1) Read Arrow (Arrow, K. J. 2001 [1963]. Uncertainty and the welfare economics of medical care. Journal of Health Politics, Policy and Law, 26(5): 851883.) (pages are below) and comment on anything you found interesting. Choose to agree or disagree with something in the article. Defend your position. You might consider the following: When you think about healthcare, which do you see as most important access, cost, and/or quality? Explain your answer and discuss how you think they are related.

2) Find a link to an article or video that you think is relevant to what you read so far and post the link with a note on how it is relevant.

Sloan (role of the consumer) IL A Survey of the Special Characteristics of the Medical Care Market This section will list selectively some characteristics of medical care which distinguish it from the usual commodity of economics textbooks. The list is not exhaustive, and it is not claimed that the characteristics listed are individually unique to this market. But, taken together, they do establish a special place for medical care in economic analysis. A. The Nature of Demand The most obvious distinguishing characteristics of an individual's demand for medical services is that it is not steady in origin as, for example, for food or clothing, but irregular and unpredictable. Medi- cal services, apart from preventive services, afford satisfaction only in the event of illness, a departure from the normal state of affairs. It is hard, indeed, to think of another commodity of significance in the average budget of which this is true. A portion of legal services, de- voted to defense in criminal trials or to lawsuits, might fall in this cate- gory but the incidence is surely very much lower (and, of course, there Since writing the nbove, I find that Buchanan and Tullock (10, Ch. 13) have argued that all redistribution can be interpreted as "income insurance." " For an illuminating survey to which I am much indebted, see S. Mushkin (20). Arrow . Uncertainty and the Welfare Economics of Medical Care 859 949 ARROW: UNCERTAINTY AND MEDICAL CARE are, in fact, strong institutional similarities between the legal and Sage medical care markets.)" (lawyerization In addition, the demand for medical services is associated, with a of medicine) considerable probability, with an assault on personal integrity. There is some risk of death and a more considerable risk of impairment of full functioning. In particular, there is a major potential for loss or reduc- tion of earning ability. The risks are not by themselves unique; food is also a necessity, but avoidance of deprivation of food can be guaranteed with sufficient income, where the same cannot be said of avoidance of illness. Illness is, thus, not only risky but a costly risk in itself, apart from the cost of medical care. B. Expected Behavior of the Physician It is clear from everyday observation that the behavior expected of Bloche, sellers of medical care is different from that of business men in gen- Hall eral. These expectations are relevant because medical care belongs to the category of commodities for which the product and the activity of Millenson production are identical. In all such cases, the customer cannot test the Peterson product before consuming it, and there is an element of trust in the (expected relation." But the ethically understood restrictions on the activities of behavior of B. Expected Behavior of the Physician It is clear from everyday observation that the behavior expected of Bloche, sellers of medical care is different from that of business men in gen- Hall, eral. These expectations are relevant because medical care belongs to Millenson, the category of commodities for which the product and the activity of production are identical. In all such cases, the customer cannot test the Peterson product before consuming it, and there is an element of trust in the (expected relation." But the ethically understood restrictions on the activities of behavior of a physician are much more severe than on those of, say, a barber. His physicians) behavior is supposed to be governed by a concern for the customer's welfare which would not be expected of a salesman. In Talcott Par- sons's terms, there is a "collectivity-orientation," which distinguishes medicine and other professions from business, where self-interest on the part of participants is the accepted norm. A few illustrations will indicate the degree of difference between the Havighurst behavior expected of physicians and that expected of the typical busi- (antitrust nessman. (1) Advertising and overt price competition are virtually restraints eliminated among physicians. (2) Advice given by physicians as to of trade) further treatment by himself or others is supposed to be completely "In governmental demand, military power is an example of a service used only irregularly and unpredictably. Here too, special institutional and professional relations have emerged, though the precise social structure is different for reasons that are not hard to analyze *Ever with material commodities, testing is never so adequate that all elements of implicit trust can be eliminated. Of course, over the long run, experience with the quality of product of a given eller provides a check on the possibility of trust. "See (22, p. 463). The whole of [22, Ch. 101 is a most illuminating analysis of the ucial role of medical practice; though Parsons interest lies in different areas from mine, I must acknowledge bere my indebtedness to his work, *I am indebted to Herbert Klarman of Johns Hopkins University for some of the points discussed in this and the following paragraph. 