What would medical care be like in a genuine free market?

Nobel laureates in economics have opposing views. But does India have the answer? There, healthcare has a strong private sector: patients usually pay directly and the insurance industry is just emerging.

Milton Friedman believed that markets would work just fine in healthcare. Kenneth Arrow was not so optimistic. In his much cited opus, Arrow singled uncertainty as the key factor that distinguishes medical care from other goods and services. Uncertainty means that one doesn’t know when and how much healthcare one is going to need. Not quite the same as shopping for cereal.

George Akerlof felt that asymmetric information, i.e. when one side knows far more about the product, could be problematic for quality.

In Akerlof’s hypothetical market “Market for Lemons,” which takes the example of used cars, there are “peaches” (good cars) and “lemons” (low quality cars). Buyers can’t distinguish between peaches and lemons, but know lemons exist and so offer a price that’s too low for peaches. Sellers who, of course, know their peaches and lemons, remove good cars and retain bad cars. Process continues, and there’s a downward spiral, with the market progressively enriched with lemons.

Asymmetric information in a free market could lead to a fall in quality and market failure. There’s asymmetric information in healthcare when buying insurance; people are more inclined to purchase it when sick. Also, when the physician knows more about the quality of a product and its need than the patient.

It was in regards to quality, specifically novelty of medical imaging equipment, that I met Rajan Chaudhuri, a practicing radiologist in Patna, Bihar, as part of an ongoing project studying price variation in imaging in India.

“We are buying a 3 Tesla MRI scanner,” beamed Chaudhuri.

I was about to launch into an academic monotone about the comparative performance of a 3 Tesla magnetic resonance imaging (MRI) scanner over the cheaper but good enough 1.5 Tesla scanner. Luckily I didn’t. I would have totally missed the point.

Chaudhuri wants the commercial MRI with strongest magnet strength not just because it is clinically more useful—it is, but not by a mile—but also because it looks good for his practice. It signals quality.

“Our practice was [the] first to install 64 detector CAT [computed tomography] scan in Bihar,” Chaudhuri proudly claims.

Presumably, this was because informed consumers, patients, and clinicians, wanted the higher quality images that came from the latest technology, and were willing to pay the marginal cost for the marginal benefit?

“No, we were managing with a single detector CT [older technology]. But to compete you have to show you are better, which means having [the] latest technology,” explains Chaudhuri.

Chaudhuri was competing on quality, not price. One might quibble whether the more advanced the CT, the higher the quality. Currently, it’s not important to resolve this quibble with precision. The point to emphasize is that to draw consumers Chaudhuri didn’t slash prices. Nor did he use the cheapest and most antiquated equipment to skim profits. He could have. Patients generally don’t know about the latest CT scanners.

Akerlof predicted a race to the bottom. According to his theory, the market for medical imaging in Patna should be enriched with outdated technology. Chaudhuri, instead, was offering the latest 3D fetal ultrasound; flaunting “peaches,” rather than storing “lemons.”

But how can quality be lucrative in a free market? Price gouging, or at least higher prices, I wondered. Does he raise the price of services after acquiring new technology?

“We can’t charge much more than our competitors. This is not [the] US or UK. In India, patients pay out of pocket. If I overcharge, no one will come to my center.”

Chaudhuri charges rupees 2500 ($41; €31; £25) for a head CT, which is standard in most practices in Patna. He charges rupees 10 000 ($165; €125; £100) for a coronary CT, but the volume of this high-end study is low. My managerial mindset was puzzled. How are the costs of expensive gadgets recuperated?

“We make up on volume. Because our colleagues know about our quality, they send patients to us. Even patients ask to be referred to us. If your practice is busy people know you’re a good doctor.”

You can get in a tangle with that explanation. Does volume precede investment in technology, or does investment precede volume? Volume signaling quality: is this not circular reasoning? The problem with the market is that even when it appears to work in practice, it seems not to work in theory. I began to theorize why neither prices for medical imaging are slashed, nor are patients gouged.

When patients pay directly for services there is relative price inelasticity, within a bandwidth of sane prices. Patients are not likely to compromise on quality, within a reasonable price range. When prices vary little, physicians compete on quality, since it’s unlikely that slashing prices will draw more patients. One reason that Chaudhuri doesn’t fleece customers is because he doesn’t, in pursuit of gold, wish to kill the hen that lays bronze eggs. There are more bronze than gold eggs. The market brings sanity to prices.

Comparisons can inevitably be made to the wild and gross price variations that uninsured people in the United States face when paying for medical services. But perhaps those who are uninsured are less likely to be struck by deadly medical bills when more of the population are uninsured and paying out of pocket, than when fewer people are uninsured—as is the case in the US. The elephant in the room, conspicuous by its absence, was the insurance industry.

“We don’t take insurance,” says Chaudhuri. “We used to for employees of Indian Railways, but it would take more than six months to get paid by them. We had too many forms to fill. So now we have stopped. We tell their employees just to pay us cash.”

It’s difficult for insurers to penetrate a market of direct pay when consumers are not price gouged. Healthcare in a free market could lead to a robust insurance industry, or prevent one from developing. It’s hard to tell. Middle class Indians have no qualms about paying out of pocket for medical services. Culturally, there exists an odd combination of religious fatalism and self-reliance. The latter arises from little faith in the government. India’s strong private sector is reflective, to some extent, of the government’s incompetence in healthcare.

Healthcare in India is intriguing, although not always worthy of emulation. The wild west of the market has unsavory elements, such as ultrasound scanning for sex determination and selective termination of a female fetus, the organ trade, kickbacks for referrals, unnecessary hysterectomies, and others. I could not decide if it was because of the lawlessness or despite it that quality like this still rises.

“We just want to do a good job for our patients,” reflects Chaudhuri.

Indeed. Professional pride is transcendental. Whatever the explanation, it’s a joy to watch Akerlof’s lemons revolt.

Saurabh Jha is an assistant professor of radiology at the University of Pennsylvania School of Medicine. Follow him on Twitter @RogueRad

Competing interests: I declare that I have read and understood the BMJ policy on declaration of interests and I would like to declare the following: I have received a speaker’s fee from Toshiba. I have no financial relationship with Rajan Chaudhuri’s practice, which is mentioned in this blog.