Market Failure I: "Money-Driven Medicine"

I always take note when a writer takes a position that is contrary to his usual stance. Tyler Cowen of Marginal Revolution is an intelligent and thoughtful commentator, but hews too closely to free market orthodoxy for my taste. But his review of Maggie Mahar’s Money- Driven Medicine, a hard-hitting critique of health care, American style, is positive, insightful, and implicitly acknowledges that health care reformers have a point.

The reason that Cowen supports Mahar’s assessment is that she explains why health care has failed in terms an economist can appreciate: she shows why the market has failed. One big culprit is information asymmetry. One of the conditions for a market to function well is that buyers and sellers have perfect information. In the medical arena, there is often a lack of good data as to what constitutes optimal practice. Among the many examples are the backing and forthing on hormone replacement therapy and mammograms. Now condiser: these treatments have been the subject of multiple large scale studies. Most protocols haven’t been investigated this intensely. And even when there is good information, the patient is at the mercy of his medical providers, the drug companies, and device makers. He can’t challenge their views; his best hope is to shop for a better practitioner, which is a costly, time consuming, and deeply flawed process (how can he judge whether a doctor is making sound recommendations?).

The other major element of market failure is the considerable disparity in buyer and seller power. If you are very sick, you will do anything to get better, which includes spending a lot of money. And our can-do, technology-loving culture favors doing more, whether beneficial or not.

From Cowen:

The book has the most coherent, supportable, and fleshed out anti-market story I’ve seen. It both tries to explain why the current system works as it does, and historically how it evolved from more modest and less expensive ways of doing business. It’s not just a rehash of the usual stories about the VA system or France. The discussions of the growth of for-profit hospitals, the increasing specialization of medicine, the problems with pay for performance, and markets for medical devices are all full of interesting tales.

I interpret the basic story as this: the American health care cost spiral comes from suppliers and their entrepreneurial abilities to market expensive and highly specialized services of dubious medical efficacy. Medical care starts off as ambiguous in value and hard to measure in quality. Customers are cowed by doctors and other family members into accepting or even demanding what is offered to them. Third-party payments make the problem worse, and government intervention has stoked rather than checked the basic dynamic. You end up with massive expenses, lots of stupidity, and – because of its expense — radically incomplete coverage. Every now and then the extra services do pay off, but not frequently enough to boost American stats on health care quality.

Ezra Klein also has an excellent review in Washington Monthly. He gives more of a feel of the book itself (and makes clear it’s a bit too heavy on anecdote for his taste). He concludes with an urgent plea:

It is up to us to decide if the ultimate goal of care should be cash, if our system of insurance should incentivize identifying those most in need of care so they can be denied access to it, if our hospitals should fret over the bottom line or the flat line, if our physicians should practice in a context that leaves them desperate to confide in the unknown reporter who leaves an unexpected message on their voicemail.

Finally, an article by Mahar, “The State of the Nation’s Health,” in Dartmouth Medicine, discusses inefficiency and variations in regional practice (which reflects a lack of consensus on what “good practice” is).

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