Cafe Hayek: Pittsburgh Tribune-Review: “Health care’s simple economics”

Link to source.

Don Boudreaux shares on his blog an article he wrote for the Pittsburg Tribine-Review. In it he debunks the idea that “health care can be improved through a collective effort.”

The following illustration is key to Boudreaux’s debunking.

“If you go to dinner with a large group of strangers and you know that the bill will be split evenly, aren’t you more likely to order pricier dishes and drinks than you would order if you, and you alone, were responsible for picking up your full tab?

“The answer is surely ‘yes.’ Let’s say that you’d be content to order the pork chop priced at $15, but would get even greater enjoyment from ordering the rack of lamb priced at $25. If you alone were responsible for your tab, you’d order the lamb only if it is worth to you at least the extra $10 that it costs. So suppose that you value the lamb by only $8 more than you value the pork chop. In that case, you’d order the pork chop. You wouldn’t spend an extra $10 to get extra satisfaction worth only $8.

“But if the bill is evenly shared among, say, 10 diners (yourself and nine others), then if you order the lamb, your share of the higher bill will be only $1. That’s $10 split evenly 10 ways. You’ll order the lamb.

“You might think that this sharing arrangement is good. After all, in this example, the cost to you of getting something you valued more (the lamb rather than the pork chop) was reduced. It became sensible for you to order the lamb.

“Look more deeply, though. What happened is that society (here, the 10 diners) was led to supply something that wasn’t worth its cost. The lamb was worth to you only an additional $8, but to make it available to you, society spent $10. Ten dollars were used to raise the welfare of society by only $8. (You’re a member of society, so any improvement in your welfare counts as an improvement in the welfare of society.) That’s a waste of $2.

“You are better off, but the group is worse off.

“Now look even more deeply. Everyone at the table faces the same incentives that you face. You’re not the only person who will order excessively costly dishes and drinks. Everyone will. The entire table over-consumes. The total bill is higher — even your share is higher — than it would have been had the bill not been split evenly. Resources are wasted.

“Such sharing of our medical-care bill takes place now on a massive scale. It is impossible to see how expanding this sharing will reduce the bill.”

15 thoughts on “Cafe Hayek: Pittsburgh Tribune-Review: “Health care’s simple economics”

  1. Try to think about the difference between . . .

    1. he debunks the idea and 2. he tries to debunk the idea

    It is a big one.

    With that said, I got a good laugh and some real insight into the “conservative” mindset from this attempted debunking. The author asks the question about behavior when the bill is shared versus when you are paying for yourself. That he thinks the self-evident answer is . . . “The answer is surely ‘yes.’ ” you will order more expensive fare.

    Uh, no it isn’t. Decent people with a healthy respect for others would choose to be moderate in their ordering. It takes the greedy, self-interest of a “conservative” thinker to assert that the opposite is true. This fellow has inadvertently highlighted a key difference between “liberals” and “conservatives” – respect for other people, empathy, and the lack of it.

    Liked by 2 people

    1. Perhaps you should think about the difference between the article as a whole and the part I excerpted. While you’re at it, you might try to figure out the difference between that which you assert to be true and that which is demonstrably true.

      For example, it is not demonstrably true that Boudreaux’s illustration reveals the moral failing (greed) of conservative thinkers. That is a dimension which you fallaciously bring to the discussion. This is easy to show.

      The diners in the illustration agreed to split the bill evenly. Boudreaux doesn’t say why, but for all you know it might be because the diners were all decent people with a healthy respect for others who wanted some in their party to be able to order above their means.

      You commit the same fallacy as other liberals who routinely confuse the concepts of greed and self interest. In other words, you introduce moral (existential) issues where they don’t belong.

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      1. @Roberts

        Whatever, the reason for the agreement to evenly split, the bill, it is IRRELEVANT to the decision of the doofus who decides to take advantage of it by ordering a more pricey meal than he otherwise would have.

