Consider Health Care’s Opportunity Costs

There is an old joke in economics that goes something like this: two economists run into each other on the street. The first economist asks the second, “How’s your wife,” and the second replies, “Compared to what?” I was reminded of this joke today while reading on various methods of making international comparisons between different kinds of health care delivery systems.

I’ve written before about “Cannon’s First Rule of Economic Literacy,” which is libertarian health policy expert Michael Cannon’s warning that you should never say costs when what you mean is spending , and I came across a similar lesson while perusing John Goodman’s health policy blog today too. Goodman has written extensively about the importance of using the real resource cost of health care rather than just spending totals when trying to make international comparisons of health care delivery systems. By considering the way resources are or are not diverted toward the health care sector and away from possibly more valued uses from country to country, we can construct a complementary view of the different health care systems we’re interested in comparing. In other words, any true look at costs should also try and account for opportunity costs .

As Goodman explains, these opportunity costs could be any number of things. The social costs of each doctor we have, he writes, can be estimated using the value of that man or woman’s next best use of talents. (Imagine, for instance, if we forced all graduates of Ivy League schools to become bus drivers and janitors–the social cost of such a policy would be very high, since we as a society would be foregoing all of the inventions, businesses, discoveries, and works of art that this population might otherwise have provided. When it comes to doctors, obviously, the situation is not as extreme, but there must certainly be a point where we have too many doctors, and not enough of something else).

Instead of becoming a doctor, the pre-med student might have become an engineer, say, or an architect. So what society as a whole must give up in order to have one more doctor is the loss of the engineering or architectural goods and services the young man or woman would otherwise have produced. This cost, called “opportunity cost,” is independent of how much doctors actually get paid.

In other words, cutting physicians’ salaries in half would do little in terms of opportunity costs associated with them, the same way that forcing all Ivy grads to become bus drivers and then slapping them with a pay cut wouldn’t bring back any of the good things we’d be missing out on under that absurd scheme. As Goodman goes on to note, this doesn’t apply to doctors alone, but rather to all of the different resources we put toward health care (as well as everything else in the economy, for that matter).

The principle also applies to other medical personnel and to buildings and equipment. The opportunity cost of a hospital, for example, is the value of a commercial office building or some other use to which those same resources could be put.

The concept of opportunity cost allows us to see that if we don’t trust spending totals in the international accounts, there is another way to assess the cost of health care. We can count up the real resources being used. Other things equal, a country that has more doctors per capita, more hospital beds, etc., is devoting more of its real income to health care than one that uses fewer resources — regardless of its reported spending.

Even if a nation is devoting more of its real income, rather than just spending, to health care in comparison with its neighbors, there’s no reason to believe that that’s necessarily wrong or bad either. Because value is subjective, and because the demographics as well as the preferences of the citizenry from nation to nation will differ, it’s entirely reasonable to think that some nations will devote a larger share of their real resources to health care than the rest of the world. As Mark Pauly points out, we’re not alarmed to find out that the Japanese devote a higher share of their GNP to seafood than we do, so why should we necessarily be alarmed by discrepancies in health care spending?

Okay, I’m partially having fun here. Obviously, we hear all the time that the US spends far more on health care than the rest of the world and does not receive demonstrably better care in return. I have issues with some of these statistics, but, as Aaron Carroll explains, enough of these different indicators point in the same direction to suggest that we aren’t exactly golden on this side of the pond. All I’m saying is that I don’t often see the resource cost of health care brought up in those sorts of arguments, and so I wanted to bring some attention to it for readers here. I think it’s a useful way of looking at the problem, and, in combination with the more conventional numbers on spending, can help to flesh out the comparisons that we’re trying to make.

This entry was posted in Economics , Healthcare and tagged , , , , , , , , . Bookmark the permalink .

Leave a Reply