10 Questions and Answers about Health Care

1.    Is health care different from other goods & services?  If so, how?

a.    Is health care a public good?  Definitely not, since

                   i.     It is excludable; non-payers can be excluded.

                 ii.     It is not jointly consumed; all of us do not consume all that is produced.

               iii.     It is exhaustible; units of health care consumed by Ben cannot be consumed by Betty.

                iv.     It does not have zero marginal cost in consumption; adding another consumer requires additional production, and therefore, additional cost.

                  v.    And yet, health care does generate a positive externality in consumption, because most people are unwilling to ignore suffering of others; therefore, we all gain value from the consumption of health care by others; most people are willing to pay something for the health care of people who unable to pay for their own health care.

b.    Is health care scarce?  Definitely yes;

                   i.     The quantity of health care available is insufficient for everyone to have all they want without sacrificing something else they also want.

                 ii.     Production of health care requires the use of valuable land, labor, and capital, just like other valuable goods. The owners of the land, labor, and capital used must be paid the opportunity cost of their valuable resources, which makes the supply curve of health care upward sloping.

               iii.     Because it is scarce, health care must be rationed somehow; if not by willingness and ability to pay money, then what?

c.    Do people "need" health care?   

                   i.     Health care is not a single, homogeneous economic good; health care ranges from a band aid and an aspirin to heart replacement surgery.

                 ii.     If some quantity of health care is needed, how much? People do not need any particular quantity and quality of health care.

               iii.     Substitutes for professional health care include watching and waiting (human bodies have incredible recuperative abilities), home remedies, and self care (although the possibilities for self care are substantially limited by law).

                iv.     Different people want different amounts and qualities of health care; people seek to maximize their own net benefit from consuming health care, which means they attempt to find the quantity and quality for which MPB=MPC.

                  v.    Equal consumption of health care by everyone isn't possible, and if it were possible, few if any would say equal consumption by all would be fair.

d.    Is health care a basic human right, regardless of ability to pay? 

                   i.     If so, who has the responsibility to provide health care, since a right for one always implies a responsibility for someone else? Do not say "society" has the responsibility, because "society" is not a person, it is a collective noun.

                 ii.     If so, how much health care and what quality of health care does everyone have a right to? Do not say "enough to stay alive," or "enough to be well," because neither is definable or quantifiable.

e.    Which economic good is health care more like:  cars or food?

                   i.     Health care is more like food, so why don’t we have all the same public policy issues with food that we have with health care?

                 ii.     Why don’t employers typically provide a "food benefit” as part of their compensation to employees?

               iii.     Consider the cost of food per typical person for a year compared to the cost of health care per typical person for a year. Why is health care so expensive, compared to food?

                iv.     Why do we not eliminate restrictions on the supply side for health care?

                  v.    Is asymmetrical information a serious problem with health care? Not really; asymmetrical information is far more serious with automobiles.

2.    What are justifications for government intervention and obstruction of voluntary exchange in health care? Do the conventional justifications offered by economists apply to health care?

a.  Not market power; nothing besides government laws and regulations keeps health care from being highly competitive.

b. Not externalities; even though most people are sympathetic and willing to help others who are suffering, we have no evidence whatsoever that not enough health care will produced without government intervention. We have ample evidence to the contrary.

c.  Not the public good argument; health care has none of the characteristics of a public good.

d. Not the incomplete or asymmetric information problem; consumers know more about health care than they do about their cars.

e.  Certainly not economic stabilization.

f.   What about equity, fairness, and justice?  (is there an efficiency-equity trade off with production or consumption of health care?)  No more so than for any other economic good.

3.    Does health care fit the insurance model?

a.  Yes, for catastrophic illness, we do have low probability of high cost events, which are insurable events, but not for routine health care.

b. Health care insurance generates moral hazard, as does any insurance.

                   i.     May influence eating choices (obesity, junk food), if individuals do not have to bear the full cost of their choices.

                 ii.     May influence life-style choices (lack of exercise, smoking, speeding, riding motorcycles), if people do not have to bear the full cost their choices.

