Economics Marcus Welbys Medicine in the 21st Century Discussion

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Topic: Marcus Welby Medicine in the 21st CenturyStep 1: Read Dr. Arrow’s paper to review the MWM model:Step 2: Answer the following questions. Today, technology has changed everything. Individuals now buy drugs on the Internet and Tweet about their latest visit to the physician office. They can rate their doctors on healthgrades.com. They can research their own illnesses through websites such as WebMD.com and MDAdvice.com.* The recent development of Health Information Technology (HIT) such as Electronic Medical Records (EMR) could help prevent medical errors and exchange patient information among healthcare providers. Moreover, during the current pandemic, the use telemedicine has been expanded to ensure access to essential health services. (See CDC guideline for telehealth services during COVID-19 pandemic: https://www.cdc.gov/coronavirus/2019-ncov/hcp/tele… How might you harness modern technology to transform the role of the primary care physician, creating a “Marcus Welby for the 21st Century”? (I.e., how does technology such as telemedicine, healthgrades.com and WebMD.com change the role of primary care physicians?) Specifically, how does modern technology affect demand inducement (i.e., the extent to which physicians could potentially induce demand)? * Note that these sites are not always a good source for determining what caused their illnesses or accurately providing a self-diagnosis. Sometimes these sites even create frustration and unnecessary worrying.

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TH1EAMERICAN
ECONOMIC REVIEW
VOLUME
LIII
DECEMBER
UNCERTAINTY
ECONOMICS
By
1963
NUMBER 5
AND THE WELFARE
OF MEDICAL CARE
KENNETH
J. ARROW*
I. Introduction:Scope and Method
This paper is an exploratoryand tentativestudy of the specific
of medicalcare as the object of normativeeconomics.It
differentia
is contendedhere,on the basis of comparisonof obviouscharacteristics of themedical-careindustry
withthe normsof welfareeconomics,
that the special economicproblemsof medicalcare can be explained
as adaptationsto the existenceof uncertainty
in the incidenceof disease and in theefficacy
of treatment.
It shouldbe notedthatthe subjectis the medical-care
not
industry,
health.The causal factorsin healthare many,and the provisionof
medicalcare is only one. Particularlyat low levels of income,other
commoditiessuch as nutrition,
shelter,clothing,and sanitationmay
be much more significant.
It is the complexof servicesthat center
about the physician,privateand grouppractice,hospitals,and public
health,whichI proposeto discuss.
The focus of discussionwill be on the way the operationof the
medical-careindustryand the efficacy
withwhichit satisfiestheneeds
of societydifferfroma norm,if at all. The “norm”that the economistusuallyuses forthepurposesof such comparisons
is theoperation
of a competitivemodel,that is, the flowsof servicesthat would be
* The author is professorof economicsat StanfordUniversity.He wishes to expresshis
thanks for usefulcommentsto F. Bator, R. Dorfman,V. Fuchs, Dr. S. Gilson, R. Kessel,
S. Mushkin,and C. R. Rorem. This paper was preparedunderthe sponsorshipof the Ford
Foundation as part of a seriesof papers on the economicsof health,education,and welfare.
942
THE AMERICAN ECONOMIC REVIEW
offered
and purchasedand the pricesthat wouldbe paid forthemif
each individualin themarketoffered
or purchasedservicesat thegoing
prices as if his decisionshad no influenceover them,and the going
prices were such that the amountsof serviceswhichwere available
equalled the total amountswhich otherindividualswere willingto
purchase,withno imposedrestrictions
on supplyor demand.
The interestin the competitivemodel stemspartlyfromits presumeddescriptive
powerand partlyfromits implications
foreconomic
efficiency.
In particular,we can state the following
well-known
proposition (First OptimalityTheorem). If a competitiveequilibrium
existsat all, and if all commodities
relevantto costsor utilitiesare in
factpricedin the market,thenthe equilibriumis necessarilyoptimal
in the following
precisesense (due to V. Pareto): There is no other
allocationof resourcesto serviceswhichwill make all participantsin
themarketbetteroff.
