Different—That’s Why Expenditures Matter

Health Care Is Different—That’s Why
Expenditures Matter
Victor R. Fuchs, PhD
have been increasing much more rapidly than
the rest of the economy over the past 30 years.
The average gap, 2.8% per annum, results in
health care’s share of the economy doubling every 26
years.1 Why does this matter? Would it matter if expenditures for personal computers were increasing 2.8% per
annum more rapidly than the rest of the economy? The
appropriate response would be, “So what?” Concern about
health care expenditures is often attributed to the large
role of these expenditures in the federal budget and the
effect on the deficit.2 But that is not the whole story. A dollar spent on health care is not a priori more fiscally toxic
than a dollar spent on transportation or education or any
other item in the government budget. Moreover, health
expenditures in the private sector have also been increasing rapidly. What matters most are the characteristics that
distinguish health care from other goods and services:
great uncertainty about an individual’s need for care, the
essential nature of some care, and the ambiguous role of
competition. These characteristics help explain the distinctive institutional features of health care and their consequences.
Uncertainty About an Individual’s Need for Care
In any year, the incidence of illness is distributed very
unevenly among the population. Many millions of individuals use no health care, while a small proportion, about
1 in 20, account for about half of total health care utilization.3 Much of an individual’s high utilization is unforeseen: the sudden myocardial infarction, the diagnosis of
cancer, the nearly fatal automobile crash, and the like.
Individual demand for most goods and services is much
more predictable. Because individuals are at risk of generating health care bills far in excess of their ability to pay
from income or savings, there is widespread demand for
health insurance. In many countries this demand is met by
publicly supplied insurance; in the United States private
insurance (subsidized by government) is still the primary
mode, but public insurance such as Medicare and Medicaid and direct public provision of services through the Veterans Health Administration, county hospitals, and other
government agencies account for almost half the total.4
Insured patients tend to “overconsume” health care relative to other goods and services.5 If there were third-party
payments for personal computers, expenditures for PCs
would surely be greater than at present. Even if consumers
did not purchase more computers, many would be
tempted to purchase top-of-the-line models. To offset
overutilization of health care, a variety of constraints are
attempted, including fixed budgets for hospitals and physicians, quantitative limits on supplies of personnel and
facilities, and alternative payment mechanisms such as
Essentiality of Care
Some health care can make the difference between life and
death or between a full functioning life and one of pain and
disability. Given the essential nature of some care, no developed country permits access to be determined solely by
individual ability to pay. Every developed country engages
in some redistribution; the poor who are ill obtain care paid
for by others. Personal computers are not viewed the same
way; if access to a computer were regarded as essential, computers would be subsidized for poor individuals. To the extent that government redistributes health care, it must increase revenues through taxes (or similar measures), which
have a negative effect on the overall economy by discouraging work, saving, and investment.6 Some redistribution
is sought through the private sector such as when insurance companies are required to charge healthy persons and
sick persons the same premiums.
The day after passage of the Patient Protection and
Affordable Care Act of 2010 (ie, “Obamacare”), Leonhardt7 noted that the most important result of this act is to
redistribute care to the poor and sick with the wealthier
and healthier bearing the cost. To accomplish redistribution equitably and prevent “free riders,” every country uses
some form of compulsory participation. Many do so
through tax-supported universal coverage; the Obama
reform does it through a combination of mandates, taxes,
income-tested subsidies, and regulation of private insurance.
Author Affiliation: National Bureau of Economic Research, Stanford, California.
Corresponding Author: Victor R. Fuchs, PhD, National Bureau of Economic Research, 30 Alta Rd, Stanford, CA 94305-8006 ([email protected]).
©2010 American Medical Association. All rights reserved. (Reprinted) JAMA, May 12, 2010—Vol 303, No. 18 1859
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The Ambiguous Role of Competition
in Health Care
Expenditures for most goods and services are not of concern for public policy, in part because they are the result of
interaction between supply and demand in competitive
markets. Given sufficient competition, theoretical and
empirical research concludes that a commodity’s price and
quantity reflect its real cost to producers and its real value
to buyers. That level of competition does not exist in many
health care markets. Furthermore, in numerous situations
it is doubtful whether society would benefit if it did.
