This is Kenneth Arrow's most-cited article. He won the Nobel Prize ...
Kenneth Arrow is is an American economist, writer, and political th...
A pareto optimal allocation is an allocation of resources in which ...
The Second Optimality Theorem basically says that if you're unsatis...
Increasing returns in production is the opposite of diminishing ret...
The divergence between private and social costs/benefits relates to...
As mentioned in this paragraph, "a great many risks are not covered...
Most of the medical care that we buy from physicians is information...
There are many non-market social institutions and also market insti...
Although there is a lot of regulation in place to monitor how docto...
In 2016, of the 4,926 community hospitals in the US, 20% were state...
Here Arrow predicts the concept of value-based care.
TH1E
AMERICAN
ECONOMIC
REVIEW
VOLUME
LIII
DECEMBER
1963
NUMBER
5
UNCERTAINTY AND THE
WELFARE
ECONOMICS OF
MEDICAL CARE
By
KENNETH J.
ARROW*
I.
Introduction:
Scope
and Method
This
paper
is an
exploratory and
tentative study of
the specific
differentia
of
medical care
as the
object of normative
economics.
It
is contended
here, on the
basis of
comparison of
obvious
characteris-
tics of the
medical-care
industry with
the norms
of
welfare
economics,
that
the
special
economic
problems of
medical care
can be
explained
as
adaptations
to
the
existence of
uncertainty in the
incidence
of dis-
ease and in
the
efficacy of
treatment.
It
should
be noted that
the subject is
the medical-care
industry,
not
health.
The
causal factors
in
health are
many,
and
the provision
of
medical
care is
only one.
Particularly at low levels
of
income,
other
commodities such as
nutrition, shelter,
clothing,
and
sanitation
may
be
much
more
significant.
It
is the
complex
of services that
center
about the
physician, private
and
group
practice,
hospitals,
and
public
health,
which I
propose
to
discuss.
The focus of
discussion will be
on
the way the
operation of
the
medical-care
industry
and
the efficacy with
which it
satisfies the needs
of
society
differ from a
norm,
if
at all. The "norm"
that
the econo-
mist usually
uses for the
purposes
of
such
comparisons
is
the
operation
of a
competitive
model,
that
is,
the
flows
of
services
that would
be
*
The
author
is
professor
of economics
at
Stanford
University. He
wishes to express
his
thanks for useful comments
to
F.
Bator,
R.
Dorfman,
V.
Fuchs,
Dr.
S.
Gilson,
R.
Kessel,
S.
Mushkin,
and
C. R.
Rorem. This
paper
was
prepared
under
the
sponsorship
of the Ford
Foundation
as
part
of
a
series of
papers
on the economics of
health,
education,
and
welfare.
942
THE
AMERICAN
ECONOMIC
REVIEW
offered and
purchased and the
prices that would
be paid for them
if
each
individual in
the market
offered or purchased
services at the
going
prices as if his
decisions had no
influence over
them, and the
going
prices were such
that the amounts
of services
which were
available
equalled the total
amounts which
other
individuals were willing
to
purchase, with no
imposed
restrictions on supply
or demand.
The interest in
the competitive
model stems
partly from
its
pre-
sumed descriptive
power and partly
from its
implications
for
economic
efficiency. In
particular, we can
state the following
well-known
prop-
osition
(First
Optimality
Theorem). If a
competitive equilibrium
exists at all, and if
all commodities
relevant to
costs or utilities are
in
fact priced in the
market, then the
equilibrium is
necessarily optimal
in
the following
precise sense (due
to V. Pareto):
There is no other
allocation of
resources to services
which will
make
all participants in
the
market better
off.