Both the conditionsof thisoptimality
theoremand thedefinition
of
optimality
call forcomment.
A definition
is just a definition,
but when
the definiendum
is a wordalreadyin commonuse withhWighly
favorable connotations,
it is clearthatwe are reallytryingto be persuasive;
we are implicitly
recommending
theachievement
of optimalstates.’It
is reasonableenoughto assertthata changein allocationwhichmakes
all participants
betteroffis one thatcertainlyshouldbe made; thisis
a value judgment,not a descriptive
proposition,
but it is a veryweak
one. Fromthisit followsthatit is notdesirableto put up witha nonoptimalallocation.But it does not followthatif we are at an allocationwhichis optimalin theParetosense,we shouldnotchangeto any
other.We cannotindeedmake a changethatdoes not hurtsomeone;
but we can still desireto changeto anotherallocationif the change
makesenoughparticipants
betteroffand by so muchthatwe feelthat
the injuryto othersis not enoughto offsetthe benefits.Such interpersonalcomparisonsare, of course,value judgments.The change,
however,by the previousargumentoughtto be an optimalstate; of
coursethereare manypossiblestates,each of whichis optimalin the
sensehereused.
However,a value judgmenton thedesirability
of each possiblenew
of benefitsand costs corresponding
distribution
to each possiblereallocationof resourcesis not,in general,necessary.Judgments
about
thedistribution
can be made separately,in one sense,fromthoseabout
allocationif certainconditionsare fulfilled.
Beforestatingtherelevant
it is necessaryto remarkthatthe competitive
proposition,
equilibrium
achieveddependsin good measureon the initialdistribution
of purchasingpower,whichconsistsof ownershipof assets and skills that
‘This point has been stressedby I. M. D. Little [19, pp. 71-74]. For the concept of a
“persuasivedefinition,”see C. L. Stevenson[27, pp. 210-17].
ARROW: UNCERTAINTY AND MEDICAL CARE
943
commanda price on the market.A transferof assets amongindividuals will,in general,changethe finalsuppliesof goods and services
and the pricespaid forthem.Thus, a transferof purchasingpower
fromthe well to the ill will increasethe demandformedicalservices.
This will manifestitselfin the shortrunin an increasein thepriceof
medicalservicesand in thelongrunin an increasein theamountsupplied.
With this in mind,the followingstatementcan be made (Second
Optimality
Theorem): If thereare no increasingreturnsin production,
and if certainotherminorconditionsare satisfied,theneveryoptimal
state is a competitiveequilibriumcorresponding
to some initialdistributionof purchasingpower.Operationally,
the significance
of this
proposition
is thatif theconditionsof thetwooptimality
theoremsare
and if theallocationmechanism
in thereal worldsatisfiesthe
satisfied,
conditionsfora competitive
model,thensocial policycan confineitself
to steps takento alter the distribution
of purchasingpower.For any
given distribution
of purchasingpower,the marketwill, under the
assumptionsmade, achieve a competitive
equilibriumwhichis necessarilyoptimal;and any optimalstateis a competitive
equilibriumcorrespondingto some distributionof purchasingpower, so that any
desiredoptimalstatecan be achieved.
The redistribution
of purchasingpower among individualsmost
simplytakesthe formof money:taxesand subsidies.The implications
of such a transferfor individualsatisfactionsare, in general,not
knownin advance. But we can assumethatsocietycan ex post judge
the distribution
of satisfactionsand, if deemedunsatisfactory,
take
steps to correctit by subsequenttransfers.Thus, by successiveapproximations,
a mostpreferred
social state can be achieved,withresourceallocationbeinghandledby the marketand publicpolicyconfinedto the redistribution
of moneyincome.2
If, on the contrary,
the actual marketdiffers
significantly
fromthe
competitivemodel,or if the assumptionsof the two optimalitytheoremsare not fulfilled,
the separationof allocativeand distributional
proceduresbecomes,in mostcases, impossible.3
The firststep thenin theanalysisof themedical-caremarketis the
2The separationbetween allocation and distributioneven under the above assumptions
has 4osSed over problemsin the executionof any desiredredistribution
policy; in practice,
it is virtuallyimpossibleto find a set of taxes and subsidies that will not have an adverse effecton the achievementof an optimal state. But this discussionwould take us
even furtherafieldthan we have already gone.
