Is Health Care Really Different than Groceries?

by Don Boudreaux on November 20, 2005

in Health

Calls for government-supplied ‘universal’ health-care seem to be louder and more freuquent.  Many of those who demand collectivized provision of health care are fond of pointing out that most other industrialized nations have collectivized their health care far more to date than has the U.S., implying that Americans are barbaric for not doing so.  (See, for example, this letter in today’s Boston Globe.)

Oceans of virtual (and real) ink have been spilt on this issue.  But one consideration for me looms above all others, at least as far as the economics of the matter go.  This point is the one that Russ Roberts made in a Wall Street Journal essay, now available here, several years ago — namely, if at a restaurant Joe pays for a large share of Sam’s dinner and if Sam simultaneously pays for a large share of Joe’s dinner, then both Joe and Sam have incentives to order more and more-expensive dishes and drinks than they each would order if each were responsible for paying principally, and only, for that which he orders.  One result is that the prices of restaurant meals increase.

Here’s one way I think of the matter.  Suppose we had taxpayer provision of ‘universal’ grocery needs.  That is, we are all taxed to stock supermarket shelves, and in return for these higher taxes that we pay, each of us is accorded by government the ‘right’ to take from each supermarket whatever grocery items we ‘need.’

Isn’t it obvious that each of us, having to pay no marginal cost of whatever grocery items we take from supermarkets, will take more than we need — or, at least, try to take more than we need?  Isn’t it obvious that, having to pay no marginal cost of whatever grocery items we take, we will consume wastefully?  Isn’t it obvious that the prices of grocery items (and the actual costs, including queuing, of acquiring such items) will rise to heights far higher than those that we pay now with our private system of supplying groceries?

What am I missing?  Why do so many people — including some faculty members tenured at presigious Departments of Economics — fantasize that if we collectivize medical-care provision, ordinary people will be made better off?

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{ 23 comments }

Mark Wickens November 20, 2005 at 12:23 pm

A point also well-made by Leonard Peikoff in his "Healthcare is Not a Right" piece.

http://www.capmag.com/article.asp?ID=9

I'll add that as a Canadian, I shudder to think how much worse the situation here would be without the safety valve of the US system so readily available (to those with resources).

Alan November 20, 2005 at 12:51 pm

And if we had taxpayer provision of groceries, the governments would have to try to control costs by throttling supply, with the result that we'd have to be queuing ahead for bread, etc., much as those of us who have need of certain types of medical service in Canada.

Abhi November 20, 2005 at 1:49 pm

It's just another case of creeping communism.

Does Canada have a significant opposition in its residents to the health care system?

Mark Wickens November 20, 2005 at 2:24 pm

Abhi: No, government-funded medical care is seen by most Canadians as something essential to the national identity. The "father of medicare," Tommy Douglas, was recently voted the "Greatest Canadian" in a TV series poll. This is not to say that there isn't a recognition that there are problems with the system. The problems are too obvious to deny, even for die-hard medicare supporters. But the answers that the vast majority of people look to are laughable and sad: better government management to avoid inefficiencies, more government funding, regulation of doctors' pay, laws forcing doctors to work in under-served communities, etc. In short, more of the same kind of thing (i.e., statism) that got us into this mess.

(To me this is a testament to how important people's deeper philosophies are to politics, and — forgive me, hosts — how even crystal clear and accurate economic arguments can be so maddeningly unpersuasive. People can see doctor shortages, years-long waits for essential medical services that are available on demand in the US and STILL cling protectively to the current system because they have a deep-seated idea that it's "just wrong" that medical care not be "freely available" to everyone.)

Scott November 20, 2005 at 3:46 pm

http://www.fff.org/freedom/0101b.asp

Food, Education, and Health Care
by Jacob G. Hornberger, January 2001

…Suppose, however, that during the Great Depression, the U.S. Department of Food had been established to protect the American people against starvation and the vicissitudes of the market. Suppose that from the 1930s on, all grocery stores in the United States were government-owned and that no one had been permitted to own a private grocery store. There would, of course, be less variety and fewer choices with respect to groceries, but everyone would undoubtedly feel a sense of comfort and security over the fact that the government was in charge of the “public grocery stores.”

Now suppose I came along and said, “I believe we ought to separate food and the state. Let’s fire all the government food workers, sell off the state grocery stores, and turn the entire process over to the free market.”

What would be the reaction of most people? “We can’t do that. Food is too important an item to be left to the free market. How could we be sure that there would be enough food for everyone? What if one city didn’t receive any food and another received all of it? What if grocery stores forgot to order food one day? For that matter, what if no one opened grocery stores in our community? What about the poor? How would they eat, especially when the rich would be buying everything? You place too much faith in the free market. This program favors the rich. The burden of buying groceries falls most heavily on the poor.”…

dearieme November 20, 2005 at 5:34 pm

When the British National Health Service was introduced in 1947, there were apparently serious arguments advanced that its cost would fall once a backlog of ill health had been cleared up. In fact, its cost in real terms has increased every year since then, except for one year in the late 70s when the then Labour government had got us into unusually terrible economic trouble. Whatever you do, DO NOT copy our health service.