Both the
conditions of this
optimality theorem
and the definition of
optimality call for
comment. A
definition is
just
a
definition, but
when
the definiendum is
a word already
in common use
with
hWighly favor-
able
connotations,
it is clear that
we are really
trying to be
persuasive;
we are
implicitly
recommending
the achievement of
optimal states.' It
is
reasonable
enough to assert that
a change in
allocation which
makes
all
participants
better off is one
that certainly
should be made; this
is
a value
judgment, not a
descriptive proposition,
but it is a very
weak
one. From this it
follows that it is
not desirable to
put up with a
non-
optimal allocation.
But it does not
follow that if
we are at an
alloca-
tion
which is
optimal in the Pareto
sense, we should
not change to
any
other. We cannot
indeed make a
change that does
not hurt
someone;
but
we can still
desire to change
to another
allocation if the
change
makes
enough
participants better
off and by so much
that we feel that
the
injury
to
others is not enough
to offset the
benefits. Such
inter-
personal
comparisons are, of
course, value
judgments. The
change,
however, by the
previous
argument ought to be
an optimal state;
of
course there are
many possible
states, each of which
is
optimal
in the
sense here used.
However,
a
value judgment on
the desirability of
each possible new
distribution
of
benefits and
costs
corresponding
to each possible
re-
allocation
of
resources is not, in
general,
necessary. Judgments
about
the distribution
can
be made
separately,
in
one
sense, from those about
allocation
if
certain conditions
are fulfilled.
Before
stating the relevant
proposition,
it is
necessary
to
remark that the
competitive equilibrium
achieved
depends
in
good measure on the
initial
distribution of pur-
chasing power, which
consists
of
ownership
of
assets
and
skills
that
'This
point has
been
stressed by I.
M. D.
Little [19, pp.
71-74].
For the
concept of a
"persuasive
definition," see C.
L.
Stevenson [27,
pp. 210-17].
ARROW:
UNCERTAINTY AND
MEDICAL CARE
943
command a
price
on
the market.
A
transfer of
assets
among individ-
uals
will,
in
general,
change the
final
supplies
of
goods
and
services
and the
prices
paid
for
them.
Thus,
a
transfer of
purchasing power
from
the well to
the
ill
will
increase the
demand for medical
services.
This
will
manifest
itself in
the
short run in
an increase
in
the
price
of
medical
services
and
in
the long
run
in an
increase
in
the
amount
sup-
plied.
With
this in
mind,
the
following statement
can be made
(Second
Optimality
Theorem): If
there
are no
increasing returns
in
production,
and if
certain
other
minor
conditions
are
satisfied,
then
every
optimal
state
is
a
competitive
equilibrium
corresponding
to some initial dis-
tribution of
purchasing
power.
Operationally, the
significance
of this
proposition is
that
if the
conditions of
the
two
optimality
theorems are
satisfied,
and if
the
allocation
mechanism
in
the
real
world
satisfies the
conditions for
a
competitive
model,
then
social
policy can
confine
itself
to
steps
taken
to
alter
the
distribution of
purchasing
power.
For
any
given
distribution
of
purchasing
power,
the
market
will,
under the
assumptions
made,
achieve a
competitive
equilibrium
which
is
neces-
sarily
optimal; and
any
optimal
state
is a
competitive
equilibrium cor-
responding to some
distribution
of
purchasing
power,
so
that
any
desired
optimal
state
can
be
achieved.
The
redistribution
of
purchasing
power
among
individuals
most
simply
takes
the form
of
money:
taxes
and
subsidies.
The
implications
of
such
a
transfer
for
individual
satisfactions
are,
in
general,
not
known in
advance.
But
we can
assume that
society can
ex post
judge
the
distribution of
satisfactions
and,
if
deemed
unsatisfactory,
take
steps
to
correct
it
by
subsequent
transfers.
