Examples of free market health care

There are, however, no examples of successful health care based on the
principles of the free market, for one simple reason: in health care,
the free market just doesn’t work.

That's Paul Krugman.  I would frame this point a little differently.  There are in fact plenty of people who buy their health care in a more or less free market setting, most of all in Latin America but all over the world.  It's far from obvious that these markets fail in efficiency terms ("compared to what?" is the obvious follow-up).  For the wealthy in Latin America these markets seem to work well.  They work much less well for the poor but is that because of market failure or because these poor simply don't have much money to spend?

One possibility is that the main problem with these markets is distributional rather than efficiency.  (Krugman's third paragraph recognizes this, but he doesn't use the point to reorganize the analytics of his critique.  Also note some tricks.  When markets fail at providing insurance, ex ante this is a possible efficiency problem but ex post it will be a problem of distribution.)

Another way to state the health care problem is this: once we try to obtain distributional objectives, supply becomes less efficient.  That understanding might focus your attention on a voucher-like system, combined with deregulation. rather than government interference in provision.  Another option is for government to provide nudges to have better monitoring of HMOs or insurers, to make them more trustworthy.  Or maybe catastrophic-only insurance, to overcome the distributional problem where it is most severe.

You can understand the French system by citing the incentive for overtreatment and now we are back to the possibility of efficiency being the primary problem.  If you limit overtreatment, by organizing doctors into poorly paid, fixed salary co-ops, you keep costs down and make some parts of the distribution problem easier to solve. 

There are plenty of health care services in this country, such as laser
eye surgery
, or plastic surgery, which are supplied in more or less
market settings.  I don't consider their efficiency an open and shut case, but it's quite possible we'd be delighted if other areas of health care worked this well in terms of cost-lowering and innovation and even availability.  It could be that these services are more transparent or it could be they are simply less regulated and further removed from third-party payment.

Read this post of Bryan Caplan's and ask yourself whether the Arrow problems are in fact what motivate most of the health care intervention we observe in the U.S.  Maybe France is the country which took Arrow seriously.

It makes a difference whether you view the case against the market as starting with issues of efficiency or distribution and usually those concepts are jumbled together.

Sometimes I wonder how wealthy we all would have to be before we could just pay cash for our health care.  I call this the Pablo Escobar solution.  It's a long way away but is it imaginable at all?  Does it recede as we approach it?  Do we have to give up some distributional objectives to ever get there?  Do we simply embrace it when the poverty line is defined as standing at $200,000 a year?


How much do doctors earn in that $200,000 poverty line future? And biochemists?

I think we all need to stop conflating health care with health insurance in our thinking. There is a basically free market in health care. If a doc chooses to accept certain insurance he accepts their reimbursement rates. He can also take cash if you have it.

The health insurance "market" is what's FUBAR, and not free. Krugman's arguments apply to every kind of insurance, and yet many smart people choose to insure things anyway. He's dismissed the free market's ability to innovate, case closed, based on a 45 year old economics paper. Who's the conservative?

In the debate you hardly ever hear about people who keep terrible jobs that they hate and would quit if they didn't need the insurance. They're out there, though. The massive distortion created by having most people obtain insurance as an employment benefit puts individual seekers of health insurance at a disadvantage. What if instead of single payer, we had "single pool?"

The massive distortions created by state-mandated first-dollar coverage have made high-deducible plans economically infeasible in many populous states, like NY & NJ. What if we stopped packaging insurance with prepaid expenses?

Maybe if we stopped letting the perfect be the enemy of the good we could make some progress here.

What does Krugman mean by a successful free market health care system? Is it a system that achieves both the efficiency of free market systems and the welfare distribution and equality function of a controlled market system? Most economists probably regard that as a unachievable as free markets tend to produce outcomes that indicate economic inequality and unequal access to its primary goods and services. Such has been the experience, so it is only natural for Krugman to assert free markets as disfunctional that way. The cases from Latin America suggest exactly that.