        Opinions are NEVER demonstrably true. Or false. It is my opinion that “conservative” thinking is driven by the idea that one’s own self interest is the highest moral value. And all good will flow from that if everyone followed that idea. Many “conservatives” are very explicit about that morality and greatly admire the “philosophy” found in the novels of Ayn Rand. It is also my opinion that this blindness about how decent people behave is a mark of that kind of thinking.

        As for your assessment of my honesty, please speak up when I assert as a fact something which is not demonstrably true. I do not hesitate to do that myself when I see it, which I frequently do with “you people.” So should you if it ever happens.

        And keep in mind, “debunking something” is not the same as “trying to debunk something.” The essay you provided TRIED but failed miserably to debunk the idea that “health care can be improved through a collective effort.” It is the kind of nonsense answer you get when you argue from erroneous assumptions.

        Liked by 2 people

        1. RE: “And keep in mind, ‘debunking something’ is not the same as ‘trying to debunk something.'”

          Yes, exactly as your own failed arguments demonstrate.

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          1. @Roberts

            The argument by Mr. Boudreaux IS debunked. It is based on a false premise about how people behave.

            Even you, decent fellow that I am sure you are, would not take advantage of the situation described. It should therefore be self-evident that this premise – “The answer is surely ‘yes.’ ” you will order more expensive fare – is a bad assumption. Or, maybe I am wrong. Maybe you are the sort who would order the lobster when everyone else sharing the bill was having fish and chips?

            Liked by 1 person

          2. RE: “It should therefore be self-evident that this premise – ‘The answer is surely ‘yes.’’ you will order more expensive fare’ – is a bad assumption.”

            I don’t consider it a bad assumption. It is merely a given of the story being told. It doesn’t matter whether or not all of humanity would behave like the “you” in the story or like the altruistic “you” that you irrelevantly imagine to be representative of the human race. What matters is that the “you” in the story creates a false pricing signal in the market under analysis that in turn harms all of the participants — solely because the collective arrangement they agreed to allowed it.

            Put another way, your distinction between decent and not-decent people has nothing to do with the illustration at hand. It debunks nothing because it is just a fantasy you chose to think about instead of the actual story Mr. Boudreaux happened to tell.

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          3. @Roberts
            Whether you consider this model of universal greedy self-interest to be a good assumption or not, it is the key assumption about human behavior that drives this “analysis.” Otherwise, why tell the “story?”

            One giveaway that there is SOMETHING wrong is that the “analysis” reaches a nonsense conclusion. Health care CAN be improved through a collective effort. Most other prosperous countries demonstrate that REALITY every day. Their people are healthier than us, suffer less infant mortality, live longer, never go bankrupt over medical bills, never worry about losing coverage and through their “collective effort” spend far, far less to get these better results than we do.

            Liked by 1 person

      2. The fact that you can’t see the fundamental logical flaws in this idiots diatribe is striking.

        Here, I’ll help:

        “Every American” ?

        And the “You’ll order the lamb“ comment says EVERYTHING about your character, or in this case, lack thereof.

        Liked by 1 person

      1. @Tabor

        It is not a theory. It is a fact. By definition. Somebody who would order more than otherwise to stiff their fellows does not meet the definition of a decent person. And yeah, that would apply to a “Welfare queen” if she lived on the dole when she had a realistic opportunity to work for a living wage. Not a decent thing to do either.

        Of course, as we all have seen in countless ways, in Trump world basic human decency is not important in the least. In fact even the idea of it is the object of ridicule. As you just tried to do.

        Liked by 2 people

  2. Boudreaux’s premise is flawed. The diner example does not apply to the healthcare industry.

    We don’t try to see how much healthcare we can get each day or week or month in order to get our money’s worth, or more for that matter. The reality is that people really don’t want to use their healthcare plans other than for physicals. Nobody is going to try to get cancer so they can run up a big bill.

    Treatment regimens are designed by the caregivers, and unfortunately the setup is fee for service, but that is another topic. In a sense, it would be like the diners asking the waiter to please let the chef decide the meals. Depending upon the ethics of the chef, it may be the most expensive items or it could be just a very tasty favorite of the kitchen, inexpensive even.

