New Report: Ushering in Medicine’s Digital Revolution

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As Internet-driven innovation revolutionizes the U.S. economy, many have wondered: Why isn’t there an Uber of health care? Why can’t we deploy, in health care, the same forces that are improving quality and lowering costs in virtually every other sector of the economy? Health care professionals are neither dumb nor averse to new technology; the U.S. health care sector employs hundreds of thousands of people with doctorate-level scientific and medical training.

The reason that health care increasingly lags the rest of the information economy is not because health care is fundamentally different. It is because decades of unwise government policy have made it almost impossible for consumers and innovators to succeed.

Many observers—especially those aligned with the political Left—argue that health care can never function like a conventional market. Certain structural aspects of health care, they say, prevent the efficient functioning of market forces and must be corrected by government action.

This argument has been espoused, most notably, by Stanford economist and Nobel laureate Kenneth Arrow. In 1963, Arrow’s seminal essay, “Uncertainty and the Welfare Economics of Medical Care,” was published in The American Economic Review.  Health care, Arrow argued, diverges from traditional markets in important ways; he concluded that “it is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.” The essay, still widely read, is credited by many as having invented the field of modern health economics. 

Medical care has changed dramatically in the past half-century, and Arrow’s observations have become increasingly antique. But his thesis remains at the heart of the ideological objection to market-driven health care. 

Consider a key problem identified by Arrow: asymmetric information. It is not unusual, per se, for a buyer to have less information than a seller. The seller of a used car, for example, is likely to know more about that car’s mechanical history than a buyer. The phrase “caveat emptor”—“let the buyer beware”—dates back centuries and has been enshrined in U.S. law since at least 1817.

Thanks to the Internet, the market for used cars is far less asymmetric than it once was. Before the World Wide Web, Carfax, the leading U.S. vehicle-history service, was primarily used for auto dealers, not consumers. Today, Carfax is available free online, making it possible for a consumer to review the mechanical histories of hundreds of cars before purchasing one. Indeed, in many types of transactions, the buyer now has an advantage over an inexperienced seller because the buyer has access to a wealth of data with which to compare price and quality.

Arrow also expressed concern about the unpredictability of one’s need for health care. But unpredictability, as an economic principle, is far less exotic today than it was in 1963. Advances in the pricing of options contracts have allowed individuals to assign prices to risk in almost every field of endeavor. The last half-century has witnessed a proliferation of insurance products, addressing all sorts of unpredictability, including traveler’s insurance, extended warranties, overdraft protection, and malpractice insurance. All these products can be priced—and compared—online.

Trust is another Arrovian economic problem that technology has made great strides to resolve. Airbnb, the home-sharing website, encourages lessees and lessors to rate each other online. In this way, Airbnb reduces the risk of bad customers invading one’s home, as well as the risk of unscrupulous landlords failing to live up to consumers’ expectations. Uber also encourages drivers and passengers to rate each other, simultaneously improving customer service and driver safety.

The Internet’s most profound impact on the non–health care economy involves reducing barriers to entry. Mom-and-pop craftsmen can start multinational businesses by selling their crafts worldwide on Etsy. More financial information is now available to nonprofessional investors. Authors can self-publish electronic books online. 

The greatest discrepancy between health care and the rest of the economy centers on the way we pay for health care goods and services. In most other sectors, consumers pay directly for goods and services, giving businesses a strong incentive to deliver those goods and services at an attractive price. But this is not what happens in U.S. health care.

More than 90 percent of Americans have health insurance, under which the vast majority of health care expenditures are paid for by a third party. But the problem extends deeper: nearly 90 percent of the 90 percent with coverage did not choose that coverage on their own. Instead, a third party—an employer or the government—purchased third-party health insurance on their behalf. On this issue, Arrow was not sufficiently concerned. We now have “ninth-party” health care—third-party payment of third-party payment of health care services. Few policymakers have sought to reverse this trend.

In sum, technology can solve many of the health care problems that Arrow identified before the information economy arose; outside health care, technology has already largely solved them. If we wish to bring Internet-like innovation to health care, we must understand the key aspects of how America’s digital economy differs from its health care system—and what government policy has done to exacerbate those differences.

For decades, Americans have seen their individual sovereignty eroded by a health care system—and a patchwork of laws—that places the system’s priorities over the patient’s. Consumer-driven health care technology can put patients back in charge of events that, quite literally, can mean the difference between life and death. What stands in the way?

Each current barrier to a more innovative, competitive, affordable health care system was created for a reason. The FDA exists to protect patients from unsafe drugs and unscrupulous sponsors of new medicines. Privacy laws protect patients from having their sensitive medical records fall into the wrong hands. America’s complex, inefficient method for subsidizing health coverage exists because Americans have understandably sought to protect the poor and vulnerable from unaffordable health care expenses. 

But the cumulative weight of these policies has been to make U.S. health care less innovative, less patient-centered, and less affordable. Calibrated reforms, such as the ones contemplated in the Manhattan Institute’s HEALTH CARE 2.0 series, could do much to make health care better for everyone.

Avik Roy is a senior fellow at the Manhattan Institute.

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