Supply, Demand and Heart Attacks

According to two new studies being presented at this weekend's American Economic Association annual meeting in Philadelphia, market forces do operate in some way in the health-care market.

The U.S. health-care system, with its bizarre pricing mechanisms and convoluted relationship between supply and demand, is probably about as far from a free market as anything in the country's economy gets. Yet according to two studiesbeing presented at this weekend's American Economic Association annual meeting in Philadelphia, market forces do operate in some way.

One study -- by Amy Finkelstein and Adam Sacarny of the Massachusetts Institute of Technology, Amitabh Chandra of Harvard University and Chad Syverson of the University of Chicago -- challenges the established view that market signals in health care are too weak to make hospitals improve their efficiency. Looking at the productivity of hospitals' heart-attack treatment services, they found that variations were actually similar to those in other sectors, and that more productive hospitals tended to gain market share -- features typically associated with competitive markets. A 10 percent increase in productivity in treating heart attacks, for example, corresponded to 25 percent higher market share at a point in time and 4 percent more patients over the next four years. As the authors put it, the findings suggest that "the healthcare sector may not be as idiosyncratic as the conventional wisdom has claimed."

The other study, by Michael Luca of Harvard Business School and Sonal Vats of Boston University, demonstrates how increased information about the quality of care is changing the competitive environment for doctors. The authors looked at the ratings for doctors in the New York borough of Manhattan compiled by the website, which as of early 2013 covered about 25 percent of the area's physicians, 84 percent of whom had at least five reviews. They found that doctors who had garnered more positive ratings from patients subsequently filled appointments faster than their less-liked competitors -- specifically, a half-star increase on a five-star scale was associated with a 10 percent increase in the likelihood of filling an appointment.

The result isn't as obvious as it might seem. Health care is what economists call a "credence good": Its quality can be difficult to assess even after it has been consumed. Hence, it isn't a given that consumers would respond to new information about quality, particularly from strangers who happened to leave reviews on a website. The fact that they do suggests that doctors may eventually have to compete for patients much as restaurants and hotels do.

To be sure, none of this means that the U.S. health-care system works well. Americans pay far more than their counterparts in other developed nations for service that falls short. It's not clear to what extent markets are the answer, but they are showing a surprising ability to operate in even the most inhospitable of environments.

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