Thus,
by
successive
ap-
proximations,
a
most
preferred
social
state
can
be
achieved,
with
re-
source allocation
being
handled
by
the
market
and
public
policy
con-
fined to
the
redistribution
of
money
income.2
If,
on
the
contrary, the
actual
market
differs
significantly
from
the
competitive
model,
or if
the
assumptions
of the
two
optimality
the-
orems
are not
fulfilled, the
separation
of
allocative and
distributional
procedures
becomes,
in
most
cases,
impossible.3
The
first
step
then
in the
analysis
of the
medical-care
market is the
2The
separation
between
allocation
and
distribution
even
under
the
above
assumptions
has
4osSed
over
problems
in
the execution
of
any
desired
redistribution
policy;
in
practice,
it
is
virtually
impossible
to
find a set of
taxes
and
subsidies
that
will
not
have an ad-
verse
effect on
the
achievement of
an
optimal
state.
But
this
discussion
would
take
us
even
further
afield
than
we have
already
gone.
'The
basic
theorems of
welfare
economics
alluded to
so
briefly
above
have
been
the
subject
of
voluminous
literature,
but
no
thoroughly
satisfactory
statement
covering
both
the
theorems themselves
and
the
significance of
exceptions
to them
exists. The
positive
assertions of
welfare
economics
and
their relation
to the
theory
of
competitive
equilibrium
are
admirably
covered
in
Koopmans
[181.
The
best
summary
of the
various
ways
in
which
the
theorems
can
fail
to
hold
is
probably
Bator's
[6].
944
THE
AMERICAN
ECONOMIC
REVIEW
comparison between the
actual
market
and the
competitive
model.
The
methodology
of
this
comparison
has
been
a
recurrent
subject
of
con-
troversy
in
economics
for
over a
century.
Recently, M. Friedman
[15]
has
vigorously
argued that
the
competitive
or
any
other model
should
be
tested
solely
by
its
ability to
predict.
In
the
context
of
competition,
he
comes
close to
arguing
that
prices
and
quantities are the
only
rele-
vant
data. This
point of
view
is
valuable
in
stressing
that
a
certain
amount of
lack of
realism
in
the
assumptions
of a model is
no
argu-
ment
against
its
value.
But
the
price-quantity
implications of
the com-
petitive
model
for
pricing are
not
easy to
derive without
major--and,
in
many
cases,
impossible-econometric
efforts.
In
this
paper,
the
institutional
organization
and
the
observable
mores
of
the
medical
profession are
included
among
the
data to
be
used
in
assessing the
competitiveness
of the
medical-care
market.
I shall
also
examine
the
presence
or
absence
of
the
preconditions
for
the
equiva-
lence
of
competitive
equilibria
and
optimal
states.
The
major
competi-
tive
preconditions,
in
the sense
used
here,
are
three: the
existence
of
competitive
equilibrium,
the
marketability
of
all
goods
and
services
relevant to
costs
and
utilities,
and
nonincreasing
retiurns.
The
first
two,
as
we
have
seen,
insure
that
competitive
equilibrium is
necessarily
op-
timal;
the
third insures
that every
optimal state
is the
competitive
equilibrium
corresponding
to
some
distribution
of
income.4
The
first
and
third
conditions
are
interrelated;
indeed,
nonincreasing
returns
plus
some
additional
conditions
not
restrictive
in
a
modern
economy
imply
the
existence
of a
competitive
equilibrium,
i.e.,
imply
that
there
will be
some
set
of
prices
which
will
clear all
markets.5
The
concept of
marketability
is
somewhat
broader
than
the
tradi-
tional
divergence between
private
and social
costs
and
benefits. The
latter
concept
refers
to
cases in
which
the
organization
of
the
market
does
not
require an
individual
to
pay
for
costs
that
he
imposes
on
others
as
the
result of
his
actions or
does
not
permit
him
to
receive
compensation
for
benefits he
confers. In
the
medical
field,
the
obvious
example
is
the
spread
of
communicable
diseases.
An
individual
who
fails to
be
immunized
not
only risks
his
own
health, a
disutility
which
presumably
he
has
weighed
against
the
utility
of
avoiding
the
proce-
dure,
but also
that of
others.
