Health Care Economics

John B. Davis, Robert McMaster

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317294009
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The analytical approach of standard health economics has so far failed to sufficiently account for the nature of care. This has important ramifications for the analysis and valuation of care, and therefore for the pattern of health and medical care provision. This book sets out an alternative approach, which places care at the center of an economics of health, showing how essential it is that care is appropriately recognized in policy as a means of enhancing the dignity of the individual.

Whereas traditional health economics has tended to eschew value issues, this book embraces them, introducing care as a normative element at the center of theoretical analysis. Drawing upon care theory from feminist works, philosophy, nursing and medicine, and political economy, the authors develop a health care economics with a moral basis in health care systems. In providing deeper insights into the nature of care and caring, this book seeks to redress the shortcomings of the standard approach and contribute to the development of a more person-based approach to health and medical care in economics.

Health Care Economics will be of interest to researchers and postgraduate students in health economics, heterodox economists, and those interested in health and medical care.

1
Health Care Economics?

“The place of care in the economy is everywhere.”

(Nelson, 2016: 12)

1.1 Introduction: mainstream health “care” economics?

In his last book, Challenging Health Economics, the late Gavin Mooney¹ (2009: 3) recommends that the field of what he terms “health care economics”² be re-named “health economics” to help better focus research in health issues on the many specifically social determinants of health, which he argues mainstream “health care economics” largely ignores. In his view, the social determinants of health are not only economic, and those that are economic are not only associated with market-type exchanges. The field as it is currently constituted, then, is too narrow, and seeing it rather as “health economics” might encourage researchers to investigate a greater range of issues and factors involved in the determination of health. Were this to happen, mainstream health care economics might then become a subfield of “health economics,” would primarily investigate individual decision-making behavior in what Mooney takes to be health care markets, and would perhaps be better re-named “the economics of health care markets.”

We entirely agree that Mooney’s conception of “health care economics” in its current form misses much that explains health – especially as practiced in the United States where the development of the field over the last several decades has been closely tied to the study of US health care markets. But we have a concern additional to Mooney’s, and argue that the mainstream approach is even narrower than he believes it is in that in our view it does not even include a genuine concept of care. If we are right, then in Mooney’s terms, “health care economics,” or even “the economics of health care markets,” are misleading labels, and mainstream practitioners operate under what we regard as an even more serious misunderstanding regarding the subject matter of their field. This book develops this case in arguing that concept of care itself has been misconceived and has consequently been neglected in contemporary “health care economics.” Our aim is to make an adequate concept of care central to an economic analysis of health – a step we regard as both complementary to Mooney’s initiative and potentially transformative of the field as is his emphasis on the social determinants of care. We propose an approach that embraces moral values aimed at enhancing human flourishing.

Our starting point, then, is the puzzle we think arises if “health care economics” (Mooney’s terminology) is not actually about care. Mooney says that “health care economics” is not really about health; we say it is also not really about care. What is left – “economics” – is an important clue to our puzzle. Following Lionel Robbins (1932), many standard economics textbooks describe “economics,” that is, mainstream microeconomics, as about applying standard neoclassical economic reasoning to the analysis of choice in whatever form this happens to take. Nothing in this analysis, which assumes rational individuals always seek to maximize utility, says anything about the concept of care per se. Microeconomic theory, including standard health economics, does recognize other-regarding behavior, for example in the form of altruism (see, especially, the work of Gary Becker, 1976b). Care may have some altruistic features, but it need not. The temptation for health economists is to conceptualize care as altruism thereby conflating the two. We believe this is a substantial error. By conflating altruism and care, people’s utilities are assumed to become aligned. We believe that care goes beyond individual preferences in that it encompasses moral, instinctive, habitual, and practice dimensions. Care is both individual and social. We believe that care for most people involves some kind of caring activity or caring attitude which individuals exhibit towards others often in some sort of selfless way when they care for them. Indeed, this is a common understanding of care and, as we argue later in the book, this conception of care seems to be quite the opposite of utility-maximizing behavior, which supposes individuals are always motivated by the prospect of payoffs for themselves.

