The Market Approach
Michael A. Gillette, Ph.D.

The problem of the allocation of scarce medical resources has been approached in four basic ways, as briefly described last month. Those strategies for dealing with this issue are:

• The Market Approach,
• The Lottery Approach,
• The Political Approach,
• The Mixed Approach.
  

Each of these views has its own merits and problems. This month we will consider the advantages and disadvantages of the market system. The basic concept of this system is captured in the phrase "to each according to his means”.

The market approach to allocation is based on the idea that health care, like many other goods in society, should be available for sale in the open market. Those who have the resources to buy healthcare will get it; those who do not have the resources will be forced to do with less. While this view of healthcare might seem cold to many, it does have several purported advantages.

The first advantage to this approach is actually based on an appeal to fairness. The proponent of a market system argues that a free market is the best mechanism for generating goods in society and making them available to the populous. The profit incentive creates a reason for people to commit their lives to healthcare provision and research. Furthermore, such a system of allocation respects the rights of the producers of healthcare. A doctor, under this view, is just like a baker. Both have skills that they own themselves, and both sets of skills are necessary for the protection of life and health. The baker is allowed to sell his bread for whatever price the market will bear, and so should the physician.

This last point leads to the next advantage of the market system. The market is perfectly efficient. No bread is baked that cannot be sold (at least not much of it), because by using resources in such a way the baker loses money. Likewise, no one who wants a bread and can afford one will go without bread, because the baker (or his competitors) will rush in to satisfy any unmet desire to purchase bread. If there is an excess of supply, prices drop until enough people can afford to buy bread that all the bread is sold. If demand outpaces supply, then prices go up until enough people drop out of the bidding for loaves, such that a balance once again exists regarding the supply of bread and the demand for it. Price, under this system, is automatically adjusted to its optimum level, and accurately measures the desires of those who would buy bread.

Price is an accurate measure of desire because prices will rise in the face of excess demand until enough people decide that the they would rather spend their money elsewhere. By voluntarily dropping out of the bidding because we would rather spend our money on another item, those of us who drop out of the bidding are expressing the fact that while we could buy the item in question, we do not want to.

The following is an example. In shopping for a car, I could afford a Ferrari if I wanted to. It might mean that I would have to sell some of my other property, or that less money would go into savings, or that I would have to eat cheaper meals, but these things could be arranged. I now have to ask myself, do I want that particular car enough to give up those other things? If I do, then I will enter the bidding on a Ferrari. If I do not, then I won't. In either event, I cannot complain about either having the car and nothing else, or having other things but not the car. The choice was freely mine.

If we apply this argument to healthcare there are some immediate problems. First of all, I may question the initial premise that physicians own their skills. I could argue that producing a doctor takes a tremendous amount of social resources for which no doctor, even the ones who paid their tuition bills in full, has covered that cost. There were community hospitals in which they trained, tax breaks for the schools in which they were taught, relatively low paid professors who gave up opportunities in private practice to teach them, and patients who let them poke and prod their way through medical school and residency. In short, every doctor owes a debt to society for the advantages that he or she now possesses.

Second, we can argue that the market does not measure desire very accurately. If we all had the same amount of money when we "entered the bidding”, then this argument might go through. But the principle of diminishing marginal utility shows that a poor person is at a disadvantage in the market when compared to a wealthy person.

According to the concept of diminishing marginal utility, the last unit of any good that I have is worth less to me than the one before it. If I have one million dollars, then the value of my one-millionth dollar is far less than the value of my first dollar. I am more willing to spend that last dollar on trivial things about which I care little. If I had only one dollar, such trivial desires could not motivate me to spend my money. Therefore, the more money I have, the less desire is needed for me to spend it, and the greater my advantage in a bidding war against someone with less money. The market, therefore, does not measure desire. A rich person might purchase a Ferrari on a whim, but for me to do it would take very serious commitment and desire.

Finally, the biggest weakness in the market system is its inability to recognize that many of us believe in a right to health care. Medicine is not like a car, many of us think, and should not be sold on the market like a car. Such a trivialization of the value of medicine is unfair to those with moderate or meager financial resources. In order to be fair, opponents of a market argue, we should all have an equal chance at receiving healthcare. When scarcity exists, we should prefer a lottery.

The lottery, however, has its own problems. For that discussion, tune in next month.