Arrow's Perspective on Healthcare

Summary:

Arrow's perspective: An Introduction

Problems in healthcare Industry as a differentia from Welfare Economics

Information Gap

Moral Hazard

Adverse Selection

Arrow's Perspective: An Introduction:

Prof. Kenneth Arrow was a theoretical Economist and is also considered one of the pioneers of Health Economics. His Central theme of study in Economics of Healthcare is the lack of complete markets. 

Arrow's 1963 paper - "Uncertainty and the welfare Economics of Medical care" is a fundamental and foundational work in Health Economics. He explored how healthcare differs from typical goods and services and concluded that healthcare's unique traits hold special position in economics analysis.

Problems in healthcare Industry as a differentia from Welfare Economics:

Arrow broadly highlighted three healthcare industry-specific problems leading to market failure.

The problems he briefly discussed are:

* Information Gap

* Moral Hazard

* Adverse Selection.

Information Gap:

With reference to Arrow's work, the problem of information gap is due to the fact that Information possessed by physician is necessarily greater than that of a patient, or is at least believed by both parties. As a result of this problem of informational gap, individuals do not know the amount of care they will receive from doctors, especially when specialists are involved. It is important to find good doctor since an incompetent doctor can cost you your life.

Arrow suggested solution to the problem of Information gap as follows: 

He perceives entry barriers as the sole method to mitigate uncertainty and he believed market competition would eliminate incompetent doctors. He also played an active role in criticizing unregulated medical markets, akin to a risky game of 'Russian roulette', that which does not serve society's interests.

Moral Hazard:

Arrow's concept of Moral hazard suggests that insurance alters individual behavior by reducing concerns about the consequences of their actions. For example, when our bank deposits are insured, we are less concerned about how the banks utilize our funds. A real world example is the US Sub-prime crisis and subsequent housing collapse (2007-2010). As a result of this problem of Moral Hazard in healthcare, a phenomenon would be created leading to an increased demand for health services and higher healthcare spending.

Arrow's suggested solution to the problem of Moral hazard as follows:

 He proposed co-insurance as a solution to mitigate Moral hazard, wherein individuals pay a significant portion of their healthcare costs. Co-insurance encourages less risky behavior, resulting in fewer health issues and decreased national healthcare expenditure.

Adverse Selection:

The problem of Adverse selection is due to the fact that individuals posses more information about their health than insurers and insurers can acquire health problems to avoid increased premiums. This information gap creates challenges for insurers. 

As a result of Adverse selection, if premiums are set based on average risks, high-risk groups buy more insurance, and low-risk groups will buy little or no insurance, leading to losses for insurers. To overcome the loss, the company will raise rates, resulting in more low-risk individuals avoiding insurance.

Arrow's suggested solution to the problem of Adverse selection as follows:

He proposed that these problems can be resolved with a single-payer system. In a single-payer system, everyone is covered by one health insurance plan. This eliminates concerns about low-risk individuals leaving the system and the escalating costs of insuring people.