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Journal of Health Politics, Policy and Law 26.5 (2001) 835-849

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Kenneth Arrow and the Changing Economics of Health Care:
"Why Arrow? Why Now?"

Peter J. Hammer
University of Michigan Law School

Deborah Haas-Wilson
Smith College

William M. Sage
Columbia University School of Law

Brand New '64 Dodge
Money comes out of Dad's billfold. Hankies come out of Mom's purse.
The engine hardly makes a sound, even when you put it in reverse.
Its got a push-button transmission, hardtop convertible, 4-door.
Its November of '63 and the brand new Dodge is a '64.

The Poet Game, Greg Brown (1994)

Why Arrow? Why now? Kenneth Arrow is a Nobel laureate and one of the most important economists of our time. "Uncertainty and the Welfare Economics of Medical Care" (Arrow 1963) is a landmark contribution to health economics that is required reading in health economics, health policy, and health law courses. While most of Arrow's economic insights transcend time and can fit comfortably with modern economic theory, his institutional analysis of medical markets is layered in amber. This turns out to be a blessing. By offering a point of reference that only time and distance can provide, Arrow's interpretation of medical markets circa 1960 affords an extraordinarily useful framework for understanding the health care economy and health care policy of today.

The year 1963 evokes an era as well as a specific date. It was a time of innocence and Camelot. People had faith in their government, in the functioning of private markets, and in the family doctor. The Dodgers beat the Yankees in the World Series, Cleopatra played in the movie theaters, and television audiences tuned in to My Favorite Martian and The Fugitive. [End Page 835] At the same time, rumblings of unrest could be heard. Martin Luther King Jr. led his historic march on Washington in 1963, and President Diem was assassinated in South Vietnam. America's own President Kennedy had just brought the world back from the brink of nuclear war but would not himself survive the year.

For medicine, 1963 was a time of hope and optimism, though most of the profession's accomplishments still lay in the future. Most physicians were in solo practice, and many still made house calls. Medical science had made tremendous strides with antiseptic surgery, antibiotics for the treatment of infections, and vaccines for the prevention of diseases such as polio, but few specific therapies for important diseases yet existed. The delivery of professional services was undoubtedly a market transaction, but medical charity was also common, by necessity if not by design. Private health coverage was not yet widespread, and, although national health insurance came periodically into political debate, the government still played little direct role in the purchase of medical services. Aggregate national spending on health care amounted to roughly 6 percent of the gross domestic product--a substantial but hardly a daunting sum.

Some forty years later, health care occupies a far more central role in the national economy. Today, it is common to speak of a "medical-care industry" comprising large physician organizations and hospital networks and of using "competitive forces" to discipline health care spending. But even as economics and competition have gained ascendance, we are wrestling with many of the same questions that Arrow attempted to address: What is the proper role of markets in delivering health care services? Can we base our health care system exclusively on private competition? What place should be reserved for government or for social mechanisms such as professionalism, nonprofit status, or trust? Do these "nonmarket institutions" help markets overcome uncertainty, or do they replace markets that have failed because of informational asymmetry? How does one define the proper boundary between market and nonmarket institutions?

It is also fitting that both Arrow's original contribution in 1963 and this retrospective collection today are the products of public policy initiatives by major philanthropic foundations. The Robert Wood Johnson Foundation...


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