Medical Economics

Sorry for missing a couple of days, been bizzy. Anyway, to continue with our trashing of the "discipline" of economics (which is actually more a branch of theology than a science), it should be obvious that Medicine exists in a world even less like Economics 101 than most industries. To begin with, while our basic needs for food, clothing and shelter are predictable and roughly similar for everyone, our need for medical services is largely unpredictable, and it varies radically from person to person and time to time. Some people go for decades without really needing any at all, although there are some preventive measures or screening tests that are recommended even for people who think they’re perfectly healthy. Then suddenly, by surprise, people can face medical costs they cannot possibly afford; and the alternative might be horrible suffering, disability, or death.

Another major reason Medicine is not like Economics 101 is that Bob knows what kind of food and other goods he likes, and he has some idea how to evaluate the products on offer and compare the prices. In other words he can shop around and exercise his power as a consumer. But for the most part, as consumers of medical services, we can’t do any of that -- the problem of information asymmetry is extreme.

We might have a symptom that bothers us and go to our physician to get it diagnosed, but we have to rely on the physician to tell us what is happening and what to do about it. We might not even have a symptom. We may go for a checkup, feeling just fine, and learn from a test or a physical examination that we have a condition that the physician thinks we should do something about. That could even be something very expensive. We might even be in the position of Bob when he was starving, and face the choice of buying the thing or dying. Or at least that’s what the doctor tells us. This is called provider induced demand. In Economics 101, consumers generate demand. (Advertising and some other tricks mean that producers can generate some amount of demand for other goods and services, but the effect is much stronger in Medicine.)

 

Next, we'll get to positive externalities, and medicine as a public good.