Standard health care economics, then, is simply the result of taking conventional microeconomic tools and concepts, and applying them to yet another set of choices aimed at utility maximization, in this case those that are assumed to be “markets”³ in which the commodity being transacted is health care. Indeed, since standard microeconomic theory is believed to be a universal engine of analysis that can be applied to all situations at all times in all locations, irrespective of their apparent institutional or cultural differences, there is a temptation to argue that there is little distinctive about “medical care markets” (see, for example, Pauly, 1978). Yet many “health care economists” think of health as “distinctive” (for example, Arrow, 1963; Culyer and Newhouse, 2000a). They do so frequently on the basis that “health care markets” on both demand and supply sides depart from the standard microeconomic textbook analysis of markets. Thus, for example, consumers of health care may be ill-informed about costs and benefits; the supply of health care (what we later term as medical care) may be subject to trade-offs between personal financial incentives and morally informed preferences, and the demand and supply of health care may exhibit spillover effects – externalities. Nonetheless, this analysis retains important assumptions about the centrality of what is taken to be market exchange and the rationality of individuals. The implication of this is that caring activities in health care markets must accordingly be explained in terms of the behavior of rational utility-maximizing individuals, and that any caring behavior that does not fit this specification is irrational or does not play a role in the way health care, as economists conceive it, works. Thus the solution to our puzzle about what can health “care” economics be about if it is not about care is that it is about this substitute rational utility-maximizing concept of “care,” not about what we believe most people think the idea of care involves.

Of course “health care economists” could be right and most people wrong about what the idea of care involves. This book argues, however, that economists are wrong and most people are right, and thus that it is important to re-appraise the nature and place of care in the health care economy. To defend these conclusions, this chapter begins by first examining how the concept of care has been interpreted in standard “health care economics” as the idea of a special type of externality: a caring externality. It then goes on in subsequent chapters to set out how care is understood in various other literatures, including philosophy, medicine, and feminist works, as well as what we believe to be broadly involved in caring activity in normative and behavioral terms. Our view is that: (1) health care cannot be successfully explained using the standard economic model; (2) health care is relational in nature and must be explained in terms of social relationships between people, which goes beyond the mainstream economic account; and (3) an alternative health economics is needed to account for what is involved in producing good health and medical care.

The second section of this chapter describes standard microeconomic reasoning about markets for health care that uses principal–agent analysis to account for clinician–patient relationships as being between utility-maximizing individuals.⁴ The third section then explains the specific conception of care this type of analysis employs as a special type of market externality – a “caring externality” – that is especially characteristic of health care markets. The fourth section critically evaluates the “caring externality” idea as a concept of care by arguing that it is problematic in ways that undermine it as a concept of care as commonly associated with caring attitudes and activities. We also trace these difficulties back to the individualist, market-based approach to health care from which the “caring externality” idea is derived. The fifth section of the chapter then advances an alternative view of the individual as socially embedded, and argues that this accommodates a different conception of care in the clinician⁵–patient relationship. The sixth section returns to the subject of what an alternative health economics ought to involve. The seventh section outlines the argument and the chapters of the book as a whole, and summarizes its main conclusions.

1.2 The microeconomics of health care markets: principal–agent theory, moral hazard, and care

Standard microeconomic theory assumes that in market transactions individuals behave rationally, and act in such a way as to maximize individual utility, or expected individual utility when outcomes are probabilistic, subject to their incomes, their endowments, and market prices. Health care economics uses an important development of this analysis – principal–agent theory – to explain how people seeking health care and medical professionals interact in health care markets (for example, Mooney and Ryan, 1993). In principal–agent theory, information about the quality, performance, and value of goods and services being transacted in markets is incomplete and asymmetric across the individuals participating in those markets. Individuals who lack this information on the demand side of the market are thus at a disadvantage relative to those individuals on the supply side who possess it, and if the former are sufficiently risk averse, they may choose not to participate in the market. However, if this information problem can be overcome, both sides stand to gain, and so both have incentives to reach agreements that offset the information asymmetry between them. This occurs when those lacking information, now referred to as the principals, enter into principal–agent relationships with those who have it, now referred to as the agents, such that transactions between them are structured so as to make it in the agents’ interest to act in the principals’ interest. Both principals and agents are then able to maximize expected utility, and carry out their desired transactions despite the market’s special informational characteristics (Fama and Jensen, 1983).

