The Underpants Gnome Theory of Healthcare

  1. Market discipline would produce a better healthcare system.
  2. ?
  3. Profit!

The editors of the Wall Street Journal complain about the evils of “government healthcare”:

President Obama addressed the Veterans Affairs scandal on Wednesday, saying he’s waiting for an Inspector General “audit” of what went wrong. And the press corps is debating whether VA Secretary Eric Shinseki should be fired. These are sideshows. The real story of the VA scandal is the failure of what liberals have long hailed as the model of government health care.

Don’t take our word for it. As recently as November 2011, Paul Krugman praised the VA as a triumph of “socialized medicine,” as he put it: “What’s behind this success? Crucially, the V.H.A. is an integrated system, which provides health care as well as paying for it. So it’s free from the perverse incentives created when doctors and hospitals profit from expensive tests and procedures, whether or not those procedures actually make medical sense.”

Ah, yes, the VA lacks the evil profit motive. What the egalitarians ignore, however, is that a government system contains its own “perverse incentives,” such as rationing that leads to treatment delays and preventable deaths, which the bureaucracy then tries to cover up. This isn’t an accident or one-time error. It is inherent in a system that allocates resources by political force rather than individual consumer choices. The VA is ObamaCare’s ultimate destination.

I think they’re missing some basic things. We haven’t had anything approximating free market healthcare in the United States for about a century, there are basically no prospects for ever having such a system again, no one would like going back to such a system, and the promise of a free market healthcare system is that it would optimize welfare in the economic sense of producing the greatest quantity of healthcare at the lowest prices for those willing to pay. It does not promise that ordinary people won’t drop dead in the streets of preventable causes, that the diseases of the poor won’t spread to the rich, or that a world with free market healthcare would be one that any of us would want to live in. All of those things require some level of “government healthcare” so we’re stuck with it.

The challenge that we face is how to be prudent stewards in the face of scarcity and human nature. Minimizing the role of government or maximizing it are trivial in difficulty by comparison. They’re the easy, simple-minded, and completely unsatisfactory solutions. Prudence is always the scarcest commodity.

20 comments… add one
  • Ben Wolf Link


    Thatt’s a good effort to draw attention to the oversimplification of this issue.

    I have yet to hear anyone propose how a market would function in the economic sense; 99 time out of 100 when someone says “markets” all they mean is “non-government”.

    How does one draw a supply curve for health care? How does a utility maximizing individual negotiate prices when they can’t have access to all available information other than financial cost? How can that individual be expected to weigh their lives and 4.5 billion years of survival instinct against some vague standard of utility?

    There are many types of markets and they must meet some combination of variables to function. It just isn’t so simple as “get government out and we have a market”.

  • Cstanley Link

    @Ben and Dave-
    Agree that we’ve never had a true market for healthcare and never will, but shouldn’t the discussion then become one about how central planning can achieve some of the objectives that are lost without market forces (ie, allocation of resources?)

    Obviously the conservative arguments are oversimplified, but they appeal to so many people because the lack of market forces really does create problems. Has anyone on the liberal side ever taken up that point, instead of dismissing what should be the real issue for reform?

  • Jimbino Link

    It may be that we have never had a free market in health care in the United States, but then it used to be that I didn’t have to participate in it as I do now under Obamacare.

    Those of us who were dissatisfied with what the USSA had to offer could take our business to Mexico, Costa Rica, Brazil, Hungary, the Czech Republic, Thailand and India, where better care is provided for from 1/9th to 1/2 the cost.

    I know: I just had cataract surgery done in Brazil for half the cost. Exams cost half as much and drugs and medical devices can be bought without prescription.

    An Amerikan can still get good, cheap health care in Mexico, of course, but only after being subjected to the Obamacare mandate or penalty. We’ve gone from unfree market to compulsion.

  • steve Link

    First, there is no model for us to look at to verify the WSJ model. As you note, this is mostly just the old noun, a verb and “markets” argument.

    Next, few of the people writing on the VA issue follow health care. Fewer have followed it for a while. You need to separate the issue out into its individual components. How well does the VA function when it comes to getting patients evaluated and into the system and how well does it function once they are found eligible and in the system?

    On the former, that has long been a problem and will continue to be so. It can get better, but there will always be waits. Especially with the 2003 change, there is now such a strong incentive to try for VA eligibility that we are guaranteed that many vets who arent really eligible will try.

    On the latter, I dont think I can begin to explain how much better things are than in the 80s. I am not sure who gets credit for those improvements, but since we point fingers at presidents, I guess Bush I through Obama get that credit.

    What is unclear to me is who these people were on these waiting lists for things like colonoscopies. It sounds like they are probably on the low level priority list for care at a VA. It would be nice if someone who understands the system, preferably a vet also, would write up what is really happening.

    Last of all, just as a point of reference, the US does not have especially good wait times compared with the rest of the world, except for specialty care. Event then, wait times (like in our area) can exceed a year for some specialties.


