Why markets might work in primary education, but not in healthcare

My postings from the last couple of weeks should have made clear that I’m sceptical about markets working in healthcare. What I’m going to try here is to show that I’m not actually anti-market, just anti the use of markets where they can’t work.
For markets in public services to work, several things need to be in place. On the demand-side, there needs to be a way that whoever is choosing can make informed choices so that the best providers are rewarded by being chosen, and the worse ones aren’t. I’ve also claimed that making better choices doesn’t depend on better ‘information’ as we would normally use the term. It depends on having a frame or accurate proxy which we can use when making choices that is representative of our likely experience if we choose that provider. My examples (below) will hopefully make this clearer.
On the supply-side, there needs to be enough competition to prevent collusion and to offer genuine choice. Without competition, there is a danger that local cartels can stitch up provision, and without genuine choice (that is for choosers to believe there is actually a difference between providers that matters), then choosers won’t bother to make informed choices.
Between supply and demand there needs to be a means by which choices have consequences – that when chosen a provider is rewarded, and when not chosen (below a threshold) there are consequences. The most obvious means for doing this is for choices to carry a transfer of rewards – in private markets this involves a personal payment, but in public markets resources, usually from the state, have to follow choices instead. Where providers are not chosen, there needs to be a risk of closure. Where providers are chosen, in contrast, there needs to be some kind of additional reward. At very least, they should be safe in terms of resources.
Still with me? Let’s look at two examples.
In primary education we’ve developed a range of means for parents making informed choices. They are likely to care about where they send their child, and can look up league tables through newspaper and government websites to see how each school compares both nationally and locally in terms of the % of pupils achieving level 4 in English and Mathematics. They can get copies of OFSTED inspections. They can visit the school. They can talk to parents of kids already at the school. And they know if all else fails, they can probably move their child to another school if things don’t work out. The result of all of this is that you can get a reasonable idea of which is the best school for your child.
What this means, on the demand side, is there there is a frame for how you choose a primary school. It may well be that not all parents from all classes work according to it, and that the proxies aren’t entirely representative of how good a school is. But league table results provide a rough and ready guide as to how well the school is performing relative to others in the local area, and are just a starting point the decision process of which school you are going to send you child to.
On the supply-side, primary school are relatively small, which means that most children in any kind of urban area is going to have a choice. That choice may not be as wide as you’d like, as you aren’t going to typically travel long distances to go to primary school, but within a couple of miles of your door it is not untypical to have a few schools. It is also possible to create a system where funding can follow parental choices, and if those choices are reasonably sensible, that schools that are doing well will get more resources than those that aren’t.
This means that there are potentially more resources for schools doing well than for those that aren’t. Now this can cause problems in terms of equality, and that’s something that needs to be addressed strategically across a local health area, but in terms of getting a market to work to drive provision, I can see how one for primary education can work – there is a means of choosing for parents, a choice of schools, and a system of rewards for schools receiving choices. It’s not perfect – rural areas won’t have much if any choice, and there is a danger of poor areas being badly served by poorly-resourced schools without some additional intervention, and there will always be capacity problems – but in theory I can see how a market can work.
In healthcare we really do have none of the above.
On the demand-side, it’s hard to see how either patients or GPs can know much about the providers they are choosing unless they involve healthcare they have personally and recently experienced, and even then, they won’t have seen all the providers. There isn’t information that is representative of the particular services that patients need, and GPs will tend to prefer services they know and trust, even if this means making sub-optimal choices (from the perspective of the market). We don’t have data for individual services that can be presented in anything like league-table form, and even if we did, there is no guarantee that it would be representative of what that patient will actually receive. In schooling, a class gets pretty much the same teaching. In healthcare, treatment has to vary according to what ails you, and may be considerably different, even within the same service.
On the supply-side, public provision is large and comprehensive, and may be undercut by smaller, more nimble private providers that do not offer a wide range of services, but we can’t let the public providers fail because they are both too important (they offer the full range of services) and too big (there isn’t enough spare capacity in the non-public sector to take up the slack), to fail.
As such, we can’t really make good choices of health services, and we can’t follow the market logic of the consequences of public services not being chosen. We can’t make markets work here.
So I’m not hostile to markets. I can see, with some revisions (pupil premiums, for example) how they can work in primary education. But in healthcare – I just can’t see how they can work. Markets require careful design in either public or private sectors – and in healthcare I can’t see how to design them so they can work.


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