The Efficient Economist

Towards an Efficient Health Care System

It is an accepted ideology that "the market" or "market economy" is the most efficient economic system and always produces the optimal results for solving a given economic problem.  The problem with this ideology is that the nature of its efficiency and the nature of its optimization need to be clarified somewhat.  First of all, it is important to clarify WHAT a market economy is good at producing efficiently and HOW it is optimal.  Next we need to examine what is optimal or most efficient for providing health care to a population of hundreds of millions of people.  Last, we should see if the "market economy" is in fact the mechanism that is the most efficient  for solving the particulars of the health care problem.

First, let us dissect the statement that the market economy is optimally efficient and always produces optimal results.  This description of being optimally efficient and maximally productive needs to be contextualized.  The market economy is designed to MAXIMIZE PROFITS, MINIMIZE COSTS and OPTIMIZE RETURN ON INVESTMENT.  And it is very important to note that for an particular firm of agent to pursue these results it is assumed he or it does so in an OPEN environment- that is to say that the firm or person pursuing maximum return, minimal cost and maximum profits does so as a small part of a much larger economic system of which he or it is a very small part, and in a state of intense competition.  There are several ways to accomplish these various goals, not all of which are well suited to the problem at hand, but all of which should be looked at.  The most famous are the division of labor, economies of scale, and product differentiation and distinction.  Firms in the health care industry today are well suited in all three- they have large and very task-specific staff, sales for major equipment vendors or insurance providers are in the billions (if not tens of billions) of dollars annually, and there is a veritable cornucopia of devices, drugs, and procedures for treatment of the ailing patient.  There are some specific ways of maximizing return on investment, profit or minimizing expense that are specific to different parts of the industry- an expense for one part may be a benefit to another.  For example, it is in a hospitals best interest to charge as much as possible for providing a particular service.  It is in the best interest of an insurer to pay as little as possible and to provide as few services as possible.  It is in the interest of a patient to get the best and most appropriate health care possible and to pay as little as possible for this without taking on too much risk in case of serious illness or injury.  A medical equipment provider wants to sell as many expensive machines at as high a price as possible to as many places as it can (and it will see to it that buyers are regarded as being better providers of health care than non-buyers, regardless of cost).  A hospital may want the expensive machine but not have a large enough client base to justify it.  These are some of the very, very many pushes and pulls in the American health care system today.  Everyone is looking out for themselves, and it is rarely justifiable to absorb the expense of looking out for someone else, which is ironic given that health care should ideally very much be about looking out for the well being of others.

Next, lets us examine what would constitute an efficient solution to providing health care at a large scale.  Costs should be minimized, and the amount of service provided should be optimal.  It is crucial to distinguish what is optimal from what is "maximized"; we can not allow a measurement of efficiency that suggests that replacing every-ones gall bladder is a useful service.  Here the return on investment is critical to analyze.  The difficulty with doing so in health care is the inescapable subjection of cost and benefit analysis to emotional and cultural evaluation.  For example, is it better to spend $10,000 on an operation to return a young worker to a path of a high-paying career and productivity towards the larger economy, or to spend that same $10,000 to extend the life of a 82 year old cancer survivors life by 6 months?  It is obvious from the stand point of return on investment that the first case is a far superior use of the money.  However, how does a doctor explain to a family that this elderly person is not worth the money?  Another issue is of course that if the hospital does not spend the $10,000 to extend the octogenarians life it may face an even more expensive lawsuit from the family; this is a fascinating and important matter, but for the scope of this article it must be left off as a distraction.  Distribution of cost is another matter, outside of the bounds of efficiency, but let us examine the question briefly.  All humans have roughly the same likelihood of injury, illness or disease, if we hold for environmental factors being constant or randomly distributed.  Income is, however, very unevenly distributed by comparison.  Another caveat is that those people with higher level of wealth and income tend to live away from environmental hazards to their health (such as crime and pollution), and invest in preventative health care services such as vaccinations and education.  So, not only do lower-income people have less income, in reality they tend on average to have more health risk.  An optimally efficient solution would accommodate this fact.

Now, does a free-market approach to solving the need for health care provide an efficient solution?  It is easy to jump into specific details, but let us start at the beginning.  There is nothing less expensive that an illness or injury that does not take place, so an efficient solution must invest considerably in prevention.  "Invest" means that there is an expense that can offset or avoided later (or, as we shall see, elsewhere).  Investments in vaccinations, basic annual checkups, proper dentistry (this is an area of health care that is very much overlooked- there are few better pathways into the human body than the mouth, particularly one with an infection or opening) all pay huge dividends.  The question is what is the cost of the preventive measure and what is the cost of not investing in it.  If an insurance provider pays for preventive care how do they know their customer will stay with them long enough to pay premiums that will cover the expense?  Timing becomes a critical element in the issue of cost of health care.  All insurers would love to have large cohorts of healthy young people paying premiums through their company PPO, and ideally then joining another insurer or retiring before they get old, sick or injured.  Here we see the first problem to be solved in designing an efficient solution.  We need a health care system that is all encompassing enough in terms of time (a complete human life span) and scope of patients (potentially the entire US population) to be truly effective.  The system needs to collect money (fees, premiums, taxes, whatever) over the productive life of individuals to, collectively, pay for their productive and unproductive life spans.  So, to be efficient we know we need a large payer for health care that can invest in preventative measures to minimize long terms costs without fear of losing future premiums by movement of its customer base (this assumes that the insurer is actually required to pay for something- ideally they would maximize profits by receiving premiums and having no outlays, which is a very efficient producer of profits and return on investment and is an excellent minimizer of costs, but in terms of providing actual health care it is wanting).  Let us assume we have a single payer health care system.  Is it more efficient to have a for-profit or non-profit running such a system?  What function would a profit serve in such a system?  If the intention is to make as much resources available as possible to providing health care then profit must be regarded as a drain on that function.  In the end we see that profit in the health care industry, particularly on the part of insurance providers, in a drain on the ability of the health care system as a whole to benefit the participants in that system. 

Here is a very unpalatable fact of the economics of health care in the United States.  When a health care provider, say an insurer, reports a profit, pays a dividend, pays a bonus to its management, all of these represent inefficiencies in the provision of health care.  When an insurer reports a billion dollar profit that is a billion dollars in health care that either needs to be banked for future outlays, has been denied in service, and/or was over charged from the payers into the system.  Socialism is a tainted word in the United States for reasons pertaining to a 50 year struggle against the Soviet Union that today we refer as the "Cold War".  Every time "socialized medicine" is mentioned on CSPAN, the usage is comparable to that of the Bogey Man.  What is needed is not a "Capitalist" solution or "a health care system that is right for America" or suggesting that what is right for other countries is somehow not right for America, but a health care solution that is efficient.  Other Western industrialized democracies embraced a "socialist" solution because they needed to provide as much as possible for as little as possible.  America has not had to address this, and as a country she has become stubborn and but ideology ahead of practicality.  If the nature of politics today is to frame a debate let the framework be this: How do we provide an efficient health care system?  And for those who flail reflexively against anything that might be considered "socialist", keep in mind the following: jobs flow to where the cost of doing business is most profitable- if it is 15% more expensive to employ workers in the US than comparable countries, then we will not be able to compete and maintain our standard of living in the global economy.