Chapter Ten. Health Care Markets, Regulators, and Certifiers

Economists have devoted considerable attention to the question of whether market transactions, contracts, and/or regulation can generate efficient outcomes. The chapter presents a discussion on efficient outcomes for health care services markets. The chapter begins with an analysis of whether health care markets are different from textbook markets. Arrow argues that the conditions facilitating an optimal state are often missing in health care. This chapter discusses and examines these conditions and pays particular attention to asymmetric information about quality. The chapter also reviews the empirical evidence on the performance of competitive health care markets. At one time the conventional wisdom was that competition led to higher prices, an idea captured by the theory of the Medical Arms Race. With the growth of selective contracting between providers and payers, competition is now associated with lower prices. The chapter also discusses regulatory approaches to containing prices. Theory suggests that a mixed payment scheme combining a fixed prepayment with partial cost sharing should outperform either pure prepayment or pure cost-based payment. The chapter also includes another quality assurance mechanismthird party certification embodied by health care report cards. Despite widely cited unanticipated and undesirable consequences, report cards for health insurers and providers seem to offer several benefits: they move market share away from the worst sellers, encourage all sellers to improve quality, and facilitate matching between severely ill patients and the best providers. The chapter also explores pay for performance schemes, which combine elements of incentive contracts and quality certification.