860 Journal of Health Politics, Policy and Law 950 THE AMERICAN ECONOMIC REVIEW Kronick (charity) divorced from self-interest. (3) It is at least claimed that treatment is dictated by the objective needs of the case and not limited by financial considerations." While the ethical compulsion is surely not as absolute in fact as it is in theory, we can hardly suppose that it has no influence over resource allocation in this area. Charity treatment in one form or another does exist because of this tradition about human rights to ade- quate medical care." (4) The physician is relied on as an expert in certifying to the existence of illnesses and injuries for various legal and other purposes. It is socially expected that his concern for the correct conveying of information will, when appropriate, outweigh his desire to please his customers." Sage (lawyerization of medicine) Needleman (nonprofits) Departure from the profit motive is strikingly manifested by the overwhelming predominance of nonprofit over proprietary hospitals. The hospital per se offers services not too different from those of a hotel, and it is certainly not obvious that the profit motive will not lead to a more efficient supply. The explanation may lie either on the supply side or on that of demand. The simplest explanation is that public and private subsidies decrease the cost to the patient in nonprofit hospitals. A second possibility is that the association of profit-making with the supply of medical services arouses suspicion and antagonism on the part of patients and referring physicians, so they do prefer nonprofit institutions. Either explanation implies a preference on the part of some group, whether donors or patients, against the profit motive in the supply of hospital services. "The belief that the ethics of medicine demands tealueut independent of the patient's ability to pay is strongly ingrained. Such a perceptive observer Ren Dubos has made the remarks that the high cost of anticoagulants restricts their use and may contradict classical medical ethics, as though this were an unprecedented phenomenon. See 113, p. 419). "A time may come when medical ethics will have to be considered in the harsh light of economics" (emphasis added). Of course, this expectation amounts to ignoring the scarcity of medical resources; one has only to have been poor to realize the error. We may contidently assume that price and income do have some consequences for medical expenditures. "A needed piece of research is a study of the exact nature of the variations of medical care received and medical care paid for as income rises. The relevant income concept also needs study.) For this purpose, some disaggregation is needed; differences in hospital care which are essentially matters of comfort should, in the above view, be much more responsive to income than, e.g, drugs. This role is enhanced in a socialist society, where the state itself is actively concerned with illness in relation to work, we Field (14, Cl. 9). - About 3 per cent of beds were in proprietary hospitals in 1958, against 30 per cent in voluntary nonprofit, and the remainder in federal, state, and local hospitals; see [26. Chart 4-2, p. 60. "C. R. Rorem has pointed out to me some further factors in this analysis. (i) Given the social intention of helping all patients without regard to immediate ability to pay, Economics of cale would dictate a predominance of community sporcored hospital. (2) Arrow . Uncertainty and the Welfare Economics of Medical Care 861 951 ARROW: UNCERTAINTY AND MEDICAL CARE Conformity to collectivity-oriented behavior is especially important Bloche, since it is a commonplace that the physician-patient relation affects the Hall quality of the medical care product. A pure cash nexus would be in- adequate; if nothing else, the patient expects that the same physician (physician-patient will normally treat him on successive occasions. This expectation is relationships) strong enough to persist even in the Soviet Union, where medical care is nominally removed from the market place [14, pp. 194-96]. That purely psychic interactions between physician and patient have effects which are objectively indistinguishable in kind from the effects of medication is evidenced by the use of the placebo as a control in medi- cal experimentation; see Shapiro [25]. C. Product Uncertainty Uncertainty as to the quality of the product is perhaps more intense Sloan here than in any other important commodity. Recovery from disease is consumer as unpredictable as is its incidence. In most commodities, the possi- decision making) bility of learning from one's own experience or that of