Health Care a Public or Private Good?

Transcription

1 Health Care a Public or Private Good? Keith Schenone December 09, 2012 Economics & Institutions MGMT 7730-SIK Thesis Health care should be treated as a public good because it is not an ordinary commodity that works efficiently in a free market. Abstract The US is one of the few highly developed countries that do not have a true public health care system. While the US spends more on health care capita than any other country, its average life expectancy and other health measures are in the middle of the pack. In comparison countries considered the healthiest all treat health care as a public good and all spend less than the US. Looking at health care as a commodity it is not evenly distributed with a small percentage of the population consuming a larger percentage of the costs. When someone is sick they are not necessarily worried about price, the price they are willing to pay may become near limitless because the alternate could be death. Health care in terms of supply and demand does not fit efficiently into a fee market and externalities provided by healthy citizens indicate that health care should indeed be treated as a public good. Analysis The US health care system in terms of efficiency does not seem to match up to other developed (OECD) countries around the world. The average health care spending per capita in the US spends is over $8,000. This is greater 50% more than the next biggest spender, Norway. i The US system (Pre Obamacare ) is based on a free market system. This is in contrast to most of the developed world that uses some form of public health care. If it were true that health care should be a private good, then a free market such as in the US should efficiently set prices and demand. But simply looking at the average amount spent per capita and then comparing health measures, such as life expectancy, we see that the US doesn t measure up. As shown in the chart below the US spends more with lower life expectancy than the typical OECD country.

2 OECD Countries Health Care spending vs. Life Expectancy Life Expectancy USA Total Health Care Expeditures per Capita Source OECD.org There are many other statistics that can be shown that further highlight this inefficiency such as US hospital beds per 100,000 (3.0), and number of doctor consultations per capita (3.9). Error! Bookmark not defined.i Each are well below the OECD averages. So if the US is using less health care services than why are they paying higher costs. The reason is related to price. US consumers pay more for a given service, and the average price paid for hospital services is 85% higher than the average OECD country. Along with services administration fees are also higher in the US. ii Just about all costs in the US are higher than in OECD countries, as shown in the chart below. This further emphasizes the lack of efficiency and the need for intervention to better regulate the industry to contain costs and more evenly distribute care.

3 Externalities are also associated with health care, which reinforce the idea of health care as a public good. Externalities are typically, but not always, associated with public goods. They provide benefits (or costs) to others even though they may not be directly involved. Having public health care would lead to more preventative care as more individuals have access to care. If more preventative measures are taken perhaps future health issues of an individual can be avoided. (Not an externality, but a time discounting problem for a single person.) This leads to a healthier society as whole and would drive down overall costs, improving efficiency in the system. Being healthy also means you are a productive citizen. If you as an individual or a company are burdened with less health care costs, because of improved efficiency than you may contribute more money to other areas of the economy helping spur growth. (Yes, externality because others are involved in the benefits.) Having healthy citizens limits disease and sickness and provides a benefit for all people in a society In terms of economics, a public good is a good in which the quantity available is not defined by a free market. The amount consumed by consumers is generally the same, but the price paid for that good by a given consumer may vary. With a private good in a free market the price and amount available is determined by the willingness of the consumer to consume. The price is then constant for all consumers but the amount each consumer uses may vary. If we look at health care I would argue, in general terms, that the health care demand of a general population is constant. That is, in general all people require the same amount of health care. Of course this is not true in absolute terms as illness and disease may require some individuals to consume more, but as whole I feel this is true. This is much like police protection, which is considered a public good. If an individual is robbed they may consume more police protection, but in general society as whole consumes equally. (Good analogy; both are like an insurance policy.) One way to look at health care as a public good is to think about in terms of a demand curve. I would argue that the amount of health care or the demand for health care should be based on population as all people require health care in some form. The more people the more doctors and health facilities are needed. If you make this assumption then the total demand for health care in a given population would be constant. The price an individual is willing or able to pay may vary, but the overall consumption would remain the same. This would mean your demand curve is summed up vertically, as the overall demand would not change as everyone essentially consumes the same amount of health care. This is opposed to a private good where the total demand is equal to the sum of the individual demands, as consumers consume different quantities. This contrast can be seen by looking at two individuals who would like to purchase a car. If one can pay $20K for the car and second individual can pay $30K, and the price of the car is set at $30K, then the demand would only be one. In comparison if the same good were health care and both individuals had a life threatening sickness then price would be irrelevant and the demand would be two. With health care an individual who is sick may be willing to pay an extraordinary amount for care without changing overall demand. So on the demand curve the price would go up vertically. (good explanation)

