The American health care system is a complex mix of private and public institutions, providers, patients, and payers. It is also a highly regulated industry. The goal of the system is to maximize human health potential and provide equitable access to essential health services. Despite this high priority, the system is plagued with rapidly rising costs and unexplained variations in use of services for seemingly similar individuals. The reasons for these inefficiencies are numerous. They may include differences in values that different people and groups hold for goods and services (including health, privacy, financial resources, and assets), conflicts of interest between providers and patients, and competing incentives to supply and consume certain types of health care services.
Some of these inefficiencies are the result of moral hazard induced by the availability of insurance coverage. Health insurance, which typically covers only a portion of the cost of medically necessary care, can induce behavioral responses that raise the expected losses to which insured individuals are exposed. For example, insured patients will take less preventive care to avoid future illness or injury because they can count on insurance payments to cover a substantial portion of the associated losses.
Other inefficiencies may be the result of information problems or problems with the allocation of resources in the system. Many patients are not well informed, and it is difficult for them to identify which health care services are most valuable or effective for them. In addition, it is not clear that health care firms allocate their resources to the most efficient uses. They may be more interested in obtaining patients’ insurance premiums than in achieving the most beneficial outcomes for those patients.
Moreover, the complexities of the health care environment can make it difficult to establish accountability for poor decisions and outcomes. The process of obtaining and interpreting the information that guides decision making in this context often requires complex and uncertain calculations, the evaluation of a variety of value judgments made by people with varying levels of expertise, and the balancing of legitimate interests that frequently conflict.
Health care is a classic second best world in which one can never be sure that prescriptions to fix one source of inefficiency, based on models that do not incorporate the other distinctive features of health care, will actually improve resource allocation. This is why analyzing each of these features in isolation is so challenging, and why solutions that are applied to health care in the abstract do not always translate into better outcomes on the ground. Moreover, it is a reminder that health care is not just a market, but a service provided by individuals who are socialized to act differently from the prototypical supplier of a good who seeks profit in a self-interested manner. In health care, this is achieved through an emphasis on agency and a culture of professionalism that socializes providers in ways that differ from the standard agent in economic theory.