others is strong because there is an adequate number of trials. In the case of severe ill- ness, that is, in general, not true; the uncertainty due to inexperience is added to the intrinsic difficulty of prediction. Further, the amount of uncertainty, measured in terms of utility variability, is certainly much greater for medical care in severe cases than for, say, houses or auto- mobiles, even though these are also expenditures sufficiently infre- quent so that there may be considerable residual uncertainty. Further, there is a special quality to the uncertainty; it is very dif- Haas-Wilson, ferent on the two sides of the transaction. Because medical knowledge Robinson is so complicated, the information possessed by the physician as to the (information) consequences and possibilities of treatment is necessarily very much greater than that of the patient, or at least so it is believed by both parties." Further, both parties are aware of this informational inequal- ity, and their relation is colored by this knowledge. To avoid misunderstanding, observe that the difference in informa- tion relevant here is a difference in information as to the consequence of a purchase of medical care. There is always an inequality of infor- mation as to production methods between the producer and the pur- chaser of any commodity, but in most cases the customer may well Some proprietary hospitals will tend to control total costs to the patient more closely, in Millenson cluding the fees of physicians, who will therefore tend to prefer community-sponsored hospital (physicians ** Without trying to assess the present situation, it is clear in retrospect that at some actual point in the past the actual differential knowledge possessed by physicians may not knowledge) have been much. But from the economic point of view, it is the subjective belief of hoth parties, as manifested in their market behavior, that is relevant 862 Journal of Health Politics, Policy and Law 052 Cooper and THE AMERICAN ECONOMIC REVIEW have as good or nearly as good an understanding of the utility of the product as the producer. D. Supply Conditions In competitive theory, the supply of a commodity is governed by the net return from its production compared with the return derivable from the use of the same resources elsewhere. There are several sig. nificant departures from this theory in the case of medical care. Most obviously, entry to the profession is restricted by licensing. Licensing, of course, restricts supply and therefore increases the cost of Aiken (licensing and medical education) Aiken (licensing and medical education) net return from its production compared with the return derivable from the use of the same resources elsewhere. There are several sig. nificant departures from this theory in the case of medical care. Most obviously, entry to the profession is restricted by licensing. Licensing, of course, restricts supply and therefore increases the cost of medical care. It is defended as guaranteeing a minimum of quality. Restriction of entry by licensing occurs in most professions, including barbering and undertaking. A second feature is perhaps even more remarkable. The cost of medical education today is high and, according to the usual figures, is borne only to a minor extent by the student. Thus, the private benefits to the entering student considerably exceed the costs. (It is, however, possible that research costs, not properly chargeable to education, swell the apparent difference.) This subsidy should, in principle, cause a fall in the price of medical services, which, however, is offset by ra- tioning through limited entry to schools and through elimination of students during the medical school career. These restrictions basically render superfluous the licensing, except in regard to graduates of for- eign schools. The special role of educational institutions in simultaneously sub- sidizing and rationing entry is common to all professions requiring advanced training. It is a striking and insufficiently remarked phe nomenon that such an important part of resource allocation should be performed by nonprofit-oriented agencies. Since this last phenomenon goes well beyond the purely medical aspect, we will not dwell on it longer here except to note that the anomaly is most striking in the medical field. Educational costs tend to be far higher there than in any other branch of professional training. While tuition is the same, or only slightly higher, so that the subsidy is much greater, at the same time the earnings of physicians rank high- est among professional groups, so there would not at first blush seem to be any necessity for special inducements to enter the profession. Even if we grant that, for reasons unexamined here, there is a social interest in sidized professional education, it not clear why the rate of subsidization should differ among professions. One might ex- *The degree of subsidy in different branches of professional education is worthy of a major research effort. Arrow . Uncertainty and the Welfare Economics of Medical Care 863 ARROW: UNCERTAINTY AND MEDICAL CARE 953 pect that the tuition of medical students would be higher than that of other students. 