Nobel Laureate, Kenneth Arrow famously wrote about uncertainty and the welfare economics of medical care. Arrow wrote about the effects of asymptomatic information flows of medicine. Arrow made some observations that are relevant today and others that may be less so. Much of what he discussed had to do with how medicine overcomes the problem with asymmetric information. Your doctor knows more than you and you are in no position to negotiate as an equal. There was even a theory that was popular for a time that physicians can induce their own demand. The theory posited that doctors could use their superior knowledge to increase demand for their services and training more doctors would increase health care spending, not boost competition.
Today the medical marketplace is far different than it was in 1963 when Arrow drafted his classic article. Back 60, 50 and even 30 years ago most medical information came from one’s doctor. Nowadays, people turn to Google, YouTube, and various websites on the Internet. As I wrote years ago, a patient spending a few minutes on the Internet can learn more about their disease or condition than their doctor would have time to explain. That does not mean the doctors and patients relate as equals, however. With the increase in medical technology, uncertainty in health care has increased since Arrow wrote about uncertainty in 1963.
Arrow explored how medical markets are different from other services. Arrow wrote the following:
It is clear from everyday observation that the behavior expected of sellers of medical care is different from that of business men in general. These expectations are relevant because medical care belongs to the category of commodities for which the product and the activity of production are identical. In all such cases, the customer cannot test the product before consuming it, and there is an element of trust in the relation.
One consequence of such trust relations is that the physician cannot act, or at least appear to act, as if he is maximizing his income at every moment of time.
The special trust relation of physicians (and allied occupations, such as priests) extends to third parties so that the certifications of physicians as to illness and injury are accepted as especially reliable… The social value to all concerned of such presumptively reliable sources of information is obvious. Notice the general principle here. Because there are barriers to the information flow and because there is no market in which the risks involved can be insured, coordination of purchase and sales must take place through convergent expectations, but these are greatly assisted by having clear and prominent signals, and these, in turn, force patterns of behavior which are not in themselves logical necessities for optimality.
In other words, Arrow was saying doctors’ code of professional conduct compels them to maintain a fiduciary duty to act in their patients’ best interest. At least that is what Arrow wrote more than 60 years ago. Today about three-quarters of physicians have a boss. They are employees of hospitals, private equity-owed group practices, and even work for retail clinics. The trust doctors and patients may have shared in 1963 is eroding due to insurance coverage, time constraints and even perverse medical norms. Increasingly it will be due to the demands of physicians’ employers. Physician employers possibly spent hundreds of thousands, millions and even billions to acquire doctors’ services. Private equity did not buy physician practices to allow their employees to act in patients’ best interest. Neither did hospitals.
Years ago, there was a doctrine known as the corporate practice of medicine. It was illegal in one-third of the states for corporations to employ doctors to practice medicine on their behalf. It was legal in about one-third of states and ambiguous in the remaining third. Private equity has gotten around these restrictions by putting a physician nominally in charge, but with no real power. Hospitals get around restrictions on the corporate practice of medicine by claiming they are nonprofit charities. It is becoming increasingly apparent that the doctor-patient relationship is changing, and the fiduciary duty has become a profit opportunity for physician employers.
Kenneth Arrow: Uncertainty and the Welfare Economics of Medical Care
Michal Cannon: Kenneth Arrow’s 1963 article on health hare doesn’t say what you think