From the Editor

His New York Times obituary opens: “Kenneth J. Arrow, one of the most brilliant economic minds of the 20th century and, at 51, the youngest economist ever to win a Nobel, died on Tuesday at his home in Palo Alto, Calif. He was 95.”

Kenneth J. Arrow

As a tribute to Kenneth Arrow, this week’s paper is his “Uncertainty and the Welfare Economic of Medical Care.”

This paper was published decades ago. Our selections try to be current. But we’ll make an exception for a good reason: Kenneth Arrow, one of the most significant economists of the 20th Century, died last week; his work on health care and economics remains deeply influential. Indeed, whether we are discussing the Choosing Wisely campaign or debating the expansion of public coverage under Obamacare, we are essentially weighing in on Arrow’s 1963 health economics paper – which makes this paper a natural choice for this week’s Reading.

Arrow didn’t mention mental health in his 1963 paper. But as we seek to better mental health services, his observations on the problems of health-care information are worth considering.


Economics and Health Care

“Uncertainty and the Welfare Economic of Medical Care”

Kenneth J. Arrow

The American Economic Review, December 1963


This paper is an exploratory and tentative study of the specific differentia of medical care as the object of normative economics. It is contended here, on the basis of comparison of obvious characteristics of the medical-care industry with the norms of welfare economics, that the special economic problems of medical care can be explained as adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment.

It should be noted that the subject is the medical-care industry, not health. The causal factors in health are many, and the provision of medical care is only one. Particularly at low levels of income, other commodities such as nutrition, shelter, clothing, and sanitation may be much more significant. It is the complex of services that center about the physician, private and group practice, hospitals, and public health, which I propose to discuss.

The focus of discussion will be on the way the operation of the medical-care industry and the efficacy with which it satisfies the needs of society differ from a norm, if at all.

Kenneth J. Arrow

So begins a paper written by Kenneth J. Arrow. Many consider it the first important paper written on health economics.

“Uncertainty and the Welfare Economic of Medical Care” is one of his most cited and significant work. The paper forwards one key argument: that health care is different (economically speaking) from other aspects of the economy. Whereas markets may be functional outside of health care, he argues that market forces don’t work within health care.

“It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.”

He identifies several ways that health care is different:

Unpredictability. People’s needs for health care are unpredictable, unlike other basic needs like food or clothing.

Barriers to entry. Medicine must be practiced with a licence, requiring years of training, limiting the supply of services.

The importance of trust. Trust is a key component in the doctor-patient relationship.

Asymmetrical information. Doctors know more about medicine than do their patients, leaving the consumers of medical services at a disadvantage.

Picking up on the last point about asymmetrical information: providers of health care have far more information than patients. While Arrow acknowledges that we doctors are supposed to act in the patients’ best interest (we aren’t “barbers,” as he notes), he still argues that physicians are “sellers of health care” and that we can exploit the lopsided relationship.

A few thoughts:

1. Despite being decades old, Arrow’s paper is cited, discussed, and debated. (It yields almost a million hits on Google.)

For example, blogging on Obamacare, economist and writer Paul Krugman (himself a winner of the Nobel Memorial Prize in Economics) notes:

One of the most influential economic papers of the postwar era was Kenneth Arrow’s ‘Uncertainty and the welfare economics of health care,’ which demonstrated – decisively, I and many others believe – that health care can’t be marketed like bread or TVs.

He goes on to frame his views on health reform around Arrow’s paper. You can find his blog here:

2. Let’s focus on information asymmetry. Arrow wrote his paper before the Internet. In an information age, how to think about information asymmetry? Economist Deborah Haas-Wilson of Smith College weighs in with an essay noting: “There has been explosive growth in the amount of health information available online.” By 2001, for example, “there were approximately 26,000 health-related Web sites.”

You can find the full paper here:

3. Pushing further on the idea that health information has significantly changed over time, columnist David Brooks argues for more market reforms in health care (and changes to Obamacare):

There’s much research to suggest that people are able to behave like intelligent health care consumers. Work by Amitabh Chandra of Harvard and others found higher-performing hospitals do gain greater market share over time. People know quality and flock to it.

Brooks’ argument provides something of a counter-point to Krugman’s – but it still begins by mentioning Arrow. You can find his article here:

4. Tying back to mental health services: regardless of our views on health care reform, we can see that asymmetric information is deeply problematic for people trying to access mental health services.

5. In light of Arrow’s work, we can appreciate the importance of Choosing Wisely, a campaign which seeks to provide patients and providers with relevant information in order to reduce unnecessary care. The recommendations for psychiatry are thoughtful and practical – and ultimately attempt to address information asymmetry.

6. It’s fantastic that employers are beginning to offer more robust mental health benefits, but there is still the information divide. Starbucks Canada recently began offering employees up to $5,000 a year for private psychological services. But how does a barista in Scarborough or Saskatoon find a good therapist for CBT?

CBT Associates, which runs 6 clinics in the GTA, uses validated scales to measure outcomes, thereby monitoring the quality of their therapists’ work. Some online services are posting their therapists’ ratings, empowering patients with provider reviews – Uber meets psychotherapy.

7. Internationally, some countries have experimented with providing information directly to patients and their families, beyond the reach of industry and research biases. In the UK, as an example, mental health information is available on the National Institute for Health and Care Excellence’s website. Quick thought: wouldn’t it be nice for Canada to have a NICE?

I suspect that Arrow would think so.

(Many thanks to Paul Tuns for calling my attention to some of the articles referenced in this Reading.)

Reading of the Week. Every week I pick articles and papers from the world of Psychiatry.