CHAPTER 5

MY SISTER'S KEEPER: THE COMMUNITY INTERESTIN HEALTH CARE

QUOTE FROM NY BOARD OF HEALTH?

THE SOCIAL SIGNIFICANCE OF INDIVIDUAL HEALTHSTATUS

The common description of health care as a "need" -- asdifferent from ordinary commodities for which there are wantsthat, when backed by willingness to pay, become demands --conveys information about two of its characteristics. As notedin chapter 1, need refers to a special technical relationshipbetween care and health status, identifiable by an externalobserver. An expert evaluation of A's health status by B givesrise to B's judgement that A "needs" care, that utilization ofspecific forms of care would raise A's health status, and whilethis judgement may not command universal agreement, it is ina form communicable to C, D, and so on. Nor does its validitydepend on A's agreement. By contrast, the value to A ofcommodities in general, or health status in particular, isknowledge privileged to A which B and others, howeverexpert, can only infer by observing A's statements or actions, orby analogy from their own or others' experience in similarcircumstances.

But "need" also carries significant ethical overtones; itsallegation asserts an obligation on others. The statement that Aneeds care, which gains credibility if made by an expert anddisinterested B, implies that A, or someone in A's family, or A's

community, ought to do something. A's want for a particularcommodity is, by contrast, neutral. The statement "Oh Lord, Ineed a Mercedes-Benz!" is a joke. "Oh Lord, I need a coronaryartery by-pass graft!" is not.

This more general social significance of health care utilizationdepends on its being needed in the technical sense as well. Onlycare which is perceived as effective in preventing or restoringdeteriorations in someone's health status is a "need" in thesecond, obligational sense. If A asserts a desire for care whichexpert B judges unnecessary in the technical sense, then C, D,et al. will not, in general, feel any obligation to respond.1

The health status of an individual thus takes on a specialimportance to the rest of the community beyond that of herconsumption in general, but similar to that of political or judicialstatus. "One person, one vote" is a firmly established principle,and while no one denies that money buys political influence, itis not lawful actually to buy and sell votes. Indeed in somesocieties voting is a legal duty. Similarly access to justice issupposed to be available to all, regardless of ability to pay. "Tono man will we sell, deny, or delay justice," it is said in MagnaCarta. And though, again, the courts do respond to the longpurse, there is a fundamental principle that justice is not acommodity to be bought and sold like any other. When it is, itis not justice.

Such special status derives from a general perception that life,health, and freedom, are not ordinary commodities, but are 1 The human mind is a very strange place, and odd things happen at the margins of the health care system. Theindividual who feels a need to have a perfectly healthy limb amputated to match a “self-image” of an amputee wouldgenerally be agreed to be suffering from a form of mental illness. But cosmetic surgery tests the limits ofobligation, as does the multiplicity of “alternative therapies”.

prerequisites to the enjoyment of all others. Maximizing one'sutility across a consumption bundle remains possible if one is inhospital or prison, or disabled (though not, presumably, if dead),but there is a marked shift in the whole quality of life, a sharpdiscontinuity in the domain of the maximand. And since, asColonel Rainborough put it, "The poorest he that is in Englandhath a life to live as the greatest he," assurance of thepreconditions of living this life becomes a basic right. Whenthreatened, such preconditions are normally defended, not inthe market, but in the political arena, or (not infrequently) byforce of arms.2

MODELLING THE INTERPERSONAL RELATIONSHIP

Traditionally, this aspect of the concept of need has beenbrought within economic analysis through the concept ofexternal effects, or externalities, in consumption. The use of acommodity, in this case health care, by one individual may havepositive or negative effects on the well-being of some other orothers. The consumer represented in Chapter 1 (and most ofeconomic theory) is a rather bizarre animal, not only purelyselfish, unconcerned with the well-being of others, but isunaffected by their patterns of consumption. External effects,however, may be represented by inserting another term into[1.3] thus:

UB{Q1, Q2, Q3…QM, HC, HS(HC, Qj, etc.), HCA} … [5.1]

Here, the term HCA has been inserted to indicate the amountof health care used by an individual A, while the superscript B 2 note 1 from Mercy 2

has been added to the utility function to indicate that it, and allthe other terms in it, refer to a second individual B. It iscommonly assumed that dUB/dHCA > 0, that is, more healthcare for individual A makes individual B better off in someway, but this need not be so. A’s decision to get a flu shotreduces B’s chances of getting the flu, but A’s use ofantibiotics can increase B’s chances of acquiring a resistantstrain of infection. The external effects of one person’sconsumption pattern (health care or any other commodities)on another’s well-being can be positive or negative.

When such external effects exist, private market mechanisms ofresource allocation lead to under- or over-provision of thecommodity in question. B, and others C, D, etc., would eachbe willing to pay something, at least, in order to encourage A toget a flu shot. The flu shot is worth more to the community ofpotentially affected individuals as a whole, than it is to A alone. If decisions over immunization are based only on thewillingness to pay of the individual getting the shot, too fewpeople will be immunized. Correspondingly, if the volume ofantibiotic use is based only on the willingness to pay of users,antibiotics will be overused because their negative impact onthe well-being of others -- which might be reflected in othersbeing willing to pay A to use less -- is not taken into account.3 There is no market in which those affected by the primary 3 It is very important to be clear, at this point, about the standpoint from which “too much” and “too little” arebeing defined in this framework. From the clinical perspective, which in this example is probably shared by mostreaders, “too few” flu shots would be defined by the degree of population coverage needed to achieve “herd immunity”and prevent the spread of disease. Any reference to “too much” antibiotic use has to be qualified by appropriateness ofuse; the patient with a severe bacterial infection needs the drugs, and her use may generate positive externalities inlimiting the spread of the infection. But the person taking antibiotics for a viral infection is simultaneouslygenerating a negative externality. From the economic perspective, however, these clinical questions are irrelevant.“Too much” and “too little” are defined solely in terms of willingness to pay. The allocative distortion arises becausethe private market fails to take account of the willingness to pay of those benefiting or suffering from the externaleffects of an individual’s consumption behaviour.

