The Market for Medical Ethics

At the core of Kenneth Arrow's classic 1963 essay on medical uncertainty is a claim that has failed to carry the day among economists. This claim--that physician adherence to an anti-competitive ethic of fidelity to patients and suppression of pecuniary influences on clinical judgment pushes medical markets toward social optimality--has won Arrow near-iconic status among medical ethicists (and many physicians). Yet conventional wisdom among health economists, including several participants in this symposium, holds that this claim is either naïve or outdated. Health economists admire Arrow's article for its path-breaking analysis of market failures resulting from information asymmetry, uncertainty, and moral hazard. But his suggestion that anticompetitive professional norms can compensate for these market failures is at odds with economists' more typical treatment of professional norms as monopolistic constraints on contractual possibility.

Arrow acknowledged that all indusrywide norms of conduct limit the options for economic exchange (Arrow 1972). For some commentators, the fact of such limits is proof enough of the perniciousness of professional norms from an efficiency perspective. Richard Posner (1993) treats the common "ideology" of guild members concerning matters of quality and craftsmanship as a tool for cartelizing production in order to serve the self-interest of members. ¹ Guild ideology, in this view, deceives both its own adherents and the public concerning members' furtherance of their own interests at society's expense, and guild norms that express this ideology do not deserve the law's deference. To the contrary, suppression of competition through guild norms ought to be the object of legal attack.

Nowhere did Arrow deny that physician adherence to the ethic of fidelity to patients and suppression of pecuniary influences at the bedside serves the medical profession's self-interest. Indeed, implicit in Arrow's account is a short-term/long-term tradeoff: physicians resist bedside financial temptation case-by-case ² in order to reap reputational (and financial) rewards from the profession's perceived adherence to this ethic. The norm of fidelity to patients is, by this account, a product of the marketplace. Arrow and critics who view this and other professional norms as pernicious from a social welfare perspective differ not over whether these norms reflect professional self-interest, but over whether they yield welfare gains or welfare losses by comparison with a hypothetical absence of such self-constraint.

This difference of opinion is not merely academic. The question of how health care policy and law should treat professional ethics is key to a variety of ongoing legal controversies. To the extent that health policy and law strive toward optimality in resource allocation, the social welfare impact of professional norms, including the ethic of fidelity to patients and suppression of pecuniary influences at the bedside, is an important public policy matter.

The effect of professional ethics norms on social welfare is most visibly an issue in antitrust law. Over the past twenty-five years, antitrust doctrine has come to treat professional norms with skepticism, as so-called naked restraints on trade (see Havighurst in this issue). Yet ethics norms have survived antitrust scrutiny through a variety of doctrines that enables defenders of these norms to argue that they advance consumer welfare or other public purposes, ³ and the U.S. Supreme Court recently signaled an increased willingness to entertain such arguments. ⁴

The implications of professional ethics norms for social welfare are at issue in other areas of law marked by tension between these norms and the market paradigm. Conflicts over the lawfulness of financial rewards to physicians for frugal practice, the authority of treating physicians versus health plan managers to determine medical need, and the supervisory powers of plan managers over clinical practitioners pit professional norms against immediate market pressures.

If the goal of health care policy and law is to maximize the social welfare yield...