lot of people, the inherent logic makes sense. And one source for the sympathy some have for this argument comes from college economics classes, I suspect.
In economics textbooks and in college classrooms, there’s something called perfect competition. Perfect competition is a theoretical idea. It assumes there are a huge number of small sellers, so that no one seller can have a significant impact in determining the price. It assumes that the buyers and sellers are aware of all the prices being charged in the market. It assumes that the good being bought and sold is homogeneous, so that buyers make all decisions based only on price.
The textbooks go on to analyze how the supply and demand for the good in question produce a price and how that price adjusts to various changes. This is the bread-and-butter of most economics classes in college.
And is there any market out there that conforms to the assumptions of perfect competition? Wheat. Maybe. At least that’s the answer you’ll find in a lot of textbooks and classrooms.
This may explain why most conversations I have with strangers about economics leave me so depressed. I’ll be on an airplane and the person next to me will ask me what I do for a living. When I tell them I teach economics, I usually get one of the following responses:
“Do you think the stock market will go up this year?”
“I took economics in college. That’s the subject that works in theory but not in the real world.”
Both responses lower my spirits. But there’s something special about the second one. Who would want to teach economics if that second quote is an apt description of the field? Who would want to study something in graduate school for four years that can’t be applied to the real world? It would be like studying the life of a newt on Jupiter. It might be an interesting intellectual challenge. But why would you devote your life to it? And why would you want to communicate that knowledge to thousands of undergraduates across the country and the world?
I think about those poor students learning about “perfect competition.” If you’re taught a theory that requires a large number of all-knowing sellers interacting with lots of all-knowing buyers, buying and selling a product that’s identical, with price the only form of competition, why that’s obviously malarkey. And it’s malarkey that’s particularly pernicious because it appears to be designed for one purpose
Comment by Robert Sussman on 4 February 2009:
I would also add that shortages, such as kidneys for transplantation or blood for transfusion are due to government price controls. Remove the ban on payment to donors, and the supply would increase to match the demand. Robert Sussman, MD
Comment by Dennis Bowland, pharmacist on 4 February 2009:
It is wonderful to see this piece from an economist that I respect. I have always believed that high health care costs and primary care physician and access shortages have been caused by Medicare, Medicaid, regulation on insurance companies (such as laws requiring a minimum hospital stay for new mothers), and the plethora of regulation of the health care industry such as licensing boards, the FDA, HIPAA, OSHA, CLIA, etc, etc, etc.
Comment by Ron Dionne on 24 February 2009:
Okay, I’ve read your article twice. Now please explain why the exact same medicines are available in Mexico at a fraction of the U.S. prices?
Comment by Tommy on 25 February 2009:
The prices in foreign markets are lower due to government price controls in those markets. The US is the largest free market for drug companies in the world. It’s the reason foreign manufacturers allow the FDA into their companies – they want into the US market to make profits they cannot realize or, to overcome losses in foreign markets due to those same government price controls.
Most people do not realize the US is the last free market. But, that will soon change as more government control is introduced to “control” prices to consumers. As was mentioned, the pharmaceutical companies will have no choice but to limit research, limit production, or go out of business. The end result is a controlled industry is not a profitable industry. The best health care system in the world will cease to exist. We’ll see restrictions on treatment due to age, longevity expectations, survivability, etc…
On the flip side, if the other countries would eliminate their price caps and get out of government health care, we’d see much lower prices in this country since those foreign nations would have to shoulder their fair share of the costs.