Health Care a Public or Private Good?
Keith Schenone
December 09, 2012
Economics & Institutions
MGMT 7730-SIK
Thesis
Health care should be treated as a public good because it is not an ordinary commodity
that works efficiently in a free market.
Abstract
The US is one of the few highly developed countries that do not have a true public
health care system. While the US spends more on health care capita than any other
country, its average life expectancy and other health measures are in the middle of the
pack. In comparison countries considered the healthiest all treat health care as a public
good and all spend less than the US. Looking at health care as a commodity it is not
evenly distributed with a small percentage of the population consuming a larger
percentage of the costs. When someone is sick they are not necessarily worried about
price, the price they are willing to pay may become near limitless because the alternate
could be death. Health care in terms of supply and demand does not fit efficiently into a
fee market and externalities provided by healthy citizens indicate that health care should
indeed be treated as a public good.
Analysis
The US health care system in terms of efficiency does not seem to match up to other
developed (OECD) countries around the world. The average health care spending per
capita in the US spends is over $8,000. This is greater 50% more than the next biggest
spender, Norway. i The US system (Pre “Obamacare”) is based on a free market
system. This is in contrast to most of the developed world that uses some form of
public health care. If it were true that health care should be a private good, then a free
market such as in the US should efficiently set prices and demand. But simply looking
at the average amount spent per capita and then comparing health measures, such as
life expectancy, we see that the US doesn’t measure up. As shown in the chart below
the US spends more with lower life expectancy than the typical OECD country.
Life Expectancy
OECD Countries Health Care spending vs. Life Expectancy
84
83
82
81
80
79
78
77
76
75
74
73
USA
0
2000
4000
6000
8000
Total Health Care Expeditures per Capita
10000
Source OECD.org
There are many other statistics that can be shown that further highlight this inefficiency
such as US hospital beds per 100,000 (3.0), and number of doctor consultations per
capita (3.9).Error! Bookmark not defined.i Each are well below the OECD averages. So if the
US is using less health care services than why are they paying higher costs. The
reason is related to price. US consumers pay more for a given service, and the average
price paid for hospital services is 85% higher than the average OECD country. Along
with services administration fees are also higher in the US. ii Just about all costs in the
US are higher than in OECD countries, as shown in the chart below. This further
emphasizes the lack of efficiency and the need for intervention to better regulate the
industry to contain costs and more evenly distribute care.
Externalities are also associated with health care, which reinforce the idea of health
care as a public good. Externalities are typically, but not always, associated with public
goods. They provide benefits (or costs) to others even though they may not be directly
involved. Having public health care would lead to more preventative care as more
individuals have access to care. If more preventative measures are taken perhaps
future health issues of an individual can be avoided. (Not an externality, but a time
discounting problem for a single person.) This leads to a healthier society as whole and
would drive down overall costs, improving efficiency in the system. Being healthy also
means you are a productive citizen. If you as an individual or a company are burdened
with less health care costs, because of improved efficiency than you may contribute
more money to other areas of the economy helping spur growth. (Yes, externality
because others are involved in the benefits.) Having healthy citizens limits disease and
sickness and provides a benefit for all people in a society
In terms of economics, a public good is a good in which the quantity available is not
defined by a free market. The amount consumed by consumers is generally the same,
but the price paid for that good by a given consumer may vary. With a private good in a
free market the price and amount available is determined by the willingness of the
consumer to consume. The price is then constant for all consumers but the amount
each consumer uses may vary. If we look at health care I would argue, in general
terms, that the health care demand of a general population is constant. That is, in
general all people require the same amount of health care. Of course this is not true in
absolute terms as illness and disease may require some individuals to consume more,
but as whole I feel this is true. This is much like police protection, which is considered a
public good. If an individual is robbed they may consume more police protection, but in
general society as whole consumes equally. (Good analogy; both are like an insurance
policy.) One way to look at health care as a public good is to think about in terms of a
demand curve. I would argue that the amount of health care or the demand for health
care should be based on population as all people require health care in some form. The
more people the more doctors and health facilities are needed. If you make this
assumption then the total demand for health care in a given population would be
constant. The price an individual is willing or able to pay may vary, but the overall
consumption would remain the same. This would mean your demand curve is summed
up vertically, as the overall demand would not change as everyone essentially
consumes the same amount of health care. This is opposed to a private good where
the total demand is equal to the sum of the individual demands, as consumers consume
different quantities. This contrast can be seen by looking at two individuals who would
like to purchase a car. If one can pay $20K for the car and second individual can pay
$30K, and the price of the car is set at $30K, then the demand would only be one. In
comparison if the same good were health care and both individuals had a life
threatening sickness then price would be irrelevant and the demand would be two.
With health care an individual who is sick may be willing to pay an extraordinary amount
for care without changing overall demand. So on the demand curve the price would go
up vertically. (good explanation)
Another reason health care doesn’t fit efficiently into a free market is because it
incentivizes the need for more health care or higher prices. In terms of profit, health
care facilities make more money the higher the consumption or the higher the price. If
the consumption can be inflated above what the true demand is than they would make
even more money. To examine this we can create a simple game where we have a
sick patient who can decide to be treated or not, and then the hospital who can decide
to treat the patient and send them home or to treat the patient and order additional
tests. The treat and additional test scenario would represent the case where the
consumption is being inflated to increase hospital revenue. The game below shows that
the hospital has the upper hand. The Nash equilibrium is in the top right where the
patient gets treated and the hospital inflates the consumption.
Hospital
Treat and Send
Home
Treat and order
additional testing
Patient
10
20
Get Treated
20
10
0
0
Don’t Get Treated
-30
-30
10
Treat and send
home
20
Hospital Decides
Get treated
Patient Decides
20
Perform additional
testing and treat.