In
an
ideal
price
system, there
would
be a
price
which
he
would
have
to
pay
to
anyone
whose
health is
endan-
gered,
a
price
sufficiently
high
so
that the
others
would
feel
compen-
sated;
or,
alternatively,
there
would
be
a
price
which
would be
paid to
him
by others
to
induce him
to
undergo
the
immunization
procedure.
'There
are
further
minor
conditions,
for
which
see
Koopmans
[18,
pp.
50-551.
5
For
a
more
precise
statement
of
the
existence
conditions,
see
Koopmans
[18,
pp.
56-60]
or
Debreu
[12, Ch.
5] .
ARROW:
UNCERTAINTY
AND
MEDICAL CARE
945
Eilther
system
would
lead
to an
optimal
state,
though
the
distributional
implications
would
be
different. It
is, of
course,
not hard to see that
such price
systems could
not,
in
fact,
be
practical;
to
approximate
an
optimal state it
would
be
necessary
to
have
collective
intervention
in
the
form
of
subsidy
or
tax or
compulsion.
By
tlle
absence
of
marketability
for
an
action
which
is
identifiable,
technologically
possible,
and
capable of
influencing
some
individual's
welfare,
for
better
or
for
worse,
is
meant here
the
failure
of the
exist-
ing
market
to
provide a
means
whereby the
services
can
be both
of-
fered
and
demanded
upon
payment of
a
price.
Nonmarketability
may
be due
to
intrinsic
technological
characteristics
of
the
product which
prevent a
suitable
price
from
being
enforced,
as in
the
case
of com-
municable
diseases,
or it
may
be
due
to
social
or
historical
controls,
such
as
those
prohibiting
an
individual
from
selling
himself into slav-
ery.
This
distinction
is,
in
fact,
difficult to
make
precise,
though it
is
obviously
of
importance for
policy;
for
the
present
purposes,
it
will be
sufficient to
identify
nonmarketability
with
the
observed
absence
of
markets.
The
instance
of
nonmarketability
with
which
we
shall
be
most
con-
cerned is
that
of
risk-bearing.
The
relevance
of
risk-bearing to
medical
care
seems
obvious;
illness is
to a
considerable
extent
an
unpredictable
phenomenon.
The
ability
to
shift
the
risks
of
illness
to
others
is
worth
a
price
which
many
are
willing to
pay.
Because
of
pooling
and
of
supe-
rior
willingness
and
ability,
others
are
willing to
bear
the
risks.
Never-
theless,
as we
shall
see
in
greater
detail, a
great
many
risks
are
not
covered,
and
indeed
the
markets
for
the
services of
risk-coverage
are
poorly
developed
or
nonexistent.
Why
this
should be
so is
explained
in
more
detail
in
Section
IV.C
below;
briefly,
it is
impossible to
draw
up
insurance
policies
which
will
sufficiently
distinguish
among
risks,
par-
ticularly
since
observation
of
the
results
will
be
incapable of
distin-
guishing
between
avoidable
and
unavoidable
risks, so
that
incentives
to avoid losses
are
diluted.
The
optimality
theorems
discussed
above are
usually
presented
in
the literature as
referring
only
to
conditions
of
certainty,
but
there
is
no
difficulty
in
extending
them
to
the
case
of
risks,
provided
the
addi-
tional
services
of
risk-bearing
are
included
with
other
commodities.6
However,
the
variety
of
possible
risks in
the
world
is
really
stagger-
ing.
The
relevant
commodities
include,
in
effect,
bets on
all
possible
occurrences
in
the world
which
impinge
upon
utilities. In
fact,
many
of
these
"commodities,"
i.e.,
desired
protection
against
many
risks,
are
'The
theory,
in variant
forms,
seems to
have
been
first
worked
out
by
Allais
[2],
Arrow
[5],
and Baudier
[7].
For
further
generalization,
see Debreu
[11]
and
[12,
Ch.
71.
946
THE
AMERICAN ECONOMIC
REVIEW
simply not
available.