‘The basic theoremsof welfare economics alluded to so brieflyabove have been the
subject of voluminous literature,but no thoroughlysatisfactorystatementcoveringboth
the theoremsthemselvesand the significanceof exceptionsto them exists. The positive
assertionsof welfareeconomicsand theirrelationto the theoryof competitiveequilibrium
are admirably covered in Koopmans [181. The best summary of the various ways in
whichthe theoremscan fail to hold is probablyBator’s [6].
944
THE AMERICAN ECONOMIC REVIEW
comparisonbetweentheactual marketand thecompetitive
model.The
of thiscomparisonhas been a recurrent
methodology
subjectof conin economicsforovera century.Recently,M. Friedman[15]
troversy
has vigorously
arguedthatthe competitive
or any othermodelshould
be testedsolelyby its abilityto predict.In thecontextof competition,
he comesclose to arguingthatpricesand quantitiesare the onlyrelevant data. This point of view is valuable in stressingthat a certain
amountof lack of realismin the assumptionsof a modelis no argumentagainstits value. But theprice-quantity
implications
of thecompetitivemodelforpricingare noteasy to derivewithoutmajor–and,in
manycases, impossible-econometric
efforts.
In thispaper,theinstitutional
organization
and theobservablemores
of the medicalprofessionare includedamongthe data to be used in
assessingthe competitiveness
of the medical-caremarket.I shall also
examinethe presenceor absence of the preconditions
forthe equivalence of competitive
equilibriaand optimalstates.The majorcompetitivepreconditions,
in the sense used here,are three:the existenceof
competitiveequilibrium,the marketability
of all goods and services
relevantto costsand utilities,and nonincreasing
retiurns.
The firsttwo,
as we have seen,insurethatcompetitive
equilibrium
is necessarilyoptimal; the thirdinsuresthat everyoptimalstate is the competitive
equilibriumcorresponding
to some distribution
of income.4The first
and thirdconditionsare interrelated;indeed,nonincreasing
returns
plus some additionalconditionsnot restrictive
in a moderneconomy
implythe existenceof a competitive
equilibrium,
i.e., implythatthere
willbe someset of priceswhichwillclearall markets.5
The conceptof marketability
is somewhatbroaderthan the traditional divergencebetweenprivateand social costs and benefits.The
latterconceptrefersto cases in whichthe organizationof the market
does not requirean individualto pay forcosts that he imposeson
othersas the resultof his actionsor does not permithim to receive
compensation
forbenefitshe confers.In themedicalfield,the obvious
exampleis the spread of communicablediseases. An individualwho
failsto be immunizednot onlyriskshis ownhealth,a disutility
which
presumablyhe has weighedagainstthe utilityof avoidingthe procedure,but also thatof others.In an ideal pricesystem,therewouldbe a
price whichhe would have to pay to anyonewhose healthis endangered,a price sufficiently
highso thatthe otherswould feelcompensated; or,alternatively,
therewouldbe a pricewhichwouldbe paid to
himby othersto inducehimto undergothe immunization
procedure.
‘There are furtherminor conditions,for which see Koopmans [18, pp. 50-551.
5 For a more precisestatementof the existenceconditions,
see Koopmans [18, pp. 56-60]
or Debreu [12, Ch. 5] .
ARROW: UNCERTAINTY AND MEDICAL CARE
945
Eilthersystemwouldlead to an optimalstate,thoughthedistributional
implicationswould be different.
It is, of course,not hard to see that
such pricesystemscould not,in fact,be practical;to approximate
an
optimalstate it would be necessaryto have collectiveintervention
in
the formof subsidyor tax or compulsion.
