Measuring health care costs and benefits

The U.S. spends more than any other country on health care, over 14 percent of gdp.  A crude economist would take the "gdp" of the health sector as a measure of its economic value.  Of course this isn’t quite right, since spending money does not automatically increase health or customer satisfaction.  Advocates of European health care systems are keen to point this out.

In other words, "p x q" doesn’t measure the benefits of the U.S. system.  But critics are quick to insist that "p x q" measures the costs of the U.S. system.  That is a disconnect.  The real costs are what could have been produced with those same resources, or opportunity costs. 

Let’s say a patient pays $1000 to a doctor, but half of that sum is fraudulent pricing brought on by patient irrationality, non-transparency, fear of death, and fraud.  Sound familiar?  The real social cost is what the doctor could have produced, had he not been looking after that patient.  The real social cost is $500, not $1000.

How does this sound as a debating point: "America doesn’t have better health care outcomes than Europe, and in real terms we are spending about seven percent of gdp —  adjusting for relevant corrections– on health care"?  Not so fierce. 

Of course one might dispute the 1:2 ratio mentioned above.

But in general, the more American medical care is overpriced in current markets, the more current expenditures overmeasure social costs.

The more you think that government can bargain down prices without wrecking supply, the more you should think that current expenditures overmeasure social costs.

Recall that economists do not find efficiency loss in higher prices per se.  Higher prices are bad as a sign of restricted output.  But the American medical system has high prices and relatively high outputs, for reasons partially explained by Maggie Mahar.  So don’t measure cost by the high prices, look for output restrictions, either for health care or elsewhere.

Two caveats: We still must consider secondary economic costs; for instance it is harder to switch jobs for health insurance reasons.  Second, medical care is a sector where distribution and efficiency are not totally separate. 

But the general point remains: many of the arguments for greater government involvement imply that the true cost of the American medical system is less than the current numbers imply.


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