Tuesday, January 27, 2009

Polyglot path dependence and health insurance systems

Atul Gawande writes in the Jan 26th New Yorker about the importance of historical events in shaping national health insurance systems. He discusses how Britain, for example, ended up with a de facto national system because of the blitz.

As he points out, economists like Paul Krugman and others have recognized the importance of path dependence in, for example, patterns of industrial clustering. What's worrisome to an economist is how path dependence might well lead to an equilibrium where optimality, as we perceive it in its fundamental form as equating marginal costs and marginal benefits, does not necessarily occur.

Ironically, of course, optimality could be in the eye of the beholder. Toward the very end of his piece, Gawande rejoices that "[f]or the past year, I haven’t had a single Massachusetts patient who has had to ask how much the necessary tests will cost...." To an economist, it is worrisome when consumers don't know the prices they face, although Gawande may implicitly believe that the doctor does know and will optimize. But I'm not so sure.