Can a Free Market in Healthcare Work?

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]