Topic 7: The Provision of Medical Care

A major area of government activity in most countries is the provision of medical care. Barring government intervention, medical care will be provided within a free market, with residents purchasing medical care services from doctors and hospital care from privately owned and run hospitals. It is inevitable that with modern scientific developments the cost of these services will become high enough so that the poorest segment of society will not be able to afford them, especially in peoples' later years when the postponement of death becomes an overriding concern.

Since major sickness and the resulting heavy medical care requirements is a random process, major medical expenses will occur randomly over the course of life with frequent long periods in which no major expenditures need be made. When life-threatening issues appear, the required expenditures will in many cases, be unaffordable or equal to the entire accumulated capital assets of the person's family leaving that family with insufficient medical care and in poverty thereafter. An appropriate market response is the development of medical-care insurance which will spread the costs more evenly over a lifetime. Randomly arising lapses into poverty accompanied by inability to purchase necessary medical care can then be avoided by purchasing insurance.

When family members are young the costs of insurance are likely to be greater for many families than what would otherwise be the ongoing flow of medical maintenance expenditures, making it cheaper to operate on a cash basis. Indeed, poor families may not be able to pay the premiums. As major medical-care needs become more likely with age, the cost of purchasing insurance will rise, eventually to unaffordable levels for non-poor families. Risk-taking by families will result in wealth-eliminations and insufficient medical care with probabilities that will become larger with the ages of family-members.

Given these conditions, why would a community force all its members to continually have medical-care insurance by having the government provide free insurance paid-for through taxes or, alternatively, provide free medical care to all members of the community also paid-for through taxes? Are there externalities that need to be accommodated?

The usual types of externality do not appear to be substantially present with respect to medical care. If one individual does not buy insurance and at some point loses her entire wealth as a result of critical medical-expense needs, some other members of the community may be worse off to the extent that newly bankrupted individual may not pay her debts or continue to buy some particular commodities on a regular basis. But some individuals, those who supply medical care, will be better off. The average effects on everyone but the bankrupted individual will likely be small. It is thus not clear that the rest of the community will suffer a decline in individual wealth of the sort that will lead a majority to support the imposition of medical-care insurance on the entire community.

To the extent that some individuals do not buy insurance and end up bankrupt and unable to purchase the medical care that will keep them alive, other people may experience sadness and discomfort upon observing them dying or living in poverty because they did not buy medical insurance. This is what is sometimes called a consumption externality, but could also be labeled a taste or utility externality. The person experiencing it may not be suffering a reduction in their physical wealth or income, but will nevertheless experience a substantial reduction in utility. It is the same reaction that typical parents will have upon observation that their ten-year-old son is using alcohol or drugs. The favored policy approach will be of the sort advocated by committed Christians to deal with associates who declare themselves to be atheists---force them to change their views and resulting behaviour.

At the basis of every free society is a view that individuals should be allowed to choose what they believe and how they act as long as their behavior does not physically harm others. Nevertheless, a policy of requiring everyone to have medical insurance will be adopted in a democratic society because it prevents others from suffering a loss of utility by observing the consequences resulting from a failure to have that insurance. This disutility will be augmented by self-interested crying for help by those who suffer the consequences of not having purchased medical-care insurance and now wish otherwise.

One might thus expect that these taste-based externalities will induce a majority of members of a society to ensure that everyone has freely available government-arranged basic medical care to extend survival and provide minimum acceptable health outcomes while those who might desire a more advanced and scientifically updated level of medical care would still be free to purchase insurance for that purpose in the private market. This will minimize financial and physical suffering resulting from an inability to pay for basic necessary medical care and to subsequently earn normal levels of income.

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