But even if most or perhaps all examples of free market approaches in major social sectors indicate unequal outcomes, does that necessarily imply that the culprit is the system itself, or is it something else?

In my view, the problem may not be the free market itself, but the lack of philanthropist functions in a free market system. The main drive behind controlled or planned welfare systems are of philanthropist nature, i.e. to utilize the demographic power of the State through a majority of vote in order to confiscate money through taxes from the wealthy to distribute amongst the poorer so that all are given equal opportunities and services not dependent on their income. But if societies are so determined to distribute wealth that way for the most appreciated goods that are health and education, why don´t the same functions appear in a free market system? Wouldn't a free market health care system in a society determined to aid the poorer in their quest for health and education indicate a vast system of non-governmental welfare institutions based on free donations of those better off, be it individuals or even companies? But why don´t they appear?

Western societies have for the last century or so been determined to incorporate general welfare into the State, mostly successfully, and by such removed the impetus for people to allocate money freely to such functions. They have outsourced it to the State, so to speak. So isn´t the problem of bringing the older free market approach back just a basic problem of market penetration? Why, and how, can non-governmental welfare institutions compete with the image of the State as the major player on the market?

What does Krugman mean by a successful free market health care system?

There is no disputing taste. Writing in evaluative terms evades the possibility of dispute, which is convenient for a columnist such as Krugman. Krugman does not write to persuade the unpersuaded; he writes to reassure his own audience, and so avoiding the possibility of dispute (and therefore the possibility of troubling his audience) has a higher priority, to him, than persuading the unpersuaded. The Nobel comittee, which for many years delayed his deserved Nobel, now that he has abandoned economics in favor of writing professions of faith to reassure his coreligionists, has given him his Nobel, all the better to protect the cause of progressivism.

Socialist generally dislike free markets because they dislike the way resources are distributed. It does not fit their views of an equitable society. Obama and Krugman are clearly in this camp with regard to healthcare.

We as a society have decided to ignore free markets in health care and attempt to provide for many who can not, or even will not provide, for themselves. This has created a huge financial problem for the government. Plus it has created incentives for some to depend on the government system and leave the private market.

People spend an increasing amount on health care. That should be expected. Wealthy societies that are aging will buy more health care. Politicians have a lot of spending that they want to do for various interest groups and object to budget constraints imposed by increasing medical costs. Society is calling for more health care, while government wants to promise more but lacks the resources to directly provide more care.

Doctors are like other businesses. When they have stable relatively high incomes they are ethical. However firms or Doctors faced with rapidly shrinking incomes, think inner city doctors dependent on medicaid, ethical boundaries get blurred. That is human nature. How Krugman thinks he can squeeze health care providers without having some game the system is unclear to me.

The first problem is that the poor lack income to buy insurance. The second problem is that the government has decided to take on responsibility without funding the obligation.

The government has rejected free markets, vouchers etc., and decided that they need to enroll more healthy people and ration care to the elderly. But to ration care based on political considerations rather then market considerations

For those advocating a free market in healthcare:

1) why does just about every other industrial nation have much lower costs than the US and at least as good quality?

2) Are we as a society prepared to let people die or suffer major health problems if they can't afford to pay?

laser eye surgery and plastic surgery, IVF

I'd expect a free market to work for optional things (cosmetic surgery, TVs, etc.) but not for essential things (treatment for heart attack).

..For those advocating a free market in healthcare:

1) why does just about every other industrial nation have much lower costs than the US and at least as good quality?..

This is simply false. Our care is extremely good, and better than virtually anywhere. Why are you here? Go away, and leave us one place in the world where free markets can flourish. You know...diversity...!!!

What about Singapore, a developed country where all health care is paid for from health savings accounts and catastrophic-only insurance policies.

"...but healthcare needs a baseline social objective that has to be placed above profit making"

Why ? Cars are a necessity in most of the US, do brake jobs need a "baseline social objective", whatever that banality means ?

"...why does just about every other industrial nation have much lower costs than the US and at least as good quality?"

