Can a Free Market in Healthcare Work?
By John C. Goodman • Wednesday October 17, 2012 11:05 AM PDT • 4 Comments
As the author of Priceless: Curing the Healthcare Crisis, from time to time I hear policy wonks claim that the market cannot work in healthcare. Usually, they cite a very old article by Stanford University economist Kenneth Arrow, who claimed that the market for medical care is inherently imperfect. True, but most markets are imperfect. The question is: does the market for healthcare work better than a nonmarket for healthcare? I believe the evidence supports an unqualified yes.
Consider some standard complaints that are normally leveled at the current system: that price and quality information is not transparent, that the market is not competitive, that unsustainable rising costs are inevitable, that quality is inadequate, and that providers make inadequate use of technology, including electronic medical records and electronic prescribing. But do these problems exist because of an inherent flaw in healthcare markets? Or do they exist because normal market forces have been systematically suppressed?
As it turns out, healthcare markets seem to work reasonably well wherever third-party payers are not the dominant payers. Wherever patients are paying with their own money, providers always compete on price, and where there is price competition, transparency is never a problem. Moreover, in such markets, we do not find the problem of healthcare inflation that plagues the rest of the system. The real price of cosmetic surgery has actually declined over the past fifteen years. The real price of LASIK surgery has declined by 30 percent over the past decade.
I know of nothing in health economics that would lead a rational person to conclude that markets cannot work in medical care. Indeed, the evidence all points in the other direction: Markets can work much better than our current system, if they are allowed to do so.
[Cross-posted at Psychology Today]
Tags: Economics, Healthcare, Insurance 
Mr. Goodman makes some outlandish statements. Such as “Wherever patients are paying with their own money, providers always compete on price,” When I was negotiating witha facility to get a PET scan for my wife (because her insurance would not cover it at that time) the cost to me was $3,000. However, when the insurance company finally did pay for the procedure the cost to them was only $900. Is this the way the free market works in his world?
Verner Eglit | Oct 23, 2012 | Reply
The saddest thing is that those who are in the most need to read this terse article are the ones who will simply deny it without reading it.
Bob Robertson | Oct 23, 2012 | Reply
Libertarians such as myself have known this fact for a long time. However, the health care system is designed to make as much money as possible for those involved and the best way to do this is to prevent the free market from operating in health care. Getting rid of government regulation and laws would greatly reduce the cost of health care. In my own case, I have determined that without prescription laws I’d save $400 a year right there. Add this up and the figure runs into very large sums. Of course this would cut doctor’s incomes, and we can assume they’d use their political power to try to prevent repeal of a law that makes them so much money...
Jerome Bigge | Oct 23, 2012 | Reply
Verner, Dr. Goodman’s entire point is that the current healthcare system is NOT a free market and this is why costs go up, interest groups are protected from competition and being accountable to customers, innovation is stifled, waiting gets longer, etc. We desperately need to liberate patients and caregivers from government mandates, subsidies, price controls and the myriad other intrusions responsible for the current healthcare mess. Please see the following:
Priceless: Curing the Healthcare Crisis, by John C. Goodman
David J. Theroux | Oct 26, 2012 | Reply