This article was written by Jeff Goldsmith, who discusses the negative impact that the search for perfect markets has had on health policy. According to Goldsmith, certain ideas in healthcare are so powerful that they continue to shape policy despite their tenuous connection to the real world. One such idea is “moral hazard,” as described by future Nobel Laureate economist Kenneth Arrow in 1963.
Arrow’s influential essay suggested that moral hazard occurs when the demand for a product increases due to third-party insurance paying for it, leading to unnecessary care provided by physicians. Arrow’s thesis coincided with the enactment of Medicare and Medicaid in 1965, which dramatically expanded the government’s role in healthcare financing. This expansion led to a significant increase in health spending, skyrocketing from 5% of GDP in 1960 to 15% by 2003.
Arrow’s moral hazard thesis influenced a “blame the patient” narrative in health economics. However, a different moral hazard narrative emerged in liberal circles, which shifted the blame to physicians for the health cost crisis. This “blame game” has fueled a futile quest for the perfect payment framework to control health cost growth. The implementation of value-based care and high-deductible health plans has led to adverse effects on patient care.
Goldsmith argues that the blame game has resulted in a policy conversation steeped in mistrust and cynicism. Alternative explanations for the post-Medicare cost explosion, such as better access to care improving health, have been overlooked. He suggests that periods of economic inflation coincided with healthcare expansion, amplifying their cost impact.
Goldsmith highlights the oversimplification of reducing the physician-patient interaction to a mutual quest of maximizing utility and fighting moral hazard. This approach has insulted both parties and oversimplified their complex interaction. American health policy has been obsessed with fighting moral hazard, leading to a significant burden of medical debts for millions of Americans despite spending more on healthcare than other wealthy countries.
In conclusion, Goldsmith presents a critical analysis of how the search for perfect markets has damaged health policy, resulting in mistrust, cynicism, and significant medical debts for Americans.