The costs are "lower" because the government is subsidizing through absurd taxes. The "quality" isn't as good. The problem with "quality" is that it is ill defined, and things like infant mortality and life span trotted out as indicators of "quality". Infant mortality is a canard because of the difference in counting that what is an "infant mortality". In the same vein, life span is a bogus indicator because of the disparity between rates of accidental death (higher in the US) and the like.

If one defines "quality" in terms of access, choice, quality & availibility of ancillary care, quality of life, quality of hospitals, and access to the latest devices and treatments (most of which come from the US), the rest of the world is sucking dust.


How does one unravel and separate government intervention (HMO Act of 1973) from free market (dentistry, optometry) from medicare/medicaid/insurance companies acting like monopolies (e.g., pre-approval for treatments)? Seems this would be a requisite for any talk of reform to make any sense. I've read plenty of "this is what's wrong" but never a dissection of who is doing what that necessitates reform.

Please, our health care system is so distorted and manipulated by existing regulations and subsidies that it's impossible to call it free market with anything like a clear conscious. Our system has been getting more and more out of whack for at least the last 40 years.

One quick fix, allow the existence of something in between Doctor and Nurse. Must it really be so rigid? Is what we currently have really the optimal makeup of certifications?

Daniel: you mean like physician assistant or ANRP?

"There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work."

Like so many categorical statements, this one is false. US hospitals like the Mayo Clinic and the Cleveland Clinic and Sloan Kettering do a thriving business in selling their services to wealthy foreigners, particularly from the Middle East, but also from Latin America. Why does the Cleveland Clinic have an outpost in Miami?

Anyway, those are clearly market transactions for delivering healthcare, willing buyer, willing seller etc. Believe me, the hospitals heavily market to those potential customers - go to the Cleveland Clinic's website and look at "global patient services", for instance.

I agree that Krugman must mean that to be "successful" it has to be universal. He should let you edit his posts. If there was ever anyone about whom it could be said "less is more", it is Paul Krugman.

Well, it depends. I think that the poverty line doesn't need to be raised a lot to pay for basic health-care. F.e. in Germany there is a 10 Euro doctors fee that has to be issued quarterly (and you have to be directed to specialists by a common practitioneer or you have to pay a second time). And even with this base-line of 10 euro poor people go to the doctor more often.
I'd say if you scrap insurance for everyday things and restrict it to truly costly applications (surgery being one and hospital treatments), then the financial burden is not too big. It would also keep people more aware and alert to their body condition. If you look at the amount of insurance money that gets wasted to make the insured aware and alert to basic prevention like sports and such, then you get to know why basic insurance is overwrought.

One can make a case for prevention care, but I think more often than not the cost/benefit is very low, because if you do sports and don't have genetic issues or chronic diseases (allergies and such) than you don't even need to visit your medical doctor except in real hard cases, thus cutting costs. And you are more willing to do this if you really feel the costs of visiting doctors.
Another positive side effect is that the doctor has more time to spend for real cases or difficult cases or both.
At least, this is my feeling after having had the chance to compare the marginally more competitive and efficient US system to the European (may it be UK, France or Germany).

In response to: Lonely Libertarian at Jul 26, 2009 8:48:18 AM

Counterexample: in between health care providers, ultrasound private cost: 634 USD, cost billed to insurance: 305 USD. Markets are free if there is a relatively easy to accomplish choice between competing providers and there are enough sellers and buyers to create meaningful supply and demand. Neither is true in healthcare - location is paramount (there are things you'll have to go to the closest hospital for, quickest), and as the guy trying to get coverage without insurance, you'll quickly find out that you are one in a million. It took a day for the admins to figure out what I would have to pay - they never had anyone ask what a procedure would cost upfront before, and nobody on the frontline knew, so my request had to worm its way up the chain through the backoffice which was used to billing people after the fact.

The U.S used to be an example of the free market working for health care, according to Roderick Long.

Krugman should have said that there is no successful free market model in a country which has first world quality medicine. If you disagree, name one. Certainly not any Latin American country.

