Healthcare reform and….Hayek?

It is the common sense of healthcare reform that competition is the way to drive up standards. Depending on which version you subscribe to, either patients or GPs or other commissioners will choose the best providers, forcing both public and non-public providers to drive up their standards or face losing funds by not being chosen.

The problem with this, is that it is entirely unclear how exactly these choices are meant to be made. GPs don’t know who the best providers in an area are – how would they? And if GPs don’t know, patients don’t either. There have been various attempts to put together leaflets and present performance statistics in a digestible form, but there is a fundamental problem – it’s extremely difficult to come up with any way of representing a particular health service that represents well how good (or not) it is.

The other thing you need to know to fully understand the problem is that providers don’t set the price for their services in the NHS. Instead they are set by the state, on the basis of average costs for particular treatments (the ‘tariff’). This means that in a given year, prices are effectively fixed. It is meant to provide an incentive for providers who are above average cost to improve or get out, and for those below to generate what might be called an efficiency surplus. Again, like competition, this sounds like a good idea. But again, it isn’t.

The problem with fixed prices is perhaps best illustrated by Hayek (and von Mises before him). Policymakers seem to regard the price as either the output of a market process, or a means of driving who should, and should not be in the market through the tariff. This is an error. The price is fundamentally, the means by which markets co-ordinate themselves not only on the consumer, but also the producer side. Prices provide a single index of a product or service – not a perfect one, as we are not in a perfect world – but one that acts to summarise the information available in a way that allows producers to decide whether or not they should enter, exit or compete, and consumers whether they can afford to buy.

But here’s the really important thing that modern economics always seems to lose sight of – prices allow markets to adapt on both sides because they move about (or at least should, so long as the market is at all competitive). Most recently Tim Harford’s new book ‘Adapt’ gets closest to understanding that the benefit of a market is that it allows both failure and innovation – and these only occur if prices are allowed to move about.

The thing is, it’s hard to see how prices can move about in a state-funded healthcare system like the NHS. That could mean that we can’t receive the benefits of markets in public healthcare and so should abandon attempts to use them (which would be my view), or it could mean that we should abandon public financing, put in place an insurance-based system (or even take away state provision and financing completely) and let markets run. I don’t think the latter is sensible or sustainable – even Kenneth Arrow, one of the candidates for the greatest economist of the twentieth century acknowledged that healthcare markets probably weren’t viable because of the range of information problems that would probably lead to abuse and inefficiency (if I were being uncharitable, I would bring up the US at this point).

So what we are left with is the idea that markets certainly can’t work in the NHS, and probably can’t work in healthcare more generally. But that doesn’t seem to stop the major political parties of the UK, both left and right, from trying.

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One Response to “Healthcare reform and….Hayek?”

  1. Blog News- Left and Right Views » Healthcare reform and….Hayek? « The Academic Blog Says:

    […] More Blog News Here : Healthcare reform and….Hayek? « The Academic Blog […]

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