Monday, July 28, 2008

Health care - an economist environmentalist perspective.

There are a number of issues I want to publicise on this blog, all of which challenge the economic and social orthodoxy that so rarely provides causal explanations and the ability to make even simple predictions. Today, I want to explain the predicament of public health care with two simple theories, both of which have somehow escaped much focus from mainstream economists.

It is best to start with what one would expect the health care current situation to be, and where the fingers are currently pointed. With the rapid technological advances in medical treatments, and the rapid reduction in price of almost all medical treatments including preventative measures, one would expect a healthier society and lower costs for running the healthcare system. But instead the system is in a funding crisis (as is the case in many countries), and people are seeking medical treatments more than ever. The finger is being pointed from some corners at the bureaucracy, for inefficiently providing services, and from other corners, simply to a shortage of funding. But would improving the efficiency of the system and the funding relieve the current pressures? I suggest not.

It is probably time to introduce the first theory to explain why I say this. It is known as Baumol’s disease, and describes how costs of production rise due to improvements in labour productivity in other sectors of the economy. In his classic example, William Baumol shows how improvements in labour productivity in other sectors of the economy (for example in farming, mining and manufacturing) lead to increased costs for playing a string quartet. Since individuals have a choice of whether to supply labour in the industries with increasing wages due to productivity improvements, or to the string quartet, the salary of the musicians must rise to attract them away from the other industries. If we replace the musicians with nurses, doctors and hospital administrators, we can see that it is our improved productivity in other areas that is causing this rise is health costs (as well as most other services). One might argue that productivity is improving in health professions as well, but a nurse making their rounds still needs as much time as ever, even if they are checking more medical vital signs.

The second theory that helps to explain the situation in health care is a broad interpretation of Jevons paradox. The theory explains that the efficient use of a resource does not diminish its consumption, but in fact increases it. The theory was developed in response to improvements in the efficiency of the coal fired steam engine, but it nevertheless applies to more broad cases. To begin this intuitive explanation one fact must be made clear – almost half of the medical costs a person incurs in their lifetime are incurred in the last thirty days of their life. With a little thought it is clear to see why this is the case. What has happened is that improvements in medical treatments have enabled us to live longer lives, and because of much of the preventative treatments, we die less suddenly then ever, increasing these 'death postponing' medical costs. Because we can diagnose more problems, we can visit doctor more readily, we treat more medical conditions then ever. Thus, it is because of the very efficiency and effectiveness of medical technology that our demand for it has grown, both during our lives, and in our ‘prolonged death’.

This harsh reality escapes almost every economist looking to improve the health case system. If we continue to improve productivity elsewhere in the economy, health costs will rise, and on top of this, their own technological breakthroughs lead to further demand for medical treatment. An analogy that might be more accessible is the idea of the paperless office. We have had wonderful improvements in the efficient provision of paper, but also elsewhere in the economy to actual produce the documents we wish to print. In all, paper use has risen dramatically, and if not for the reduction in real costs of paper (the opposite case to the labour of medical profesionals) the costs would have also sky-rocketed.

There is no easy way to reduce the health care burden. Actually, burden is not the right word, for health care itself supports much of society. Without it, there would be less of us, less of us in a healthy condition, and less production elsewhere in the economy. Looking in this way, those politicians who believe in productivity and growth might actually want to invest more in health care, due to the flow on benefits. For those who think less growth is the way to go because of environmental concerns, be aware that this goal conflicts with that of improved health spending, and improved health and life expectancy of the people.

What a complex world.


  1. How does prevention i.e. "healthy living" fit into all of this?

  2. Prevention is prevention, whether it is immunisation, or eating carrots. Rather than heathly living, 'healthy dying', should be on the agenda. Voluntary death without medical intervention would be a good start.