By tlle absenceof marketability
foran actionwhichis identifiable,
technologically
possible,and capable of influencing
some individual’s
welfare,forbetteror forworse,is meantherethe failureof theexisting marketto providea meanswherebythe servicescan be bothofferedand demandedupon paymentof a price.Nonmarketability
may
be due to intrinsictechnological
of the productwhich
characteristics
preventa suitableprice frombeingenforced,as in the case of communicablediseases,or it may be due to social or historicalcontrols,
such as thoseprohibiting
an individualfromsellinghimselfintoslavery.This distinction
to make precise,thoughit is
is, in fact,difficult
obviouslyof importanceforpolicy; forthepresentpurposes,it willbe
sufficient
to identifynonmarketability
with the observedabsence of
markets.
The instanceof nonmarketability
withwhichwe shall be mostconcernedis thatof risk-bearing.
The relevanceof risk-bearing
to medical
care seemsobvious; illnessis to a considerableextentan unpredictable
phenomenon.
The abilityto shifttherisksof illnessto othersis worth
a pricewhichmanyare willingto pay. Because of poolingand of superiorwillingness
and ability,othersare willingto bear therisks.Nevertheless,as we shall see in greaterdetail,a greatmanyrisksare not
covered,and indeedthe marketsforthe servicesof risk-coverage
are
poorlydevelopedor nonexistent.
Whythisshouldbe so is explainedin
moredetailin SectionIV.C below; briefly,
it is impossibleto drawup
insurancepolicieswhichwill sufficiently
distinguish
amongrisks,particularlysince observationof the resultswill be incapableof distinguishingbetweenavoidable and unavoidablerisks,so that incentives
to avoidlossesare diluted.
The optimalitytheoremsdiscussedabove are usuallypresentedin
the literatureas referring
onlyto conditionsof certainty,
but thereis
no difficulty
in extending
themto thecase of risks,providedtheadditionalservicesof risk-bearing
are includedwithothercommodities.6
However,thevarietyof possiblerisksin theworldis reallystaggering. The relevantcommodities
include,in effect,
bets on all possible
in theworldwhichimpingeuponutilities.In fact,manyof
occurrences
these “commodities,”
i.e., desiredprotectionagainstmanyrisks,are
‘The theory,in variant forms,seems to have been firstworked out by Allais [2],
Arrow [5], and Baudier [7]. For furthergeneralization,see Debreu [11] and [12, Ch. 71.
946
THE AMERICANECONOMICREVIEW
simplynotavailable.Thus, a wide class of commodities
is nonmarketand
a
basic
competitive
precondition
is not satisfied.7
able,
There is a stillmoresubtleconsequenceof theintroduction
of riskbearing considerations.When there is uncertainty,
informationor
knowledgebecomesa commodity.
Like othercommodities,
it has a cost
of productionand a cost of transmission,
and so it is naturallynot
spread out over the entirepopulationbut concentrated
amongthose
who can profitmostfromit. (These costsmaybe measuredin timeor
as well as money.)But the demandforinformation
disutility
is difficult to discussin the rationaltermsusuallyemployed.The value of
information
is frequently
not knownin any meaningful
sense to the
buyer; if, indeed,he knew enoughto measurethe value of information,he would know the information
itself.But information,
in the
formof skilledcare,is preciselywhatis beingbouight
frommostphysicians,and, indeed,frommostprofessionals.
The elusivecharacterof
information
as a commodity
suggeststhatit departsconsiderably
from
the usual marketability
assumptionsabout commodities.8
That riskand uncertainty
are, in fact,significant
elementsin medical care hardlyneedsargument.
I willholdthatvirtually
all thespecial
featuresof thisindustry,
in fact,stemfromthe prevalenceof uncertainty.
