Question

Why are the demand and supply for healthcare different from other economic goods?

Answer 1

Answer

Healthcare is different from every other commodity in at least 5 ways.

1 — Patients Can’t Make Normal Consumer Choices

·         Shapiro writes, “to make a commodity cheaper and better, two elements are necessary: profit incentive and freedom of labor.”

·         When patients are able to walk away, the result is often more inefficiency, not less. For example, treating cancer is much cheaper if caught early. Patients who decline cancer screenings because they don’t like the price will return if the disease manifests. At that point, they’re like the person suffering a heart attack, willing to spend whatever it takes.

·         Healthcare is the only commodity in which many consumer decisions are made under the condition of “holy shit, holy shit, I’m going to die.”

2 — Patients Don’t Know What They’re Doing

·         Further complicating matters, the majority of healthcare consumers lack the knowledge to make informed decisions.

·         That leaves out an important difference: most people have no idea if they need an X-ray.

·         Engineers may do a better job assessing the chair’s design. Decorators may be better at picking one that matches the room. But every consumer has enough knowledge to make an informed decision. And the consequences of buying a crappy chair are minimal.

·         By contrast, medicine is a complex field requiring years of study. Consumers don’t know what they’re doing, and the consequences of poor decisions can be immense.

3 — Doctors Aren’t Just Businessmen

·         Shapiro focuses on profit motive, which is an important factor. But he fails to consider that people who choose the medical profession might care about something other than money.

·         Most doctors believe it’s unethical to turn away people suffering from treatable trauma. If someone without insurance shows up in an emergency room, they won’t just let him die.

·         Enshrining this principle of medical ethics into law, Ronald Reagan signed the Emergency Medical Treatment and Active Labor Act, requiring hospitals to treat emergency patients regardless of ability to pay.

·         But providing healthcare can be expensive. Even if doctors and nurses offer their services as charity, equipment and medications still cost money.

4 — People Don’t Buy Healthcare, They Buy Health Insurance

·         Healthcare needs a third party to ration resources. It’s a commodity, so resources are limited, but unlike almost every other commodity, normal supply and demand interactions do a poor job distributing it.

·         Enter health insurance.

·         Because customers cannot know their future health costs, insurance spreads risk, much as it does for other uncertainties like car accidents and floods.

·         However, just as healthcare is different from other commodities, health coverage is different from other insurance. The maximum payout to health insurance customers is ambiguous.

·         Contrast this with home insurance. The maximum payout is the combined value of the home and the property inside. But with health, customers could acquire a condition that requires expensive care for decades.

5 — The Public Doesn’t Like Healthcare Market Outcomes

·         Healthcare may be different from other commodities, but it’s still a commodity. If left alone, the market would find an equilibrium.

·         The problem is, most people don’t like the results. The natural equilibrium leaves many poorer, older, sicker people without health insurance.

·         To Shapiro’s credit, he acknowledges that free market healthcare would produce these shortages. But he defends this on the grounds that more government-oriented systems violate individual liberty and generate over-demand.

·         That’s a logically sound preference. A free market system would not force providers to cover uninsured emergency room patients as Reagan did. It would not make employer-provided insurance tax deductible, and therefore would confront patients with the costs of their healthcare, leading them to consume less.

·         But majorities do not share that preference. In the trade-off between individual economic freedom and expanded health coverage, most Americans lean towards the latter.