  • michael reynolds Link

    My Dad’s a retired vet with multiple health issues. He lives in the San Diego area, which may well be exceptionally good, but he’s had no complaints.

  • Well, considering the VA brouhaha specifically, the VA serves former military. Not military retirees (they’re served by Tricare). In other words the career guys are on Tricare and other former service are eligible for VA.

  • michael reynolds Link

    Yep, that’s right, forgot that.

  • Ben Wolf Link


    Jamie Galbraith has written on the subject, so you might start with the chapter on health care in his book The Predator State . Ultimately health is a public good because I benefit from a Cstanley in good condition and you benefit from a healthy Dave Schuler, etc. Granting government monopsony power specifically addresses the inability of a health care market to control prices and extend coverage. Once that’s accomplished we then have a lot more options, including private ones if that’s what we choose.

  • Jimbino Link

    Your analysis of public good is wanting. Is Call of Duty a public good because it makes a violent teenager happy and occupied, and there’s nothing we need more than a happy and occupied teenager?

  • michael reynolds Link


    You not dropping dead behind the wheel of a car is a public good because then you don’t kill me in my car. You not carrying contagious diseases and passing them to my kids is a public good. You not waiting until that funny mole turns into cancer, then going broke because you don’t want none of that there soshalist health care insurance and then fobbing off your $250,000 hospital bill on tax payers, is a public good.

  • Ben Wolf Link

    Good reply, Michael. Add to that a person needing care for a chronic disease that could have been prevented is burning up a lot of drugs, attention from medical professionals and productivity. We tend to focus on the money but what if those doctors and nurses had that time back to assist more patients?

  • Cstanley Link

    Thank you for the reference, Ben. Will try to check it out.

    I’m not really interested in the public good debate, which addresses the “why”, but rather the monopsony which potentially addresses “how”.

  • Ben Wolf Link

    Interesting article on the subject in the NEJM:

    Changing demographics and medical technology pose a cost challenge for every nation’s system, but ours is the outlier. The extreme failure of the United States to contain medical costs results primarily from our unique, pervasive commercialization. The dominance of for-profit insurance and pharmaceutical companies, a new wave of investor-owned specialty hospitals, and profit-maximizing behavior even by nonprofit players raise costs and distort resource allocation. Profits, billing, marketing, and the gratuitous costs of private bureaucracies siphon off $400 billion to $500 billion of the $2.1 trillion spent, but the more serious and less appreciated syndrome is the set of perverse incentives produced by commercial dominance of the system.

    Markets are said to optimize efficiencies. But despite widespread belief that competition is the key to cost containment, medicine — with its third-party payers and its partly social mission — does not lend itself to market discipline

  • I think there’s some confusion. “Public good” is a term of art in economics/public policy theory. A good is a public good if it is non-excludable and non-rivalrous. “Good for the public” and a “public good” are not the same thing.

    A sewer system is a public good because it’s non-excludable and non-rivalrous. A regular annual check-up is not a public good because it’s both excludable and rivalrous.

    Using terms incorrectly just adds to confusion and misunderstanding.

    I don’t think we should get too far away from my point about prudent stewardship. I do not believe that taking the position that every conceivable healthcare want should be part of a public healthcare system is prudent stewardship. For one thing, that belief is ultimately incompatible with any self-determination or autonomy on the part of physicians.

  • steve Link

    Recent authors have also been making the claim that much of health care is/are credence goods. That would also make markets a poor vehicle. Meh. I think there are parts of medicine amenable to market mechanisms and we should use them when we can. I dont think the big ticket items lend themselves well. Chronic illness does not fit the model well, or at least not the market mechanisms formed to date.


  • Ben Wolf Link


    Yes, that’s my fault for not making explicit I wasn’t using the term in the sense of Samuelson’s definition.

  • Thanks, Ben. The point I’m getting at here is that although definitional public goods are easy to defend from an economic and public policy standpoint providing private goods at public expense even for a good policy purpose requires judgment or what I’m referring to as “prudent stewardship”. To date that’s something we have absolutely been unwilling to provide, cf. the fifteen year comedy of errors over SGRs or the brouhaha over “death panels”.

  • Ben Wolf Link

    I do not believe that taking the position that every conceivable healthcare want should be part of a public healthcare system is prudent stewardship.

    If we can’t then we’ll just be recreating the system of cronyism and rent extraction we have now. Health coverage by salesmanship as every hack in the medical industry comes up with new junk drugs and treatments to sell Uncle Sam.

    Health options provided by a universal system need pass the test of contributing to the general well-being; cosmetic surgery for someone whose face was torn off, certainly. Breast implants for all women would increase my personal enjoyment but it might be more difficult to demonstrate it benefits society, although it’s possible I suppose.

  • michael reynolds Link


    I’m prepared to help.

  • Ben Wolf Link


    I sense much wisdom in you.

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