consumer's consumption can register their preferences.4

The resulting under-provision, in the case of positiveexternalities, is shown for the case of two individuals in Figure5.1a (Culyer 1971). A particular commodity Q, say health care,is valued by A; DA

ADAA represents her demand for it if she

were buying it in the marketplace.5 If the price charged to heris PA, then she will choose to buy Q0 units of care.

(Each point on the horizontal axis represents a particular levelof consumption of care by A; the vertical distance to thedemand curve at each such point represents A’s willingness topay for an additional unit of care when she is alreadyconsuming the amount indicated by that point. If herwillingness to pay exceeds (falls short of) the price, she willincrease (reduce) her consumption; the equilibriumconsumption level for her will be where the price just equalsthe value to her of the last unit bought.)

But B also has an interest in A's use of care, as indicated by thepresence of HCA in B’s utility function [4.1]. Her demand, herwillingness to pay, for care for A (not B's own demand forcare) is represented by DB

ADBA.6 Thus, the total value to A and

B together of care for A is represented by the vertical sum ofDA

ADAA and DB

ADBA, or DD. If A makes her decisions as to

care consumption without reference to B's interests, then at 4 note 2 Mercy ch 35 This “demand curve”(here a straight line)is probably the most widely used piece of conceptual apparatus ineconomics -- we shall see more of it in Chapter 7. It represents the amount of a commodity that a consumer wouldwish to buy at each of a series of prices. Formally it can be derived from [1.2] by assuming that the utility functionhas been maximized and then showing how the level of consumption thus defined of a given commodity changes asits price varies. If the price of a commodity rises, the optimal or utility-maximizing amount of that commoditybought by the consumer in [1.3]falls. Or one can fall back on casual empiricism -- “everyone knows” that people’sconsumption patterns respond to prices. 6 Nercy note 3.4

price PA and output Q0, the value to A of the last unit purchasedof Q is equal to or greater than PA, and of the next (notpurchased) is less than PA. But its’ total value to “ society”(both A and B) is PA + B. Assuming PA represents the realresource cost of producing care, its opportunity cost in terms ofother things foregone, then at Q0 the value of one more unit ofQ to society exceeds its resource cost. Its production should beexpanded to Q1, at which point the value to A and B togetherof the last unit of care used by A just equals its resource cost.

If, on the other hand, care received by A were viewednegatively by B, then care for A would involve both resourcecosts and the loss of welfare to B. If A’s use of care isdetermined solely by her own preferences, “ too much” carewill be provided to A in the sense that the last unit used by Awill have a value to her less than its’ total cost to A and Btogether. This possibility is shown in Figure 5.1b, whereDB

ADBA lies below the zero-price axis. The sum DD now lies

inside DAADA

A, and the socially optimal level of provision ofcare for A is now Q2 where the value which A places on herlast unit of consumption just balances its opportunity cost inresources used up, plus the additional distress it causes B. Theprivate market will lead to an excessive supply to, andutilization of, care by A.

The under- or over-provision of particular commodities thatgenerate externalities is recognized in economic theory as aform of ” market failure” -- failure in the sense that voluntaryprivate exchange transactions will fail to bring about an“ allocatively efficient” or “ Pareto-optimal” (Chapter 3)pattern of resource allocation. After all such transactions havetaken place, it would still be possible to rearrange patterns of

resource use and of output so as to make some people betteroff without making anyone else worse off. But will thishappen? The consideration of externalities exposes anambiguity inherent in the concept of allocative efficiency, anambiguity obscured by the ubiquitous and mischievousrepresentative agent again.

The traditionally recommended response to external effects is apublic subsidy to (tax on) the commodity generating thepositive (negative) externality so as to reduce (increase) the netprice paid by users, relative to its resource cost.7 Figure 5.1creplicates 5.1a, and includes a public subsidy of $t per unit paidto buyers of care. A now confronts a price in the market of PA- t. At this price, she will choose to consume Q1, which is justthe amount at which the marginal resource cost of care equalsthe sum of its values to A and to B. This expansion in the totaloutput of health care has absorbed resources from theproduction of other commodities whose value at the marginwas less than that of health care for A (assuming that the priceof care PA reflects its true opportunity cost). In the case of anegative externality, the tax will cause total health care use tofall, resources will be released, and output of “ other things”will rise.

In the previous allocatively inefficient situation, it was possibleto rearrange output so as to make at least one person better offwhile leaving no one worse off; in the new allocatively efficientsituation this is no longer possible. But it does not follow thatthe process of moving to this new situation did in fact leave no

7 note 3.5 from Nercy The traditional recommendation is not very clear, however, as to how the informationrequired to determine the optimal t might be derived. The process would not be trivial, though considerablework has been done on ways of eliciting public preferences

one worse off.

