Guest Post from Tor Dahl

We're pleased to offer this astute critique of market fundamentalism in the health care policy debate from economist Tor Dahl, President of Tor Dahl and Associates. Dr. Dahl extends and improves upon some ideas I offered here earlier in my post Lost in Space. It's very important that we all get this because most of the people who pass for journalists these days don't, and the politicians either don't get it, or want to fool us.

This is an edited version of a longer article originally published in Dr. Dahl's newsletter, and we thank him for permission to repost it here.

-- Cervantes

The fact is that markets don't work in health care. And it is not only because some people cannot afford it. Here is why:

1. Where there is demand for something for which there is no supply, markets don't work.

The classic example is that of a lighthouse. It cannot collect from those it serves, and would not exist unless and until some entity were to finance the expense of building it.

People living in a geographic area that is under-served by health care are a bit like ships in need of a lighthouse, aren't they?

2. Where there is a supply of something for which there is no demand, markets don't work.

The classic example here is that of pollution. Pollution also directly affects our health and, potentially, our survival as a species.

3. Where there is a monopoly, markets don't work.

The monopolist controls supply of a good or a service and, hence, is free to set price, there being no countervailing power. Examples abound in health: Patent protection for drugs, the scarcity of certain medical sub-specialists, quotas for students entering medical school. In a sense, every nearby health care facility enjoys some monopoly power if no other facility is available in an emergency.

4. Where there is monopsony (one buyer and many sellers), markets don't work.

A national health care system, where a government agency has the sole right to buy drugs for its clients, is an effective monopsony. In the U.S., the Veterans Administration has the power to buy drugs for all veterans and can, thus, negotiate effectively with pharmaceutical companies that have monopoly power. Medicare does not yet have this right, but will likely receive it if costs of drugs continue to rise at the same pace as in recent years.

5. When there are externalities, markets do not work.

In this case, the classical example has to do with the benefits that derive from vaccinations. They extend well beyond those who receive them, since the likelihood for all to be exposed to contagious disease is diminished by the actions of some. This is a positive externality. The spread of bird flu is an example of a negative externality when vital food distribution channels can turn deadly.

There are even more reasons why market forces don't work in health care. Markets only work where there is competition, and effective competition requires perfect information, many small sellers and buyers, no transportation costs, and perfect knowledge. None of these conditions exist in health care delivery. Hence, competition and free markets cannot exist in health care, except in a very limited and narrow sense. That does not mean that we cannot use markets as a distribution mechanism where they can be made to work, e.g. in the sale of over-the-counter drugs and in other cases when people have the funds to pay for their healthcare needs.

But when markets break down, we have to find other ways of supplying health care. Each of these has a cost. To find the least cost solution with the highest benefit seems to be the best way. We are beginning to understand how we can make this happen.

Productivity and quality are key tools in that picture. The chance of ending up with high-cost/high-mortality care once cancer is detected is about equal to the chance of ending up with a low-cost/low-mortality care, says Dr. William McGuire, CEO of the United HealthCare Group. We must solve this problem! The information tools now available would go far in helping the health sector improve the quality of care and perform better. They will allow us to find these islands of excellence within the system, steer patients towards them, and point the way for necessary improvements throughout the health sector.