The Everyday Economist

The latest series of essays at Cato Unbound will discuss the economics of health. Robin Hanson is first. He writes:

King Solomon famously threatened to cut a disputed baby in half, to expose the fake mother who would permit such a thing. The debate over medicine today is like that baby, but with disputants who won’t fall for Solomon’s trick. The left says markets won’t ensure everyone gets enough of the precious medical baby. The right says governments produce a much inferior baby. I say: cut the baby in half, dollar-wise, and throw half away! Our “precious” medical baby is in fact a vast monster filling our great temple, whose feeding starves our people and future. Half a monster is plenty.

Am I being too allegorical? Then let me speak plainly: our main problem in health policy is a huge overemphasis on medicine. The U.S. spends one sixth of national income on medicine, more than on all manufacturing.

The reason it is important to consider health spending based on the percentage of total income is because it must be necessarily true that spending on all other goods must therefore be declining as a share of income. While I agree that this is an important calculation, I am not sure that Robin’s analysis means anything. Is it bad that we spend a sixth of our national income on health? Robin certainly thinks so, but how much is too much?

Robin and I advocate the same types of reform in the market for health care, but we have different goals. Robin seems intent on cutting spending. I am not particularly concerned with spending being cut, but rather with putting incentives in place that would allow individuals to make better health care decisions such as eliminating the employer-based subsidy. While doing so would almost certainly reduce spending on health, I would still favor such eliminating the subsidy even if spending were to hold constant. I suspect that Robin would not.

In my view, aysmmetrical information is the problem that needs to be solved in the market for health care. Individuals often lack knowledge of prices as well as the quality and effectiveness of care. It is therefore my belief that by eliminating the tax incentives that create employer-based care, individuals would be forced to make better decisions regarding insurance (i.e. policies with a greater amount of cost sharing, such as a deductible). Such policies would encourage individuals to then make more conscious of the costs and effectiveness of care.

In any event, I recommend reading Robin’s entire essay. Also, make sure to read the reaction essays that will be written by David Cutler, Dana Goldman, and Alan Garber.

UPDATE: Part 2 of this discussion, with comments on David Cutler’s essay, can be found here.