IE NATURE OF THE COMMODITY'HEALTH CARE AND ITS EFFICIENT ALLOCATION Sfod Ecmomic Papern (pre-/986): Jul 1971: 23. 2: ABUINFORM Globk pg189 THE NATURE OF THE COMMODITY 'HEALTH CARE, AND ITS EFFICIENT ALLOCATIONI By A J CULYER SINCE economists began to turn their attention to matters concerning the efficient allocation of resources devoted to preventing, curing, and alleviating ill health round about the end of the 1950s a whole new are posing intriguing new questions has been opened up. Many of the most fundamental of these problems have yet to be cleared up(for example, the definition of the product'of health care institutions and how it may be measured). The purpose of this article is to attempt to resolve just one of these difficulties, namely, whether the commodity health care defined generically as the kinds of service provided by surgeons, physicians rses, hospitals, etc, is different from other commodities in particular and crucial ways such as to make some forms of organization of the health industry intrinsically inefficient and others intrinsically efficient. As i well known, this question has been the subject of frequent controversy over the last twenty years, a controversy that is today as lively as when it began, but a controversy, it is hoped to show here, that has been largely unproductive because it has been characterized n both sides by a surprising propensity to leap from certain interesting(and mportant)descriptive characteristics of health care to conflicting(and gain important) policy prescriptions What is even more surprising, most of this discussion has been conducted at an entirely a priori level with the practical conclusions being inferred in an ad hoc fashion, without a proper logical foundation. One reason for this may be that an explicit social welfare function has rarely been stated, though some contributions have been cast in a Paretian welfare economics mould. 3 There are how ever,other more powerful reasons why different analysts'conclusions have not been the same, and it is upon these that we shall concentrate 1 Acknowledgement is made to the NufField Provincial Hospitals Trust for a researc rant to the Institute of Social and Economic Research, University of York, for research into the social and economic problems of health care provision. The Trust is not, of course, been Loes[24][25][26] he Jewkeses [20][21]in particular. More cautious analysts include Buchanan and Lindsay eciwo woula explain the oxistonoo of tho ns titation of which th nomic analysis. For a recent attempt, and the only one to date to'explain'the NHS, ee Lindsay [30]
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. THE NATURE OF THE COMMODITY 'HEALTH CARE' AND ITS EFFICIENT ALLOCATION A J CULYER Oxford Economic Papers (pre-1986); Jul 1971; 23, 2; ABI/INFORM Global pg. 189
implications that have been drawn for the appropriate organization of health care in terms of the Pareto criterion; i.e. changes which improve someone s welfare without placing a net harm on anyone else are deemed an improvement, while changes that yield net benefits to some and net arms to others cannot be evaluated in terms of whether society as a whole better off Current orthodoxy is adequately summarized in an early article by Martin Feldstein in this journal: the availability of private heaysjisn does not remedy the most basic defects of the market mechanism as a method of providing health care. Although it can permit some people with adequate foresight to escape from the precariousness of major medical expenses,, if medical care is allocated according to the patient,s financial position rather than his medical condition, the nations health-care resources will not be used as productively as possible[15, pp 22-3)1. The ajor reasons why this may not come about will be discussed later, but the diligent reader of the a priori health economics literature will search in vain for a clear alternative objective function. Feldstein, to be sure, in the article mentioned does ask '. should not health care be allocated to maximize the level of health of the nation instead of the satisfaction which consumers derive as they use health services?'(loc. cit ) 1 But even supposing that a satisfactory measure of the nations level of health existed, the unconstrained maximization of such a level is an absurd objective since it seems unlikely that the stage of negative(or zero)marginal returns would be reached short of incredibly large investments in health Not that Feldstein suggests this objective, for he later prescribes that " in making their decisions, doctors and health-care administrators should look for the optimal use of resources by weighing the benefits and costs of alternative programmes and methods of treatment indeed, much of his own subsequent work has been directed toward elping them to do just that. But a dilemma still exists, for if individual preferences are not to be counted, what are the benefits and costs to be weighed? If some benefit is foregone, no matter who loses it, is not a social ost incurred to the same value? It matters little whether the difference between benefits gained and necessary production costs is maximized, or hether production costs plus all other foregone benefits are minimized, imal consumption remains the same since it is, quite rightly, independent of the accounting conventions used. By a roundabout route, therefore, it however, the maximization of social welfare according to indications given criterion is emphasized
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seems that the Pareto criterion may have been implicit in economists analyses all the time. But if this was the case, the qualitative arguments for and against various market structures, as compared with the quantita- tive arguments for improving the workings of extant institutions,are without a logical foundation. This is partly because of a nirvana approach to the problem, i.e. comparing the actual operation of an existing system with the hypothetical operation of an ideal system(see Demsetz [14]) but also partly because of a failure by some commentators to recognize that organizational reforms cannot abolish economic problems, though they may change their form I. The characteristics of health care There can be no doubt that health care is not the same thing as other economic goods. It has, moreover, some intriguing characteristics which appear to make for conceptual difficulties in defining the nature of an optimal allocation. Some are shared with education, another good requently provided publicly, for example the direct involvement of the onsumer in the production process and the difficulty of separating or onsumption and investment elements and the very substantial cost that nay fall on