954 THE AMERICAN ECONOMIC REVIEW Bazzoli (provider compensation) Havighurst (antitrust enforcement) The opposition to prepayment is closely related to an even stronger opposition to closed-panel practice (contractual arrangements which bind the patient to a particular group of physicians). Again these atti. tudes seem to differentiate professions from business. Prepayment and closed-panel plans are virtually nonexistent in the legal profession, In ordinary business, on the other hand, there exists a wide variety of exclusive service contracts involving sharing of risks; it is assumed that competition will select those which satisfy needs best. The problems of implicit and explicit price-fixing should also be mentioned. Price competition is frowned on, Arrangements of this type are not uncommon in service industries, and they have not been sub- jected to antitrust action. How important this is is hard to assess. It has been pointed out many times that the apparent rigidity of so-called administered prices considerably understates the actual flexibility, Here, too, if physicians find themselves with unoccupied time, rates are likely to go down, openly or covertly: if there is insufficient time for the demand, rates will surely rise. The ethics" of price competition may decrease the flexibility of price responses, but probably that is all. III. Comparisons with the Competitive Model under Certainty A. Nonmarketable Commodities As already noted, the diffusion of communicable diseases provides an obvious example of nonmarket interactions. But from a theoretical viewpoint, the issues are well understood, and there is little point in expanding on this theme. (This should not be interpreted as minimiz- ing the contribution of public health to welfare; there is every reason to suppose that it is considerably more important than all other aspects of medical care.) Beyond this special area there is a more general interdependence, the concern of individuals for the health of others. The economic manifes- tations of this taste are to be found in individual donations to hospitals and to medical education, as well as in the widely accepted responsi- bilities of government in this area. The taste for improving the health of others appears to be stronger than for improving other aspects of their welfare. In interdependencies generated by concern for the welfare of others there is always a theoretical case for collective action if each partici- pant derives satisfaction from the contributions of all. -The law does impose some limits on risk-shifting in contracts, for example, ils gen- eral refusal to honor exculpatory causes. There may be an identification problem in this observation. If the failure of the market system is, or appears to be greater in medical care than in, say, food an in- dividual otherwise equally concerned about the two aspects of others' weltare may prefer to help in the first Reinhardt (redistribution) Silvers (capital markets) Cooper and Aiken, Hammer licensing and nonphysician clinicians) 956 THE AMERICAN ECONOMIC REVIEW including, in this case, education. It is not so clear that this change would not keep even unrestricted entry down below the present level. (3) To some extent, the effect of making tuition carry the full cost of education will be to create too few entrants, rather than too many. Given the imperfections of the capital market, loans for this purpose to those who do not have the cash are difficult to obtain. The lender really has no security. The obvious answer is some form of insured loans, as has frequently been argued; not too much ingenuity would be needed to create a credit system for medical (and other branches of higher) education. Under these conditions the cost would still constitute a de- terrent, but one to be compared with the high future incomes to be obtained If entry were governed by ideal competitive conditions, it may be that the quantity on balance would be increased, though this conclu- sion is not obvious. The average quality would probably fall, even under an ideal credit system, since subsidy plus selected entry draw some highly qualified individuals who would otherwise get into other fields. The decline in quality is not an over-all social loss, since it is accompanied by increase in quality in other fields of endeavor; indeed, if demands accurately reflected utilities, there would be a net social gain through a switch to competitive entry." There is a second aspect of entry in which the contrast with com- petitive behavior is, in many respects, even sharper. It is the exclusion of many imperfect substitutes for physicians. The licensing laws, though they do not effectively limit the number of physicians, do ex- clude all others from engaging in any one of the activities known as medical practice. As a result, costly physician time may be employed at specific tasks for which only a small fraction of their training is needed, and which could be performed by others less well trained and therefore less expensive. One might expect immunization centers, pri- vately operated, but not necessarily