    For many of us fortunate to be in a position to cover co-pays and deductibles, we can follow the prescriptions. For those who have inadequate coverage, or none, the choices are more stark.

    Cost savings come from several areas, all of which have constituents to make sure that they will not change the status quo. And that is a problem we need to address.

    1) Co-pays should be universal, vetted for income, but still unavoidable. Skin in the game theory.

    2) Outcome based treatments rather than fee for service. Incentivize cure, not treatment.

    3) Caps on drug pricing commensurate with what we as taxpayers are already paying for in basic research.

    4) Discourage cartels for device manufacturers.

    5) Encourage and reward lifestyle changes that impact healthcare costs in later life.

    6) Tort reform that still protects the patient from medical malpractice but doesn’t reward lawyers with million dollar fees.

    Now, taking all that into consideration, base premiums on actuarial data that encompasses the entire US population.

    The point of that is the spread the costs. Everyone’s healthcare increases in use and cost as they age. Some a lot more that others. Medicare is designed to offset that and was introduced to cut the embarrassingly high costs of healthcare to seniors.

    In my opinion, modern medicine is not a cost that can be borne by the average uninsured American. At our present family income status and the prices charged, a simple broken leg could be the road to economic disaster. But if everyone American paid their “dues” to belong to our nation, and the dues include health insurance, the prices would drop for premiums, and then we can concentrate on getting realistic pricing structures.

    Back to Boudreaux, he is wrong in my estimation for the reasons outlined above. It is not the greed of the insured that is driving the costs, it is the industry itself. Universal coverage puts the power back into the hands of the insured, and this is true whether Medicare for all or compulsory private coverage with oversight.

    Liked by 2 people

    1. RE: “Boudreaux’s premise is flawed.”

      I can’t tell from your comments what you think Boudreaux’s premise is. I would state it this way: Some group-based financing arrangements can have the unintended effect of obscuring pricing signals in an economy. Because pricing signals are obscured, prices themselves have a tendency to go up.

      Boudreaux illustrates the effect by noting that the simple act of splitting the bill evenly among the diners results in the rack of lamb being “priced” at $2 more than it would have been had the lamb-eater paid for it directly. Put another way, because of the collective decision of the group, the lamb sold for the asking price instead of the market price.

      You actually allude the same problem in your comments when you blame fee for service arrangements by caregivers who are compensated by insurance companies for driving prices up. I think you should consider the possibility that fee for service does not by itself drive up the price, but the fact that the buyer (the insurance company) and the care recipient (the patient) are not the same does. In effect, the collective decision forces the ultimate beneficiary to have no enforceable contract in the transaction to represent his own interests.

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      1. I think by using a dining analogy, we are skipping the main premise of insurance and that is spreading the risk among policy holders.

        As I said, not all premium payers are going to need to file claims. And they don’t get to pick and choose like the fictional diners in Boudreaux’s example.

        If all patients who are covered were to pick an expensive medical procedure each year, the premiums would reflect the actual cost of the product plus a markup.

        But that is not what happens. In large insurance groups, everyone pays, few get services. But, and here is the key, everyone is insured. Risk mitigation is the whole purpose of insurance.

        Liked by 2 people

        1. But he doesn’t believe in insurance. He has stated that many times and I believe he searches in earnest for opinions that jibe with his thinking. Anything that doesn’t ascribe to HIS viewpoint is worthless. Or worthy of a “So what?”

          Liked by 1 person

          1. @Adam
            He doesn’t believe in insurance for very good reasons.

            It is obviously a socialist scheme to force the collective to give free things to people who are too feckless to have saved up enough money to pay for what they want themselves. Besides, the Constitution says absolutely nothing about insurance and yet government thugs make us pay for it.

            I mean really. What sort of people buy into this scheme? Irresponsible people looking for a handout, that’s who. It is the height of irresponsibility to get sick before you have saved enough to pay the medical bills. Even worse, buying a house if you don’t have enough in reserve to pay off the mortgage if the house burns down. And then there are those freeloaders who want to drive around without a million dollars in the bank to cover their liability after a crash.

            Like

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