individuals giving rise to major distributional problems Others, however, are probably unique in the extent to which they apply to health care compared with other goods or services. The purpose in this is to these for the evidence they provide for public or private provision of health care. I Consumer rationality Welfare economics makes two crucial assumptions regarding consumer rationality. The first is the normative judgement that the individual's own interpretation of his own welfare is the one that counts. The second is the non-normative(but also untestable) assumption that choices reveal preferences. Our purpose is neither to defend nor criticize these assumptions but to discover whether health care characteristics conflict with them Three arguments concerning rationality have been put forward which are alleged impediments to the optimization of welfare in open markets (a) many consumers, though sick, do not desire treatment and may even be ignorant of their sickness (b)the mentally sick fit oddly into a'consumers'sovereignty'model (c)patients requiring emergency treatment are frequently not in a sition to reveal their preferences culiar characteristics of health care are to be found in Arrow [1]. d Mushkin [35] among others. Boulding [4] provides an interesting. iscugsion of the need for care. uced with permission of the co
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1. The first of the alleged impediments has been well documented Spectacular evidence for the truth of this proposition was discovered in the famous 'Peckham experiment'of 1935-9, where 64 per cent of the ersons examined had identifiable disorders but were unaware of them In 1964, for example, it has been estimated that there were 150, 000 unknow diabetics in Britain. It also appears that the problem has similar dimen- sions in other countries. Such evidence appears to violate a fundamental and necessary condition for the attainment of an optimum through open First, the problem of ignorance is not a problem characterizing markets only. Knowledge must be economized in all social systems, and by using patient ignorance as a stick with which to belabour private medicine attention is diverted from the more important problem of assessing the optimal amount of ignorance. There is little evidence that post-war British patients are any less ignorant of their state of health than their pre-war parents were or that a nationalized health care system devotes more resources to preventing sick as than other systems (Office of Health Economics [37]). This, of course, is not evidence for or against the efficiency of any particular system of provision, but it is evidence for the view that the description of a theoretical optimum does not tell one how it may be achieved. Secondly, the inference ignores the possibility that the degree of ignorance measured in experiments such as that at Peckham may, in fact, be optimal. If information about one' s health is costly to collect, it may be irrational to dispel all ignorance; i.e. it is perfect information ather than ignorance, that is a priori more likely to be inconsistent with the postulates of welfare economics. The fact that one set of individuals es a social benefit in reducing the ignorance of others is a problem of xternalities, to which we shall return later, but it does no damage to the conclusions here that the observation of ignorance is not sufficient to infer inefficiency in resource allocation and that the specification of an optimal distribution does not indicate the most appropriate form of social organiza tion for attaining or approaching that optimum, What is required if a of how individuals operating within the framework of constraints implied by that form of organization can be expected to act compared with their behaviour under an alternative form. This, however, is 1 See Israel and Teeling-Smith [19], and the references cited therein. seems clear that for any hich it may indeed be(Culyer [12]), though there are some possible in practic Reproduced with permission of the copyright owmer. Further reproduction prohibited without permission
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urned, and to which a satisfactory answer has yet to be reached. 1 A similar conclusion must hold with regard to patients who, though knowing that they are sick, fail to demand treatment. Given their pre ferences, information, fears, etc, there is no a priori reason for supposing that they are behaving irrationally, nor that they would behave differently nder an alternative system. On the other hand, if there exists another set of individuals who would prefer them to receive more care than they choose, then there may again be marginally relevant externalities which should be taken into account in describing the nature of the optimum The point here, however, is not that the individuals in question are behaving irrationally, violating any of the postulates of utility theory by, for example, acting inconsistently with their own preferences, but that they re behaving inconsistently with the preferences of an entirely different set of individuals. 2 3. Similar conclusions hold with respect to the emotionally disturbed, children, and emergency cases. If there is evidence that these individuals are actually behaving irrationally or are not in a position to choose, then it must follow that welfare economics, based as it is on an assumption of rationality, has nothing at all to say about their subjective utility maxi mization. It cannot therefore be used to assess alternative forms of pro vision. On the other hand, welfare economics can be used to describe the characteristics of an optimum if there exists an external demand for the care of such people. Since the problem of external demands emerges as a general problem in health economics its discussion is, however, postponed until a later point in this paper. It is, however, dangerous to overstate the degree of irrationality in the behaviour of patients, and the discussion here is not intended to lend support to any presumption that individuals, even those who are emotionally disturbed, are in general irrational in matters of personal health Uncertaint Four points in particular have been raised, which may affect the ability of an open market to satisfy the necessary optimal conditions, all arising 1 For some attempts in connection with the medical care industry see Newhouse [36 and Weisbrod [46]. For a different context (universities)see Culyer and the costs of the appropriate treatment nottoo high, the Hypo (almost)entirely logically, are Arrow [1]. Lees and Rice [28], Arrow [2], Pauly [38], and Crew [11]. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission
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