Arrow's Concept of the Health Care Consumer: A Forty-Year Retrospective

Arrow's Concept of the Consumer of Medical Care

The consumer of medical care is in a unique situation for several reasons. First, in general, the consumer is not well informed about health and medical care, certainly much less well informed than are physicians. Many, if not most, medical encounters are initiated, at least in part, for the explicit purpose of obtaining health information. In contrast to their roles in markets for most goods and services, given their lack of information, it appears that people in their roles as medical care consumers have no well-formed preferences. If people had the necessary amount of information to make themselves fully informed, patients would have "as good or nearly as good understanding of the utility of the product as the producer" (Arrow 1963: 951).

Second, demand for care is probabilistic depending on the person's health state, which is also probabilistic. Thus, although some consumption, such as physical exams, can be planned, demand for care following health shocks, such as heart attacks, cannot be planned before the shocks occur. Prior to treatment, consumers may be faced with choices that have important consequences for either life or death or good quality of life versus a life of disability without having sufficient time or emotional stamina for making adequate decisions. When health shocks occur, the consumer is likely not to be well positioned to search for quality and price among sellers. This set of problems would occur even if consumers were generally well informed about health and medical care but lacked specific information for dealing with a particular health crisis.

Third, many consumption decisions, such as purchase of food and even housing, are repeated events. Therefore, consumers can learn from experience, even if their initial purchase decisions of the commodity are not based on good information. These, in terminology developed much more recently, are experience goods.

By contrast, there is a class of goods and services of which only a one-time purchase is made. These are credence goods. ¹ Consumption decisions about these goods cannot be made on the basis of experience. Rather, one needs to rely on experience of others (reputation) or trust in the seller (professional norms). For example, each of us has only one gallbladder. Once the gallbladder has been removed surgically, there is no possibility for repeating the consumption decision. By contrast, physicians and, to continue the example, general surgeons perform their tasks repeatedly, giving them an absolute informational advantage vis-à-vis the consumer.

Through experience, physicians learn what does or does not work and under what conditions an intervention is successful. Consumers, especially given physical constraints on repetition of consumption, are not exposed to repeated trials and so cannot learn in this way. Therefore, although they too face uncertainty, physicians have an informational advantage not only in terms of having had professional education in medicine, but also because of extensive learning-by-doing.

Fourth, there are externalities in consumption. People are altruistic in the sense that they care not only about their own consumption of medical care, but also about consumption by others. These externalities transcend public health externalities from consumption of such services as immunizations. Fifth, the risk facing consumers is, at most, partially insurable. One can purchase insurance against loss of life and disability, but such insurance is not complete. In particular, for various reasons, there is no insurance for nonpecuniary loss from medical injuries such as loss from pain and suffering and or loss of consortium.

The special characteristics of health care markets have elicited various policy remedies. Asymmetric information between buyers and sellers, though not unique to this market, is sufficiently important here to have led to various institutional arrangements, including professional norms, licensure, and nonprofit institutions, in particular nonprofit hospitals. Externalities in consumption call for various cross subsidies, which may...