Arnold Kling  

McFadden on the Prescription Drug Program

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Nobel Laureate Daniel McFadden writes,


My overall conclusion is that, so far, the Part D program has succeeded in getting affordable prescription drugs to the senior population. Its privatized structure has not been a significant impediment to delivery of these services. Competition among insurers seems to have been effective in keeping a lid on costs, and assuring reasonable quality control. We do not have an experiment in which we can determine whether a single-product system could have done as well, or better, along these dimensions, but I think it is reasonable to say that the Part D market has performed as well as its partisans hoped, and far better than its detractors expected.

Does this mean that Part D proves that privatization will be effective in other segments of the health-care market? Here, I think caution is advised. First, the success of Part D depends substantially on thoughtful and muscular management of the market. The former head of Medicare, Mark McClellan, and a dynamic, no-nonsense 75-year-old government bureaucrat, Abby Block, bullied insurers to make sure there were, in her words, "no bad choices."

...consumer-directed health care works only if consumers can understand the consequences of their choices. In much of medicine, providers are the agents that guide consumers through these choices. If consumer-directed health care is to be effective, these providers must give sound advice on both the health and financial consequences of alternative choices. This is possible if the incentives to providers and consumers are right, but the design of such markets should not be left to chance.


McFadden clearly does not believe that consumers in unregulated markets will make good health care decisions. He credits regulators, not consumers, for the success of the market-oriented approach to the prescription drug program.

My view differs. But, at the very least, the strong early regulation helped to keep the program from dying in its cradle from an outbreak of anti-market hysteria that might have taken place had the benefits not been force-fed to seniors.


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COMMENTS (4 to date)
Josh writes:

This concept of doctors as agents for patients is a fascinating one that I had never thought of in those terms before. Agency problems are always complex, trying to keep the incentives of the agent aligned to that of their client. It seems like with doctors acting as agents for patients, what we really have is the seller acting as the agent of the buyer, which would be totally unthinkable in any other context. Perhaps this explains the run-up in costs.

Maybe this is all obvious, but I don't recall ever hearing of health care in the context of an agency problem before.

Arnold Kling writes:

The agency problem was recognized over 40 years ago, by Kenneth Arrow.

But it's a problem all over the place. Do you think that the salesman at Circuit City or CompUSA has your interests at heart? No, so you are careful with your money.

On the other hand, if you had "appliance insurance" which paid for whatever you bought at those places, that would tend to raise spending, wouldn't it?

jp writes:

If consumer-directed health care is to be effective, these providers must give sound advice on both the health and financial consequences of alternative choices. This is possible if the incentives to providers and consumers are right, but the design of such markets should not be left to chance.

This is a loathsome line of thought. People are not that helpless, and the government shouldn't encourage them to be.

Michael Austin writes:

I agree that McFadden has a market cynicism but not more than one would expect from a member of the academic community. I thought his three needed reforms were right on the money and reasonably libertarian even, namely 1) "we need to wring out some of the inefficiencies..." 2) "we need universal health insurance coverage ... something like a tax-financed medical voucher system." 3) we need incentives that match choice of expensive treatments with consumers' willingness to pay for them, ... that places treatment choices and financial responsibility on the individual."

Arnold: I know health economics is an area in which you have great expertise and your ideology is towards free market solutions. What do you think of his three reforms. What problems do you see with them for a libertarian thinker?

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