The Lasik model, IVF, plastic surgery are good examples where one could expect free markets to work. They are all optional. Both parties are free to walk if they are not happy with the deal. Insurance does not, generally, cover these as they are elective.

In general, private insurance pays better for individual procedures than does Medicare and much better than Medicaid. Why does private insurance pay more? That is not regulated by government.

Your last point is important. In the health care proposals I have written, I see no real way around some form of insurance. Any trauma, a premature newborn or significant illness in one's early 20's could not be paid for with cash by most of us. Insurance answers this issue, but it also distorts incentives.


>>>>So no. Food, clothing, and shelter are not good comparisons to health care.<<<< According to your straw man argument, you mean. MOST of our health care involves TOTALLY predictable costs, that all of us can plan on incurring and prepare for. We can do this in some combination of ways: savings, life-style choices, insurance, or relying on others. I am pushing 60, self-employed, and have nothing but catastrophic coverage. I have a doctor I rarely see, but trust. When I do go to his office, I rarely see him since he has very good physician's assistants/nurse practitioners. I pay about $50 per visit. An alternative that is becoming more ubiquitous is the Medi-Quick style clinics, which will only BEGIN to treat a limited number of know, readily diagnosed problems....while still eclipsing MOST reasons for normal sourcing of a health care visit. I think I paid about $35 bucks for my last visit. Any good or service is comparable to the provision of health care on global terms. The fact that some health care is much more expensive than most does not provide any logical exception. Some car repairs are a great deal more costly than regular maintenance, too. Duh. At present, I see nobody militating for nationalized auto care. In brief, there is nothing about this area of our economy that shows any valid exception to market forces. Indeed, the opposite is apparent in every model.

In the 1960s when I was a young lawyer with a decent income (but probably not much higher than the national median for all workers) I had only a major medical policy (which would pay $40 a day for a hospital room, if needed). I never had to use it and I paid for routine medical visits and also the birth of two children out of my pocket. If the same economic regime still existed I might have to pay more as an "older" person but then I would have had a lifetime of earnings to cushion the costs (presuming I didn't spend it all as I earned it).

Now, I suppose amortizing extremely expensive medical equipment that is now available would make the underlying economics at least somewhat different today, but "free market" medical care was certainly possible in the not too distant past.

I'm not sure what has contributed to the current high cost of medical care (with the attendant need to insure against it) but I am not convinced that it is due to advances in medicine as opposed to government (and lawsuit) intervention into the provision of medical care.

"Objective metrics like life expectancy are also mediocre, at best, for the U.S. compared to other nations. Please show me evidence that any of my statements is not accurate."

No, but if you create a model Y = M*X + B (where Y is dependent on more variables than the one you include in your model) and claim an R^2 and T-statistic prove your point, you have to recognize that you are ASSUMING that M2*X2 + M3*X3 + M4*X4 + ... + MnXn is insignificant.

You pick an ironic name as you should go back to your textbooks and find the section on variable omission bias.

I can't understand the concept of an economist who has read about the "market for lemons" and is familiar with the concept of asymmetrical information possibly believing that market-based health care could conceivably work.

Seriously, this is something I cannot grasp about my profession. Why are so many of us so incapable of understanding ideas articulated before my birth?

Google "satisfaction with health care by country" and you'll find out how amazing lowered expectations are; not how amazing socialized health care is. One world survey points out how Kenyans' satisfaction with their health care exceeds Americans'. The obvious followup questions, "Would you, an American, prefer to have a life expectancy under 50 and a Kenyan's access to medicine", and "Would you, a Kenyan, prefer to be able to eat, drink, and smoke like an American but still have a life expectancy over 75?" are never asked.

It's hard to get an apples-to-apples comparison. Someone already pointed out that "infant mortality" is tricky, which is true in a world where countries make different decisions about when a premature birth gets counted as an "infant" and where parents make different decisions about whether to have a drink or a prenatal vitamin every day. The seemingly-most-objective comparison I've read is that of survival rates, where the USA leads the world in some categories (e.g. breast cancer). Even in that statistic I've heard claims that it's an apples-to-oranges issue, that the US has better 5-year survival rates because of better early detection rather than because of better treatment... but "Our health care system is better at quickly detecting a disease whose treatment is much more successful after early detection" still wouldn't be a feat to take lightly.