4.    Why are employers involved in health care insurance; they aren't involved in home insurance or car insurance?

a.  There is no philosophical or economic reason.

b. Employer involvement is an historical artifact of wage-price controls during WWII, which kept employers from competing for employees using wages.

5.    Is asymmetric information a serious problem with health care?

a.  No; in which economic good is information more asymmetric:  car repair or health care?

b. Are health care providers better judges of the marginal benefit of health care than patients, and therefore better positioned to decide the quantity and quality of health care someone should consume?

c.  For most goods and services, consumers can and do use price as a principal source of information about value, cost, and relative scarcity; but not for health care, because unit prices for health care services are generally nonexistent; health care providers do not compete on price, and prices generated by voluntary exchange in unfettered markets do not exist, due to government intervention.                                            

d. If we don’t use prices (willingness and ability to pay) to ration health care, then we also cannot use prices to give us information about relative value and cost of health care compared to other goods and services.

e.  If we don’t use voluntary exchange guided by relative prices to ration health care, how can we expect that MSC will equal MSB? We cannot.

6.    What's wrong with third-party payments for health care?

a.  Third-party payments are payments made to producers of healthcare by someone other than the consumer of health care.

b. For most insurable risks, insurance is not a third-party payment system, since consumers generally pay for insurance they purchase (e.g., auto insurance, property and casualty insurance, home insurance, life insurance); but for health care, what is called "health care insurance" is typically paid for by an employer or by tax payers.

c.  What economic outcomes can we expect from 3^rd party payment for health care?

                   i.     Excess demand for health care services.

                 ii.     Shortage of suppliers of health care services.

               iii.     Rising cost of producing health care.

                iv.     Rationing of health care using some criteria other than price, e.g.,

·      Waiting in the doctors' offices and emergency rooms,

·      Denial of insurance claims,

·      Burdensome, bureaucratic procedures to get insurance claims accepted,

·      Doctors who refuse Medicare and Medicaid patients,

·      Denial of medical procedures by review boards, and

·      Limitations on eligible suppliers of health care services (HMO, PPO).

7.    What behaviors from employees can we expect, due to employers using health care benefits to compensate employees?

a.  Employees will demand more health care benefits, due to obfuscation of who is bearing the cost.

b. Low-wage employees typically won't be compensated with health care benefits (e.g., employees of McDonalds), because.

                   i.     Health care is expensive as a percentage of low-income workers’ wages

                 ii.     Low-income workers don’t tend to stay with the same employer as long as high-income workers

               iii.     Low-income workers need money, not health care benefits, since they don’t get much income to pay for food and other goods and services they want; in other words, low-income employees typically don’t want part of their pay in the form of health care benefits.

c.  Money wages of employees will not rise as fast as they otherwise would.

d. Employees will consume health care services beyond the point of MPB=MPC

e.  Employees may be less mobile, remaining in current jobs to avoid loss of health care benefits

f.   Employees may delay retirement to avoid loss of health care benefits

8.    Can government somehow achieve greater economic efficiency and equity by intervening in voluntary exchange markets? In a word, no. In fact, the opposite is true.

9.    What does economic logic tell us is the most efficient remedy, if we find someone who has little ability to pay for health care, but we’ve decided that the person deserves some minimum level of health care? Give the person some money or a health care voucher.

10.Can the U.S. health care “system” be “reformed" from where we are now? Probably not.

a.  We have no reason whatsoever to believe that government operatives will bring us greater efficiency or equity in health care, compared to voluntary exchange.

b. There is no “system” that suspends human nature and the laws of supply and demand, both of which apply to health care, just as they do for car care and food care.

c.  Voluntary exchange in competitive markets gives us as much efficiency and equity as possible, provided we make provision for the rather small number of people who are unable to pay for even modest health care services.

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