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Business and the cost of health care
Don Boudreaux has a superb post over at Cafe Hayek whacking the myth that health care costs put America at a competitive disadvantage or that a government takeover per se would lower said costs. Don puts comparative advantage to good use in this clip:
Even if all American producers suffer production-cost increases of 15 (or whatever) percent, some American firms will nevertheless enjoy a comparative advantage in production compared with foreign firms. The continued relevance of the principle of comparative advantage does not mean that such cost increases are inconsequential; Americans will be poorer than otherwise if American producers are burdened with the need to pay higher costs without any offsetting increase in quantity or quality of output. But the problem isn't international "competitiveness"; many American firms will continue to export. The problem is costs that are unnecessarily high -- a problem that ultimately is reflected in lower standards of living of consumers who buy from, and workers who work for, American businesses.
But read the whole thing.
Posted by Alex Tabarrok on August 26, 2006 at 02:23 AM in Economics | Permalink
Comments
On the whole I found the post to be underwhelming.
He thought others should consider “the possibility of private methods of supplying health insurance that differ from the current employment-based method now in widespread use throughout the United States.”
--I prefer market based solutions but I don’t see one for health care. Government pays for about half of the cost already, mostly thru Medicare, but also increasingly for the uninsured.. If you look at the numbers below and come up with a market biased solution that will work, I will be happy to support it.
Total spending on health care was $1.9 trillion in 2004, or $6,280 per person representing 16 percent of the gross domestic product (GDP). In 2005 the annual premium for an employer health plan covering a family of four averaged nearly $11,000 (which is about the annual salary of someone working at the minimum wage). The annual premium for single coverage averaged over $4,000. Almost 30% of households have an income of less than $25,000 per year and over half have incomes less than $50,000.
He then examined the problem “Even if all American producers suffer production-cost increases of 15%”
—The effect our current system is that high wage firm have an increase in production cost while low wage firms do not, because they generally do not provide health insurance. Let me ask, which American firms are more likely to enjoy a “comparative advantage”? He also seems to think that workers and consumers are not intersecting sets.
The question is posed but not answered how health care is different than other cost. It is dismissed “so it is different, I concede, in countless details.”
--The difference arises from the fact that the value system of western democracies is incompatible with people dieing because they are poor. This forces the government to be the insurer of last resort
He also states “nationalized health-care coverage will unleash gargantuan free-rider problems and, in their wake, ever-expanding mountains of red tape aimed at solving this unsolvable problem.
---I have not read the plan he is attacking, but I admit I am in awe of a mind that could create a system of universal health care with a free rider problem.
Finally I would like to say something about the argument that national heath care produces lower quality care. The standard measures of life expectancy or infant mortality rates indicate the opposite. The median quality of health care is at least as important as the best, because no matter how much money you have, you are likely to be treated for serious medical condition at the nearest emergency room by the doctor that happens to be on duty. From personal experience I would rate this part of the English health care better than the US.
Posted by: joan at Aug 27, 2006 3:19:37 AM
I would disagree about the outcome comparisons of national health care. I would say that the advantage of national health-care is that it produces 90% of the health outcomes for 50% of the cost. The whole raison-d'etre for national health-care is rationing. It prevents people from doubling spending for only a marginal increase in health-care outcomes.
As a Canadian, I would not try to pretend that our health outcomes match those of the USA. However, I would certainly not trade the American outcomes for the financial devestation that would follow if Canada had to finance American levels of medical expenditures.
(Note, one of the primary reasons that national health-care works is that it discourages thinking that one *can* improve outcomes by increased spending. When a doctor tells you "there's nothing that can be done for Grandpa", you can believe that you've done all you can. In an American system, there's always the truth that if you're willing to sacrifice more (your home, your children's education fund, etc.) that there might be *some* chance to save him. This decision leaves people with either a choice between a lifetime of guilt or destitution. It also means that health care expenditure are much, much higher.
However, don't believe that you can get increased health-outcomes for "free". National health-care's advantage is not better total outcomes, but avoidance of ruinous spending for diminishing returns. (And (for those who consider it an advantage) the advantage of living in a society that acknowledges on a fundamental level that wealth does not make you more worthy of life.)
Posted by: Tom West at Aug 27, 2006 9:03:51 AM
Prof. AT,
Unnecessarily high costs result in lower standards of living for consumers who buy from, and workers who work for, American businesses.
But doesn’t someone benefit from this inefficiency? After all high costs are a transfer of wealth in one form or another.
If this transfer is taking place domestically, then the government or business that cares about patriotism will have succeeded in keeping wealth from flowing out of the country.
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