The nonexistence
of marketsforthebearingofsomerisksin thefirst
instancereduceswelfareforthosewho wishto transferthoserisksto
othersfora certainprice,as wellas forthosewhowouldfindit profitable to take on theriskat suchprices.But it also reducesthedesireto
renderor consumeserviceswhichhave riskyconsequences;in technical language,these commoditiesare complementary
to risk-bearing.
theproductionand consumption
Conversely,
of commodities
and services withlittleriskattachedact as substitutes
forrisk-bearing
and are
encouragedby marketfailuretherewithrespectto risk-bearing.
Thus
theobservedcommodity
patternwillbe affected
by thenonexistence
of
othermarkets.
‘ It should also be remarkedthat in the presence
of uncertainty,indivisibilities
that are
small to create little difficulty
sufficiently
for the existenceand viability of competitive
equilibriummay neverthelessgive rise to a considerablerange of increasingreturnsbecause of the operationof the law of large numbers.Since most objects of insurance(lives,
fire hazards, etc.) have some element of indivisibility,insurance companies have to be
above a certainsize. But it is not clear that this effectis sufficiently
great to createserious
obstacles to the existenceand viability of competitiveequilibriumin practice.
8 One form of productionof informationis research.Not only does the product have
unconventionalaspects as a commodity,but it is also subject to increasingreturnsin use,
since new ideas, once developed,can be used over and over withoutbeing consumed,and
to difficulties
of marketcontrol,since the cost of reproductionis usually much less than
that of production.Hence, it is not surprisingthat a free enterpriseeconomy will tend
to underinvestin research;see Nelson [211 and Arrow [4].
ARROW: UNCERTAINTY AND MEDICAL CARE
947
The failureof one or moreof the competitive
has as
preconditions
its most immediateand obvious consequencea reductionin welfare
below that obtainablefromexistingresourcesand technology,
in the
senseof a failureto reachan optimalstatein thesenseof Pareto.But
morecan be said. I proposeheretheviewthat,whenthemarketfails
to achievean optimalstate,societywill,to someextentat least,recognize thegap, and nonmarket
social institutions
willariseattempting
to
bridgeit.9Certainlythisprocessis notnecessarilyconscious;noris it
successfulin approachingmorecloselyto optimalitywhen
uniformly
the entirerangeof consequencesis considered.It has always been a
favoriteactivityof economiststo pointout thatactionswhichon their
face achieve a desirablegoal may have less obvious consequences
over time,whichmorethanoffsettheoriginalgains.
particularly
But it is contendedhere that the special structuralcharacteristics
of themedical-care
marketare largelyattemptsto overcomethelack of
due to the nonmarketability
of thebearingof suitablerisks
optimality
and the imperfect
of information.
These compensatory
marketability
institutional
changes,withsome reinforcement
fromusual profitmotives, largelyexplain the observednoncompetitive
behaviorof the
medical-caremarket,behaviorwhich,in itself,interferes
with optimality.The socialadjustmenttowardsoptimality
thusputsobstaclesin
its ownpath.
The doctrinethat societywill seek to achieve optimalityby nonmarketmeans if it cannotachieve themin the marketis not novel.
at least in its economicactivities,is usually
Certainly,thegovernment,
or explicitly
implicitly
held to function
as theagencywhichsubstitutes
for the market’sfailure.’0I am arguinghere that in some circumstancesothersocial institutions
will step intothe optimality
gap, and
thatthe medical-careindustry,
withits varietyof special institutions,
some ancient,some modern,exemplifies
thistendency.
It may be usefulto remarkherethata good part of thepreference
for redistribution
expressedin government
taxationand expenditure
policiesand privatecharitycan be reinterpreted
as desireforinsurance. It is noteworthy
thatvirtuallynowhereis therea systemof subsidies thathas as its aim simplyan equalizationof income.The subsidiesor othergovernmental
helpgo to thosewhoare disadvantagedin
life by eventsthe incidenceof whichis popularlyregardedas unpre’An important current situation in which normal market relations have had to be
greatly modifiedin the presence of great risks is the production and procurementof
modern weapons; see Peck and Scherer [23, pp. 581-82] (I am indebted for this reference to V. Fuchs) and [1, pp. 71-75].