Thus,
a
wide class of commodities
is
nonmarket-
able,
and a
basic
competitive
precondition
is not
satisfied.7
There is
a
still
more
subtle
consequence
of
the
introduction of
risk-
bearing
considerations.
When
there
is
uncertainty,
information
or
knowledge
becomes
a
commodity.
Like
other
commodities,
it has
a
cost
of
production
and
a
cost
of
transmission,
and so
it
is
naturally
not
spread out over
the
entire
population
but
concentrated
among
those
who can
profit
most from
it.
(These
costs
may
be measured in time
or
disutility
as well
as
money.)
But the
demand for information is
diffi-
cult to
discuss in
the
rational terms
usually
employed.
The
value
of
information
is
frequently
not
known
in
any
meaningful
sense to
the
buyer; if,
indeed,
he
knew
enough
to
measure
the
value
of
informa-
tion, he
would
know
the
information
itself.
But
information,
in
the
form
of
skilled
care, is
precisely
what
is
being
bouight
from
most
physi-
cians,
and,
indeed, from
most
professionals.
The
elusive
character of
information
as
a
commodity
suggests
that
it
departs
considerably
from
the usual
marketability
assumptions
about
commodities.8
That risk
and
uncertainty
are,
in
fact,
significant
elements in
medi-
cal care
hardly
needs
argument.
I
will hold
that
virtually
all
the
special
features
of this
industry,
in
fact, stem
from
the
prevalence
of
uncer-
tainty.
The
nonexistence of
markets
for the
bearing
of
some
risks
in
the
first
instance
reduces
welfare
for
those
who
wish
to
transfer
those
risks
to
others
for a
certain
price, as
well
as
for
those
who
would
find it
profit-
able to
take
on
the risk
at such
prices. But it
also
reduces
the
desire to
render
or
consume
services
which
have
risky
consequences;
in
techni-
cal
language,
these
commodities are
complementary
to
risk-bearing.
Conversely,
the
production
and
consumption
of
commodities
and
serv-
ices
with
little
risk
attached
act
as
substitutes
for
risk-bearing
and
are
encouraged
by market
failure
there
with
respect to
risk-bearing.
Thus
the
observed
commodity
pattern
will
be
affected by
the
nonexistence
of
other
markets.
'
It
should
also
be
remarked
that
in
the
presence
of
uncertainty,
indivisibilities
that
are
sufficiently
small to
create
little
difficulty
for
the
existence and
viability
of
competitive
equilibrium
may
nevertheless
give
rise
to
a
considerable
range
of
increasing
returns be-
cause
of
the
operation of
the law of
large numbers.
Since most
objects of
insurance
(lives,
fire
hazards,
etc.)
have
some
element
of
indivisibility,
insurance
companies
have
to
be
above
a
certain
size. But
it is
not clear
that
this
effect is
sufficiently
great to
create
serious
obstacles
to the
existence and
viability
of
competitive
equilibrium
in
practice.
8
One form of
production
of
information
is
research.
Not
only
does
the
product
have
unconventional
aspects
as
a
commodity,
but it
is also
subject
to
increasing
returns
in
use,
since
new
ideas, once
developed,
can
be
used
over
and over
without
being
consumed, and
to
difficulties
of
market
control,
since
the cost
of
reproduction is
usually much less
than
that
of
production.
Hence,
it
is not
surprising that a
free
enterprise
economy will
tend
to
underinvest
in
research;
see Nelson
[211
and
Arrow
[4].
ARROW: UNCERTAINTY AND
MEDICAL
CARE
947
The
failure
of
one or more
of the
competitive
preconditions
has
as
its most
immediate and
obvious
consequence a
reduction in
welfare
below
that
obtainable
from
existing resources and
technology,
in
the
sense of
a failure to
reach an
optimal
state
in
the
sense of Pareto.
