Case study - health care in the US

In an earlier book "Challenge to the NHS", IEA 1986, Green looked at the performance of the health care market in the US and came to the conclusion that the introduction of a more effective free market in the early 1980s resulted in the emergence of a flexible, cost effective system. He claimed that problems often associated with the American health care system, such as rapidly rising costs and doctors providing patients with unnecessary surgery, were the result of a failure of the free market to operate.

Doctors' monopoly

Green argued that the problems of US health care in the 1960s and 1970s were the result of the doctors' monopoly power over supply. The doctors achieved this partly by restricting entry to the medical profession through limits on entry to medical schools and partly by keeping consumers in ignorance. The doctors' association, the American Medical Association (AMA), "was able to keep a tight grip on the number of doctors trained and hence to limit the supply of doctors in active practice." They also maintained the monopoly by preventing doctors from advertising which prevented consumers from gaining the information they needed to make a rational market choice.

This monopoly power was fatally undermined in 1982 when the US Supreme Court outlawed the AMA's ban on advertising. The Federal Trade Commission had already enforced a number of other pro-competition policies on the doctors such as making price fixing by the Michigan State Medical Society illegal. Combined with a significant expansion in the number of doctors, this led to the effective emergence of competition between them. Green argues that the emergence of this effective competition in the health care market has led to exactly the results predicted by the free market model.

Since Green wrote this paper, new types of health care purchaser have grown up in the US, called Health Maintenance Organisations (HMOs). These have more bargaining power over doctors on behalf of the patients who are insured with them. This is seen by many commentators as a further example of the free market working, although others have argued that HMOs restrict patients' access to doctors in order to hold down costs.

What are the results?

As we saw earlier in this Unit a free market will provide an allocation which is allocatively efficient. This means different types of health care in a mixture which accurately reflects consumer demand. It will also be productively efficient and so deliver the health care for the lowest possible cost.

Green believes that American consumers now have a much greater choice of where to get their medical treatment and that increased competition has led to the producers of health care becoming more responsive to consumer demand.

Another result of the increase in competition, Green argues, has been a significant fall in costs. In other words he claims that American health care has become more productively efficient. He cites as evidence the fall in hospital use and the fall in visits to doctors' surgeries between 1981 and 1985 - "the producers are on the defensive as competition cuts costs and promotes high quality".

Fitting the free market model

Green believes that the extension of the free market in health care in the US in the early 1980s brought substantial benefits, and in particular delivered exactly the kind of result that the free market model predicts. He does not claim that the American health care system is without problems but he does believe that those problems stem from the effects of state interference rather than the failure of the market.

Many economists would totally disagree with Green. They argue that a free market cannot operate effectively in health care. To see why go to the next Unit in this e_source - 'The case against a free market'.