Economic Theory, Economists, and the Formulation of Health Policy

Thomas Rice. The Economics of Health Reconsidered. Chicago: Health Administration Press, 1998. 195 pp. $38.00 paper.

Thomas Rice is an economist, and he uses this book to criticize his professional colleagues for what he takes to be their faulty application of economic theory to the formulation of public policy about health care. He is also a partisan of national health insurance (NHI), and he seems to conclude that correct application of economic theory to health care creates a brief for NHI. Furthermore, in the light of both that brief and the political failure of NHI in the United States, he follows Uwe Reinhardt (Pauly and Reinhardt 1996: 24) in holding that members of the policy elite have a responsibility to press that brief on a reluctant polity (164); and like Reinhardt, Rice offers no analysis of how they should pursue such advocacy or how likely it is to succeed. These two concerns--the proper application of theory and the proper role of those who formulate policy--inspire two corresponding orders of reflection. The first part of this essay pursues the economist on his own turf, exploring Rice's argument that economists have failed properly to apply economic theory and that this failure has wrought deleterious consequences for public policy. The second part, by contrast, takes a perspective external to economics and explores the circumstances that affect advocacy of policies by their intellectual progenitors. Both parts use insights afforded by history (and to some extent political science), an approach consistent with Rice's conviction that economists have been unwisely reluctant to exploit other disciplines in analyzing public policy (although, oddly, he himself appeals only to psychology).

Criticizing American Health Economics from Within

The main message and plan of this book are straightforward: the prevailing conviction in policy circles--that in health care, the market is efficient and government inefficient--"stems from a misunderstanding of economic theory as it applies to health" (3). Rice aims to make that case by exhibiting the assumptions on which the microeconomic analysis of market competition rests, arguing that they are unlikely to hold, and suggesting that resultant policies are inappropriate. These assumptions have been little discussed by economists, and agreement is lacking, Rice acknowledges, on just which ones must be met for the outcome of competition to be optimal. Nevertheless, from the literature Rice draws fifteen that he believes likely to be broadly regarded as necessary. Among the more salient are absence of externalities, determination of consumer preferences outside the market, adequacy of information to support consumer choices, rationality of individuals, revelation of consumers' preferences through their choices, derivation of social welfare solely from individual utilities (which in turn derive solely from what is consumed), independent determination of demand and supply, and social acceptance and approval of the prevailing distribution of wealth. Excluded from the list are only those assumptions (which Rice does not name) that he believes economists have properly handled (except for the theory of the second best, for which he refers readers to Robert Kuttner's Everything for Sale, 1997).¹ List in hand, he offers a primer on microeconomics and an account of why these assumptions fail and of what their failures imply for health policy. Rice concludes that economists' commitment to competition threatens to bias empirical studies (5), promotes policy prescriptions injurious to socially accepted goals, and obscures conceivably superior policy choices predicated on alternative and likely more viable assumptions (169).

There are several virtues in this approach and at least three disadvantages. First among the virtues is that, for those who are interested in health policy and mindful of its domination by economics (above all other social sciences) but who lack facility in its technical foundations, Rice's primer proves accessible but by no means trivial. Such readers will find themselves better equipped for serious engagement in policy matters and armed with citations for further...