10
Don’t get treated
0
-30
With typical commodities this scenario is prevented by supply and demand as a
consumer would decide not to purchase a good or purchase from a competitor. The
free market would determine price. But with health care, because it is essential for life
itself, the consumer has limited choice, not getting treated is not an option and shopping
around would be limited and is not a likely scenario, especially in the case of an
emergency. Now if health care were a public good, the hospital would not have
incentives to “over treat” or inflate consumption. There revenue as a public good would
be regulated. As a comparative example we can look at police protection. If this were
a private industry there would be incentives for these businesses to encourage crime as
it would bring in more revenue. Police instead of arresting and locking up individuals
may arrest them but then let them go. This would put more criminals back on the street
and increase demand for police protection growing revenue. But as a public good
there revenue is fixed and there is no incentive to encourage crime. This should be the
role of health care. While doctors and health care facilities may have all intentions to do
the right thing, they still rely on profits. Within a free market system revenue is
increased by growing the demand or increasing prices. If the demand is constant than it
either must be artificially inflated or prices must increase.
While these arguments suggest that indeed health care should be considered a public
good, there are also numerous counterarguments that can made. One argument, in
support of the US (private) system is that we already spend massive amounts of public
money on health care and only cover a portion of the population. The US is near the
top of the OECD list of public health care spending near $4,000 per capita.i And with
all this money spent only $91 91million people are receiving some form of insurance
coverage or 31% of the population.iii The argument could made that switching to public
health care would actually raise costs and decrease efficiencies. If we do some simple
math and extrapolate out coverage to include 100% of the US population than average
spending would go up to over $12,000 per capita. This is well above what we currently
spend and would indicate that public system does not improve efficiencies. To this
point however I would argue that because the US system is not a true public health care
provider they are not able to put in place the regulations and administrative system that
would be needed to bring costs down. I do not think the math is as simple as
multiplying out the current public expenditures to cover everyone.
Norway
Netherlands ²
Luxembourg
United States
Denmark
Switzerland
Austria
Germany
Canada
France
Sweden
Belgium ¹
United Kingdom
Iceland
Ireland
New Zealand
Australia
Japan
Finland
OECD AVERAGE
Italy
Spain
Portugal
Slovenia
Greece
Czech Republic
Slovak Republic
Israel
Korea
Hungary
Estonia
Poland
Turkey
Chile
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
Average public health expenditures per capita of
OECD Countries
Source: OECD.org
Another argument against public health care is in regards to the quality and the amount
of care provided. The point here is that while we may spend more in the US we receive
higher quality care and we don’t have long waits to receive such care. The free market
system insures there is sufficient supply to meet demand. In a public system the supply
may be limited and pre set by the government. Looking at Canada, it is estimated that
over 46,000 Canadians migrated to the US for health care in 2011 and specialist
physicians in Canada reported average wait times of 19 weeks.iv In the US fewer than
20% of insured patients wait more than 4 weeks for an appointment with a specialist.
And the US has better Cancer outcomes than most OECD countries.ii These statistics
indicate that there may be supply challenges with public system. It shows that
Canadians may not be getting sufficient coverage to meet there demands and perhaps
the quality of coverage is not as good as in the US. But to this point I argue that if the
supply was truly lacking in these countries then the health measures, such as life
expectancy would be less than that of the US. But as discussed this is not the case.
The US system, where we have less waiting time, still under performs in terms of health
measures to these public systems.
There is also the worry, that treating health care as a public good will result in abuses,
or over consumption. That is, if a consumer does not have to pay (directly) for health
care than they will overuse the commodity. This could result in negative effects such as
longer wait times and lack of available care for those who truly need it.
Overconsumption will be a concern with any public good and in comparing other public
health care systems there is typically still a market for private insurance to those who
desire to pay for it. Health care is not a pure public good, but here again I think the
positive outweighs the negative. A healthier society is more desired than having over
consumption of health services.
Conclusion
Health care is going continue to be a debated topic with arguments for and against
moving toward a public system. In economic terms I think the evidence supports
treating health care as a public good. I see health care as a commodity that provides
externalities for all in a society, and works more efficiently when treated as public good.
The evidence of this is supported in looking at other developed countries where costs
are less and in general health measures are higher. The free market system has not
worked efficiently to meet the supply and demand for health care. It has created higher
costs and insufficient coverage. Health care is not a typical private commodity and
while it may not be a pure public, it would fit more efficiently in regulated market as
opposed to the free market system.
i
OECD (2012).October 2012 update: DOWNLOAD the following sample of key indicators from OECD Health Data
2012 (in Excel),Retrieved December 08, 2012, From OECD.org :
http://www.oecd.org/health/healthpoliciesanddata/oecdhealthdata2012-frequentlyrequesteddata.htm
ii
Kane, Jason, PBS (2012).October Health Costs: How the U.S. Compares With Other Countries, Retrieved
December 08, 2012, From PBS.org : http://www.pbs.org/newshour/rundown/2012/10/health-costs-how-the-uscompares-with-other-countries.html
iii
Smith, Emily & Stark, Caitlin, CNN (2012). By the numbers: Health insurance, Retrieved December 09,
2012, From CNN.com : http://www.cnn.com/2012/06/27/politics/btn-health-care/index.html
iv
Bastasch, Michael, Daily Caller (2012). Report: Thousands fled Canada for health care in 2011,
Retrieved December 09, 2012, From Dailycaller.com: http://dailycaller.com/2012/07/11/report-thousandsfled-canada-for-health-care-in-2011/