This may be most easily seen in the case of a tax on acommodity that generates negative externalities. Clearly A isnow worse off, receiving less of that commodity and paying ahigher price for the amount she does get. (She may or may nothave more to spend on other, non-taxed commodities but ineither case is still unambiguously worse off overall.) B (C, D,etc.) are clearly better off, relieved of the negative effects of A’sconsumption. But what happened to the tax receipts?

If these are paid over as a grant to A, she may be compensatedfor her loss from the tax. Indeed, since B etc. are clearly betteroff simply from the reduced negative externality, they couldafford to contribute a bit more for the grant to A and still comeout ahead. There is certainly some reallocation of finances thatwould make everyone better off. But if instead the tax receiptsare equally distributed among the members of the community,then B etc. are even farther ahead -- less negative externalityand cash in pocket -- while A is unambiguously worse off.

The point is fundamental, and will be central to Chapter 7. It istheoretically possible for the transition from a less to a more“ efficient” allocation of resources to be accompanied by apattern of compensatory payments such that no one loses, andeven such that everyone gains. But there is no necessity forthis to occur, and nothing in the definition of allocativeefficiency to require it. In the real world it almost never does. Some gain, some lose.

Unless, of course, A is a representative agent! (Or a resident ofArroworld.) Everyone, A, B, C, old uncle Tom Cobbleigh and

all, is over- or under-consuming health care, and by the sameamount. All benefit equally from remedying the allocativedistortion. But outside Arroworld it is a basic theoretical errorto claim that the new allocatively efficient situation is in someabsolute sense “ better” that the previous “ inefficient” one.8 That conclusion depends on how one weights the interests ofgainers and losers -- a political decision.

CONTAGION --- IS PUBLIC FINANCING OF HEALTHCARE CATCHING?Abstracting from these distributional questions, however, thepresence of external effects in consumption of health care, asexpressed in [5.1], appears to offer a straight-forward rationalefor public intervention and support. If private markettransactions result in an “ inefficient” under-provision of healthcare, then the state can step in with subsidies, financedpresumably through taxation, to bring about a more efficientoutcome.

And certainly external effects in the form of contagion are amatter of common observation, and can beave very large. Theyear 2003 has witnessed the dramatic health and economiceffects of SARS (Severe Acute Respiratory Syndrome), but theannual death toll from influenza in high income countries ismuch larger. World-wide, the big killers are malaria,

8 An odd notion has floated around in the theory of welfare economics for a couple of generations or more, that onecan call one allocation unambiguously better than another if the gainers from the new situation could compensate thelosers and still come out ahead (and the losers could not afford to bribe the gainers, in advance, to forego the change)even if no compensation is actually paid. This potential compensation test makes no obvious sense (particularly tothe losers!), and is refuted with great élan by Reinhardt (1982). It comes down to the fact that anyone can formulatewhatever criteria she likes for judging for “better” or “worse“ the trick is to make such personal value judgementsplausible to anyone else. An economist has no particular expertise or moral authority in this choice. The potentialcompensation tests were useful to economists (and their clients) in extending their ability to offer policy advice thatappeared to be based on “objective“ analysis. But disciplinary convenience is not a moral argument.

tuberculosis and AIDS. Without discounting the very real andserious effects of contagious illnesses, however, this form ofexternality is wholly inadequate to explain the scale and extentof public funding for health care in high income countries.

In the first place, control of contagion is now a relatively minorpart of health care activity. That is not to say it is unimportantin the broader scheme of things. Control of contagious diseasesthrough improvements in sanitation and nutrition, as well ashealth care, have clearly added greatly to our well-being,lengthening and improving the quality of life.9 But only a verysmall proportion of modern health care systems deals withprevention or treatment of contagious disease. Preventive“ public health” activities accounts for 5% or less of total healthexpenditures in OECD countries (Canada is on the high side at6%-7%) and care for infectious diseases is probably between5% and 10% (though upper respiratory infections undoubtedlyaccount for a much larger proportion of visits to generalpractitioners). A sudden outbreak like SARS can place severestrains on public health facilities, but this is largely a problem ofshortages of real resources -- skilled people and facilities --rather than of money per se. To interpret the present structureof health care delivery and financing as a response to “ marketfailure” in the presence of the external effects of contagionimplies that the tail is wagging the dog.

Historically, of course, contagion has been a much moreimportant problem -- as a tour through any cemetery older thanthe twentieth century makes clear. But the community

9 Perhaps surprisingly, however, the great advances in life expectancy between the mid-19th. and the mid-20th.centuries seem to owe little to advances in medical care, or more specifically in prevention of and care for contagiousdisease.

response was primarily regulation and direct delivery of publicservices, not public subsidy of access to the general medicalcare system. Rather than subsidizing A's acceptance ofimmunization, for example, most societies provide it free, on amass basis in schools or public health clinics, and in certaincircumstances (sensitive occupations, foreign travel) require itby law. Formerly, if A became ill, quarantine enforced isolation(with or without other care) to protect B, and was backed upby legal penalties, not taxes or subsidies. The 2003 SARSepidemic revived this practice, on a voluntary basis in Canada,but with the threat of legal action in the event of non-compliance. Sanitation and nutrition are likewise improvedprimarily by the public provision of clean water and sewagedisposal, and by direct regulation of individual and particularlycommercial behaviour. "The Common Law of England doesnot recognize a prescriptive right to remain dirty."

