Editor’s Note: Health Care Is Different, but It Doesn’t Have to Be

If you’ve ever been to a hospital, you’ve probably noticed that it’s not like Wal-Mart. You can’t wander around inspecting medical services on offer, weighing different options, and reading price tags.

You may have already considered different options before arriving at the hospital—if you went to the trouble of scheduling an appointment to hear a second opinion, and if treating your condition wasn’t urgent. And while you might get a bill for copays or deductibles, you’re not likely to see any real prices for procedures.

That our arrangements in health care are different from those of other economic sectors is an example of what Emile Durkheim called a “social fact.” The role of third parties—insurers, employers, government—in providing and paying for health care is so obvious that most people rarely stop to consider whether it must be that way.

There is a mythology behind these arrangements that was laid out explicitly by Kenneth Arrow in his 1963 paper, “Uncertainty and the Welfare Economics of Medical Care.” Arrow argued that the suppression of market forces in medical care is society’s way of adapting to the special qualities of medical care that make markets in medicine function imperfectly. As he put it: “It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.”

Among those special qualities, said Arrow, were the uncertain and irregular consumption of medical care, the impossibility of examining the product before receiving it, the difficulty of measuring its effectiveness and of comparing its outcomes, and the specialized knowledge required to practice medicine, which gives providers an informational advantage over consumers—and thus an unusually large ability to influence the demand for their own product.

All these factors make it difficult for a patient to shop for medical care as he might shop for new shoes. But none of those qualities make health care truly unique. In other areas, we insure against the risk of large losses—e.g., to our homes and automobiles—without suppressing real insurance prices.

We can’t know for certain how much a college education will add to our marketable skills until we attend the classes. And by definition, students know less about what they are learning than their teachers. But nobody thinks prospective students cannot make informed decisions on the basis of college reputations, tuitions, and private ratings.

Arrow also fails to consider whether imperfect markets are better or worse than imperfect government intervention. Separating the consumption of care from the paying for care means that in health care few people have an incentive to ensure that a dollar spent purchases a dollar of value. But the federal government has expanded third-party payment—not only by being the largest payer for medical care but also through making employers the primary providers of private health insurance.

What are called market failures are in fact often market opportunities for an entrepreneur to provide a new solution. But the search for solutions gets cut short when the government dictates how things will be done. To take one example, noted by Robert Graboyes in our interview at page 14, electronic medical records could provide a lot of value in health care, but they do not do so right now because they are organized not for clinical purposes but for administrative purposes determined by the federal government.

In order to bring more market forces into health care, we need first to repeal Obamacare. Second, we need to make the policy changes described by Robert Moffit at page 20. In particular, capping the tax exclusion on employer-provided health insurance, providing a parallel benefit for individually purchased insurance, and liberalizing restrictions on Health Savings Accounts will put consumers back in charge of health care decisions and encourage them to shop for value—necessary steps for unleashing in health care the competitive forces that have transformed vast swaths of our economy over the past 50 years.

Mr. Adrianson is Editor of The Insider.