Race and Reason

Racial disparities in the use of the health care system and in health care outcomes have been well documented, including a new study by researchers at Dartmouth. Less well known is that this is a worldwide phenomenon. The Inuits and the Cree in Canada, the Maori of New Zealand, the Aborigines in Australia-all get less care and have worse health outcomes than the majority white populations. [See Lives at Risk.]

One foundation (guess who?) is planning to spend $300 million to study the U.S. problem. A better use of resources would be to put the money in the bank and download a few articles by University of Chicago Nobel Laureate Gary Becker, the economist who invented the whole field of the economics of discrimination.

There are three things economists can teach us:           

Lesson No 1: Institutions Matter.  In a free market, individuals may discriminate in their dealings with each other.   But in order for the market as a whole to discriminate there must be an extraordinary amount of prejudice on the part of a very large number of people. Take the widely publicized fact that women earn 77% of what men earn. In their crazier moments, representatives of NOW claim that women get 77 cents on the dollar for doing the same work as men. But if that were true, every business in America could cut its labor costs by up to 23% by firing all the male workers and hiring females in their stead. Failure to do so implies an incredible aversion to women and/or indifference to the sacrificed profits.  The principle: when the market as a whole is creating discriminating gaps, every participant in it must pay a price for indulging his/her prejudices.

Alas, there are no such profit-making opportunities. After adjusting for career choices and the effects of marriage and child raising, economist June O'Neill finds there is no gender gap in wages. In nonmarket institutions, by contrast, the effects of discrimination can be substantial and long-lasting because people can often satisfy their prejudices without bearing any cost. For example, the admissions officer of a law school or medical school can choose white over black and male over female (as they once frequently did) or vice versa (which may often happen today) and do so costlessly.

Markets tend to diminish the effects of prejudice. Nonmarkets tend to accentuate them.  Since normal market forces have been systematically suppressed in health care, we would expect to see more racial disparities there. A similar principle applies to education.

Lesson No. 2: Incentives Matter. As all readers of these Health Alerts know, physicians don't compete for patients based on price. They don't compete on quality either. In fact, in a real sense, they don't compete for patients at all. Since patients pay little, if anything, out of pocket, the doctor's time is rationed by waiting, not by price. This means that physicians have no incentive to customize their services. Some studies suggest that minority patients do better when providers communicate in a different way. Other studies point to racial differences in response to some drugs. Yet customized service is rarely delivered.

One study found that from two-thirds to three-quarters of the racial disparities gap for diabetics cannot be explained by socioeconomic factors or insurance status. Also, in this study, blacks and whites were seeing the same doctors. The problem, the authors concluded, is not that black patients were treated differently. It's that they were treated the same when their needs required different care. Further, one-size-fits-all medical care is the norm for all patients. [See JHE study, unfortunately gated but summarized by Jason Shafrin here.]

Lesson No. 3: Profit Matters. In a normal market, the existence of unmet needs is a lure to profit-seeking entrepreneurs. For example, filling out the forms and applying for the Earned Income Tax Credit (EITC) is so complicated that ordinary mortals can't do it on their own. So H&R Block meets this need for millions of low-income households. In fact, more than 90% of what H&R Block does these days is EITC business. So why aren't entrepreneurs meeting minority health care needs the way H&R Block meets minority accounting/tax preparation needs? Answer: We have suppressed the profit motive in health care.

The exceptions are all the myriad ways you can find to get more money out of Medicare. There's an area where entrepreneurship is alive and well and flourishing.

Have a great day,
John    

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