Individuals and organizations voluntarily transact in markets to seek better payoffs. The laws of markets, rooted in human nature, govern every transaction and participant. When these laws are ignored, as is frequently the case in healthcare, markets find ways to retaliate, harming societal interests.
Law 1: Market Transactions Make Participants Better Off
Take Uber as a general example, a driver and a passenger voluntarily enter a ride-sharing transaction, which makes both parties, along with the IRS (through a higher income tax revenue), better off than without such a transaction.
In a similar vein, in healthcare, when faced with a last-minute patient cancellation, a physician may turn to virtual care marketplaces like Sesame Health and Amazon Clinic to serve a cash-pay patient during the appointed time. This transaction benefits both the physician and the cash-pay patient, who can secure a same-day or even same-hour appointment at an affordable price. For patients and providers prohibited by government regulations or insurance contracts from using such platforms, they lose an option and thus incur an opportunity cost.
Law 2: Market Prices Reflect Collective Wisdom and Democratic Valuation
The voluntary nature of market transactions dictates that every potential consumer’s willingness to pay and every potential seller’s willingness to accept are incorporated in the price-generating process. Market prices, therefore, reflect collective wisdom and valuation of all participants fairly and democratically. In contrast, prices set by government agencies are imposed through state power and designed by a small group of individuals with inferior knowledge compared to and self-interest imperfectly aligned with market participants.
For example, Medicare has been paying hospitals and testing labs $51 for a COVID-19 PCR test, which is much higher than its cost, resulting in a windfall for these providers at taxpayers’ expense. Such a situation would hardly be allowed by consumers in direct market transactions.
As another example, many European governments use cost-effectiveness criteria to set prices for innovative medical technologies based on the assumption that everyone shares the same valuation for the expected net benefits of using a technology. Two recent studies demonstrated how such price setting harms patient wellbeing by discouraging innovation and encouraging incumbents to behave anticompetitively. It’s no coincidence that European countries have less access to new medicines and have experienced a decline in their pharmaceutical research and development as compared to the U.S.
Law 3: Market Signals Guide Optimal Resource Allocation
Healthcare AI has attracted enormous financial and human capital, not because of government mandates but due to the strong signals sent by the healthcare AI market. Promising market signals reflect consumers’ high willingness to pay, thus enticing entrepreneurs, investors, and talented individuals to enter the market. Through their innovation and competition to deliver better and cheaper products and services to attract businesses, financial capital and human capital are optimally allocated to advance consumers’ collective interests. Consumers emerge as the biggest winners.
In contrast, government-initiated capital allocations reflect policymakers’ beliefs and preferences, not necessarily those of market participants, thus creating risks for misallocation and wasting taxpayer dollars.
It’s often too easy to blame markets for undiserable outcomes while forgetting that markets may have been prevented from functioning properly in the first place. The laws of markets can be ignored, but the negative consequences cannot be avoided.
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