The standard theory of how markets work is the model of supply and demand.
That model has several notable features:
1. The main interested parties are the buyers and sellers in the market.
2. Buyers are good judges of what they get from sellers.
3. Buyers pay sellers directly for the goods and services being exchanged.
4. Market prices are the primary mechanism for coordinating the decisions of market participants.
5. The invisible hand, left to its own devices, leads to an efficient allocation of resources.
Yet none of these five features of the standard model reflects what goes on in the market for healthcare. Like other markets, the healthcare market has consumers (patients) and producers (doctors, nurses, etc.).
But various features of this market complicate the analysis of their interactions. In particular:
1. Third parties—insurers, governments, and unwitting bystanders—often have an interest in healthcare outcomes.
2. Patients often don’t know what they need and cannot evaluate the treatment they are getting. Further people will always get sick so there’s is a continual demand for services often irrespective of the quality of service provided.
3. Healthcare providers are often paid not by the patients but by private or government health insurance.
4. The rules established by these insurers, more than market prices, determine the allocation of resources.
5. In light of the foregoing four points, the invisible hand can’t work its magic, and so the allocation of resources in the healthcare market can end up highly inefficient.
Healthcare inefficiencies are likely increasing as healthcare environments become increasingly complex. Errors and subsequent adversity likely increase as a result.
Positive externalities – ratings and other support for initiatives which make it easier to deliver improved patient care may represent a great way to influence the economics of healthcare going forward.
Much of the content of his post is derived from The Economics of Healthcare.