“Intolerable” laissez-faire in medicine: the early years of the Mayo Clinic

Mayo Medical Center
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Shortly after its initial posting on this site, this article was also cross-posted on the website the Ludwig von Mises Institute under the title “The Mayo Clinic and the Free Market.” I have made some very minor edits since then. MA. April 18, 2015.

Neoclassical economists such as Kenneth Arrow and Joseph Stiglitz tell us that the health care market is imperfect (or “Pareto inefficient”), meaning that the allocation of services is not optimal from the standpoint of social welfare.   They point to information asymmetry as an important cause of this imperfection: patients cannot distinguish on their own the physician from the charlatan, the surgeon from the butcher, the remedy from the snake oil, the hospital from the coop.  This may lead to moral hazard where the party with the most knowledge can provide inferior service with impunity.

To provide the necessary counterbalance for this “knowledge gap,” experts must be in charge of social institutions that tell patients where to go, who to see, how to be treated, and how much it should cost.  This has been a principal and virtually unchallenged argument underpinning health care legislation in the last 100 years.  In a famous paper he wrote on the subject in 1963, Arrow declared that “It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.”

But for those who wonder how intolerable the “laissez-faire solution” really is, a short booklet published in 1926 may prove instructive. 

On the Squandering of Medicare’s Money

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Emperor Joseph II: My dear young man, don’t take it too hard.  Your work is ingenious.  It’s quality work.  And there are simply too many notes, that’s all.  Just cut a few and it will be perfect.

Mozart: Which few did you have in mind, Majesty? (Amadeus, 1984)

The New York Times recently published an opinion editorial entitled “Squandering Medicare’s Money” in which Dr. Rita Redberg, professor of cardiology at UCSF, proposes that much of Medicare’s financial deficit could be reduced if the government did not spend “a fortune each year on procedures that have no proven benefit.”   To support her contention, Redberg cites several studies which indicate that many routinely performed tests and treatments do not improve patient outcomes in any measurable way, and are therefore “unnecessary.” Examples given are screening colonoscopies for patients over 75, PAP smears for women over 65, coronary stents for people with stable angina, and so forth.  At an estimated cost of $150 billion, these procedures seem like obvious candidates for the deficit-reduction chopping block.

The mother of all risk factors

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In 1961 the Framingham study investigators coined the term ‘risk factor’ and unwittingly ushered in a period in the history of medicine dominated by the advancement of risk modification as a strategy to prevent disease.  Academic careers have succeeded and private enterprises have flourished on the promotion of this paradigm.  Risk factor reversal is now an established surrogate for quality of care and the cornerstone of most ‘pay-for-performance’ schemes allegedly designed to improve health outcomes.  One particular risk factor, however, stands out by virtue of the unusual treatment it receives from public health advocates.