The healthcare market

Yichuan Wang argues that conservatives who believe that replacing ObamaCare with a market for individual health insurance is not as simple a free market solution as that for many other goods and services in his post Healthcare and Cars are Not Isomorphic.

Wang notes that as healthcare is a service, not a good like a car, "one productive hospital cannot simply 'export' its health care services across the country.

Some of the commenters on the post argue that healthcare is easily exportable, just like any other service (McDonald's and WalMart are cited as examples, among others). However, a study by Georgetown University that looked at George, Maine, and Wyoming, three states that allowed sale of insurance across state lines found that nothing happened. The primary deterrent was "the localized nature of how health care is delivered."

Respondents universally reported the enormous difficulty that out-of-state insurers face in building a network of local providers, and insurers identified doing so as a significant barrier to market entry that far surpasses concerns about a state’s regulatory environment or benefit mandates. State officials and insurers also noted that across state lines legislation ignores the primary cause of high prices—the cost of delivering care—and fails to account for often dramatic differences in the cost of care between states and regions.

Practical barriers and administrative obstacles also hinder success. Many state regulators are reluctant to relinquish some or all authority to enforce state standards by taking the risk of allowing another state to establish and enforce consumer protections that affect their residents. Respondents in five states reported difficulties in implementation because other states have little incentive to establish across state lines partnerships. In addition, officials and insurers in all six states noted the complexity of health insurance as a practical barrier to across state lines proposals and that establishing the rules under which an interstate health insurance compact would operate would likely demand more time and resources than states are willing to commit.


While it is certainly the case that many consumers and small businesses lack meaningful choices among insurers and struggle to find affordable coverage, our findings suggest that across state lines legislation does not appear to be the “silver bullet” that proponents are searching for.

More importantly, though, Wang notes one critical difficulty with healthcare: determining the quality of service.

But this is an incomplete justification. Haircuts are also services, but few people think barbershops require regulation. Yet, they differ in one key respect. While it is easy for me  to determine the quality of my haircut, it is much more difficult for me to determine what counts as “good” health care. A large part of this is linked to the uncertainty inherent in any kind of biological process. How does one determine if one is receiving sufficient care? Of course, if there is any gross negligence, it can be detected. Yet if the care is just slightly worse than it should be, there's no real way for the consumer to know. The problem is compounded by the fact that most people rarely get sick. If you go to get a haircut every month, you can quickly determine which barbershop is the best. Unfortunately for neoclassical economists but fortunately for society as a whole, people need catastrophic care substantially less often than they need haircuts, thereby impeding the market from finding the most efficient solution.

I think of this every time I need to find a doctor for one reason or another. Determining who to choose from the hundreds of doctors listed on the website of my insurance provider might as well be like picking a blind date out of a phone book. I have so much more information to help me pick the best tablet computer or the best running back to pick up off of waivers this week in fantasy football than I do to choose a doctor to care for a critical health issue that it's like a plot scenario out of an absurdist tragedy.