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Obamacare and U.S.A healthspending, is that efficient?

The “Production set” is the set of all the possibilities of combination of commodities that can be achieved. The boundary of the set is the “production possibility frontier”, it’s the locus of points where the production of good is maximized given the quantity of the other good and a certain technology (in the two goods case). In fact due to this definition we can state that if a point lays on the frontier it’s efficient because it indicates an efficient use of the existing resources. Usually when the economy is represented by two consumption good the frontier has the typical concave shape, meaning that if the production of a good is increased the production of the other has to be sacrificed (Figure 1)Image

But there is the possibility for the curve to assume a different shape. This is the case of special goods like the one which I want to emphasize in this post: Healthcare as a consumption good. In fact is known that in this case the possibility frontier is concave as usual (Figure 2)

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but differently from the way we see in figure 1 where if we want to produce more than a factor we must reduce the other, for healthcare we find that increasing the amount of spending (health services use on horizontal line) initially leads to increase the amount of healthcare (vertical line). Most important there is a point that marks the limit beyond which more expenditure  will mean same or less health (point B). In my opinion this is a situation that could interest the U.S.A. scenario nowadays. As we can see from the newspapers all over the world yesterday night the America’s Government has shut down for the first time since 1996. This means that all the discretionary spending can’t be done until new order, about 800,000 federal workers will be unpaid and all the public structures as parks and museums will close. The main reason of the shutdown has been the absence of agreement on the increasing of the limit of public debt due to the health reform known as Obamacare (Affordable Care Act). American total health care expenditure has increased of 150% per year since 1960.  And data shows that in U.S.A. expenditure as a share of GDP is highest compared to major western countries (http://www.kc.frb.org/publicat/sympos/2011/2011.BaickerandChandra.paper.pdf). But if we analyze some measure of efficiency like “life expectancy” and “infant mortality” a surprising finding comes out. U.S.A. is the worst and Japan has the lowest expenditure but is one of the countries with best ranks. It seems that U.S.A. is stuck on the horizontal part of the line in figure2 or even in the descendent part of the curve, because even if it is increasing more and more is expenditure is not getting a better situation of healthcare. This finding must led us to think about some special features or characteristics of Health-care as a good. It’s demand function is not like the demand function of other goods. In fact in this case the consumer has a lack of information, the doctor or the physician drives the demand of medicines and not taking into account the price. The consumer hasn’t got the possibility to match and compare all different costs of medicines. Another distortion can raise if the doctor tend to give more and more care if they receive a fee for the service, it raises costs of malpractice, they prefer to not feel guilty for carelessness (ex. Cesarean operation if there is the minimum problem without accounting avoidable costs of a natural born if there is no really need for a Cesarean). If the Government or an insurance cover the cost of treatment the patient will be less cost conscious and then will demand higher cures than necessary. High tech care is really expensive and good doctors tend to go in hospital where there are more high tech instruments because this is a factor by which people judge a good or a bad hospital, as result there is an increase in cost of care because of the surplus and excessive and unnecessary instrumentation bought by hospital to attract good doctors and then more patients. These factors mentioned above are all cause of increase in demand of care. In those past years the demand as increased more than supply (ex. Number of beds available in hospitals or doctors). As a result the cost of healthcare has increased a lot. One possible extreme solution is to make the health sector to return a free-market. Then in fact the hospital will became a unit with a profit logic and eliminate some of the inefficiencies. We all know how the market works to match supply and demand. At the opposite side, a country can nationalize the health insurance but also this solution will raise cost of a yet over indebted nation. “In medio stat virtus!”, a middle solution can be to provide government assistance or insurance for only who can’t afford or access the insurance system. This is more or less the solution of Obamacare, and it may work because there is a similar situation in Canada and worked well. Looking at aforementioned data on U.S.A. it seems that the country is not using in an efficient way the resources directed to health (is not on the production line but somewhere below it in the production set, in a microeconomic sense), so what the government should do is to improve the efficiency of expenditure instead of just raise expenditure for healthcare. ““We are neither allocating resources efficiently between health and other uses, nor getting as much health as we could for every dollar spent – making it difficult to evaluate how much we ‘should’ be spending on health care.” (Katherine Baicker and Amitabh Chandra).

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Author: studentnovasbe

Master student in Nova Sbe

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