Economists have a professional predilection for policies thatmodify individual behaviour through changing economicincentives; this is reflected in the traditional “ subsidize and tax”response to the allocative distortions resulting from externalities. Economic motivations may be considered more powerful andpredictable in their effects; they may also give the illusion ofbeing more respectful of individual autonomy, a central featureof the ideology embedded in the mainstream economicperspective. But from the clinical perspective, the problemposed by contagion is not one of ensuring the appropriateallocation of health care relative to the preferences andresources of different individuals, but of containing the spreadof disease and limiting its effects on health. One suspects thatthis latter view is shared by a large majority of the population. Economic instruments may be one means to this end, but not

the only ones or necessarily the most effective.10

They may also, contrary to the conventional wisdom ineconomics, be unacceptably crude -- consider the impact of a taxon antibiotics to discourage excessive use. The average non-economist, confronted with the proposition that efficient resourceallocation requires such a tax, would have strong reservationsabout the validity of the analysis. And rightly so, becauseantibiotics also have positive externalities when usedappropriately to cure an infection that might otherwise be passedon to someone else.11 Yet the possibility of emergence of avirulent, highly contagious, and antibiotic resistant agentcontinues to hang over us, and can generate truly horrifyingscenarios.12

In any case, the scale of economic incentives intended toencourage or discourage behaviours with external effectswould bear no necessary relationship to the costs of associatedhealth care. It has been pointed out that the frameworkpresented in Figure 5.1 makes no case for the “free” (at pointof service) care that characterizes most modern health caresystems. This is quite true, but by the same logic it providesno argument for partial user charges either. At that level ofgenerality it is quite possible that the necessary subsidies toattain “allocative efficiency” would be much larger than theactual cost of care itself.

10 Influenza, for example, is a particular threat to the elderly, especially the very elderly in long-term careinstitutions. The disease is brought in by staff and visitors. Requiring staff to be immunized, as a condition ofemployment, could significantly reduce transmission and mortality.11 No problem. We subsidize the appropriate use and tax the inappropriate. Information is free, right?12 Far too frightening to face. Accordingly we keep our heads firmly buried in the sand, and our fingers firmlycrossed. Anyway, a serious effort to regulate antibiotic use on the basis of expected effectivenss would threaten arange of interests from drug company profits, through physician autonomy to meat produces(including, apparently,marketers of nursery equipment). Safer to stay in the sand -- for now, at least.

Recalling that care per se is a “bad” even for those fullyaware of its effects, and that there are some very strange ideasfloating about in the population about the relative risks andbenefits of various forms of preventive care, person A maywant a very hefty bribe over and above the cost of the careitself. (Figure 5.1 draws A’s demand curve above the x-axis,but this need not be so. It might very well be below.) This inturn creates an incentive for her to misrepresent herpreferences in order to get a larger subsidy.

Indeed the whole discussion of externalities opens the questionof the prior assignment of rights. The traditional “subsidy andtax” approach rests on an implicit and asymmetric assignment. A does not have the right to inflict damage on B (etc.)directly, by acting in ways that generate negative externalities -- for this she should be taxed. But she does have the right toinflict damage indirectly by forbearing to act in ways thatgenerate positive externalities, and she is thus entitled to besubsidized to encourage her to change her behaviour. But onecould instead place the onus on A by regulation. One couldmandate behaviour -- making immunization against a suite ofchildhood diseases a condition of access to the public schoolsystem, for example, or against influenza a condition ofemployment in health care institutions (especially long-termcare). Prior to the eradication of smallpox “in the wild”, itwas common for countries to require entering travelers toshow evidence of successful vaccination.

The irony of the contagion example, however, is that while itprovides the clearest example of externalities, of an indisputablelinkage between one person’s consumption patterns and

another’s well-being, it is precisely in the case of contagion thatgovernments have typically separated off the relevant activitiesfrom the general medical care system. Indeed public action todeal with contagion precedes, by centuries, public support forhealth care in general.13 The care of persons with contagiousdisease is now managed within that system -- though that hasnot always been true -- but the various activities directed atpreventing and containing it are not. This observation undercutsany attempt to explain the predominance of public financing forhealth care as a response to contagion.

EXTENDING THE RANGE OF EXTERNALITIESThe social or public interest in health care, however, goes wellbeyond contagion. As reflected in public discussions of healthcare delivery, it emphasizes access to care for those in need asan end in itself, not merely as a way of protecting the rest of thecommunity, still less as a way of remedying “ failure” incommercial insurance markets and ensuring that people areoffered coverage at premiums reflecting their own risk status.Public financing of health care has been established toredistribute the economic burden of care, transferring financialresources from low to high users of care or from low-risk tohigh-risk buyers of insurance, so as to lower the barriers to("needed") care. Health care use is supported in order toincrease utilization by some, at least, of the population. Thegeneral social interest in use of health care by privateindividuals is strong enough that the community were preparedto tax themselves to subsidize this use.

13 Or does it? This statement implicitly equates “public” with “the state”. One might well argue, however, that theprovision of health care by charitable organizations, and particularly by religious orders, was just as much “public”as anything done by the state.

Nor are public insurance for and/or provision of services theonly forms of public support for health care. Public fundscontribute extensively to capital formation, both human andnon-human, in this industry. The costs of training health carepersonnel are largely home by government; this is true of allpost-secondary education, but since health care personnel areamong the most expensive to train, the size of the subsidy pertrainee is larger than for post-secondary students generally.Hospital capital -- buildings and equipment -- is predominantlyfinanced by government, as is a large share of biomedicalresearch.14 And private voluntary organizations mobilizecollective resources to fund individual treatments of particulartypes.

