What would medical care be like in a genuine free market?
Nobel laureates in economics have opposing views. But does India have the answer? There, healthcare has a strong private sector: patients usually pay directly and the insurance industry is just emerging.
Milton Friedman believed that markets would work just fine in healthcare. Kenneth Arrow was not so optimistic. In his much cited opus, Arrow singled uncertainty as the key factor which distinguishes medical care from other goods and services. Uncertainty means that one doesn’t know when and how much healthcare one is going to need. Not quite the same as shopping for cereal in Waitrose.
George Akerlof felt that asymmetric information, i.e. when one side knows far more about the product, could be problematic for quality.
In Akerlof’s hypothetical market, “Market for Lemons,” which takes the example of used cars, there are “peaches” (good cars) and “lemons” (low quality cars). Buyers can’t distinguish between peaches and lemons, but know lemons exist and so offer a price that’s too low for peaches. Sellers who, of course, know their peaches and lemons, remove good cars and retain bad cars. Process continues, and there’s a downward spiral, with market progressively enriched with lemons.
Asymmetric information in a free market could lead to fall in quality and market failure. There’s asymmetric information in healthcare when buying insurance; people are more inclined to purchase when sick. Also, when the physician knows more about quality of product and its need than the patient.Continue reading…