Consumer Sovereignty

I haven't posted much on Stayin' Alive on weekends lately, but due to enforced hibernation you get a bonus post today. As I said last time, we don't buy medical services -- or have our insurance pay for them -- because we enjoy having our livers resected, we generally do it because we feel compelled.



Source: Jason M. Sutherland, Ph.D., Elliott S. Fisher, M.D., M.P.H., and Jonathan S. Skinner, Ph.D. NEJM.org, Sept. 9 2009

So here are figures on Medicare spending, depending on people’s self-reported health status. Obviously, as you might expect, people who are in poor health use more services. Just as obviously, they don’t do so out of choice. They are not exercising their liberty, on the contrary, their liberty is constrained by their condition. (Figures on privately insured people would show a similar relationship, but they are not as readily available. Of course pregnancy and childbirth, as well as sickness, drive part of the cost for younger women, but that doesn't contradict the principle.) (You'll also note that Medicare spending is concentrated among people in the last year of life, but that doesn't mean it's all wasted. If we could perfectly predict who is about to die, we might be able to save some money on futile measures, but we generally can't predict very well. More on all that later.)

So yes, sick people cost more, but that's not the whole story.



This is another graph from the same article by Sutherland and colleagues. Here we see that Medicare spending varies enormously by region of the country. However, it is not the case that people in the higher spending regions tend to be sicker; or at least that's a very small part of the reason. Here's how they explain it:

[I]n regions where there are more hospital beds per capita, patients will be more likely to be admitted to the hospital—and Medicare will spend more on hospital care. In regions where there are more intensive care unit beds, more patients will be cared for in the ICU—and Medicare will spend more on ICU care.
And the more CT scanners are available, the more CT scans patients will receive. . . [I]n regions where there are relatively fewer medical resources, patients get less care—and Medicare spends less. So geography becomes destiny for Medicare patients.

So evidently, it is not consumer choice that is driving the demand for medical services. It's something else, something they never told you about in Economics 101. Something is very fishy about that relationship between price, supply and demand that the guy in the bow tie lectured about. In fact, it's even fishier than you may already be thinking. More on this anon.