All such forms of public support, whether to increase thecapacity of the health care system -- people, facilitiesandknowledge -- or to lower the costs faced by users, representefforts to improve access to services, rather than providing fortheir direct delivery or mandating their use. Access in thepositive sense is rather difficult to define or measure, but in thenegative sense, barriers to access are readily identifiable and ofmany different forms. Economic barriers, direct charges tousers of care at point of service or otherwise related to use, arethe most obvious; it is these which are reduced or eliminated byuniversal public insurance. But geographic or social distancebetween provider and user, rigidities in the organization ofsupply, or simple capacity inadequate to meet needs, allrepresent additional barriers which are addressed by other typesof public policy, usually including some form of subsidy (Evans 14 Capital formation can be financed either by direct public grants -- government or charitable, or by incorporatingthe cost of capital in service reimbursements. The former retains long-run public control over the nature anddistribution of industry capital assets, But the latter approach may be unavoidable in a multi-source funding systemlike the United States, and is standard for pharmaceuticals.

1978). The whole area of educational and manpower planningfor health care, and the concomitant public concern for anappropriate geographic distribution of services, are evidence ofa social or public objective to assure access to care across thepopulation as a whole.

If the concept of consumption externalities is to provide aninterpretation of this more general community interest inits’members’ access to health care, we will have to make therelationship in [5.1] more specific as to how one person’s useof health care might matter to another. There appear to bethree different types of externalities, different channels throughwhich A's health care might influence B's well-being.the selfish,the altruistic, and the paternalistic.

Contagious diseases provide the leading examplesof the selfishexternality. In this case, B (or the rest of society) is very muchconcerned for her own health, but has no interest in A for herown sake. But B does have aninterest in A’s health, insofar asA may suffer from an illness that can spread to B. If healthcare for A can either prevent or cure her communicable illness,then B is made better off

Formally we can augment [5.1] to read:

[Selfish Externality]UB{Q1, Q2, Q3…QM, HCB, HSB(HCB, Qj, etc., HSA[HCA]| … [5.2a]

In the selfish case, A's health care affects A's health status,HSA, which affects B's health status, HSB (via contagion),which affects B's well-being. The community interest in A'scare is thus restricted to those forms of care that are effective in

improving A's health status in those particular dimensionswhich affect B's health. A's attitude toward the care she is toreceive is of no interest to B; compulsory treatment is perfectlyconsistent with this form of externality. And indeed the issueofcompulsory treatment has comeup in the case of tuberculosispatients whose failure to follow recommended treatmentregimens not only increases the risk of spread, but creates theconditions for the emergence of multi-drug resistant strains --MDRTB.

Indeed the selfish form of externality is also consistent with Inisolation, quarantine, or driving A out of the community,especially if no effective treatment is available. Quarantine is atemporary isolation, and thus relatively benign, though the 2003SARS epidemic certainly imposed costs on those unable to goto work.15 Leper colonies, by contrast, were a life sentence; inthe early stages of the AIDS epidemic there were proposals inthe United States for similar colonies for those infected withHIV.16 (These were never, apparently, taken seriously byanyone in authority.)

ALSO GET IN SOMETHING ABOUT HOMORECIPROCANS

We must, however, find a more inclusive form of external effectto explain the prevalence universal public health care.17 In whatfollows it should be understood that we are not claiming toknow what the utility function arguments are, for any 15 The costs generated or imposed by formal public health activities, however, seem to have been minute incomparison with those resulting from the independent activities of private individuals, “quarantining” and avoidingcities or whole countries where cases were reported the “Anne of Green Gables” effect?.16 In the middle ages there were apparently cases of plague victims being shipped out to sea and then bombarded untiltheir craft sank.17 For a more extensive discussion see Culyer and Simpson (1980).

individual, real or hypothetical, still less what they should be. The analysis only suggests what they might be, and thenconsiders whether a hypothetical specification is consistent withwhat we observed.

A purely altruistic form of interaction might be said to exist when B's interest in A's health care arises from a more generalconcern of B for A's well-being. We might postulate that Bderives satisfaction from seeing A happy, and suffers along withA -- Adam Smith's concept of sympathy (Collard 1978).

Formally we can modify [5.2a] to read:

[Altruistic Externality]UB{Q1, Q2, Q3…QM, HCB, HSB(HCB, Qj, etc.), UA[HSA(HCA)]} …[5.2b]

This framework, however, is also inadequate to explain theactual institutions and the cross-subsidies which we observe,virtually universally. The altruistic form of externality is notspecific to any particular commodity or source of satisfaction. IfB is really interested in A's well-being, however attained, sheshould respect A's preferences, and be as willing to subsidizegin as penicillin, if that is what A wants. And the criteria forsubsidy will be A's preferences, regardless of the effectivenessof the care received or the harm done by the gin (or vice-versa). Thus altruistic externalities lead to progressive incometaxes and welfare or public assistance schemes, which transferwealth to particular deserving A's but leave their use of itunrestricted.

