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Increasing Healthcare Efficiency

Economics generally agree that free markets are generally more effective in
increasing market efficiencies than governments. This is because they foster competition
unlike governments. The extent to which this belief holds true in healthcare has been a matter
of debate for many decades. In “Can Efficiency in Healthcare Be Left to the Market”, Uwe
Reinhardt reviews some of the key themes that are contained in the influential paper by
Kenneth Arrow titled “Uncertainty and the Welfare Economics of Medical Care”. The crux
of Arrow’s argument, which Reinhardt agrees with, is that the uniqueness of healthcare
makes free market solutions for healthcare ineffective in increasing efficiency in the sector
(Reinhardt, 2001).
While I agree with most of the arguments that are advanced in the article by
Reinhardt, there are some assertions that I disagree with. Key among them is that information
asymmetry that is inherent in healthcare is a key cause for the uniqueness of healthcare and,
therefore, a major reason why standard competitive market models may not work effectively
for healthcare (Reinhardt, 2001). Granted, healthcare providers often know more about
medicine than their clients or patients. This massive information asymmetry puts the
consumer at a disadvantage relative to the seller of medical services. Such asymmetry of
information, therefore, creates room for exploitation of the consumer by the seller of
healthcare services. However, while information asymmetry is common in medicine, it is not
unique to it. There are many industries that are characterized by information asymmetry but
this aspect of the industry does not make them unique enough to be considered immune to the
effects of market forces. For instance, engineers, lawyers, and architects all operate in
industries where they enjoy significant information asymmetry but this factor has not led
them to be labelled “unique” in economic sense.

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Save for the disagreement on some of the premises upon which healthcare is dubbed
“unique”, I agree with Uwe Reinhardt’s and Kenneth Arrow’s conclusion that market forces
are not effective in increasing efficiency in healthcare services delivery. An efficient
healthcare system is one that is able to deliver the best possible quality of healthcare services
at the lowest possible cost to the society (Predkiewicz et al., 2019). The factors explained by
Reinhardt such as unpredictability of healthcare needs, the unusual payment method of
healthcare services, and barriers to entry, among other factors, make it impossible for market
forces to create efficiency in healthcare service provision. Moreover, from examples of
countries where healthcare is largely in the hands of the private sector, it is clear that market
forces alone are not effective or strong enough to create efficient healthcare services. For
instance, the United States, whose healthcare is largely in the hands of private sector spends
far more on healthcare per person than other industrialized countries but experiences
healthcare outcomes that are inferior to those of its peers who spend fewer resources on
healthcare per person (Mossialos et al., 2016). The example of the United States and other
countries where healthcare is largely regulated by market forces shows that the market is not
the best tool of increasing efficiency in healthcare.
The best approach to achieve greater efficiency in healthcare is to have greater
government involvement in the sector. In such an approach, healthcare will be publicly
funded with a single payer system that is run by the government. The government will
determine the amount of resources allocated to healthcare, set payment rates for healthcare
services, and make other decisions related to provision of healthcare services (Mossialos et
al., 2016). While this approach does not necessarily lead to provision of superior quality
services, it is certainly cheaper than private-run healthcare.
There are various reasons why government-run healthcare is cheaper than one that is
largely in the hands of private sector. First, government-run healthcare will make it hard for

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healthcare providers to exploit information asymmetry and over charge patients (Mossialos et
al., 2016). With payment rates set by the government, healthcare providers will have no room
to exploit consumers. Additionally, healthcare costs are likely to reduce due to reduction in
administration costs. The high administrative costs are largely a result of healthcare providers
having to deal with multiple insurance companies (Mossialos et al., 2016). With government
acting as the sole payer of healthcare services, healthcare providers will significantly reduce
their administrative costs. A government-run healthcare system is also likely to increase
quality of healthcare services because it will allow for greater information sharing among
healthcare providers through technologies such as electronic health records (EHR).
While most of the arguments in the article by Uwe Reinhardt are still valid to this day,
certain changes have occurred in the past nineteen years that may necessitate some
modifications of the arguments. For instance, access to the internet was not as widespread as
it is currently. At that time, as it was the case when Kenneth Arrow wrote his article in 1963,
physicians and other healthcare providers still held monopoly of information regarding the
healthcare of patients. It, therefore, made sense to argue that extensive information
asymmetry between healthcare professionals and consumers of healthcare services made it
almost impossible for market forces to be effective in achieving efficiency in provision of
healthcare services. Nowadays, with increased internet access, the information gap between
healthcare professionals and their patients has significantly reduced.

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References

Mossialos, E., Wenzl, M., Osborn, R., & Sarnak, D. (2016). 2015 international profiles of
health care systems. Canadian Agency for Drugs and Technologies in Health.
Prędkiewicz, P., Bem, A., Ucieklak-Jeż, P., & Siedlecki, R. (2019). Public or Private? Which
Source of Financing Helps to Achieve Higher Health System Efficiency?.
In Contemporary Trends and Challenges in Finance (pp. 191-199). Springer, Cham.
Reinhardt, U. E. (2001). Can efficiency in health care be left to the market?. Journal of
Health Politics, Policy and Law, 26(5), 967-992.