Commenting on the provisions of the Affordable Care Act, Gov. Gary Herbert had this to say: "I believe in free markets. If you want the most benefit, and the highest quality for the most people at the lowest cost, that happens [with] free market competition. I don't understand how the exception to the rule would be health care" (The Salt Lake Tribune, Feb. 7, 2012).
We suggest that studying markets rather than believing in them is a more fruitful way to draft public policy. If that is true, it might be useful to try to understand what is different about health care than other consumer goods and services.
The delivery of health care involves two separate stages. The first stage is diagnosis. The patient seeks the services of a health care provider to determine what might be the source(s) of the symptoms that he or she is suffering and recommend a remedy. The second stage is the actual medical intervention. Once armed with a diagnosis and knowledge of what type of intervention is needed, the patient could theoretically decide which medical care provider is best suited to provide the service the patient needs.
The mechanisms of free-market competition could plausibly apply to this second stage. If patients had a clear idea what kind of service they needed they could then shop around for the "best" provider. The providers would then face competition, which could possibly force them to be more efficient and provide the best possible service at the lowest cost. This, however, assumes that the patient can accurately assess whether lower price reflects professional efficiency or poor quality, or conversely, whether higher price reflects state-of-the art service.
If not, as is more likely, patients cannot make informed decisions and market competition cannot be relied on to reward the efficient providers. This is a difficult problem, but not insurmountable provided that we disabuse ourselves of the dogma of the infallibility of free markets.
The problem we run into in the initial diagnosis stage is more formidable. When we turn our health care providers into profit-maximizing business persons and treat patients as customers, their interactions involve what economists call the "principal-agent" problem. The patient is the principal, who hires an agent (the provider) to do something useful for her/him (provide a diagnosis at low cost) that might not be in the agent's best interest. While the patient's interest is to have an accurate diagnosis at the lowest possible price, the providers' interest is to provide the service at the highest possible price.
The interests of the two parties do not overlap: A health care provider motivated solely by pecuniary self-interest would be in a position to "sell" a whole battery of superfluous and costly tests, whose dubious value would be next to impossible for the patient to ascertain. Even if the patient had reliable information about the provider's ability, the patient cannot necessarily assume that the provider will put that ability to use in furthering the patient's interest rather than her/his own.
Thus, rather than increasing efficiency, market competition can instead incentivize providers to engage in predatory behavior that bolsters their profits at the expense of their patients' well-being. The likely outcome would be to produce the highest profits and runaway costs, with little benefit to patients.
The governor's belief that the free market would provide the best health care at the lowest cost is unwarranted. As Utahns we would hope that the level of our public debate can rise above unwarranted beliefs based on worn-out ideological clichés. The study of free-market economics in the context of health care suggests the need for political leaders to consider creative non-market solutions.
David R. Keller is a professor of philosophy at Utah Valley University. Korkut Alp Erturk is a professor of economics at the University of Utah.