0For an explicit statementof this view, see Baumol [8]. But I believe this position
is implicitin most discussionsof the functionsof government.
948
THE AMERICAN ECONOMIC REVIEW
dictable: the blind,dependentchildren,the medicallyindigent.Thus,
optimality,in a contextwhichincludesrisk-bearing,
includesmuch
thatappears to be motivatedby distributional
value judgmentswhen
lookedat in a narrowercontext.”
This methodological
backgroundgivesriseto the following
plan for
thispaper. SectionII is a catalogueof stylizedgeneralizations
about
themedical-care
marketwhichdifferentiate
it fromtheusual commodity markets.In SectionIII the behaviorof the marketis compared
withthatof the competitive
modelwhichdisregardsthe factof uncertainty.In SectionIV, themedical-caremarketis compared,bothas to
behaviorand as to preconditions,
withthe ideal competitivemarket
thattakesaccountof uncertainty;
an attemptwillbe made to demonstratethat the characteristics
outlinedin SectionII can be explained
eitheras theresultof deviationsfromthecompetitive
or
preconditions
as attemptsto compensateby otherinstitutions
forthesefailures.The
discussionis not designedto be definitive,
but provocative.In particular, I have been charyabout drawingpolicyinferences;to a considerable extent,they depend on furtherresearch,forwhichthe present
paper is intendedto providea framework.
II. A Surveyof theSpecial Characteristics
of the
Medical-CareMarket’2
This sectionwilllist selectivelysomecharacteristics
of medicalcare
whichdistinguish
it fromtheusual commodity
of economicstextbooks.
The listis notexhaustive,
and it is notclaimedthatthecharacteristics
listedare individually
uniqueto thismarket.But,takentogether,
they
do establisha specialplace formedicalcare in economicanalysis.
A. The Nature of Demand
The most obvious distinguishing
characteristics
of an individual’s
demandformedicalservicesis that it is not steadyin originas, for
example,forfoodor clothing,but irregularand unpredictable.
Medical services,apart frompreventive
services,affordsatisfaction
onlyin
the eventof illness,a departurefromthe normalstateof affairs.It is
hard, indeed,to thinkof anothercommodityof significance
in the
average budgetof whichthis is true.A portionof legal services,devotedto defensein criminaltrialsor to lawsuits,mightfallin thiscategorybut theincidenceis surelyverymuchlower(and, of course,there
‘Since writingthe above, I findthat Buchanan and Tullock [10, Ch. 13] have argued
that all redistribution
can be interpreted
as “incomeinsurance.”
12For an illuminatingsurvey to which I am much indebted,see S. Mushkin [20].
ARROW: UNCERTAINTY AND MEDICAL CARE
949
are, in fact, stronginstitutionalsimilaritiesbetweenthe legal and
medical-caremarkets.)’3
In addition,the demandformedicalservicesis associated,witha
considerableprobability,
Thereis
withan assaulton personalintegrity.
some riskof deathand a moreconsiderableriskof impairment
of full
functioning.
In particular,thereis a majorpotentialforloss or reductionof earningability.The risksare notby themselves
unique; foodis
also a necessity,
butavoidanceofdeprivation
offoodcan be guaranteed
withsufficient
income,wherethe same cannotbe said of avoidanceof
illness.Illness is, thus,not onlyriskybut a costlyriskin itself,apart
fromthecost of medicalcare.
