The Obama Administration released a report the other day claiming that Americans must start to reduce their consumption of health care in order to avoid soaring budget deficits and further damage to the economy. In a time when the government is trying to increase consumption in every other sector, why is consumption on health care considered bad?
Insurance: Using insurance to pay for health care consumption create moral hazard and inefficiency. Moral hazard occurs when people take greater liberties in risky behavior because they know they are protected by the insurance. Insurance is based on a set of data based on behavioral patterns in the absence of insurance. When these people get insurance, their behavior invariably changes because they are now responsible for less of the burden if injury should occur.
But this doesn't only make people more risk-seeking, it also makes them medi-holics. Americans consume an enormous amount of health care services. We go to the doctor when we have a cold, we get flu shots every year, it's over precautious. There is a certain level of precaution that is considered optimal but we are surpassing that level and it results in inefficiency.
I suppose the argument against this is that it's the market-determined level of health care consumption so it is not bad that we spend so much on health care. To that I would argue that the optimal level of health care consumption can only be found when insurance is not offered. Insurance effectively subsidizes health care costs so the level of actual consumption is higher than the optimal level; again, resulting in inefficiency.
Medicare: It is a fact that people aged 65 + spend more on health care than those under 65 and that those older people are on medicare. This means that the government's health care burden is enormous. Medicare accounts for 14% of the federal budget and we can expect to see this number rise as the elderly population increases. Though people 65 + made up 13% of the population in 2002, they accounted for 36% of health care consumption. Further, the relative size of the aging population has increased greatly since 2002 and will continue to increase for the next 10 years. This creates an even greater burden for the government, especially in this recessionary time, since many of these medicare recipients will drop any outside coverage and rely solely of medicare for health insurance.
Since health care expenditures are subsidized our consumption is far above the level it should be. There is no easy solution and I think the Obama Administration is not unjustified to ask Americans to spend less on health care. Further, since our consumption on health care is inefficient, reducing the amount spent on health care and transferring it to other sectors would not only create a more efficient economy but also a more efficient household allocation of resources.
Fast Facts
Health care consumption per person
1980: $1,106
2004: $6,280
Health care as a percentage of GDP
1980: 9%
2004: 16%
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