Arnold Kling  

Grey-area Medicine and Non-monetary Costs

Backwards Induction in Oldb... Economic Impact of the Hurrica...

Another installment in my continuing attempt to fight Gladwellian nonsense and to defend the use of economics in health care policy:

Most people do not like to go to the doctor, undergo medical procedures, or stay in the hospital. Medical services are time-consuming, inconvenient, and uncomfortable to patients. An economist would call these the non-monetary costs of obtaining health care services.

It is true that non-monetary costs of health care act as a restraint on demand. Non-monetary costs would be sufficient to keep us from going berserk and rushing to get colonoscopies just because they are "on sale."

However, the fact that people face non-monetary costs does nothing to alleviate the inefficiency that arises when we are insulated from the direct monetary costs of health care services. The cost-benefit analysis that people perform is still distorted by incorrect incentives...

Suppose that the fee for a procedure is $500, and the non-monetary cost amounts to the equivalent of another $500. If the health benefits from the service are only $750, then the service is a bad deal for the patient. The fact that the health benefits exceed the fee is interesting, but it does not justify having the patient suffer through the service.

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COMMENTS (3 to date)
joebod writes:

Non-monetary costs have other potentially pervese effects on the monetary cost of health care given
the current effort to insulate consumers from health care costs.

Since health care providers can't compete with each other for customers with monetary costs. The monetary
costs most consumers with insurance see is a relatively small co-payment. However, they all experience non-monetary
costs to one degree or another especially time, and inconvenience. A health care provider may wish to compete by
combining several services under one roof. For example, a labratory and or pharmacy located on the premises. Or in
the case of hospitals offering many services under one roof instead of specializing in one or a few services. These
attempts to reduce non-economic costs are not free and the costs become monetized in the "cost" of health care. Furthermore,
the cost of reducing non-economic costs can, and probably do in some instances, exceed the reduction in non-monetary costs.

Thus the monetary costs of health care keep rising not just because people demand more because of low monetary costs, but
also because non-monetary costs the consumer sees are lower.

Robert writes:

I once convinced myself that for "reasonable" demand curves, it was approximately true that in a market where supply was controlled by a monopolist, subsidizing demand without also implementing price controls resulted in an increase in price without guaranteeing any increase in supply.

The question is, do health care markets act as though they were controlled by a monopolist?

knzn writes:

I think Gladwell’s argument rests in part on the premise that people are particularly irrational in their health care consumption decisions, and I think there is a lot of validity to that premise. For example, people may subjectively overestimate the non-monetary costs and underestimate the benefits of preventive care.

But, as a more “economistically acceptable” point, most of your “grey area” procedures seem to come under the heading of preventive care, and since the conditions being prevented are costly (for the insurer) to treat, patients fail to internalize much of the benefit as well as the cost of preventive procedures. It would be easy to construct a model in which insured patients choose to underconsume rather than overconsume.

Notwithstanding these concerns, I expect that overconsumption due to failure to internalize costs is a problem, but I doubt it’s quantitatively important compared to some of the other problems with health care costs. There’s a fundamental problem in that the demand for essential health care is ultimately infinite, limited only by income (and insurers have very high income). More or less, anything that keeps you alive is worth paying for. Financially speaking, we are lucky to have been forced to a corner solution in most cases because the required technology hasn’t been invented yet, but the more it gets invented, the more we have to pay for it. The solution to this problem, in the case of Canada and many other countries, is monopsonistic consumption, but this works in part because they can piggyback off the US. If technology continues to improve, the necessary rationing of essential care could get quite ugly, or quite expensive.

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