requiring the services of doctors. In the competitive model without uncertainty, consumers are pre- sumed to be able to distinguish qualities of the commodities they buy. Under this hypothesis, licensing would be, at best, superfluous and exclude those from whom consumers would not buy anyway; but it might exclude too many. Sloan (role of the consumer) IL A Survey of the Special Characteristics of the Medical Care Market This section will list selectively some characteristics of medical care which distinguish it from the usual commodity of economics textbooks. The list is not exhaustive, and it is not claimed that the characteristics listed are individually unique to this market. But, taken together, they do establish a special place for medical care in economic analysis. A. The Nature of Demand The most obvious distinguishing characteristics of an individual's demand for medical services is that it is not steady in origin as, for example, for food or clothing, but irregular and unpredictable. Medi- cal services, apart from preventive services, afford satisfaction only in the event of illness, a departure from the normal state of affairs. It is hard, indeed, to think of another commodity of significance in the average budget of which this is true. A portion of legal services, de- voted to defense in criminal trials or to lawsuits, might fall in this cate- gory but the incidence is surely very much lower (and, of course, there Since writing the nbove, I find that Buchanan and Tullock (10, Ch. 13) have argued that all redistribution can be interpreted as "income insurance." " For an illuminating survey to which I am much indebted, see S. Mushkin (20). Arrow . Uncertainty and the Welfare Economics of Medical Care 859 949 ARROW: UNCERTAINTY AND MEDICAL CARE are, in fact, strong institutional similarities between the legal and Sage medical care markets.)" (lawyerization In addition, the demand for medical services is associated, with a of medicine) considerable probability, with an assault on personal integrity. There is some risk of death and a more considerable risk of impairment of full functioning. In particular, there is a major potential for loss or reduc- tion of earning ability. The risks are not by themselves unique; food is also a necessity, but avoidance of deprivation of food can be guaranteed with sufficient income, where the same cannot be said of avoidance of illness. Illness is, thus, not only risky but a costly risk in itself, apart from the cost of medical care. B. Expected Behavior of the Physician It is clear from everyday observation that the behavior expected of Bloche, sellers of medical care is different from that of business men in gen- Hall eral. These expectations are relevant because medical care belongs to the category of commodities for which the product and the activity of Millenson production are identical. In all such cases, the customer cannot test the Peterson product before consuming it, and there is an element of trust in the (expected relation." But the ethically understood restrictions on the activities of behavior of B. Expected Behavior of the Physician It is clear from everyday observation that the behavior expected of Bloche, sellers of medical care is different from that of business men in gen- Hall, eral. These expectations are relevant because medical care belongs to Millenson, the category of commodities for which the product and the activity of production are identical. In all such cases, the customer cannot test the Peterson product before consuming it, and there is an element of trust in the (expected relation." But the ethically understood restrictions on the activities of behavior of a physician are much more severe than on those of, say, a barber. His physicians) behavior is supposed to be governed by a concern for the customer's welfare which would not be expected of a salesman. In Talcott Par- sons's terms, there is a "collectivity-orientation," which distinguishes medicine and other professions from business, where self-interest on the part of participants is the accepted norm. A few illustrations will indicate the degree of difference between the Havighurst behavior expected of physicians and that expected of the typical busi- (antitrust nessman. (1) Advertising and overt price competition are virtually restraints eliminated among physicians. (2) Advice given by physicians as to of trade) further treatment by himself or others is supposed to be completely "In governmental demand, military power is an example of a service used only irregularly and unpredictably. Here too, special institutional and professional relations have emerged, though the precise social structure is different for reasons that are not hard to analyze *Ever with material commodities, testing is never so adequate that all elements of implicit trust can be eliminated. Of course, over the long run, experience with the quality of product of a given eller provides a check on the possibility of trust. "See (22, p. 463). The whole of [22, Ch. 101 is a most illuminating analysis of the ucial role of medical practice; though Parsons interest lies in different areas from mine, I must acknowledge bere my indebtedness to his work, *I am indebted to Herbert Klarman of Johns Hopkins University for some of the points discussed in this and the following paragraph. 