Health care market efficiency

Here’s an excerpt from the Wikipedia article on economic efficiency.

[T]he term economic efficiency refers to the use of resources so as to maximize the production of goods and services. An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if:

• No one can be made better off without making someone else worse off.
• No additional output can be obtained without increasing the amount of inputs.
• Production proceeds at the lowest possible per-unit cost.

These definitions of efficiency are not exactly equivalent, but they are all encompassed by the idea that a system is efficient if nothing more can be achieved given the resources available.

Market efficiency can be analyzed with respect to health care goods, services, and resources the same way it applies to the whole market.  But the phrase “No one can be be made better off” suggests a broader definition of market efficiency. If the market only includes the goods, services, and resources it misses the definition of health itself.  How healthy are we?  The US has a great market under the narrow definition and a lousy market under a broad definition.  We pay way more per capita for our health care and are slightly worse than average in terms of health. There really is no deficit of health care goods, services, or resources – there’s just no great abundance of health.

If anyone designed this market, they designed it to maximize the narrow definition of efficiency.  It’s probably more accurate to say the market was constructed ad hoc and the results display that negligence.  The health care system should be designed to improve health.  It probably sounds a little strange to read this until you realize how much of a change this would be.

If you manufacture a widget and sell it for more than it costs you might feel encouraged to continue the business.  If you have a comparative advantage to your competition (better access to resources for example) then you can sell the widgets with more profit than your competition. 

If you are healthy you gain the full benefit of being healthy, but there is no way to benefit further.  There is no way to encourage healthy behavior.  If you want to eat right and exercise to improve your odds at a higher quality of life then do so.  As the sole person who can make this decision you’ll have no competition at making yourself healthy.  The market can only step in to help out when you have some disease.  If the market can be said to have carrots and sticks, it’s got no carrots to make you healthy, only sticks to correct disease.