Another point here, besides just issues of distribution, are the type of health care; I have health care which is great if I had a catastrophic problem. But with my health care, I can pay thousands of dollars a year anyway if I had a recurring problem. I can't afford that. I can barely afford to visit the doctor when I actually have a major problem. One of my friends has recurring, debilitating headaches but can't go to the doctor because she can't afford it, even with insurance.

So when we talk about distribution of health insurance, we have to remember that what TYPE of insurance and coverage you have is an important consideration, too.

But all in all, the distinction is well raised and shows sloppy writing on Krugman's part (of course).

Oh good. Obama is going to illegalize information asymmetry, because, as we all know, when the market doesn't work, government obviously does.

Sorry. but in a free country you should be free to buy any kind of insurance that you want.

To the guy with the grandfather doctor, what procedures did he preform during those home visits? If we want to limit health care to the technology from 60 years ago we have no funding troubles.

student of economics is failing the course, even the high school version.

Arguments based on efficiency often use bad data. It is beyond reason to think the government will be more efficient or deliver the same level of quality.

Distribution methods, using the power of markets, are being ignored.

MOST of our health care involves TOTALLY predictable costs, that all of us can plan on incurring and prepare for.

Simply not true. In my case, I had a tooth abscess during the few months when I had only catastrophic insurance and spent $3500 treating it -- since some of those expenses were classified as dental expenses, they didn't go toward the deductible so the insurance never kicked in. If I look at five years' worth of all my other health expenses including payments made by my insurance company to medical providers, that number is almost certainly less than what I spent on this one-time, unpredictable expense.

That's why we have medical insurance. All it takes is one unpredictable episode to make your total health expenses increase by several orders of magnitude. In 2007, 31% of the U.S. medical expenses were on hospital care. Some hospital care is routine, on the one hand, but on the other many unpredictable health issues are dealt with by private doctors and clinics. I suspect unpredictable spending on health is much larger than 31% in the U.S.

I recall words in Samuelson in the late 50s to the effect that health care was non-transferrable and so doctors would price according to what the patient could pay, and so it failed this or that criterion of something or other.

I think a similar failure is grocery store sales of the week, to pick up the miserly consumers who are willing to wait for sales to stock up, while still picking off the price-insensitive at the higher normal prices.

There's your health care solution. Cents off weeks.

We "need" insurance for a $3500 event that "cannot" be planned for.

I'm not trying to sound snide, I don't have to try to accomplish that, but this is the political environment in which we are trying to "fix" the most complicated industry there is...and before August recess, thank you very much.

Ragspierre is amazing. How can he be so wrong? Every industrialized rich country has better health outcomes than we do according to every reputable study. Anyone who has paid the least attention to the facts knows this.

I have had health care in EU single-payer countries. The experience was pretty much like here. The big difference I noted is much less paperwork both for patients and providers.

I think Tyler completely missed the point. How can one of these Latin American health care systems represent a success if people can not access it? That is like saying, "This city has the best fire fighters in the world as long as you live on certain streets." And I think this is where personal morality comes in to play. Do you think the health and well being of a community should be subject to the ideal of the free market that ensures the health of only those able to pay?

This post is technically true but uninteresting in the context of American policy. As soon as you require that emergency rooms treat all comers, the system is overwhelmed with externalities and Krugman is correct. And as a simple matter of plain political realism, a sufficiently wealthy country absolutely will not abide a change to that rule, because it will mean watching people die in the streets. You're quite right that this electoral impulse is a distributional concern rather than an efficiency concern, but so what? It's a distributional concern that is so universal that it might as well be etched in the laws of physics. Perhaps you should simply read Krugman to say "in health care, with a certain basic and unavoidable assumption that the electorate is unwilling to watch people choke to death on their own bile and vomit in the street while EMT's watch impassively, the free market just doesn't work." True, he didn't say that, but there's always a lot we don't say because space is limited and potentiality is infinite, and it's a pretty reasonable assumption of what he meant.

