Wednesday, April 27, 2011

Spending More and Getting Less the Free Market Way

Noumenon linked me to this Washington Post column about Switzerland's health care costs.

I think the author's analysis misses the boat because he's comparing two different measures. Healthcare costs are incurred on an individual basis, but the "outcomes" are measured entirely in the aggregate. I theorize that people tend to purchase as much lifespan as they can afford and, like everything, this investment in lifespan is subject to diminishing returns.

Thus in a pure free market system, rich people would spend vast sums on healthcare to provide a minimal increase in lifespan--it is, after all, easier to increase lifespan from 60 to 62 than it is to increase it from 90 to 92. If you move to a more socialized system, the rich would receive only a fraction of the lifespan they would have otherwise purchased, but this is more than offset in the aggregate by the increased lifespan of those who would otherwise be unable to afford it.

Thus the high cost, low outcome healthcare market can be explained as a result of people pursuing their self-interest. Though market failures, information disparities, and incentive structures do play a role, so long as you give people the freedom to purchase healthcare, the law of diminishing returns will lower your bang for the buck.

4 Comments:

Blogger Noumenon said...

Does your logic imply that having the government shoulder most of the cost for automobile purchases would lead to better transportation outcomes, since the rich would squander less money trying to get from 0 to 60 in only four seconds? That seems problematic.

3:10 AM  
Blogger Octavo Dia said...

Does your logic imply that having the government shoulder most of the cost for automobile purchases would lead to better transportation outcomes, since the rich would squander less money trying to get from 0 to 60 in only four seconds? That seems problematic.

I don't think it's problematic at all. Taking a $300,000 car of the road and purchasing 10 $30,000 cars for people driving 15 year old beaters would definitely increase driver safety, comfort, fuel efficiency, and reduce pollution.

9:25 PM  
Blogger Yoel Natan said...

If one didn't let the rich drive around $30,000+ SUVs and cars and such, driver insurance rates would definitely go down. It used to be that all the kids could drive under the parents insurance plan, but now many insurance companies say the teens must have separate insurance. Before if they totaled their car or someone else's car, it would only cost a few thousand for replacement value, but now replacement value on many vehicles on the road would buy a lower income house in many states.

10:11 PM  
Blogger Yoel Natan said...

Octavo Dia, One thing that is left out of the debates on healthcare, and what you don't mention either, is that the rich squandering a lot on their own personal healthcare raises prices for everyone else. Libertarians, many rich, and others would argue that they should be able to do whatever they want since it doesn't affect anyone else, but no man is an island, unfortunately. The phenomenon is similar to gold rush towns where suddenly the price of a pick-axe is ten times higher than elsewhere, and it doesn't matter if you were farming there for a hundred years previously, you still have to pay the same rate as the miners. It has been noted that wherever unions have gold-plated healthcare plans, suddenly the price of healthcare is 30% higher than in the rest of the country because all the doctors want to cash in on those plans, and they can't charge the union workers and their dependents extra. No, in fact it's the reverse. They have to charge everyone else MORE (i.e., list price) so they can appear to give the union plans a discount. Same thing goes with all the HMO plans, and even with Medicare and Medicaid. So healthcare USED to be affordable for the masses, but now it seems everyone has to be on some sort of plan because having only a fraction of the masses on a plan makes medical care unaffordable for many who are in the fraction that's not on a plan.

Noumenon, I'm sure the fuel efficiency mandates affect the rich when they try to buy sporty cars. In fact, some are turning to plug-in cars since they give more of a response to the "gas" pedal, since there are four electric motors, one on each wheel, and they can deliver more power than a gas engine and drive train can, especially since the motors now use rare-earth magnets, making them more powerful while reducing the size and weight.

Healthcare and automotive data is hard to interpret and compare because the govt does put a lot of unfunded safety and fuel efficiency mandates on automobile makers, and the govt spends a lot on healthcare already, so more is at work than just market forces. Air bags and even seat belts were resisted by the auto industry, so for a long time only "optional" seat belts were offered. So just as unfunded mandates have improved safety a lot, the govt mandating or even paying for cushioned floorboards (or floor airbags) would cut down on lower leg trauma in car crashes:

Air bags linked to increase in ankle, foot injuries
http://www.reuters.com/article/2007/03/15/us-feet-idUSL1465443720070315

10:13 PM  

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