US Healthcare

US healthcare costs, rising deficit and President Obama's plans (or lack of plans) are extensively being covered during the last few days. Nobel laureate Paul Krugman wrote an article on his blog titled "Why markets can't cure healthcare". He himself was startled to see over 800 comments on that post. In the first post, he mentioned about a paper from Kenneth Arrow titled "Uncertainty and the welfare economics of medical care".

I must admit that the paper is a stunning piece of work. I must admit that I found it difficult to understand it in the first go. Although it would be difficult but if I want to summarize it in 4-5 sentences then -

1. There is high risk and uncertainty (uncertainty in demand, products, behavior of suppliers and pricing)
2. Competitive equilibrium and optimal states are equivalent when following preconditions are satisfied - existence of competitive equilibrium; marketablity of all goods and services; and nonincreasing returns
3. Problems of insurance - from providers as well as from insured (they may not search for best prices and services if adequately insured)
4. High entry barrier to the profession and possible monopoly emerging from patient's belief (and rightly so) about superior know-how of professionals

The paper is a fascinating read and must be read by economics enthusiasts.

About India - Although there is virtually no state sponsored medicare in India and most of the expenses are beared out of the pocket, most of the points discussed in the paper are actually true and relevant for India. Various health insurance schemes actually try to find and target the people less prone to illness (although this increases the administrative costs) and also keeps a cap on the insurance cover. The role of state is critical in non-essential commodities like medicare, law suits etc and we know how and what kind of services are provided by Indian government hospitals and government appointed attorneys.