Healthcare and the limits of the free market

While it is undeniable that free markets and competition are efficient optimizing mechanisms in general, their place in a system of healthcare is more complex. There are several reasons for this.

A clear example of how competition is a mechanism for selecting the best of something is a sports tournament bracket such as the NFL playoffs or the NCAA men’s basketball tournament. At each point in the bracket, i.e. each game, the “better” contestant is selected and advances, resulting, in theory, that the winner of the last contest will have been the best. The tournament and competition is a process of progressively determining “better.” In these circumstances however, the criteria for what constitutes better and best are obvious. The games are played according to rules that apply to all games and the criteria for determining successful outcomes does not change from one contest to the next. Coaches and managers can strategize and game-plan and improve according to the accepted criteria for success. This concept does not translate cleanly to healthcare. There are not accepted criteria, analogous to game rules, objectives or criteria for winning, that are generally applicable to healthcare. For example, given a group of possible treatments for a given condition, different people will have different perspectives on what constitutes “better.” Some patients are afraid of needles, some would rather tolerate the disease than the cure, others have idiosyncratic biases for and against certain treatments (for example, “natural” or “homeopathic” cures). Some treatments are associated with longer recovery times, or are more painful or more disfiguring, and have different efficacies that different people value differently. It is hard for markets and competition to select out better processes if there is no clear idea of what “better” is. (One anticipated response is that markets allow people to select what is better for them, and thus, within defined subpopulations there is a workable idea of what is better. This is true regarding subpopulations, but the word “system in the first paragraph was chosen intentionally. Unless those subpopulations are self-contained, optimizing outcomes within those populations does not necessarily improve the system as a whole.)

Another challenge for markets is the tension between “best” and “good enough.” The whole idea behind competition is to determine what is best. The whole idea behind the give-and-take of healthcare policy is to determine what is good enough in the setting of conflicting interests. There is little doubt that if the priority of healthcare policy were to minimize the risks of medical penury, competition would find a way to achieve that outcome, but at the expense of other considerations. The same applies to cost-effectiveness, affordability, access, universal coverage, innovation, etc. Different constituencies have different priorities, and as competition optimizes one, it will likely burden another. When this happens, expect the “losing” constituency to complain that the healthcare system is broken, and that the government must fix it. Here is the general principle: competition is concerned with what is best; policy-making is concerned what is good enough in the setting of conflicting interests. Competition is still the optimizing mechanism in both cases though, except in the policy-making case it is competition for political influence, not healthcare outcomes.