B. ExpectedBehaviorof thePhysician
It is clear fromeverydayobservationthatthebehaviorexpectedof
sellersof medicalcare is different
fromthatof businessmenin general. These expectationsare relevantbecause medicalcare belongsto
the categoryof commodities
forwhichtheproductand the activityof
production
are identical.In all suchcases,thecustomercannottestthe
productbeforeconsumingit, and thereis an elementof trustin the
relation.’ But the ethicallyunderstoodrestrictions
on the activitiesof
a physicianare muchmoreseverethanon thoseof,say, a barber.His
behavioris supposedto be governedby a concernforthe customer’s
welfarewhichwould not be expectedof a salesman.In Talcott Parsons’s terms,thereis a “collectivity-orientation,”
whichdistinguishes
medicineand otherprofessionsfrombusiness,whereself-interest
on
the part of participants
is the acceptednorm.’5
A fewillustrations
willindicatethedegreeof difference
betweenthe
behaviorexpectedof physiciansand thatexpectedof the typicalbusinessman.18
(1) Advertising
and overtprice competition
are virtually
eliminatedamong physicians.(2) Advice givenby physiciansas to
furthertreatment
by himselfor othersis supposedto be completely
“In governmentaldemand, military power is an example of a service used only
irregularlyand unpredictably.Here too, special institutionaland professionalrelations
have emerged,thoughthe precisesocial structureis different
for reasonsthat are not hard
to analyze.
” Even with material commodities,testingis
never so adequate that all elements of
implicittrustcan be eliminated.Of course,over the long run, experiencewith the quality
of productof a given sellerprovidesa check on the possibilityof trust.
15See [22, p. 463]. The whole of [22, Ch. 101 is a most illuminatinganalysis of the
social role of medical practice; though Parsons’ interestlies in different
areas frommine,
I mustacknowledgehere my indebtednessto his work.
16 I am indebted to Herbert Klarman of Johns Hopkins Universityfor some of the
points discussedin this and the followingparagraph.
950
THE AMERICAN ECONOMIC REVIEW
is
divorcedfromself-interest.
(3) It is at least claimedthattreatment
dictatedby the objectiveneedsof thecase and notlimitedby financial
considerations.”7
Whiletheethicalcompulsionis surelynotas absolute
in factas it is in theory,
we can hardlysupposethatit has no influence
over resourceallocationin thisarea. Charitytreatment
in one formor
anotherdoes existbecause of thistraditionabouthumanrightsto adequate medicalcare.’8 (4) The physicianis reliedon as an expertin
to theexistenceof illnessesand injuriesforvariouslegaland
certifying
otherpurposes.It is sociallyexpectedthathis concernforthecorrect
conveyingof information
will,whenappropriate,outweighhis desire
to please his customers.”g
Departurefromthe profitmotiveis strikingly
manifestedby the
overproprietary
of nonprofit
overwhelming
predominance
hospitals.20
The hospitalper se offersservicesnot too different
fromthose of a
hotel,and it is certainlynotobviousthattheprofitmotivewillnotlead
to a moreefficient
supply.The explanationmaylie eitheron thesupply
side or on thatof demand.The simplestexplanationis thatpublicand
privatesubsidiesdecreasethecostto thepatientin nonprofit
hospitals.
A secondpossibilityis that the associationof profit-making
withthe
supplyof medical servicesarouses suspicionand antagonismon the
part of patientsand referring
physicians,so theydo prefernonprofit
Eitherexplanationimpliesa preference
on thepartofsome
institutions.
group,whetherdonors or patients,against the profitmotivein the
supplyof hospitalservices.2′
1T The belief that the ethics of medicinedemands treatmentindependentof the patient’s
ability to pay is stronglyingrained.Such a perceptiveobserveras Rene Dubos has made
the remark that the high cost of anticoagulantsrestrictstheir use and may contradict
classical medical ethics, as though this were an unprecedentedphenomenon.See [13, p.
4191. “A time may come when medical ethics will have to be consideredin the harsh
light of economics” (emphasis added). Of course, this expectationamounts to ignoring
the scarcity of medical resources; one has only to have been poor to realize the error.
We may confidentlyassume that price and income do have some consequences for
medical expenditures.
18A needed piece of researchis a study of the exact nature of the variationsof medical
care received and medical care paid for as income rises. (The relevant income concept
also needs study.) For this purpose,some disaggregationis needed; differences
in hospital
care which are essentiallymattersof comfortshould, in the above view, be much more
responsiveto incomethan,e.g., drugs.
“9This role is enhanced in a socialistsociety,where the state itselfis activelyconcerned
with illnessin relationto work; see Field [14, Ch. 91.