In health care economics, health professionals such as clinicians on the supply side of the market are the agents of individuals seeking health care on the demand side of the market who as their patients are the principals. The principals lack information about the cost, effectiveness, and variety of different forms of medical care, which is known by physicians or clinicians, but on the standard view principal–agent relationships develop between them that make it the interest of clinicians to act in the interest of their patients, so that they each maximize their respective expected utilities. These principal–agent relationships are usually embedded in health insurance systems, which establish the scope of health care coverage, prices for that coverage, and the corresponding responsibilities and compensation of medical professionals. Insurance systems use third-party payment market mechanisms that displace direct, two-party negotiation in the market over health care between principals and agents, standardize the relationship between them, and further mitigate the effects of information asymmetry in the market. The market still operates indirectly between clinicians and patients as individual expected utility maximizers, but insurance systems remove the need for them to work out the terms of agreement themselves, and are thus efficient in the sense of maximizing gains from exchange to both patients and clinician/physicians.

At the same time, insurance systems create a potential for moral hazard. Moral hazard exists when individuals who are insured against risk act less cautiously than they would were they not insured and exposed to risk. Essentially insurance creates additional incentives beyond those that already exist in the underlying market relationship by changing people’s behavior. So while insurance helps secure the principal–agent clinician–patient relationship, it also creates incentives on both sides of the market that work to weaken that relationship. Thus patients on the demand side of the market have an incentive to seek more health care than they may need when that additional care is insured, while clinicians on the supply side of the market have an incentive to supply less care than they are capable of providing when insurance systems establish levels of minimum care and predetermine their levels of compensation. That said, health economists have long acknowledged the potential for supplier-induced demand, where physicians have the incentive to over-supply, especially if service provision is linked to their remuneration (McGuire, 2000, 2011). Insurers seek to reduce the demand for unnecessary care and see that sufficient care is supplied (especially if reduced care in the short run leads to more costly care in the long run), but they also face information asymmetries with respect to both sides of the market that limit their ability to do so. This in turn creates a role for health care economists whose task in this connection is to help design efficient health care insurance markets that most effectively align individual incentives across the two sides of the market. Thus though the relationship between patients and clinicians is a complicated one, it is still explained as a market relationship.

The question this summary leaves us with, then, is this: what is there in this analysis that justifies including the term “care” in health care economics? The foundation of standard microeconomic theory, whatever its application, lies in individual utility-maximizing behavior and the self-regarding incentives which individuals face when they interact in markets. This implies that in health care markets, as in all other markets, individuals really only “care” about their own utility. Further, since what changes hands in markets is a commodity whose measure of value is its price, what changes hands in health care markets must also be a commodity whose value is its price. It is true that the commodity supplied and demanded in these markets is labeled health care and that health care suppliers are often called caregivers. But the idea that there is something distinctive about health care as a commodity and caregiving is undermined by the fact that in standard microeconomic theory health care is bought and sold in markets just like any other commodity (see, for example, Pauly, 1978). Thus just as the theory reserves no place for caring attitudes and caring activities that many people associate with the idea of care in its analysis of markets for steel, consumer appliances, etc., so there is no place in the analysis of markets of health care for the idea of care, despite the customary reference to care and caregivers, and despite longstanding protestations that health is somehow “different” (for example, Culyer, 1976). At the same time, health care economists are still reluctant to give up any association of health care markets with care, and have accordingly sought to link caring attitudes and activities to the market in the form of what standard theory calls an externality, in this case a “caring externality.” What, then, does this involve? And does it successfully make care in the wider sense a part of health care markets?

