In the first installment of my attempt to analyze how healthcare systems function I took at look at ways in which healthcare providers are compensated. I thought I’d continue in my efforts by posting about healthcare resources are allocated.
In the national discussion about healthcare reform I’ve begun to hear a lot about rationing. For example:
It is what many people say they fear most from an overhaul of the health care system — the prospect of the federal government’s limiting the medical care they can receive.
Even some people who now have private health insurance through their employers have expressed this concern in opinion polls and public forums. They say they worry that the enormous price tag for providing care to tens of millions of additional Americans will eventually force everyone else to make do with less.
Is that a realistic fear?
Policy experts say people are rightly concerned about the nation’s health care costs. But they also say there is nothing in the current proposals in Washington to suggest that the country is likely to embark on a system of medical rationing anytime soon.
Despite the author’s attempt to assuage concern by pooh-poohing the idea of rationing, rationing or resource allocation goes on all of the time whether by government, insurance companies, or by the relative preferences of individual healthcare producers and consumers. As long as wants are infinite and supplies are limited there are must be some mechanism for allocating the resource.
There are only three methods of allocating resources: fiat, the political process, and markets.
In a fiat (or command) economy resources are allocated according to the will of the all-powerful autocrat. It makes no difference whatever what the actual needs are or whether the allocation of resources according to that particular formula makes anybody but the autocrat happy. The autocrat might be a king, a monopoly, a technocrat, or a commisar. It makes no difference. It’s still a command system.
In most developed countries the political process allocates healthcare resources. Most European countries have a broad political consensus that supports allocating healthcare resources according to some formula arrived at through a combination of the healthcare technocrats, politicians, and private companies but it’s fundamentally a political process. There can be no mistaking that when you hear MP’s raising questions about the availability or quality of healthcare in their districts at question time, as frequently occurs.
The third method for allocating healthcare resources is via the market. One of the great contributions of classical economics is the description of the process of the market as a method for maximizing happiness or welfare, as it’s usually called by economists. I have eggs; you want eggs. We agree on a price and both of us are happier as a result of the transaction.
Critics of a market system point to the asymmetric nature of transactions. I, a poor man, am starving. You, a rich man, have food. You’ll exploit me by charging a ruinous price, knowing I have no choice but to pay it. This is a fallacy on any number of grounds.
First, it presumes that there is a true price. There isn’t. The price doesn’t determine the transaction, the transaction determines the price.
Second, it’s a red herring, irrelevant. Both parties in the transaction are still happier than they would have been had they not entered into the transaction. Pointing to exploitation is suggesting some hypothetical and unknowable level of happiness that might have been achieved under some unprovable conditions.
The market maximizes welfare.
We do not have a market system. Our system, like those of most other developed countries is a hybrid. Indeed, it’s a command system and a system based on the political process and a system based on the market. The mix may be a little different here than elsewhere but we have a hybrid system nonetheless. You see the fiat system, for example, in the workings of the court in a malpractice suit. The outcome of a malpractice suit is an allocation of healthcare resources by fiat. There are dozens of other examples including the operations of local or national monopolies in insurance, hospitals, medical equipment, pharmaceuticals, and so on.
If you do not recognize that the political process is a powerful allocator of healthcare resources you simply have not been paying attention. Medicare, Medicaid, the Veteran’s Administration, and a horde of other institutions, large and small, are all examples of allocating healthcare resources through the political process.
We also have a market in healthcare. In my view it’s relatively small and most obvious in the areas where the system is least regulated, e.g. food supplements.
There are two very important things to recognize. There is no system of allocation by need. Anywhere. Some systems may claim to be an allocation by need but it’s a lie. They are allocations according to fiat, politics, or the market. There’s no other alternative.
The second thing is that in any system other than a pure market system there will be a deadweight loss. That’s the difference in production and, consequently, welfare that results from allocating more or fewer resources than the market would have arrived at. Fiat systems, in particular, are notorioius for producing shortages at some times, surpluses at others. That is deadweight loss.