from various aspects of patient uncertainty about various dimensions of health care service ( d)Patients frequently will not be able to calculate the cost they will incur in receiving medical treatment; (e) they are frequently ignorant about the quality of the care they receive, (f)fair insurance may not be obtainable; and (g) moral hazard prevents an optimal insurance pricing structure 4. Consumers who seek medical care usually do so before they know how much cost they will be incurring. In the face of this uncertainty it is clearly ossible that they may take decisions which subsequently they may come to regret. They may, for example, take too much care and discover they have run up a bill higher than they would have been prepared to pay before consultation; or they may take too little if they overestimated the probable cost and the appropriate treatments are highly indivisible(e.g. having embarked upon a cheap course, an expensive and more effective course would add too much to the cost given the wealth effects that have already happened as a result of treatment already received; or that alternative courses are mutually incompatible, e.g. having embarked upon a cheap course the expensive course would not be medically feasible). Partly, the problem here is one that has already been met, namely how one can tell whether the optimal amount of information about the relevant choice parameters has been obtained. Under a zero pricing system, such as one may imagine the ideal National Health Service to be, the optimal amount of information about direct costs for any patient to collect will ormaly be zero, since the costs of his choices are spread over the whole of society and the burden upon him is effectively zero, though the collective burden of the decisions of the rest of society clearly is not zero. In this system, the cost of care falls on an individual not as a result of his ow individual choices but as a result of the choices of others through the payment of a(hidden) tax-price. The result of society-wide risk pooling is thus to reduce to negligible proportions the incidence upon him of the costs mplied by his own choices whilereducing to quite a low level the uncertainty about the costs that will be thrust upon him by the rest of society. The "ideal NHS system may therefore appear to have two major built-in allocative inefficiencies. The first of these derives from the pooling element. As arrow has shown, insurance requires a maximum degree of risk dis crimination for its full social benefit to be realized, while pooling implies no discrimination. Thus, under conditions of uncertainty, options on 1 The'ideal'NHS is characterized by zero pricing for all health care services, public inputs, and general fund tax financing. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission
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uture consumption would be purchased some of whose expected benefit exceeded expected cost at the margin(where the premium exceede actuarially predicted cost)and some of whose expected benefit fell short of expected cost at the margin (where the premium was less than the actuarially predicted cost)(Arrow [1]). The second derives from a zero price implying excess demand and a failure to satisfy the necessary condi tion that expected marginal valuation should equal marginal cost. Neithe of these two objections, however, can be regarded as sufficient to show the relative inefficiency of the NHS. First, the ma a dis crimination ment is a condition relating to a hypothetical world of zero transaction contract, and information costs. All real world institutions have degrees of pooling built into them as a means of economizing on the costs of collecting enough information for thecorrect'premiuims to be found. The comparison is properly one between different conceivable real world institutions where second-best solutions must be discovered. At least, such solutions may be second-best by comparison with a hypothetical ideal, but they may be first-best in terms of what can actually be done. This is clearly not a matter to be settled by a priori reasoning since the correct degree of pooling- depends upon the costs of administering various pooling/discrimination. gan empirical matter. There is also an alternative argument which asserts that pooling as under the NHS is actually more efficient than risk discrimination. Risk discrimination requires that individuals in groups. having a higher incidence of sickness should pay higher premiums since they impose higher social costs. With pooled risks in the NHS, however, he premium takes the form of a tax- price which, to the extent that the NHS is financed out of general funds and the tax-system is progressive, divorces the premium from the individuals risk and relates it instead to- come. Since the poor would tend to be less discriminated against under his system than one in which risk discrimination was the rule, there may be some social benefit from such a form of organization relative to one in was less prominent. This argument is an important one which we return later. At this point, however, it is observed that whatever merit the argument may have, it is not related to the matter of optimizing cost uncertainty. Instead it concerns the incidence of absolute costs. It is therefore not relevant to the discussion of this section The second objection to the NHS system is also derived from comparing the real world with a hypothetical ideal instead of a realistic, or conceivable alternative. In any known health care system, however, there is some response to the problem of the uncertainty of costs which incorporates insurance or pooling elements by which all fail the test of comparison with a hypothetical ideal. The reason for this is that so long as the tax-price (or premium) does not exceed the expected value of consumer's surplus
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she operation of a zero price for use of the service(as under the NHS or even a full insurance system with risk discrimination) will ensure that individuals will, under either type of institution, try to adjust so that their marginal valuations become zero. Any differences between alternative institutions must arise because of differences in behaviour that are implied about how individuals can adjust by, for example, coinsurance in the market, or by political voting processes in the NHS case, which reduce total supply below the rate of consumption implied by zero marginal valuations. These are, however, more or less empirical questions about the processes by which preferred positions are attained and have very little on of an optimal solution. Before a judgement about the relative merits of the market or the nhs can be reached one therefore requires far more information about these processes and about how the excess demands under either institutional framework are actually removed. Currently, we lack even a satisfactory positive theory of anagerial behaviour as a framework in which such an empirical investi- gation could be conducted. 1 Thus, at the microeconomic level, one's preference for one system or another will depend upon how resources in excess demand are actually rationed out. Since a prime health service pplying agency, the hospital, is charac ofit in eithe system, there must be substantial initial uncertainty about any behavioura differences between them, which further whittles away any a priori case favouring either one over the other. This problem is additional to another concerning the determination of the size of the excess demand, which in the case of the NHS requires some theory of public expenditure(since marginal valuations are not, in practice, equated with zero)and in the market case requires analysis of the means used to reduce the effects of moral hazard 5. Uncertainty about the quality of care received by consumers is more important in the health services than in many other areas of economic life, since the patient is frequently prevented, in the nature of his case, from shop ping around and learning about the quality of the service of rive suppliers by trial and error. Even if second opinions are feasibly obtainable as they frequently are, the patient may not be able to weigh one against the other. The typical case, however, is probably that second opinions are obtainable but that they are not sought because of the mystique associated with the medical profession and the assumption that'the doctor knows est. The difference in the amount of information available to doctors on the one hand and to patients on the other is not of the same type as occurs with most other goods and services. Typically the producer knows more about the technical methods by which a product (in this case, say, a course of But see the references cited in p. 193, n. 1. Reference 13 has some further references of a more general kind. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission
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