Kenneth Arrow published this paper in 1963, revolutionizing the field of health economics. He argues that the healthcare market is different than any other market because the dynamics of supply and demand are different. They were summarized well by Avik Roy in a National Review [article](https://www.nationalreview.com/critical-condition/gospel-according-ken-arrow-avik-roy/):

>*Unpredictability.* Arrow points out that people’s needs for health care are unpredictable, unlike other basic expenses like food and clothing. But while we can skip the occasional meal or sale at Old Navy, our need for health care can be far more urgently necessary.

>*Barriers to entry.* Arrow notes that you can’t just set up shop on the side of a road and practice medicine: you must have a license to be a physician, and gaining that license requires years of expensive schooling and training. As a result of this constraint on the supply of physicians, there is a constraint on the supply of medical services.

>*The importance of trust.* Trust is a key component of the doctor-patient relationship; if a surgeon makes a serious mistake during an operation, for example, the patient may die or become permanently disabled. The patient must trust that the surgeon knows what he’s doing, and can’t test-drive the surgery beforehand.

>*Asymmetrical information.* Doctors usually know far more about medicine than do their patients. Therefore, the consumer of medical services (the patient) is at a serious disadvantage relative to the seller (the doctor). Patients are therefore vulnerable to exploitation. In addition, third-party payors of medical bills, such as insurers or the government, are that much more removed from the particulars of a given case, and unable to effectively supervise medical practice.

>*Idiosyncrasies of payment.* Unusually, patients pay for health care after, not before, it is received (that is, if they pay for health care at all). Because patients don’t see the bill until after the non-refundable service has been consumed, and because patients are given little information about price and cost, patients and payors are rarely able to shop around for a medical service based on price and value. Compounding this problem is the fact that patients rarely pay for their care directly.

A good summary of the article can be found [here](https://nintil.com/kenneth-arrow-on-the-welfare-economics-of-medical-care-a-critical-assessment/) from Nintil.

Kenneth Arrow— Health Economics

A survey of the prominent concepts in healthcare economics.

Healthcare Economics— Victor Fuchs

Tyler Cowen dives into the problem of asymmetric information in health insurance. 

In America, the top 10% of the health care users in the population (may be outdated!!!) account for 63% of all healthcare costs, while the bottom 10% account for 3%. Imagine a scenario in which there are 10 Americans in a health insurance pool and their total healthcare costs are $100,000 total. A health insurer on a non-profit basis would charge each individual $10,000. The least healthy individual would be spending $63,000 on their own care (great deal as they only paid $10,000 for insurance). However, the healthiest individual will only be using $3,000 of expenses (and he paid $10,000)— not a good deal! So, the healthy individual stops buying insurance. Now, the insurance company must cover $97,000 of healthcare costs amongst 9 individuals , and must charge $10,777 to break even. The individuals who are healthiest will be enraged at these high costs and stop buying insurance continually until only the sickest person is left. This is a serious issue in health insurance risk pools and a key part of the ACA (or ObamaCare) with the individual mandate for every individual to buy health insurance or be fined.

Asymmetric Information in Healthcare Markets

The moral hazard in health economics most often relates to the idea that if individuals do not have to pay for any part of their medical care (their insurance company pays for everything), both patients and doctors will be incentivized to use the maximum amount of treatment, even when not medically necessary.

Moral Hazard— Tyler Cowen

Do moral hazards and asymmetric information change utilization and outcomes alongside health insurance? 

In 2008, an experiment was conducted in Oregon in which a random sample of newly eligible Medicaid applicants (due to an expansion in eligibility) were approved from a waiting list. This provided an excellent control group; 6387 applicants were selected for Medicaid coverage and 5842 were not selected (because of a ‘cost constraint’). The goal of the experiment was to measure whether health insurance actually increases utilization (see Moral Hazard), physical health, mental health, and out-of-pocket spending. The conclusions are as follows:

> This randomized, controlled study showed that Medicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years, but it did increase use of health care services, raise rates of diabetes detection and management, lower rates of depression, and reduce financial strain.

Oregon Medicaid Experiment

Market Dynamics in the U.S. Healthcare System.

The U.S. Healthcare System— Market Dynamics

Mar 16, 2021 • 5 blocks

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