1.3 Care as a market externality: caring externalities

The standard microeconomic view of an externality is of a spillover effect from a market transaction between two agents onto a third agent or agents not party to the transaction. Externalities that are costly to third parties (for example, pollution) are negative externalities, and the usual recommendation is that they be reduced by government taxing or regulating the transaction so as to force the parties to the transaction to bear the spillover cost, that is to “internalize” it and disburden third parties. Externalities that benefit third parties (for example, education) are positive externalities, and the usual recommendation is that these spillovers be promoted by government by subsidizing or otherwise supporting the original transaction to increase their beneficial effects. Both kinds of externalities, then, are effects of market activity not captured by the transaction between its parties, which as a result have an accidental or unintended character (if not always for the market participants, at least from the point of view of the theory of markets).

Noted health economist Tony Culyer has generalized this reasoning to health care markets, arguing that they often generate the positive type of externality, what he terms “humanitarian spillovers,” whereby people gain utility when the health status of others improves because they sympathize with them (Culyer, 1976: 88). Care is thus defined as an externality based on a sympathetic regard for others. “Individuals are affected by others’ health status for the simple reason that most of them care” (ibid.: 89; also cf. Culyer, 1971). This “caring externality” could operate as a third-party effect as described above when family, friends, or people in general sympathize with those receiving health care, but it could also operate as a spillover directly onto patients themselves from clinicians who exhibit sympathetic concern for them. The spillover in this case is automatically internalized without government intervention in the market, though it still counts as an externality, because the caring behavior that clinicians adopt towards their patients goes beyond the market-driven requirements of simply supplying medical services, as shown by the fact that these services can also be delivered without sympathetic caring behavior on the part of clinicians toward their patients. Why, then, would some clinicians behave in caring or sympathetic ways towards their patients? As we understand the standard health economic approach there are two plausible reasons: altruism and social capital.

Following Elias Khalil’s (2003) examination of the notion of altruism in standard economics, it is possible to distinguish three approaches: “egoistic”, where altruism revolves around the expectation of the accrual of future benefits to the altruist; “egocentric”, where there is an interdependency of utilities; and “altercentric”, which, for Khalil, refers to a particular personality trait. In other words, an individual is pre-disposed – regardless of (monetary) incentives – to be other-regarding. Thus, an altercentric individual may be inclined to behave altruistically by virtue of their ability to demonstrate concern for another where this concern is not centered on or motivated by issues pertinent to the self.

We argued in Davis and McMaster (2015) that health economics adopts the egocentric orientation by virtue of its conceptualization of interdependent utility functions, meaning that one person’s utility increases – here the clinician’s – when another person’s utility increases – the patient’s (see, for example, Mooney and Ryan, 1993). On this account, sympathy is frequently considered as a form of altruism, or is conflated with it in mainstream theorizing (Collard, 1978; Khalil, 2003). Thus, if physicians have such feelings towards their patients, and engage in caring behavior, this can be utility maximizing, despite the fact that a market transaction does not require it. If the clinician, in addition to supplying health care services, behaves in a caring way towards patients, this is likely to cause the patients’ utility to be higher. The result is that the sympathetic clinician’s own utility is then higher as a spillover from the patient’s higher utility. Interdependent utility functions consequently operate outside of the market, because they involve a relationship between individuals that is not mediated by the price–quantity logic of the market. Further, when individuals’ utility functions are interdependent, they behave toward one another in an other-regarding way rather than in a self-regarding way. Strictly speaking, in the utility function framework other-regarding behavior is also a form of self-regarding behavior, albeit a non-standard one,...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• CONTENTS
• List of illustrations
• Foreword
• Preface and acknowledgements
• 1 Health care economics?
• PART I Health care notions: health economics and the biomedical approach
• PART II Theories of care: towards health and medical care
• PART III Care systems, human flourishing, and policy
• Bibliography
• Index