Tuesday, May 8, 2012

A Capitalist's Explanation for the USA's High Healthcare Costs?

First post in over two years, yeah! Get out your "politically incorrect" folder for this one, or perhaps your "American Elitist" folder...

I was thinking about the conventional wisdom that health care costs in the USA are higher than in any other developed country. I think a lot of theories have been put forth as to why this is. Off the top of my head, the commonly cited reasons are: greed, corruption, inefficiencies, antiquated systems, too much/too little regulation, focus on treatment rather than prevention, liability insurance, malpractice lawsuits, diet issues, and increasingly sedentary population... have I missed anything?

I'm sure there's varying degrees of truth to all those reasons (even the seemingly mutually exclusive ones like too much/too little regulation). But here I put forth yet another theory. Maybe someone else already thought of this, but if so, I haven't read that person's writing!

Assume that, as a whole, across the entire planet, healthcare is a market economy. That is, it is governed by the rules of capitalism. Yes, many countries have socialized medicine: but at the global level, those countries are just another consumer of healthcare.

So, what does a market economy do? It puts a value, or perhaps more specifically, a price on whatever product is being traded. What is the value, then, of healthcare? The ultimate value is keeping someone alive.

What price are you willing to pay to keep someone alive?

Most people would have a hard time putting a price on the life of a loved one. For example, most people would do whatever it took to save the life of their children, including paying "the ultimate price" (i.e. giving up their own life). But as you move out of your circle of loved ones, past the next tier of close friends, and exclude colleagues and casual acquaintances, you're left with an overwhelming number of people that you don't even know. The number of people you know and care deeply about is---for all practical purposes---infinitely greater than the number of people you don't know. You'd pay the ultimate price to save a loved one, but what would you pay to save a random person you know absolutely nothing about on the other side of the world?

In a pure capital market, the participants' relationships to each other is that of your relationship to a random person in another country: nothing. In fact, the relationship actually hinges to some degree on adversarial, and is yet further removed from a loving, caring relationship. Perhaps you don't wish the other market participants harm, but at the end of the day, you are competing for fixed resources.

In short, my market view of healthcare is that of a proxy for the value of human life. In an efficient capital market, those things with the highest value also have the highest price.

So perhaps the global economy puts a higher value on the lives of Americans in aggregate. Health care in the USA costs more because the value of American life is higher.

From a general capital market perspective (i.e., not just health care), the USA has clearly been the leader in value creation for the last century or so. I don't think anyone will argue against the notion that the USA has been the dominant global power since WWII. America's prosperity has certainly increased the overall prosperity of the world. Yes, not everyone has uniformly benefited from the rise of the USA (in fact many have been burned), but, my layperson's gut feel says that, overall, the "rising tide" of the USA has---more often than not---"raised all boats".

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