But
more can
be said. I
propose
here the
view that,
when the
market fails
to achieve an
optimal
state,
society will,
to
some extent at
least,
recog-
nize
the gap, and
nonmarket
social
institutions will
arise
attempting to
bridge
it.9
Certainly
this
process
is
not
necessarily
conscious;
nor is it
uniformly
successful
in
approaching
more
closely to
optimality
when
the entire
range
of
consequences
is
considered. It
has always been
a
favorite
activity
of
economists
to
point
out that
actions which
on
their
face achieve a desirable
goal
may
have
less obvious
consequences
particularly
over
time, which
more
than
offset the
original
gains.
But
it is contended here
that
the special
structural
characteristics
of the
medical-care market are
largely
attempts
to overcome
the lack
of
optimality
due
to the
nonmarketability
of
the
bearing
of
suitable risks
and the
imperfect
marketability
of
information.
These
compensatory
institutional
changes,
with
some
reinforcement from usual
profit
mo-
tives,
largely explain
the observed
noncompetitive
behavior
of
the
medical-care
market, behavior
which, in
itself,
interferes with
opti-
mality.
The
social
adjustment
towards
optimality
thus
puts obstacles
in
its own
path.
The
doctrine
that
society
will
seek
to
achieve
optimality
by
non-
market means if it
cannot achieve them in
the market is
not
novel.
Certainly,
the
government,
at least
in
its
economic
activities,
is
usually
implicitly
or
explicitly
held to
function as
the agency
which
substitutes
for the market's failure.'0
I
am
arguing
here
that in
some circum-
stances other social
institutions
will
step
into
the
optimality
gap, and
that the
medical-care
industry,
with its
variety
of
special
institutions,
some
ancient,
some
modern,
exemplifies
this
tendency.
It
may
be useful to
remark here
that a
good part
of the
preference
for
redistribution
expressed
in
government
taxation
and
expenditure
policies
and
private
charity
can
be
reinterpreted
as
desire for
insur-
ance.
It is
noteworthy
that
virtually
nowhere is
there a
system
of sub-
sidies
that has as
its
aim
simply
an
equalization
of
income.
The sub-
sidies
or other
governmental
help go
to
those
who are
disadvantaged in
life
by
events
the
incidence of
which is
popularly
regarded as
unpre-
'An
important
current
situation
in
which
normal
market
relations
have
had
to
be
greatly
modified
in the
presence of
great
risks is
the
production
and
procurement
of
modern
weapons; see
Peck
and
Scherer
[23,
pp.
581-82]
(I am
indebted
for this
refer-
ence to
V.
Fuchs)
and
[1,
pp.
71-75].
0For
an
explicit
statement
of
this
view,
see
Baumol
[8].
But I
believe
this
position
is
implicit
in
most
discussions of
the
functions of
government.
948
THE
AMERICAN
ECONOMIC
REVIEW
dictable: the
blind,
dependent
children,
the
medically
indigent.
Thus,
optimality,
in
a
context
which
includes
risk-bearing, includes
much
that
appears
to
be
motivated
by
distributional
value
judgments
when
looked
at
in
a
narrower
context."
This
methodological
background
gives
rise
to
the
following plan
for
this
paper.
Section
II
is a
catalogue
of
stylized
generalizations about
the
medical-care
market
which differentiate
it
from
the usual commod-
ity
markets.
In
Section
III
the
behavior
of
the
market
is
compared
with
that of
the
competitive
model
which
disregards the
fact of uncer-
tainty.
In
Section
IV,
the
medical-care
market is
compared,
both
as
to
behavior
and as to
preconditions,
with
the ideal
competitive
market
that
takes
account of
uncertainty;
an
attempt
will be made to
demon-
strate
that the
characteristics
outlined
in
Section
II
can be
explained
either
as the
result
of
deviations
from
the
competitive
preconditions
or
as
attempts
to
compensate
by
other
institutions
for
these
failures.
The
discussion
is
not
designed
to
be
definitive, but
provocative.
In
particu-
lar,
I
have been
chary about
drawing
policy
inferences;
to
a consider-
able
extent,
they
depend
on
further
research,
for
which
the
present
paper
is
intended to
provide
a
framework.