It is a standard student exercise in elementary economic theoryto demonstrate that any given augmentation of well-being for arecipient A can be achieved by a smaller (or at worst, no larger)transfer of resources if it is through an income transfer --generalized purchasing power -- than if it is by subsidy of aparticular commodity.18 If B's interest is in A's well-being, theimplication is that B should give A money. This argumentunderlies some advocacy of negative income taxes as a cheaperand more effective form of assistance, substituting for variouscategorical and commodity-specific social programs -- likepublic health insurance.19

The argument from altruistic externalities to cash transfersrather than commodity subsidies does, however, have a seriousgap in the case of health insurance and health care. B's interestin A's well-being, when expressed through a program whichprovides of subsidizes health care use, responds to fluctuationsin A's well-being which arise from changes in health status. Ageneral negative income tax, or cash transfer program from richto poor, does not. Thus an altruistic society might very wellchoose to subsidize health care as a partial compensation fordifferences in well-being which arise, not from income orwealth differences, but from health status differences. Ideally,the compensation might be directly associated with healthstatus, not linked to it indirectly through health care use. Asdiscussed in Chapter4, however, it is generally impractical tomonitor health status directly. are use is taken as a signal for 18 Ceteris paribus, holding prices fixed, no work-leisure trade-off, and no after-markets in the commodity. Relaxthese assumptions, and predictions become both less secure and more complex, but the general principle ismaintained1919 In practice, of course, direct subsidies have the significant additional advantage that they may in fact be provided.Those who oppose direct subsidy or provision of specific commodities on the ground that hypothetical income transferswould in principle be superior, rarely advocate such transfers with equal energy. And a de facto policy of "do nothing" hasno a priori support

poor health.

In Canada, for example, the impact of public programs forhealth care on utilization patterns and levels can now betracked across half a century. In the early 1950s utilization ofcare varied directly with income. The Canadian SicknessSurvey showed that low-income persons experiencedsubstantially more illness and disability than medium- andupper-income persons. They received less care, however, andthe differences were particularly striking when care use wasmeasured relative to days of disability. Low-income peoplereceived just over half as many physician visits and operationsper disability day as the average person surveyed, upper-income people received about a third more. Differences inhospital use were less pronounced, but still significant (Canada,Department of National Health and Welfare and DominionBureau of Statistics 1960).

Studies of the introduction of public medical insurance, inparticular, have shown that its effect was generally to removethe influence of income on utilization patterns, and toredistribute care from upper- to lower-income groups. Whetherit also raised overall utilization levels, or whether these aremore a function of overall levels of health system capacity,personnel, and facilities, is a more difficult issue which we shalltry to deal with below. But the redistributive effect of publicinsurance seems well established. In fact there is now a cleartendency for utilization to be negatively related to income, and

students of the issue have concluded that this is not the result ofdifferences in the "price of time" or any other indirect priceeffects, but simply that poor people are sicker (Boulet andHenderson 1979; Broyles et al. 1983). Public health insurancedoes appear to have changed the distribution of health careutilization away from its previous relation to income, and closerto some external standard of medical need, which was itsprincipal announced objective.

The fact that the public program was declared to have thisobjective, that it appears to have met it, or at least moved agreat distance toward it, and that there is widespread andgeneral satisfaction with this result, supports the propositionthat the community at large feels an interest in the consumptionof needed health care by individuals. To express thisrelationship in the language of external effects, we must drawsome distinctions as to the nature of these effects. In makingsuch distinctions, the relationship between health status andhealth care which we have emphasized throughout will be ofconsiderable assistance.

ALTERNATIVE FORMS OF INTERPERSONAL EFFECTSIn the altruistic case, UB = UB{UA[HSA(HCA)]}, B's welfaredepends directly on A's welfare, which in turn depends interalia on A's health and thereby A's health care. In thepaternalistic case, B's well-being may depend directly on A'shealth care, but more plausibly, as discussed below, on A'shealth status, UB = UB[HSA(HCA)], and thus on A's health care.For a more extensive discussion see Culyer and Simpson(1980).

Of course, people can always buy insurance. Thus one mightargue that, if instead of subsidizing health care a societyredistributes income, formerly poor people can then choose tobuy health insurance, or not, as they see fit. But in the firstplace this presumes a more-or-less smoothly functioninginsurance market, which, as we have seen above, is least likelyto exist for the poor, elderly, and high-risk groups most likely toneed care. Secondly, even if such a market existed, high-riskpeople would still have to pay higher premiums. Thus the cashtransfer which expresses collective B's interest in individual A'swelfare would have to be related to A's ex ante expectation ofillness, or at least of health care use, or else significantinequalities would remain among A's at similar money incomelevels (after adjustment). Indeed the costs of fair insurance forsome particular chronically ill A's could easily exceed the totalamount which society was prepared to transfer to eachindividual A for income support. In the presence of largevariations in expected health care use, general income transfersplus even the fairest of insurance cannot substitute for a directsubsidy program.8

Such a direct subsidy could, in principle, take the form of anattempt, as part of the income transfer system, to estimate eachindividual's risk status ex ante and adjust her incometax/transfer position accordingly.9 Alternatively, and morerealistically, it could be based on the risk-evaluation process inprivate insurance markets. Each person's premiums, for astandard form of coverage, could be determined in that market,and a tax-financed subsidy would then be paid, not necessarilycontingent on actual purchase of insurance, to people in high-

risk categories. In effect, such premiums would be deductedfrom income in computing relative income for the generalredistribution program. This of course presupposes efficient andfully informed insurance markets. In practice such a systemwould be very expensive, unreliable, and inaccurate for thosewho need it most. It would also be a source of substantialincreases in insurance overhead costs, i.e., revenues for theprivate insurance industry.

