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Journal of Health Politics, Policy and Law 26.5 (2001) 1069-1079

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Moral Hazard vs. Real Hazard:
Quality of Care Post-Arrow

Michael L. Millenson
Visiting Scholar, Northwestern University

The doctor is essentially a small businessman. He is selling his services, so is as much in business as is anyone else who sells a commodity.

--American Medical Association official to the Wall Street Journal, 1956

It is clear from everyday observation that the behavior expected of sellers of medical care is different from that of business men in general. . . . The ethically understood restrictions on the activities of a physician are much more severe than on those of, say, a barber.

--Kenneth J. Arrow

Was Kenneth Arrow naïve? Did the ivory tower inure him to manifestations of medical mendacity? Probably not. In "Uncertainty and the Welfare Economics of Medical Care" (1963) Arrow carefully chooses his qualifiers:

Advice . . . is supposed to be completely divorced from self-interest. . . . It is at least claimed that treatment is dictated by the objective needs of the case [although] . . . the ethical compulsion is surely not as absolute in fact as it is in theory. (949-950)

The physician avoids the obvious stigmata of profit-maximizing. (965; emphasis added) [End Page 1069]

And yet for all his caution, Arrow was at the same sort of disadvantage writing about medical care in 1963 as a political scientist analyzing presidential accountability would have been on the cusp of the Vietnam War and Watergate. Just as no analyst could have foreseen the dramatic legal and social changes related to governance that emerged from those events, so, too, was it impossible to foresee the manner in which post-1963 legal and social changes would transform health care.

Arrow did not, and could not, anticipate the passage of Medicare and Medicaid. Nor did he foresee how the profession's subsequent behavior would undermine trust in medicine as surely as the unexplained eighteen-and-a-half-minute gap in a crucial Watergate tape shredded the credibility of the Nixon administration. The resulting end of untrammeled clinical autonomy would also give rise to a form of managed care much different from the "prepaid group practices" of Arrow's day and, in the process, lead to further redefinition of the trust relationship.

Moreover, when Arrow wrote about information asymmetry, he could not foresee how information technology, most notably the Internet, and the consumer empowerment movement would combine to redefine information asymmetry in a manner similar to the way trust had been. (See James C. Robinson's article in this issue.)

The balance between clinical autonomy and clinical accountability--to patients, to payers, and to society--has changed enormously since Arrow's day. As nineteenth-century British parliamentarian put it: "A reform is a correction of abuses; a revolution is a transfer of power" (Edward George Bulwer-Lytton in an 1866 speech to the House of Commons the Reform Bill). The product-formerly-known-as-insurance has taken on the revolutionary role of not just providing access to care, but of shaping the content of that care through financial incentives to providers and to patients. At the same time, public interest groups and the news media now address the information asymmetry problem regularly and in unprecedented detail, while the Internet has opened up sources of information once available only to physicians. Taken together, the information from "old" and "new" media can shame the physician community as a whole into action. This article briefly examines how developments since Arrow that relate to trust and information asymmetry have affected quality of care. [End Page 1070]

Dollars versus Duty

In Arrow's conception, the patient's trust in the physician substitutes for hard information: "Medical knowledge is so complicated, the information possessed by the physician as to the consequences and possibilities of treatment is necessarily very much greater than that of the patient, or at least so it is believed by both parties" (951). Arrow wrote at a time when the spectacular achievements of post-World War II medicine made the public willing...


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pp. 1069-1079
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