860 Journal of Health Politics, Policy and Law 950 THE AMERICAN ECONOMIC REVIEW Kronick (charity) divorced from self-interest. (3) It is at least claimed that treatment is dictated by the objective needs of the case and not limited by financial considerations." While the ethical compulsion is surely not as absolute in fact as it is in theory, we can hardly suppose that it has no influence over resource allocation in this area. Charity treatment in one form or another does exist because of this tradition about human rights to ade- quate medical care." (4) The physician is relied on as an expert in certifying to the existence of illnesses and injuries for various legal and other purposes. It is socially expected that his concern for the correct conveying of information will, when appropriate, outweigh his desire to please his customers." Sage (lawyerization of medicine) Needleman (nonprofits) Departure from the profit motive is strikingly manifested by the overwhelming predominance of nonprofit over proprietary hospitals. The hospital per se offers services not too different from those of a hotel, and it is certainly not obvious that the profit motive will not lead to a more efficient supply. The explanation may lie either on the supply side or on that of demand. The simplest explanation is that public and private subsidies decrease the cost to the patient in nonprofit hospitals. A second possibility is that the association of profit-making with the supply of medical services arouses suspicion and antagonism on the part of patients and referring physicians, so they do prefer nonprofit institutions. Either explanation implies a preference on the part of some group, whether donors or patients, against the profit motive in the supply of hospital services. "The belief that the ethics of medicine demands tealueut independent of the patient's ability to pay is strongly ingrained. Such a perceptive observer Ren Dubos has made the remarks that the high cost of anticoagulants restricts their use and may contradict classical medical ethics, as though this were an unprecedented phenomenon. See 113, p. 419). "A time may come when medical ethics will have to be considered in the harsh light of economics" (emphasis added). Of course, this expectation amounts to ignoring the scarcity of medical resources; one has only to have been poor to realize the error. We may contidently assume that price and income do have some consequences for medical expenditures. "A needed piece of research is a study of the exact nature of the variations of medical care received and medical care paid for as income rises. The relevant income concept also needs study.) For this purpose, some disaggregation is needed; differences in hospital care which are essentially matters of comfort should, in the above view, be much more responsive to income than, e.g, drugs. This role is enhanced in a socialist society, where the state itself is actively concerned with illness in relation to work, we Field (14, Cl. 9). - About 3 per cent of beds were in proprietary hospitals in 1958, against 30 per cent in voluntary nonprofit, and the remainder in federal, state, and local hospitals; see [26. Chart 4-2, p. 60. "C. R. Rorem has pointed out to me some further factors in this analysis. (i) Given the social intention of helping all patients without regard to immediate ability to pay, Economics of cale would dictate a predominance of community sporcored hospital. (2) Arrow . Uncertainty and the Welfare Economics of Medical Care 861 951 ARROW: UNCERTAINTY AND MEDICAL CARE Conformity to collectivity-oriented behavior is especially important Bloche, since it is a commonplace that the physician-patient relation affects the Hall quality of the medical care product. A pure cash nexus would be in- adequate; if nothing else, the patient expects that the same physician (physician-patient will normally treat him on successive occasions. This expectation is relationships) strong enough to persist even in the Soviet Union, where medical care is nominally removed from the market place [14, pp. 194-96]. That purely psychic interactions between physician and patient have effects which are objectively indistinguishable in kind from the effects of medication is evidenced by the use of the placebo as a control in medi- cal experimentation; see Shapiro [25]. C. Product Uncertainty Uncertainty as to the quality of the product is perhaps more intense Sloan here than in any other important commodity. Recovery from disease is consumer as unpredictable as is its incidence. In most commodities, the possi- decision making) bility of learning from one's own experience or that of others is strong because there is an adequate number of trials. In the case of severe ill- ness, that is, in general, not true; the uncertainty due to inexperience is added to the intrinsic difficulty of prediction. Further, the amount of uncertainty, measured in terms of utility variability, is certainly much greater