II. A
Survey
of
the
Special
Characteristics
of
the
Medical-Care
Market'2
This
section
will
list
selectively
some
characteristics
of
medical
care
which
distinguish
it from
the
usual
commodity of
economics
textbooks.
The list
is not
exhaustive,
and
it is
not
claimed
that
the
characteristics
listed are
individually
unique to
this
market.
But,
taken
together,
they
do
establish
a
special
place
for
medical
care
in
economic
analysis.
A.
The
Nature
of Demand
The
most
obvious
distinguishing
characteristics
of
an
individual's
demand for
medical
services
is
that
it
is
not
steady in
origin
as,
for
example,
for
food
or
clothing,
but
irregular
and
unpredictable.
Medi-
cal
services, apart
from
preventive
services,
afford
satisfaction
only
in
the
event
of
illness,
a
departure
from
the
normal
state
of
affairs. It
is
hard,
indeed,
to
think
of
another
commodity
of
significance
in
the
average
budget
of
which this
is
true.
A
portion of
legal
services,
de-
voted to
defense in
criminal
trials
or
to
lawsuits,
might
fall in
this
cate-
gory
but
the
incidence
is
surely
very
much
lower
(and,
of
course,
there
'Since
writing the
above,
I
find
that
Buchanan
and
Tullock
[10,
Ch.
13]
have
argued
that
all
redistribution can be
interpreted as
"income
insurance."
12For
an
illuminating
survey
to
which
I am
much
indebted,
see
S.
Mushkin
[20].
ARROW:
UNCERTAINTY
AND
MEDICAL CARE
949
are,
in
fact,
strong
institutional
similarities
between the
legal
and
medical-care
markets.)'3
In
addition,
the
demand
for
medical
services
is
associated,
with
a
considerable
probability,
with
an
assault
on
personal
integrity.
There
is
some risk
of
death and
a
more
considerable risk of
impairment
of
full
functioning. In
particular,
there is
a
major
potential for loss
or
reduc-
tion of
earning
ability.
The
risks
are not
by
themselves
unique;
food
is
also
a
necessity,
but
avoidance
of
deprivation
of
food can be
guaranteed
with
sufficient
income,
where
the
same
cannot be
said
of avoidance
of
illness.
Illness
is,
thus,
not
only
risky
but a
costly
risk in
itself,
apart
from
the
cost of
medical
care.
B.
Expected
Behavior
of
the
Physician
It is
clear
from
everyday
observation
that
the
behavior
expected
of
sellers
of
medical
care is
different
from
that
of
business
men in
gen-
eral.
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.'
But
the
ethically
understood
restrictions on
the
activities
of
a
physician
are
much
more
severe
than
on
those
of,
say, a
barber. His
behavior is
supposed
to
be
governed
by
a
concern
for
the
customer's
welfare
which
would
not
be
expected
of a
salesman. In
Talcott Par-
sons's
terms,
there
is
a
"collectivity-orientation,"
which
distinguishes
medicine and
other
professions from
business,
where
self-interest
on
the
part
of
participants
is
the
accepted
norm.'5
A
few
illustrations
will
indicate
the
degree of
difference
between
the
behavior
expected of
physicians
and
that
expected of
the
typical
busi-
nessman.18
(1)
Advertising
and
overt
price
competition
are
virtually
eliminated
among
physicians.
(2) Advice
given
by
physicians
as
to
further treatment
by
himself
or
others is
supposed to
be
completely
"In
governmental
demand,
military
power
is
an
example
of
a
service
used
only
irregularly
and
unpredictably.
Here
too,
special
institutional
and
professional
relations
have
emerged,
though
the
precise
social
structure is
different for
reasons
that
are
not
hard
to
analyze.
"
Even
with
material
commodities,
testing
is
never
so
adequate
that
all
elements
of
implicit
trust can
be eliminated.