‘ About 3 per cent of beds were in proprietaryhospitalsin 1958, against 30 per cent in
voluntary nonprofit,and the remainderin federal,state, and local hospitals; see [26,
Chart 4-2, p. 601.
” C. R. Rorem has pointed out to me some furtherfactorsin this analysis. (1) Given
the social intentionof helping all patientswithout regard to immediateability to pay,
economies of scale would dictate a predominanceof community-sponsored
hospitals. (2)
ARROW: UNCERTAINTY AND MEDICAL CARE
951
to collectivity-oriented
Conformity
behavioris especiallyimportant
sinceit is a commonplace
thatthephysician-patient
relationaffects
the
qualityof the medicalcare product.A pure cash nexuswouldbe inadequate; if nothingelse, the patientexpectsthatthe same physician
will normallytreathim on successiveoccasions.This expectationis
strongenoughto persistevenin the SovietUnion,wheremedicalcare
is nominallyremovedfromthe marketplace [14, pp. 194-96]. That
purelypsychicinteractions
betweenphysicianand patienthave effects
which are objectivelyindistinguishable
in kind fromthe effectsof
medicationis evidencedby theuse of theplaceboas a controlin medical experimentation;
see Shapiro [25].
C. ProductUncertainty
as to thequalityof theproductis perhapsmoreintense
Uncertainty
herethanin any otherimportant
commodity.
Recoveryfromdiseaseis
as unpredictable
as is its incidence.In most commodities,
the possibilityof learningfromone’s ownexperienceor thatof othersis strong
becausethereis an adequatenumberof trials.In thecase of severeillness,thatis, in general,not true; the uncertainty
due to inexperience
is added to theintrinsic
difficulty
of prediction.
Further,theamountof
uncertainty,
measuredin termsof utilityvariability,
is certainlymuch
greaterformedicalcare in severecases thanfor,say, housesor automobiles,even thoughthese are also expendituressufficiently
infrequent so thattheremay be considerableresidualuncertainty.
Further,thereis a specialqualityto theuncertainty;
it is verydifferenton the twosides of the transaction.
Because medicalknowledge
is so complicated,
theinformation
possessedby thephysicianas to the
consequencesand possibilitiesof treatment
is necessarilyverymuch
greaterthan that of the patient,or at least so it is believedby both
parties.22
Further,bothpartiesare awareof thisinformational
inequality,and theirrelationis coloredby thisknowledge.
To avoid misunderstanding,
observethatthe difference
in informationrelevanthereis a difference
in information
as to theconsequence
of a purchaseof medicalcare. There is alwaysan inequalityof informationas to productionmethodsbetweenthe producerand the purchaser of any commodity,
but in most cases the customermay well
Some proprietaryhospitalswill tend to controltotal costs to the patient more closely,including the fees of physicians,who will thereforetend to prefercommunity-sponsored
hospitals.
2″Without tryingto assess the presentsituation,it is clear in retrospectthat at some
point in the past the actual differentialknowledge possessed by physicians may not
have been much. But from the economic point of view, it is the subjective belief of
both parties, as manifestedin their market behavior, that is relevant.
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THE AMERICAN ECONOMIC REVIEW
have as good or nearlyas good an understanding
of theutilityof the
productas theproducer.
D. SupplyConditions
In competitive
theory,thesupplyof a commodity
is governedby the
net returnfromits productioncomparedwith the returnderivable
fromthe use of the same resourceselsewhere.There are severalsignificantdeparturesfromthistheoryin thecase of medicalcare.
Most obviouisly,
entryto the professionis restrictedby licensing.
supplyand therefore
increasesthecostof
Licensing,ofcourse,restricts
medicalcare. It is defendedas guaranteeinga minimumof quality.
Restriction
of entryby licensingoccursin mostprofessions,
including
barberingand undertaking.
A second featureis perhaps even more remarkable.The cost of
medicaleducationtodayis highand, accordingto theusual figures,
is
borneonlyto a minorextentby thestudent.Thus, theprivatebenefits
to the enteringstuden