for medical care in severe cases than for, say, houses or auto- mobiles, even though these are also expenditures sufficiently infre- quent so that there may be considerable residual uncertainty. Further, there is a special quality to the uncertainty; it is very dif- Haas-Wilson, ferent on the two sides of the transaction. Because medical knowledge Robinson is so complicated, the information possessed by the physician as to the (information) consequences and possibilities of treatment is necessarily very much greater than that of the patient, or at least so it is believed by both parties." Further, both parties are aware of this informational inequal- ity, and their relation is colored by this knowledge. To avoid misunderstanding, observe that the difference in informa- tion relevant here is a difference in information as to the consequence of a purchase of medical care. There is always an inequality of infor- mation as to production methods between the producer and the pur- chaser of any commodity, but in most cases the customer may well Some proprietary hospitals will tend to control total costs to the patient more closely, in Millenson cluding the fees of physicians, who will therefore tend to prefer community-sponsored hospital (physicians ** Without trying to assess the present situation, it is clear in retrospect that at some actual point in the past the actual differential knowledge possessed by physicians may not knowledge) have been much. But from the economic point of view, it is the subjective belief of hoth parties, as manifested in their market behavior, that is relevant 862 Journal of Health Politics, Policy and Law 052 Cooper and THE AMERICAN ECONOMIC REVIEW have as good or nearly as good an understanding of the utility of the product as the producer. D. Supply Conditions In competitive theory, the supply of a commodity is governed by the net return from its production compared with the return derivable from the use of the same resources elsewhere. There are several sig. nificant departures from this theory in the case of medical care. Most obviously, entry to the profession is restricted by licensing. Licensing, of course, restricts supply and therefore increases the cost of Aiken (licensing and medical education) Aiken (licensing and medical education) net return from its production compared with the return derivable from the use of the same resources elsewhere. There are several sig. nificant departures from this theory in the case of medical care. Most obviously, entry to the profession is restricted by licensing. Licensing, of course, restricts supply and therefore increases the cost of medical care. It is defended as guaranteeing a minimum of quality. Restriction of entry by licensing occurs in most professions, including barbering and undertaking. A second feature is perhaps even more remarkable. The cost of medical education today is high and, according to the usual figures, is borne only to a minor extent by the student. Thus, the private benefits to the entering student considerably exceed the costs. (It is, however, possible that research costs, not properly chargeable to education, swell the apparent difference.) This subsidy should, in principle, cause a fall in the price of medical services, which, however, is offset by ra- tioning through limited entry to schools and through elimination of students during the medical school career. These restrictions basically render superfluous the licensing, except in regard to graduates of for- eign schools. The special role of educational institutions in simultaneously sub- sidizing and rationing entry is common to all professions requiring advanced training. It is a striking and insufficiently remarked phe nomenon that such an important part of resource allocation should be performed by nonprofit-oriented agencies. Since this last phenomenon goes well beyond the purely medical aspect, we will not dwell on it longer here except to note that the anomaly is most striking in the medical field. Educational costs tend to be far higher there than in any other branch of professional training. While tuition is the same, or only slightly higher, so that the subsidy is much greater, at the same time the earnings of physicians rank high- est among professional groups, so there would not at first blush seem to be any necessity for special inducements to enter the profession. Even if we grant that, for reasons unexamined here, there is a social interest in sidized professional education, it not clear why the rate of subsidization should differ among professions. One might ex- *The degree of subsidy in different branches of professional education is worthy of a major research effort. Arrow . Uncertainty and the Welfare Economics of Medical Care 863 ARROW: UNCERTAINTY AND MEDICAL CARE 953 pect that the tuition of medical students would be higher than that of other students. 