Is medicine a money pit?

Robin Hanson suggests on CATO Unbound that much of the health care spending governments do is a waste of money. Citing the RAND study on healthcare he says:

The experiment’s random assignments allowed it to clearly determine causality. Being assigned a low price for medicine caused patients to consume about 30% (or $300) more in per-person annual medical spending… For the five general health measures, [they] could detect no significant positive effect of free care for persons who differed by income … and by initial health status.

Despite this and other studies, governments still devote huge proportions of their budget to health care. Hanson points out that, despite the apparently negligible returns to greater medical care, there are “apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution [and] climate.”

If this evidence is to be believed, leading a healthy lifestyle is far more beneficial to one’s health than free health care. In light of this, is the government’s emphasis on providing low cost health care a good idea? Low cost health care results in far greater consumption of medical services, but does not appear to appreciably increase aggregate health. It seems an expensive strategy for a government to pursue and one that may provide perverse incentives to live unhealthily. If health care is seen as a substitute for a healthy lifestyle then cheaper health care may lead to people living less healthily than they otherwise would if they had to pay for their own health care. The moral hazard problem engendered by these incentives could further raise the costs to the government of health care, yet without appreciably improving health care outcomes. Does this mean that a new approach to health care funding, focussed on encouraging healthy living, is required?

4 replies
  1. CPW
    CPW says:

    I like the idea that healthcare is bad for us via encouraging moral hazard.

    It’s not strictly a problem with government provision, though, I think Hanson attributes the underlying problem to either people’s ignorance or a social norm of signalling care.

    It seems it would be very hard to overcome people’s false beliefs about the value of healthcare. Especially as there is seemingly a strong preference for insulation (Arnold Kling’s term) from health care costs . People are willing to pay a large amount of money to never have to think about these issues.

    Was anyone else surprised at the claim that “large and significant lifespan effects: a three year loss for smoking, a six year gain for rural living” – ie, living in (US) cities is twice as bad as smoking. Where are the public health campaigns designed to get us to move to the sticks?

  2. r a
    r a says:

    “If health care is seen as a substitute for a healthy lifestyle then cheaper health care may lead to people living less healthily than they otherwise would if they had to pay for their own health care.”

    In theory, maybe. The 2006 study “Disease and Disadvantage in the US and England” reported that Americans are significantly less healthy than the English. England is on a(mostly) socialized health care system; so where is the effect of this moral hazard?

  3. rauparaha
    rauparaha says:

    I’m not sure that the study mentioned provides evidence that moral hazard doesn’t occur. There are three things to consider with respect to the moral hazard: first, the fact that people live less healthily may not result in lower health relative to another country, if health care is correspondingly ‘better’. Secondly, the moral hazard arises because the government is effectively insuring the populace against health problems. A similar effect is likely to be seen when a person has private health care insurance, dependent upon the effectiveness of the other incentives built in to the insurance contract. Finally, I doubt that the level of government health care funding is the primary explanation for a country’s level of health. My post mentions that environmental concerns are far more important for goods health, and I think it’s unlikely that these things are constant between the US and UK.

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