Ami Ganguli November 20, 2005 at 11:04 pm

While your analogy is interesting, it fails the empirical test: if it represented a good model of public healthcare then one would expect Canadians to spend more on health care than Americans. In fact Canadians (and everybody else) spend much less while getting roughly the same or better service overall.

I think the flaw in your analogy is that people enjoy consuming food, while there are very few who enjoy going to the doctor. Also, health care has the unusual property that it costs the system less if we go frequently (ie. for regular checkups or when a chronic condition is not yet serious). If the public system encourages this sort of consumption then we might actually save money overall.

Rather than present a simplistic analogy, it would be better to address the actual arguments on market failure presented by Krugman and others. Perhaps you can find a more libertarian way to address these issues than have the rest of us.

Russell Nelson November 21, 2005 at 2:27 am

MOGW (Men of Good Will) point out that people generally enjoy more food, but only a sick person enjoys getting more health care.

MOGW pay no attention to the fact that zero marginal cost doesn't reward frugality.

adjustedRsquared November 21, 2005 at 3:15 am

dearieme has a point. I would have completely agreed with the grocery store analogy, until I read Malcom Gladwell's convincing essay on moral hazard and health care. I've returned to being agnostic on this issue. There isn't enough empirical evidence for either way.

link to gladwell article: (http://www.gladwell.com/2005/2005_08_29_a_hazard.html)

Mark November 21, 2005 at 4:57 am

The grocery analogy is a very good one.

The same post-war labour government in Britain that introduced the NHS also believed that other basic needs should be met by the state. This included food and housing (the food part never took off but government was the landlord for many Britons until the 1980s).

I agree with Scott that if food was currently provided by the state the two would seem impossible to separate. I was taught in school that rationing actually improved the diet of the poor because it brought food under state control and that's fifty years after the state relinquished control over food.

Ami Ganquili's comment is unfortunately inaccurate. Demand for NHS services did rise once they became free at the point of delivery. People now use doctors for less serious complaints than they did when the service cost money (such as calling the doctor at night for an upset stomach etc…). The comment about it costing the system less if we go more frequently is the same argument that dearieme cited ("clearing the backlog of ill health") and showed to be false.

In fact free healthcare can cause people to take less care of their bodies. Good health is a utility. So is drinking, smoking and not exercising. If there is a financial incentive to keep healthy (i.e. lower insurance costs) then more people will. Unfortunately this price signal has been undermined by the American habit of relying on insurers for healthcare.

I think the real reason Americans pay more for healthcare is the lack of price controls on drugs. If the US imposed price controls then Americans would get cheaper healthcare and the negative impact (i.e. fewer drugs developed) would be shared by all of us).

Stephen W. Stanton November 21, 2005 at 8:27 am

I used that exact analogy to explain the folly of universal healthcare. I explained how "grocery insurance" could only work if it covered catastrophic grocery coverage. (e.g., over a thousand dollars in a month). This way, adjusters could review each claim (because there would be so few). But with near-100% coverage of every dollar in cost/price, then we get beluga caviar for everyday lunch and CAT scans for sniffles.

Randy November 21, 2005 at 9:31 am

Universal health care will eventually result in a two tier system; top quality health care for those who can afford it, and basic services and long waits for those of lesser means. So why not skip the deterioration process and simply create the basic system now? A network of government run free clinics, funded with taxpayer dollars. This would not eliminate the chorus from those who believe everyone should have top quality care for free, but it would provide a necessary service – and costs could be kept within budget.

Noah Yetter November 21, 2005 at 12:25 pm

The "Canada spends less so clearly communist medicine isn't more expensive" argument is a complete non-sequitur. Canada has price controls, which only "work" because prices are not controlled where the drugs are invented (ie: the USA). They have non-price rationing which limits the amount of care people can receive.

The fact that health care spending as a proportion of GDP is lower in Canada than in the US has no relevance to this argument. We could have the lowest ratio in the world by banning doctors and drugs, but would that be better?

Dash Brannigan November 21, 2005 at 4:06 pm

Perhaps another way to look at role health care is to prevent asset failure in human capital. We can’t well invest a whole swag of cash in educating someone for 12 years of their life only to have the poor sod snuff it before his turn at the business end of the lash is done. Why wouldn’t the state make an investment and make an effort to protect that asset?

Just a thought.

Keith November 21, 2005 at 10:41 pm

Dash makes a nationalist case, as if people are assets owned by the national government and must therefore be maintained by it. I respectfully disagree.

It really is amazing that people still believe governments can effectively administer and allocate the hundreds of products and services in the various health sectors. These items are sophisticated, precise, and carry different levels of risk to produce.