For instance, economies of scale prevail in hospital care.
How many hospitals are needed in a community of 100 000
population for greatest efficiency? Probably only one with
about 225 beds. Even in a city of 1 million, where several
hospitals could efficiently compete in providing ordinary
acute care, quality of care would be higher and costs lower
if neonatal intensive care, open heart surgery, organ transplantation, and other specialized services were each provided in a single hospital. The production of personal computers also benefits from economies of scale, but because
the relevant market is national rather than local, it can sustain a sufficient number of producers to keep the market
Another example is the provision of physician specialty
care, such as urology, neurology, or interventionist radiology. Even if a community were large enough to require the
services of several physicians in each specialty, patients would
probably be better and more efficiently served if physicians
worked cooperatively—exchanging information, covering
patients for one another, sharing specialized technology and
assistants—than if each physician was an “independent firm”
competing with colleagues. But without competition, it is
not possible to automatically assume that the price and quantity (and therefore, the level of expenditures) is socially appropriate.
The conclusion that a competitive market for a good or
service will result in an appropriate level of expenditures
usually assumes informed consumers. A special problem
for competition in health care is that consumers are frequently poorly informed. In most cases a patient has
symptoms—such as fever, pain, or headache—but does
not know the cause or what treatment if any should be
undertaken. Given the complexity of the current medical
diagnostic and treatment options available, even welltrained physicians must make decisions while facing considerable uncertainty. Which of 4 different imaging
devices is the most appropriate for this patient? If the
diagnosis is hypertension, which of the numerous different drugs should be prescribed? Is hospitalization
needed, or can the patient be treated on an outpatient
basis? Which stent is more appropriate, bare metal or
drug-eluting? The notion that the typical patient, even
with a computer and an electronic medical record, would
be able to make these decisions correctly gives too much
credence to “free market ideology” over the complexity
of health care. The fact that competition cannot be relied
on to result in a socially appropriate level of expenditures
for much of health care explains the widespread presence
of government regulation and self-regulation through
professional ethics.8 Neither solution is perfect, but competition alone is not a realistic option for many health
care markets.
In summary, the distinguishing characteristics of health
care and the institutional features they induce are a more
fundamental source of concern about health care expenditures (private as well as public) than their role in the federal budget.
Financial Disclosures: Dr Fuchs reported receiving financial support for his research from the Robert Wood Johnson Foundation and Blue Shield of California
1. The long-term outlook for health care spending: a Congressional Budget
Office study [November 2007]. The Congress of the United States.
http://www.cbo.gov/ftpdocs/87xx/doc8758/11-13-LT-Health.pdf. Accessed April
20, 2010.
2. Chernew ME, Baicker K, Hsu J. The specter of financial armageddon: health
care and federal debt in the United States. N Engl J Med. 2010;362(13):1166-
3. Cohen SB, Rohde F. The concentration in health expenditures over a two year
time interval: estimates for the US population, 2005-2006. [statistical brief No.
244]. April 2009. Agency for Healthcare Research and Quality. http://www.meps
.ahrq.gov/mepsweb/data_files/publications/st244/stat244.pdf. Accessed April 20,
4. National health expenditure data. Centers for Medicare & Medicaid Services. http://www.cms.gov/NationalHealthExpendData/02
_NationalHealthAccountsHistorical.asp. Accessed April 20, 2010.
5. Newhouse JP. Free for All? Lessons From the RAND Health Insurance Experiment.
Cambridge, MA: Harvard University Press; 1993.
6. Auerbach AJ, Hines JR Jr. Chapter 21: taxation and economic efficiency. In: Auerbach AJ, Feldstein M, eds. Handbook of Public Economics. New York, NY: NorthHolland; 2002:1347-1421.
7. Leonhardt D. In health bill, Obama attacks wealth inequality. New York Times.
March 23, 2010:A1.
8. Arrow KJ. Uncertainty and the welfare economics of medical care. Am Econ
Rev. 1963;53(5):941-973.
1860 JAMA, May 12, 2010—Vol 303, No. 18 (Reprinted) ©2010 American Medical Association. All rights reserved.
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