Uncertain Times: Kenneth Arrow and the Changing Economics of Health Care - Hardcover

Hardcover

ISBN 10: 0822332094 ISBN 13: 9780822332091

Verlag: Duke University Press, 2004

Inhaltsangabe

This volume revisits the Nobel Prize-winning economist Kenneth Arrow’s classic 1963 essay “Uncertainty and the Welfare Economics of Medical Care” in light of the many changes in American health care since its publication. Arrow’s groundbreaking piece, reprinted in full here, argued that while medicine was subject to the same models of competition and profit maximization as other industries, concepts of trust and morals also played key roles in understanding medicine as an economic institution and in balancing the asymmetrical relationship between medical providers and their patients. His conclusions about the medical profession’s failures to “insure against uncertainties” helped initiate the reevaluation of insurance as a public and private good.

Coming from diverse backgrounds—economics, law, political science, and the health care industry itself—the contributors use Arrow’s article to address a range of present-day health-policy questions. They examine everything from health insurance and technological innovation to the roles of charity, nonprofit institutions, and self-regulation in addressing medical needs. The collection concludes with a new essay by Arrow, in which he reflects on the health care markets of the new millennium. At a time when medical costs continue to rise, the ranks of the uninsured grow, and uncertainty reigns even among those with health insurance, this volume looks back at a seminal work of scholarship to provide critical guidance for the years ahead.

Contributors
Linda H. Aiken
Kenneth J. Arrow
Gloria J. Bazzoli
M. Gregg Bloche
Lawrence Casalino
Michael Chernew
Richard A. Cooper
Victor R. Fuchs
Annetine C. Gelijns
Sherry A. Glied
Deborah Haas-Wilson
Mark A. Hall
Peter J. Hammer
Clark C. Havighurst
Peter D. Jacobson
Richard Kronick
Michael L. Millenson
Jack Needleman
Richard R. Nelson
Mark V. Pauly
Mark A. Peterson
Uwe E. Reinhardt
James C. Robinson
William M. Sage
J. B. Silvers
Frank A. Sloan
Joshua Graff Zivin

Über diesen Titel

Über die Autorin bzw. den Autor

Peter J. Hammer is Assistant Professor at the University of Michigan Law School.

Deborah Haas-Wilson is Professor of Economics at Smith College.

Mark A. Peterson is Professor of Policy Studies and Political Science at the University of California, Los Angeles, School of Public Policy and Social Research.

William M. Sage is Professor at the Columbia University School of Law.

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Uncertain Times

Kenneth Arrow and the Changing Economics of Health CareBy Peter J. Hammer

Duke University Press

Copyright © 2003 Peter J. Hammer
All right reserved.
ISBN: 9780822332091

Chapter One

MICHAEL CHERNEW

* General Equilibrium and Marketability in the Health Care Industry

Kenneth Arrow's 1963 article, "Uncertainty and the Welfare Economics of Medical Care," has become a seminal essay in the field of health economics. Its fundamental contribution is a detailed and thoughtful comparison of the deviations between the workings of markets for medical care and the competitive ideal. As Arrow demonstrates, a variety of factors prevents the medical care market from yielding an optimal allocation of resources. Prime among those factors is the "lack of marketability" for many products. Essentially, certain products that would improve the allocation of resources if they existed are not available for purchase (nonmarketable).

Arrow provides a complementary analysis of how "nonmarket social institutions" may arise to fill the gaps left by the lack of markets for certain products and thereby improve resource allocation. By nonmarket social institutions, he largely means norms of behavior that deviate from those typically observed in a competitive model.

This essay examines nonmarketability in the health care sector. The first section outlines Arrow's notion of general equilibrium in the health care sector and the problem of nonmarketability. The second section examines the markets (and market failures) in the early 1960s and how those market failures can be traced to a lack of markets for several types of products. It concludes with a discussion of how nonmarket institutions could be viewed as filling the gaps for those missing markets. The final two sections discuss how, since 1963, there has been an expansion in markets and an associated change in the role of nonmarket institutions. The central thesis of this essay is that market and nonmarket institutions have a symbiotic relationship, with nonmarket institutions serving to improve resource allocation in areas where markets fail or do not exist. As the role of the market has expanded, the role of social institutions has changed to fill new gaps that have arisen in the increasingly market-oriented environment.