So I award you one point for technical correctness but deduct two for unhelpful pedantry.

The rest of the post was an interesting thought experiment -- I just didn't like the Krugman part.

There is a free market in laser eye surgery and it seems to work quite well with prices flat to dropping and quality improving.

Cowen makes a good point. Much of what we call "insurance" is not insurance at all but an array comprehensive health benefits. Many of the life events currently covered involve uninsurable risks. A health plan paying for scheduled office visits, check-ups, etc. is like Geico or AllState paying for your gas and tire rotations.

I think Krugman was talking about the vast bulk of health spending. I suspect that dental care, veterinary care, plastic surgery, lasik surgery, and optometry don't add up to anything within an order of magnitude of the 1/6 of the economy represented by health care. It's not a valid comparison. Also note that you can afford to shop among plastic surgeons, optometrists, lasik providers, vets and dentists because it's voluntary, unlike say getting hit by a bus or having sudden medical crisis.

When you been injured or are critically ill, you are not shopping for the best medical bargain. Maybe Tyler should have another look (you have read it haven't you?) at Kenneth Arrow's work on health econ and market failure. Markets for health care are a case study in market failure, and finding a few small counter examples doesn't change it. If you want a nice efficient market some people are simply going to be priced out and die because of it, that is the logic of the market place. We've long since mandated that hospitals not turn ill people away. Now we're just arguing about more efficient ways of delivering the care.

Winslow: Even by your metrics the rest of the world is far ahead of the U.S., despite Republican arguments to the contrary. The Japanese, who use a single buyer price control system, have the highest rates of doctor's visits and diagnostic procedures taken (CAT scans, blood work, ect.) in the entire world. You can walk into a Japanese clinic, one of which will likely be located within a block or two or your residence, get a check up, blood work, and, if more precise diagnostics are needed, be in a hospital talking to a specialist within the same day. Congressmen, senators, and commercials stating that socialized systems stymie choice and lead to life-threatening waiting periods are, quite simply, lies, as anyone who has actually talked to or read the writings of people living under these systems would know.

Another benefit of socialized systems; not being harassed by EMT companies and their collection agencies. Does it make sense that a person who falls and breaks their leg must choose between a painful drive to the hospital in a car or a 10-20k bill for waiting for the EMT? How could such prices possibly be justified, particularly when one considers that most EMT companies face little if any competition in their home cities?

To DanC this morning at 9:15 am -- No, Coase argued instead that each case has to be studied. In "The Nature of the Firm" (1937), Coase argues that institutions reduce transaction costs. That is the reason why business firms exist. And it must go for the government too -- the government is like a big "superfirm." Coase then says each separate case has to be studied.

"Inability to pay" may be due to the distributions of income and wealth, commonly called "distribution." How you would have supposed that distribution is a transaction cost problem is a mystery. Although your status may help to determine what sort of transaction costs you are about to incur.

But whether distribution is, or is not, a market failure? You agree with Tyler, and it still means nothing.

When I was growing up my father, a farmer in central IL, didn't buy health insurance to cover the family (4 kids, 2 parents) because it was less expensive to pay out of pocket.


"I'd expect a free market to work for things which are optional. There is little difference between buying cosmetic surgery and buying a TV for these purposes. On the other hand, there is a major difference between critical care and a TV. You can live without a TV, but not without treatment for life threatening conditions."

It's irrelevant whether something is elective or not, with respect to competition. In both cases a person would have a choice as to which provider to use if the service is provided through the market, as long as it's not an emergency. This choice creates competition.

When it comes to health care you could be going in circles all day long and still never come up with an amicable solution. It's a given that everyone should be entitled to basic health care

In the U.S., the insurance provider picks the doctor. In countries with universal systems, the patient picks it.

Comments for this post are closed