Too Much Government in Healthcare

This is a continuation of yesterday’s post, and in this post, I seek to come up with the best libertarian arguments for why healthcare markets should have as little government as possible.

Three questions for you to consider:

  1. When patients receive a healthcare service, how much should they pay for it?
  2. When doctors and other providers deliver a healthcare service, how much payment should they receive?
  3. How should these amounts be determined?

These questions aren’t mine. They’re taken from John C. Goodman’s book, “Priceless: Curing the Healthcare Crisis“. These are excellent questions, and as an economist, I do not find them remotely objectionable. Were I to analyze (or teach somebody how to analyze) a market for a good or service, this would be a very good place to begin.

You may be tempted to ask questions about externalities, moral hazard etc., and how these affect the provisioning and pricing within these markets, but I would argue that this really is the third question at play. In other words, I find this list fairly comprehensive.

What are the author’s own answers to these questions?

  1. Patients should pay a price for care equal to its marginal social cost.
  2. Providers should receive a price equal to the marginal social value their care creates
  3. Wherever possible, these prices should be determined in competitive markets.

Again, as an economist, I find this unobjectionable. Note that our concerns about different forms of market failures are accounted for by using the phrase “wherever possible”. Presumably, if markets are not competitive, price determination should happen by other means.

As an Indian economist, I need to ask what happens if patients are unable to pay a price for care equal to its marginal social cost. And I also need to ask what these other means for price determination might be, in case the market for healthcare isn’t competitive. Note that I don’t mean either of these as criticisms of what has been said. I simply wish to state that different countries will have different constraints and features, and at least in the case of India, I think both of these are truly important and relevant questions.

John Cochrane has a nice paper in which he answers the first of these questions:

“What about the homeless guy with a heart attack?”
Let’s not confuse the issue with charity. The goal here is to fix health insurance for the vast majority of
Americans –people who have jobs, people who buy houses, cars, and cell phones, people who buy
insurance for their houses and life insurance for their families.
Yes, we will also need charity care for those who fall through the cracks, the victims of awful disasters,
the very poor, and the mentally ill. This will be provided by government and by private charity. It has to
be good enough to fulfill the responsibilities of a compassionate society, and just bad enough that few will choose it if they are capable of making choices. I wish it could be better, but that’s the best that is
possible. For people who are simply poor, but competent, vouchers to buy health insurance or to refill
health savings accounts make plenty of sense

Cochrane, J. H. (2013). After the ACA: Freeing the market for health care. Available at SSRN 2213027. (pp 23-24)

In other words, government intervention is necessary, unless the provisioning is entirely and always possible via private charity. At least in India’s case, I feel fairly safe in assuming that private charity is simply not going to be enough, now or in the foreseeable future.

As regards the second question: why isn’t the market for healthcare competitive?

I ran a simple Google search for “Assumptions of Competitive Markets“, and clicked on this link. Pick any other link that you prefer, but I would assume that the list won’t change all that much.

Competitive markets will have price takers, identical goods, a large number of buyers and sellers, easy entry and exit, and complete information. Some other websites may talk about zero search costs and zero transaction costs, but you can argue that this comes under complete information.

Is the market for healthcare in India competitive? Ask yourself which of these assumptions are met in the context of healthcare in India.

Where we lie on the spectrum between “hell yes” and “gawd no” may differ, but I think it is safe to say that most of us will be closer to “gawd no”. If your answer differs from this, I would love to know why.

But long story short, here would be my summarization of the libertarian approach to healthcare in the abstract:

As long as markets are competitive, and most people are above a certain income threshold, healthcare is best served by having as little government intervention in regulation and provisioning of healthcare as possible.

If that is not an acceptable statement for a libertarian approach to healthcare, please let me know how and why you would rephrase it.

If, on the other hand, it is an acceptable statement, then I have follow-up questions:

  1. If markets are not competitive, are we better off trying to make them competitive, or are we better off provisioning healthcare with government intervention? I ask this question specifically in an Indian context, but feel free to think about other nations while answering as well.
    Why does this matter? Because of opportunity costs. A resource that is spent on making markets competitive is a resource not spent on the provisioning of healthcare. Given the amount of poverty in India, this is an important question to think about.
  2. What is a good income threshold to keep in mind, and how do we know the answer is mostly correct?
  3. How many people need to be above this threshold for government to mostly withdraw from regulation and provisioning of healthcare?
  4. What does “as little government intervention as possible” mean? What should the government move out of first (regulation or provisioning), and why? Also, how?

I look forward to your answers!