ARROW'S GENERAL EQUILIBRIUM ORIENTATION AND THE PROBLEM OF NONMARKETABILITY

Much of Arrow's acclaim reflects his exposition of the theory of general equilibrium. In economics, general equilibrium refers to the situation in which all markets (consumer and producer markets as well as markets for inputs such as labor and capital) are in equilibrium (namely, supply meets demand). It is largely a theory in which prices adjust to achieve this balance, and the theory recognizes the interconnection between markets.

The theory of general equilibrium is founded on decentralized action by consumers and firms, with consumers maximizing their well-being (utility) and firms maximizing profits. In standard models, individuals are assumed to be perfectly informed. Perfect information does not mean that everyone knows what the future will hold, only that they know the probabilities with which different events may occur. Outcomes are uncertain, but individuals are not uninformed (or misinformed). General equilibrium models also assume that, when faced with a set of prices, individuals (and firms) are cognitively capable of maximizing their well-being through their behavior. A variety of other assumptions, such as those that relate to market power (or lack thereof ), complete the general equilibrium model but are less salient for this discussion.

As Arrow notes in his essay, much of the appeal of the general equilibrium model relates to its implications for economic efficiency. Specifically, in general equilibrium settings two theorems of welfare economics link optimal resource allocation and competition. First, if a competitive equilibrium exists, it will be optimal; second, if we do not like the particular competitive equilibrium that arises from the market, we could reallocate incomes to achieve, through competition, any other optimal allocation we desired.

Such an analysis relies heavily on one's definition of optimal resource allocation, and Arrow is careful to introduce early in his essay the standards he uses and their precise meaning. Specifically, he adopts the economic concept of Pareto optimality, which defines an optimal allocation of resources as one in which no one person can be made better off without making at least one person worse off. He is careful to note that this is a weak definition of optimality. Many such allocations may exist, and though some value judgments would be required, society may not view each of them as equally desirable.

Arrow recognized several prerequisites for competitive equilibrium. Among the key requirements is that markets exist for all of the relevant goods and services (all relevant goods and services are marketable). Arrow views nonmarketability essentially as synonymous with a lack of markets. Marketability is necessary if individuals are to be able to match their purchases to their preferences, a fundamental feature of optimality. Without markets, there are commodities that would enhance welfare if produced, but they are not produced.

Arrow recognized that in the competitive ideal, general equilibrium would be characterized by a very rich set of markets. In the absence of this rich set of markets, Arrow contended that nonmarket institutions would develop so that resource allocation would come closer to the competitive ideal than would otherwise occur if only the incomplete set of markets were relied upon.

MARKETS, MARKETABILITY, AND THE ROLE OF NONMARKET INSTITUTIONS IN THE EARLY 1960S

The medical care market, as outlined by Arrow, really comprises two distinct, but interrelated, markets-the market for health care services and the market for health insurance. Arrow recognized that risk-averse individuals desire insurance against the financial and nonfinancial consequences of illness. Individuals purchasing health insurance products in the early 1960s typically purchased policies that reimbursed them for some portion of their expenditures. In this dominant insurance model of the time, the insurer did not interfere with the patients' choice of physician or the recommended treatment. Payment from insurer to physician was on a fee-for-service (FFS) basis.

This system could mitigate the financial risks associated with illness, at least for those with some insurance coverage. Yet several market failures were apparent. First, many individuals lacked coverage, a suboptimal outcome in a general equilibrium model if one assumes individuals are risk averse. Second, even insured individuals were not insured against the nonfinancial consequences of illness or treatment. Third, the system of insurance encouraged medical care prices and utilization to rise above their optimal levels (i.e., prices rising above marginal costs and utilization rising above that where the marginal benefit equals marginal cost). The phenomenon of consumption rising above optimal levels is commonly referred to as moral hazard (Pauly 1968; Manning et al. 1987; Newhouse 1992).

Each of these market failures could be traced to a gap in markets (a lack of marketability). Before discussing missing markets, it is important to recognize that the number of potential markets is enormous. The...

Details zur Ausgabe

• Verlag: Duke University Press
• Erscheinungsdatum: 2004
• Sprache: Englisch
• ISBN 10: 0822332094
• ISBN 13: 9780822332091
• Einband: Gebundene Ausgabe
• Anzahl der Seiten: 400
• Herausgeber: Hammer Peter J., Haas-Wilson Deborah, Peterson Mark A., Sage William M.
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar