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Editor's blog 7th April 2009: Markets, economics and healthcare

Good evening - a very quick one, to alert you to the arrival of fresh Maynard Doctrine, and to promise you something on Channel 4's The Hospital tomorrow. Once I feel a bit less demoralised by it.

But for today, I will presume to repeat something I wrote on a comment on the excellent Dr Grumble blog, about markets and healthcare. It's obviously been a theme of his of late, and I found myself chuntering on for a bit. As I do.

Anyway, here it is.

Inspired by Grumble - thoughts on markets, economics and healthcare
Q: How many economists does it take to change a lightbulb?
A: None. The market will sort it out.

There are a lot of reasons why markets and healthcare do not mix tremendously well. This is because markets are not identical for every sector of an economy.

In the abstract, markets are good at allocating things between providers who want to sell and consumers who want to buy: however, in the words of Adam Smith, "people of the same trade seldom meet together ... but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices".

So markets require effective and appropriate regulation. This is more difficult than it seems: as we have seen recently in both healthcare and banking (and in the media since … well, pick your own date), in reality, regulation often fails to protect the consumer - and indeed the provider, from their own folly. Competition and monopoly issues are significant ones.

Failure and markets
Markets are also places where the bad, the unpopular, the un-business-savvy or those simply ahead of their time can fail. This is acceptable if a) adequate warning of a failure can reasonably be gained by a consumer, b) there are other providers and suppliers to whom customers can turn, and c) that failure will not cause disproportionate material loss or loss of amenity to customers and trading partners - ‘too big to fail’.

In healthcare, it is dubious that a consumer could be clearly aware of the likelihood of their NHS provider going out of business – which is, technically, now allowed. Given ‘commercial in confidence’ rules, and what has been seen in banks’ statements about their own financial health (not to mention the marvellous work of their independent auditors), we can be sure that private sector providers would not be warning of failure.

Healthcare is expensive, requires expertise, and is potentially dangerous if done badly. As a science (mostly), it is an area where profound asymmetries of information will probably always tend to exist between providers and consumers.

A note on classical economic theory
Classical economic theory suggests that competitive markets require ‘perfect information’ and rational agents. Classical economic theory also suggests that there is such a thing as an ‘efficient market hypothesis’.

Classical economic theory quite clearly needs to get out a bit more.

How much is that risk in the window?
Markets are, allegedly, fantastic at pricing risk. Although there is very little evidence that this is true, and lots of evidence that they seek to avoid risk whenever possible. Insurance companies, whose business is the pooling and assessment of risk, often do their damnedest to avoid paying out on policies, and the list of caveats and exclusions to insurance policies appears to grow year on year (yes, I read the small print).

The private finance initiative (PFI) has been a masterpiece of technical obfuscation with the public sector comparator described by Jeremy Colman, ex-assistant auditor-general to Nick Timmins of the FT back in 2002 thus: “If the answer comes out wrong you don’t get your project. So the answer doesn’t come out wrong very often … (some public sector comparators used are) utter rubbish … utterly irrelevant” (thanks to George Monbiot for that one.)

Moreover, there is very little or no evidence of real risk having been transferred.

Externalities in extremis
Another useful learning point from market jargon is ‘externalities’ to a transaction. Externalities arise when prices do not reflect the full costs or benefits in production or consumption of a product or service (a positive impact is an ‘external benefit’, and a negative impact is an ‘external cost’).

The implications in healthcare are surely obvious - and not only at the public health level of communicable diseases. In the insurance-based US system (one of the most marketised on the planet), as well as the 15-20% uninsured and the large proportion of the population regarded as underinsured, they have the highest costs and cost inflation in the world. This is not what we are told markets should do. Yet it happens in the US.

Moreover, pro-market advocates would surely want to be concerned about ‘job lock’ – the well-acknowledged problem affecting workforce mobility which arises when an employee is unwilling to change job because they do not believe a prospective new employer’s healthcare plan is as good as the one they would be leaving to change job.

The idea that the private sector is uniformly evil and untrustworthy in healthcare seems improbable. General practice remains (in the vast majority) the private sector, and it is vital to the NHS.

However, the private sector’s primary motivation is different from that of the NHS. The NHS is not – Dr G may interject ‘yet’ – tasked to make a profit. The private sector must do so – whether by doing things ‘better, cheaper, faster’ or by manipulating the market – or it will go bust.

Politically and economically, we are now living in a different world to the one we lived in twelve months ago. The chickens of credit have come home to roost, and they’ve got bird flu. In such circumstances, market fetishists have already started to switch their attack towards public sector pay.

Although not all market mechanisms are necessarily bad ones, their introduction into healthcare requires particular care and attention.