954 THE AMERICAN ECONOMIC REVIEW Bazzoli (provider compensation) Havighurst (antitrust enforcement) The opposition to prepayment is closely related to an even stronger opposition to closed-panel practice (contractual arrangements which bind the patient to a particular group of physicians). Again these atti. tudes seem to differentiate professions from business. Prepayment and closed-panel plans are virtually nonexistent in the legal profession, In ordinary business, on the other hand, there exists a wide variety of exclusive service contracts involving sharing of risks; it is assumed that competition will select those which satisfy needs best. The problems of implicit and explicit price-fixing should also be mentioned. Price competition is frowned on, Arrangements of this type are not uncommon in service industries, and they have not been sub- jected to antitrust action. How important this is is hard to assess. It has been pointed out many times that the apparent rigidity of so-called administered prices considerably understates the actual flexibility, Here, too, if physicians find themselves with unoccupied time, rates are likely to go down, openly or covertly: if there is insufficient time for the demand, rates will surely rise. The ethics" of price competition may decrease the flexibility of price responses, but probably that is all. III. Comparisons with the Competitive Model under Certainty A. Nonmarketable Commodities As already noted, the diffusion of communicable diseases provides an obvious example of nonmarket interactions. But from a theoretical viewpoint, the issues are well understood, and there is little point in expanding on this theme. (This should not be interpreted as minimiz- ing the contribution of public health to welfare; there is every reason to suppose that it is considerably more important than all other aspects of medical care.) Beyond this special area there is a more general interdependence, the concern of individuals for the health of others. The economic manifes- tations of this taste are to be found in individual donations to hospitals and to medical education, as well as in the widely accepted responsi- bilities of government in this area. The taste for improving the health of others appears to be stronger than for improving other aspects of their welfare. In interdependencies generated by concern for the welfare of others there is always a theoretical case for collective action if each partici- pant derives satisfaction from the contributions of all. -The law does impose some limits on risk-shifting in contracts, for example, ils gen- eral refusal to honor exculpatory causes. There may be an identification problem in this observation. If the failure of the market system is, or appears to be greater in medical care than in, say, food an in- dividual otherwise equally concerned about the two aspects of others' weltare may prefer to help in the first Reinhardt (redistribution) Silvers (capital markets) Cooper and Aiken, Hammer licensing and nonphysician clinicians) 956 THE AMERICAN ECONOMIC REVIEW including, in this case, education. It is not so clear that this change would not keep even unrestricted entry down below the present level. (3) To some extent, the effect of making tuition carry the full cost of education will be to create too few entrants, rather than too many. Given the imperfections of the capital market, loans for this purpose to those who do not have the cash are difficult to obtain. The lender really has no security. The obvious answer is some form of insured loans, as has frequently been argued; not too much ingenuity would be needed to create a credit system for medical (and other branches of higher) education. Under these conditions the cost would still constitute a de- terrent, but one to be compared with the high future incomes to be obtained If entry were governed by ideal competitive conditions, it may be that the quantity on balance would be increased, though this conclu- sion is not obvious. The average quality would probably fall, even under an ideal credit system, since subsidy plus selected entry draw some highly qualified individuals who would otherwise get into other fields. The decline in quality is not an over-all social loss, since it is accompanied by increase in quality in other fields of endeavor; indeed, if demands accurately reflected utilities, there would be a net social gain through a switch to competitive entry." There is a second aspect of entry in which the contrast with com- petitive behavior is, in many respects, even sharper. It is the exclusion of many imperfect substitutes for physicians. The licensing laws, though they do not effectively limit the number of physicians, do ex- clude all others from engaging in any one of the activities known as medical practice. As a result, costly physician time may be employed at specific tasks for which only a small fraction of their training is needed, and which could be performed by others less well trained and therefore less expensive. One might expect immunization centers, pri- vately operated, but not necessarily requiring the services of doctors. In the competitive model without uncertainty, consumers are pre- sumed to be able to distinguish qualities of the commodities they buy. Under this hypothesis, licensing would be, at best, superfluous and exclude those from whom consumers would not buy anyway; but it might exclude too many