Economics in Many Lessons: Health care’s simple economics by Donald J. Boudreaux

One of the cherished beliefs of many Americans today is that health care can be improved only through a collective effort. As a television talking head expressed it recently, “We all have to pull together to improve health care in this country.”

Nonsense.

Each of us has it within our power to improve our own health care.

I can improve my and my family’s health care in numerous ways, all of which are within my power. I can prepare more healthful meals; do more exercise; drink less alcohol; go to bed earlier. I can also, say, drive a less-expensive car or buy fewer consumer electronics and, with the money I save, purchase more exercise equipment, better health insurance or more visits to my doctor.

What’s true for me is true for every American. Even the poorest American is far from living at a subsistence level. That person, too, has the individual power to improve his or her health care by doing many of the sorts of things that I can do.

Of course, no one, not even Bill Gates, can achieve “perfect” health — if by that is meant 100 percent assurance of being free from aches, pains and the risk of dying before, say, the age of 80. And it’s true that the wealthier an individual is, the greater is that person’s scope to improve his or her health care.

But it’s not true that health-care improvements require a collective effort.

In fact, steps taken to collectivize health-care provision have only made it more difficult for individuals to improve their own health care.

Collective efforts — which, in practice, mean “imposed by government command” — typically allow each of us to free-ride off of each other’s resources. And when I get to spend your money and you get to spend mine, it’s a sure bet that that money will be spent wastefully.

Consider Medicaid and Medicare — huge socialized health-care programs. Funded with tax dollars, these programs allow the millions of Americans covered by them to consume medical services without paying the full cost of those services. The predictable result is that these services are over-consumed.

To see why, ask the following question posed by my George Mason University colleague Russell Roberts. If you go to dinner with a large group of strangers and you know that the bill will be split evenly, aren’t you more likely to order pricier dishes and drinks than you would order if you, and you alone, were responsible for picking up your full tab?

The answer is surely “yes.” Let’s say that you’d be content to order the pork chop priced at $15, but would get even greater enjoyment from ordering the rack of lamb priced at $25. If you alone were responsible for your tab, you’d order the lamb only if it is worth to you at least the extra $10 that it costs. So suppose that you value the lamb by only $8 more than you value the pork chop. In that case, you’d order the pork chop. You wouldn’t spend an extra $10 to get extra satisfaction worth only $8.

But if the bill is evenly shared among, say, 10 diners (yourself and nine others), then if you order the lamb, your share of the higher bill will be only $1. That’s $10 split evenly 10 ways. You’ll order the lamb.

You might think that this sharing arrangement is good. After all, in this example, the cost to you of getting something you valued more (the lamb rather than the pork chop) was reduced. It became sensible for you to order the lamb.

Look more deeply, though. What happened is that society (here, the 10 diners) was led to supply something that wasn’t worth its cost. The lamb was worth to you only an additional $8, but to make it available to you, society spent $10. Ten dollars were used to raise the welfare of society by only $8. (You’re a member of society, so any improvement in your welfare counts as an improvement in the welfare of society.) That’s a waste of $2.

You are better off, but the group is worse off.

Now look even more deeply. Everyone at the table faces the same incentives that you face. You’re not the only person who will order excessively costly dishes and drinks. Everyone will. The entire table over-consumes. The total bill is higher — even your share is higher — than it would have been had the bill not been split evenly. Resources are wasted.

Such sharing of our medical-care bill takes place now on a massive scale. It is impossible to see how expanding this sharing will reduce the bill.

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Published in: on May 7, 2009 at 6:37 pm  Leave a Comment  
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