Have you ever heard the claim that U.S. medical care is in trouble because we subsidize third-party insurance through the tax system?
...If the argument is that tax deductibility leads to too much health care, I can see the logic. But then the problem is in the pretzels and beer markets; health care should be doing fine, albeit in bloated form.
Another way to pose Cowen's question is to say that the tax subsidies and third-party payments reduce the consumer's incentive to be cost conscious. However, they do not affect the supplier's incentive to produce as efficiently as possible.
I think that the inefficiency of the health care system comes from the fact that compensation is for procedures rather than for outcomes. For example, the cheapest way to treat an illness is often for the doctor to prescribe an antibiotic over the phone. However, because office visits are what drive physician compensation, you have to come into the office and be seen in order to get your prescription.
For Discussion. The economic theory of compensation schemes is that employers will pay for what is least costly to monitor. When a worker's output is hard to measure, the employer will pay for hours worked. When output is easier to measure, the employer is more likely to pay for results. Does this theory explain the way compensation takes place in medicine?