There are no shortcuts. The same dynamics that apply to groceries, blue jeans, and automobiles also apply to medicine. There are no national debates about these and products.

Problems with health care exist because of government interference.

The current market is distorted by a mix of federal and state restrictions and mandates, such as employer-subsidized health insurance.

Darius Winford November 22, 2005 at 2:32 am

As soon as we as a society, decide to lock people who are sick and with no, or limited insurance, from emergency rooms — you're free market fantasy will work. Until then, it's not clear how economic it is to set up situations in which medically unsophiscated people make tradeoff decisions between healthcare and other goods and services. In these case, people generally ignore health issues until they become unignorable. And then, there's a big bill for the healthcare system as whole — unless, as stated above, we're willing to lock them out.

It's also clear that people with poor genes or health habits are (reasonably predictably) subsidized by those with better genes or health habits. So, for all those concerned with socialist subsidization, by all means lets rationally stick each person into more and more narrowly defined "risk pools." You'll find it amazing, how young people with good health who resent paying premiums that subsidize the old and the poor, change their tunes when they inevitably wear out and get sick. Everyone ultimately deals with entropy.

I'm not claiming to have a good solution. As a physician, I'm not thrilled on the progressive restriction of my autonomy — but to think that this market looks like other one's is pretty naive.

What other market has such inelastic demand? Virtually everyone has a inelastic demand for life. Perhaps if you could convince people that they will be responsible for their medical bills after death — and burn in hell to compensate for the costs they incur — you might change that curve — and everything would work out in some kind of efficient well-functioning market model in which so many people today cleave to in quasi-religious belieft.

N.B., I don't have a good solution either. But I'd like to hear from the "culture of life" crowd thinks about these issues.

Keith November 22, 2005 at 10:55 am

Darius brings up the uncertainties of how people will behave when faced with some types of decisions, and also the difference between health and other products. It’s a tough situation.

We are currently living and experimenting with a mix of employer-based insurance, and gov't mandates and provision. Other countries have tried various gov’t managed schemes. It’s a distorted or non-existent market process. There are holes, and the current situation can be improved. It’s too complex for a single, top-down solution.

This is where the market's discovery process can help. Because of the uncertainties, all the players (gov't, doctors, other service providers, patients, manufacturers, etc) must try different combinations.

JohnDewey November 22, 2005 at 1:14 pm

Mark suggested:
"I think the real reason Americans pay more for healthcare is the lack of price controls on drugs."

My wife, a health care professional, believes it is U.S. lawyers that drive up the cost of healthcare. It's not just the outrageous cost of malpractice insurance. She believes many physicians order more medical tests than 30 years ago because they are truly afraid not to do so.

I disagree that Canadians receive the same level of healthcare service. From all that I've read, Canadians must suffer for months awaiting even routine surgeries. I've also read that many Canadians are crossing the border and paying for that so-called "same level of service".

Billy Beck November 22, 2005 at 6:52 pm

Leonard Peikoff made this analogy over twenty years ago.

See "Medicine: The Death of a Profession" in Ayn Rand's "Voice of Reason" anthology.

dan November 22, 2005 at 6:52 pm

Does anyone have a link to waiting times for standard surgical procedures? I know that they are considerably longer in Canada and the UK as opposed to the US.

Of course, then I'd like to see a list of cost saving procedures (check ups, prenatal and maternal health interventions, disease screenings) that are NEVER utilized by the 40 million uninsured until they reach an emergency room.

Don draws an interesting prisoner's dilemma above, but it fails the smell test:
1) In the countries that offer "free groceries" the prices are not higher than here in the US
2) As a nation, we will NEVER bar the uninsured from emergency rooms
3) We already heavily subsidize "private" healthcare through employee tax deductions and spend a large fortune on medicare/medicaid

Given all of the above, the only questions on my mind are HOW and WHEN to implement some sort of NHI. Perhaps Don and crew would make better use of their time if they focused on how to align incentives with performance via appropriate co-pays, deductibles, systems with hospitals/doctors, and administration…

dagny November 23, 2005 at 1:53 pm

The big problem is that the dinner analogy works just about as well for the current system, which is that everyone expects their employer to provide insurance, which means that some inbred hypochondriac moron is essentially getting twice my salary for the same job. Which is not to say that state health care would be a GOOD idea, just that there are serious problems now.

Phil November 27, 2005 at 11:33 pm

The most that set off these comments made a good point, but what about the fact that the two people sitting in the restaurant already have to pay for others who show up to the restaurant starving and need food right away? I guess the argument is that emergnecy care costs much more than preventitive care. Also, those without insurance are charged much more for the same services, I never understood why this wasn't illegal price discrimination. I don't want universal Health Care tomorrow, but it seems that there must be a better way, and by that I mean someway to decrese admin. costs and still be able to treat the poor.

AntiLabel November 30, 2005 at 10:44 am

What you are missing is that, in publicly provided services, the public decides what is provided (not the consumer). That will likely not be unlimited.

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