Finally, of course, there is the "bleeding cheat" problem(Archibald and Donaldson 1976). Income is transferred, butrecipients spend it on gin, not health insurance. Some becomeill, a few gravely so. If society is not prepared to let them die,then ex post a further subsidy will be paid. In Canada at least,and we suspect in most other developed societies, improvidentA's would not be denied needed care, at least not life-savingcare. Knowing this, why should A's receiving income transferspurchase insurance?

atruistic, non-paternalistic relationships among the members ofa community. The Canadian approach, of financing care costsfrom tax revenues plus (in some provinces) compulsory"premiums" unrelated to risk status, serves to redistribute asubstantial amount of wealth from low- to high-risk persons, aswell as (like any insurance program), from well to ill.10 Thistransfer, which is independent of any effect of the publicinsurance program on levels of utilization, is consistent with thealtruistic, non-paternalistic form of external effects.

But consideration of community attitudes towards gin andpenicillin suggests that the externalities are in fact paternalistic,rather than altruistic. Health care is what the public finance

literature calls a "merit good" -- society in general feels thatindividuals in particular circumstances ought to use it -- asopposed to alcohol, which is a demerit good, and taxed. Butpublic responsiveness to concerns over frivolous use andunnecessary care, whatever the source of payment for suchcare, suggests that it is only effective, needed care which is themerit good. The social interest is in A's health status, and in herhealth care use only insofar as it contributes to that. Indeed,Canada's medical insurance program provides reimbursementonly for "medically necessary" services.11

POLICY RESPONSES TO EXTERNAL EFFECTS

If society's, or other individual B's, preferences display thispaternalistic (or perhaps maternalistic) characteristic, as itappears that they do, then optimal allocation of resources tohealth care production and use will require some sort of socialprogram to subsidize and expand this output beyond privatemarket levels. The beneficiaries of such transfers may be lesswell off than they would be with a straight cash transferconditional on illness (they might prefer the gin), but the payersof the subsidy will be happier.12 The form this subsidy shouldtake, however, is not determined by the existence of theexternal effects themselves. The strengths and weaknesses ofalternative institutional approaches can only be analysed in thecontext of the other peculiarities and sources of market failureintrinsic to the commodity, health care.

The range of possible alternatives is in fact two-dimensional,running from completely public provision, to completely

private, with variable degrees of public subsidy in bothinsurance and care markets. A completely nationalized healthservice, along the lines of the British National Health Service,represents public insurance and public provision; the state bearsrisks and delivers care. In the United States, most of both theinsurance and the provision functions are in the private sector,at least superficially. But large public sector subsidies flow todifferent groups in many different ways. The Veterans'Administration provides both public insurance and publicdelivery to its eligible population. The tax system providespublic subsidy to both private insurance purchase and, above athreshold, private care use, in amounts which increase withincome level. Medicare for the elderly and Medicaid for thepoor involve private delivery, and a mix of predominantlypublic with some private insurance. The functions of insuranceadministration are contracted to the private sector, while thepublic sector bears the risks and subsidizes the costs. Thosewho qualify for subsidy neither by age, nor by poverty, nor byspecial status or special illness, may receive no assistance at all.

In Canada, the insurance function is public for hospital andmedical care, and part of dental and pharmaceutical. Subsidiesflow through tax plus uniform premium finance of hospital andmedical care, with insignificant out-of-pocket charges. Dentaland pharmaceutical costs are subsidized for children, theelderly, and the poor, in amounts varying from province toprovince. Most provide a subsidized public insurance programfor private delivery; Saskatchewan and Prince Edward Islandprovide direct dental care delivery for children.

In form, the hospital and medical care delivery systems areprivate and contract with the public insurance program to

provide care at specified rates of reimbursement. In practice,however, the monopsonistic power of the public programs inhospital and medical care has been used to exert significantinfluence on the delivery system to the point that hospitals, atleast, can no longer be thought of as purely private sectorinstitutions. Unlike their American counterparts, they occupy amiddle ground between public agencies and private "firms,"with entrepreneurial decision-making power fragmentedbetween hospital managements themselves, governments, andprivate physicians. Physicians are farther toward the privatecontractor end of the spectrum, and dentists even more so.

If external effects in consumption were the only source ofmarket failure in health care, the form of the public subsidy toindividual use would not be a significant issue. A health caremarket supplied by private, for-profit firms, competitive inpricing, with free, unlicensed entry, and unregulated as tochoice of technique, would, according to conventionaleconomic theory, be marketing its products at minimum cost.Fully informed buyers would select the care which was of mostvalue to them, relative to the prices they were required to pay.Since private sector delivery would be both technically efficientand price-competitive, it would make care available at a priceequal to its marginal resource cost (P = MC, as in Figure 3-1 or2-2), so there would be no particular advantage in public sectorprovision. Indeed, the absence of competition, plus bureaucraticregulation, might be expected to make public sector provisionmore costly and less efficient. By a similar argument, andignoring the problems of market failure in insurance markets, itwould appear that the risk-bearing and premium/claimsadministration functions would be best carried out in thecompetitive and efficient private sector. The public response to

externalities in consumption could then be restricted tosubsidizing (partially or fully) health insurance premiums forthose whose income levels and/or expected health care usewere such that they could not pay for private insurance, at all,or without undue sacrifice, and to subsidizing and/or mandatingthe use of specific services which were of particular significanceto the rest of society (immunizations, e.g., or the care ofchildren).