Of
course,
over
the
long
run,
experience
with the
quality
of
product
of
a
given
seller
provides
a
check on
the
possibility
of
trust.
15See
[22,
p. 463].
The whole of
[22,
Ch. 101
is a
most
illuminating
analysis
of
the
social
role of
medical
practice;
though
Parsons'
interest
lies in
different
areas
from
mine,
I
must
acknowledge
here
my
indebtedness
to
his
work.
16
I
am indebted to
Herbert Klarman
of
Johns
Hopkins
University for
some
of the
points discussed
in this
and the
following
paragraph.
950 THE AMERICAN ECONOMIC REVIEW
divorced
from
self-interest. (3) It is at least claimed that
treatment
is
dictated
by
the
objective
needs of
the case
and not
limited
by
financial
considerations."7
While the ethical compulsion is surely not
as absolute
in
fact as it
is in
theory, we can hardly suppose that it has
no influence
over
resource allocation in this area. Charity treatment in
one form
or
another does
exist because
of
this tradition about human
rights to ade-
quate medical care.'8 (4) The physician is relied on as
an expert
in
certifying
to
the existence of illnesses and injuries for various
legal
and
other
purposes. It
is
socially expected that his concern for the correct
conveying
of
information will, when appropriate, outweigh his desire
to
please
his
customers."g
Departure from the profit motive is strikingly
manifested by the
overwhelming predominance
of
nonprofit
over
proprietary
hospitals.20
The
hospital per
se offers services
not too different from
those of
a
hotel,
and it is
certainly
not obvious
that the profit motive
will not lead
to a
more efficient
supply.
The
explanation may
lie
either on the
supply
side or on
that
of
demand.
The
simplest explanation
is
that
public
and
private subsidies decrease the cost to the patient in
nonprofit hospitals.
A
second
possibility
is
that
the association of
profit-making
with the
supply
of
medical services
arouses
suspicion
and
antagonism
on
the
part
of
patients
and
referring physicians,
so
they
do
prefer
nonprofit
institutions.
Either
explanation implies
a
preference
on
the
part
of
some
group, whether
donors or
patients, against
the
profit
motive in the
supply
of
hospital
services.2'
1T The
belief that the ethics of
medicine demands treatment
independent of the patient's
ability to
pay is strongly ingrained.
Such a perceptive observer as
Rene Dubos has made
the
remark that
the
high
cost
of
anticoagulants restricts their use
and may contradict
classical
medical ethics,
as
though this
were an unprecedented
phenomenon.
See
[13,
p.
4191.
"A
time
may
come when medical
ethics will have to be
considered in the harsh
light of
economics" (emphasis added).
Of course, this expectation
amounts to ignoring
the
scarcity
of medical
resources;
one
has
only
to
have
been
poor
to
realize the error.
We
may
confidently
assume
that
price
and
income do
have some
consequences for
medical
expenditures.
18A
needed
piece
of
research
is a
study
of the
exact nature of
the
variations of medical
care
received
and medical
care
paid
for as
income
rises.
(The
relevant
income
concept
also
needs
study.)
For this
purpose,
some
disaggregation
is
needed;
differences in
hospital
care which
are essentially
matters
of
comfort
should,
in
the above
view, be much
more
responsive to
income
than, e.g., drugs.
"9 This role is
enhanced in a socialist
society,
where the
state itself is
actively concerned
with illness
in relation to
work;
see
Field
[14,
Ch.
91.
'
About
3 per
cent
of beds were
in
proprietary hospitals
in
1958, against
30 per
cent
in
voluntary
nonprofit,
and the remainder in
federal, state,
and
local
hospitals;
see
[26,
Chart
4-2,
p.
601.
"
C.
R.
Rorem
has
pointed
out
to me some
further factors
in
this
analysis. (1)
Given
the
social intention of
helping
all
patients
without
regard
to immediate
ability
to
pay,
economies
of scale would dictate a
predominance
of
community-sponsored
hospitals. (2)