A Quibble with Kling

Arnold Kling points out a disagreement we have over whether Americans spend too much on health care. There is no doubt that Americans spend more on health care than any other country. But why is that necessarily a bad thing? There is no “right” amount to spend on health care or anything else. The United States spends more on athletic shoes than any other country. No one speaks of the athletic shoes crisis.

Economists consider health care a “normal good,” meaning that spending rises or falls with income. As incomes rise, people demand more and better health care. America’s wealth determines its spending on healthcare. And we receive value for our money. If you’re sick, American health care is still the best in the world. For diseases such as cancer, heart disease, and AIDS, outcomes are far better in the U.S. than in other countries.

Of course much health care spending is wasted. Many of the drugs, procedures and services we purchase are relatively useless. Some may even do more harm than good.  But who is best placed to make that decision? After all, health care purchasing is based on a wide range of personal preferences, not all of which are measurable in terms of outcome. Pain tolerance, time away from work, desire to pursue certain activities, and even peace of mind may all influence my decision. Only individual consumers can really make such decisions — and there really is no wrong answer.

Where Arnold is right is in pointing out that those decisions are currently distorted by our third-party payment system. Because those purchasing health care are able to pass the bill onto third parties, the usual market disciplines don’t apply. We consume health care with even the most marginal perceived value. That is why health-care reform must focus on giving consumers a greater stake in the decision-making process.

If consumers were spending more of their own money on health care, would total spending go down? Probably. But, then again, I don’t care — and neither should the rest of us.