4 Another reason health care doesn t fit efficiently into a free market is because it incentivizes the need for more health care or higher prices. In terms of profit, health care facilities make more money the higher the consumption or the higher the price. If the consumption can be inflated above what the true demand is than they would make even more money. To examine this we can create a simple game where we have a sick patient who can decide to be treated or not, and then the hospital who can decide to treat the patient and send them home or to treat the patient and order additional tests. The treat and additional test scenario would represent the case where the consumption is being inflated to increase hospital revenue. The game below shows that the hospital has the upper hand. The Nash equilibrium is in the top right where the patient gets treated and the hospital inflates the consumption. Hospital Patient Get Treated Treat and Send Home 10 Treat and order additional testing 20 Don t Get Treated Treat and send home Hospital Decides Get treated Patient Decides Perform additional testing and treat Don t get treated 0-30 With typical commodities this scenario is prevented by supply and demand as a consumer would decide not to purchase a good or purchase from a competitor. The free market would determine price. But with health care, because it is essential for life itself, the consumer has limited choice, not getting treated is not an option and shopping

5 around would be limited and is not a likely scenario, especially in the case of an emergency. Now if health care were a public good, the hospital would not have incentives to over treat or inflate consumption. There revenue as a public good would be regulated. As a comparative example we can look at police protection. If this were a private industry there would be incentives for these businesses to encourage crime as it would bring in more revenue. Police instead of arresting and locking up individuals may arrest them but then let them go. This would put more criminals back on the street and increase demand for police protection growing revenue. But as a public good there revenue is fixed and there is no incentive to encourage crime. This should be the role of health care. While doctors and health care facilities may have all intentions to do the right thing, they still rely on profits. Within a free market system revenue is increased by growing the demand or increasing prices. If the demand is constant than it either must be artificially inflated or prices must increase. While these arguments suggest that indeed health care should be considered a public good, there are also numerous counterarguments that can made. One argument, in support of the US (private) system is that we already spend massive amounts of public money on health care and only cover a portion of the population. The US is near the top of the OECD list of public health care spending near $4,000 per capita.i And with all this money spent only $91 91million people are receiving some form of insurance coverage or 31% of the population. iii The argument could made that switching to public health care would actually raise costs and decrease efficiencies. If we do some simple math and extrapolate out coverage to include 100% of the US population than average spending would go up to over $12,000 per capita. This is well above what we currently spend and would indicate that public system does not improve efficiencies. To this point however I would argue that because the US system is not a true public health care provider they are not able to put in place the regulations and administrative system that would be needed to bring costs down. I do not think the math is as simple as multiplying out the current public expenditures to cover everyone.

6 $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Average public health expenditures per capita of OECD Countries Norway Netherlands ² Luxembourg United States Denmark Switzerland Austria Germany Canada France Sweden Belgium ¹ United Kingdom Iceland Ireland New Zealand Australia Japan Finland OECD AVERAGE Italy Spain Portugal Slovenia Greece Czech Republic Slovak Republic Israel Korea Hungary Estonia Poland Turkey Chile Source: OECD.org

7 Another argument against public health care is in regards to the quality and the amount of care provided. The point here is that while we may spend more in the US we receive higher quality care and we don t have long waits to receive such care. The free market system insures there is sufficient supply to meet demand. In a public system the supply may be limited and pre set by the government. Looking at Canada, it is estimated that over 46,000 Canadians migrated to the US for health care in 2011 and specialist physicians in Canada reported average wait times of 19 weeks. iv In the US fewer than 20% of insured patients wait more than 4 weeks for an appointment with a specialist. And the US has better Cancer outcomes than most OECD countries. ii These statistics indicate that there may be supply challenges with public system. It shows that Canadians may not be getting sufficient coverage to meet there demands and perhaps the quality of coverage is not as good as in the US. But to this point I argue that if the supply was truly lacking in these countries then the health measures, such as life expectancy would be less than that of the US. But as discussed this is not the case. The US system, where we have less waiting time, still under performs in terms of health measures to these public systems. There is also the worry, that treating health care as a public good will result in abuses, or over consumption. That is, if a consumer does not have to pay (directly) for health care than they will overuse the commodity. This could result in negative effects such as longer wait times and lack of available care for those who truly need it. Overconsumption will be a concern with any public good and in comparing other public health care systems there is typically still a market for private insurance to those who desire to pay for it. Health care is not a pure public good, but here again I think the positive outweighs the negative. A healthier society is more desired than having over consumption of health services. Conclusion Health care is going continue to be a debated topic with arguments for and against moving toward a public system. In economic terms I think the evidence supports treating health care as a public good. I see health care as a commodity that provides externalities for all in a society, and works more efficiently when treated as public good. The evidence of this is supported in looking at other developed countries where costs are less and in general health measures are higher. The free market system has not worked efficiently to meet the supply and demand for health care. It has created higher costs and insufficient coverage. Health care is not a typical private commodity and while it may not be a pure public, it would fit more efficiently in regulated market as opposed to the free market system.

8 i OECD (2012).October 2012 update: DOWNLOAD the following sample of key indicators from OECD Health Data 2012 (in Excel),Retrieved December 08, 2012, From OECD.org : ii Kane, Jason, PBS (2012).October Health Costs: How the U.S. Compares With Other Countries, Retrieved December 08, 2012, From PBS.org : iii Smith, Emily & Stark, Caitlin, CNN (2012). By the numbers: Health insurance, Retrieved December 09, 2012, From CNN.com : iv Bastasch, Michael, Daily Caller (2012). Report: Thousands fled Canada for health care in 2011, Retrieved December 09, 2012, From Dailycaller.com: