Learning to Optimize

Article excerpt

Alistair McGuire and Victoria Serra correctly argue in "The Cost of Care: Is There an Optimal Level of Expenditure?" (Spring 2005) that taking an economic perspective helps us to consider whether a country's health spending is optimal and efficient. But it is important to focus on the microeconomics of consumer decisions in health to understand why efficiency is elusive.

Consider the United States. The conventional view is that the United States spends too much money for the health benefits received. Yet economic work by Harvard University's David Cutler and others, which compares the economic value of extended and improved life expectancies with investments in medical care, suggests that for many treatments and procedures--such as heart surgery and many drug therapies--the return is generally far higher than for most other economic investments. But there are large variations in efficiency. Evidence from Medicare (the US government's health care program for the elderly) suggests that levels of spending beyond a certain point may actually have negative health outcomes. Moreover, for US citizens with good access to services, wide differences in spending and service costs within the United States are not closely related to differences in outcomes.

Certain aspects of the US health system's consumer incentives may help to explain this puzzle. For typical working families, services are provided through group health insurance as tax-free compensation sponsored by employers. Most employees are not aware of the true cost of this insurance, which is rarely identified as an explicit trade-off for cash compensation. Therefore, they tend to choose higher levels of health spending than they would if the full cost were clear. Consequently, there is a structural economic inefficiency associated with the health choices made by these working families; this leads to a strong tendency to over-consume because the cost in foregone future cash income is not evident, and there is a reduced consumer incentive to seek value for money. …