A few additional problems would remain, of course. In view ofthe "bleeding cheat" problem, minimal coverage would have tobe mandatory for everyone. Secondly, the community interestonly in effective care would have to be reconciled withindividual interests, which might be broader. We have arguedabove that rational individuals attach negative value to healthcare per se, and value positively only its health status benefits,but care believed effective clearly also has an amenitydimension. Thus, the mandated and subsidized care would haveto be restricted, insofar as possible, to the care which, whenreceived by individual A's, was perceived by collective B's aseffective and of an appropriate amenity standard.

This, however, opens up a serious issue of the moral hazardvariety. Suppose the relationship of health care to health statustakes the form of Figure 1-3, panel (b). The payoff to more careis always positive, but declines as care increases. Collective B'scannot then undertake to subsidize all effective care forindividual A's, but must somehow impose a cut-off point atwhich further effect is judged not worth the cost to society.Schemes for the public subsidy of private insurance anddelivery envision this as taking place through more or lesssophisticated systems of patient cost-sharing; the mandated and

subsidized minimal insurance policy would embody suchprovisions to limit patient/consumer-initiated moral hazard andto ensure that the public subsidy commitment was not open-ended. Thus access to social resources (insurance funds pluspublic subsidy) would be conditional on individual willingness-to-pay, which, in turn, would require cost-sharing to becarefully matched to individual resources if it were not todiscriminate against lower-income people, not only in utilizationof care, but in access to financial subsidy as well.

A program of direct public provision, by contrast, can limitutilization by direct rationing without a structure of patient cost-sharing. The limitations on individual A's access to collectiveresources are imposed by refusal to provide, either directly or,more commonly, in the form of restrictions on availablepersonnel and facilities. Both the British National HealthService and the Canadian public insurance program do this; thelatter as a monopsony buyer of care can determine the terms onwhich suppliers will be reimbursed, as well as (for hospitals)providing capital by direct grant. The public agency thusdetermines the amount of hospital space and facilities available;its influence over manpower is more problematic.

THEORY TO OBSERVATIONGovernments outside Arroworld therefore have in formulatingtheir health care policies no choice but to take on thesefundamental distributional issues -- who gains and who loses? Public intervention goes far beyond trying to remedy “ market

failures” and move towards a more “ efficient” or “ Paretoimproved” allocation of resources. The financing of health caresystems, in all countries, redistributes resources amonghouseholds on quite a large scale.20 Relative to the hypotheticalpurely private market system depicted in Figure 2.4, somepeople are unambiguously made better off and others worse off(at least in financial terms, see below). The scale and directionof these transfers is determined by the mix of financing andfunding mechanisms operating at any given time -- the upperleft and upper right branches of Figure 2.7. And because thespecification of and choice among these mechanisms hassignificant implications for the relative well-being of differenthouseholds, they are permanently matters of politicalcontention. The intensity of this contention varies greatlyacross nations and over time, but nowhere and never does itentirely disappear. The notion that there is, or could be, afinancing system that was “ best for everyone” is a fantasy.

Figure 5.2, drawn from the work of Mustard et al. (1998),illustrates the scale of the transfers that can be generatedthrough health care financing. The population of the provinceof Manitoba, Canada (about a million people) were divided intoincome deciles on the basis of (a sample of) family incomesreported on the Canadian Census.21 These individual-level datawere then matched with individual records from the universal,comprehensive public health insurance system providing fullcoverage of the cost of hospital and physicians’ services andlong term care. Figure 5.2a shows total public expenditures for 20 Recall the distinction made above between ex ante and ex post redistribution. All forms of insurance, public orprivate, redistribute resources ex post, after the fact, from those who have not suffered losses to those who have. Butif premiums or other contributions are set equal to each person’s expected loss, then there is no redistribution exante. Here, we refer to ex ante redistribution.21 The use of individual-level census data for research purposes raises very significant privacy concerns, and wascarried out under very tight security procedures.

these services, allocated by income decile, in 1994. Theassociation of illness with low income shows up clearly in thebottom half of the income distribution; average per capita healthexpenditures rise, decile by decile, as incomes fall below themid-range. (A small group of permanently institutionalisedpeople -- “ INS” in the Figure -- were separated from theincome deciles because of their exceptionally high costs.)

The public programs funding these services are financed fromprovincial general revenues, which include cash grants from thegeneral revenues of the federal government. Figure 5.2b usesthe individual-level income data from the Census, inconjunction with a simulation model developed within thefederal government, to estimate within each decile the taxpayments corresponding to the public expenditures on thesehealth care programs. Estimated total tax payments across alldeciles (plus the permanently institutionalized population) areset equal to total population expenditures reported in theadministrative records of these health programs. Thecombination of a relatively progressive income tax system anda concentration of income in the top decile results in a heavyconcentration of contributions at the high end.

Figure 5.2c makes the obvious subtraction of contributionsfrom expenditures, by income decile, showing the total net gainor loss from the current public financing system relative to ahypothetical system of universal self payment.22 The netimpact on individuals will obviously vary; there are healthypeople with low incomes and very ill people with high

22 The comparison is hypothetical because the distribution of utilization by income class would obviously bedifferent if people had to pay all their own bills. The permanently institutionalized would presumably be in theirfamilies’ back rooms -- or out on the street.

incomes. But the average effect can be seen readily fromnoting that the number of people in each decile is just over100,000. In Figure 5.2d the net gain or loss in each decile isconverted to a percentage of “ consumable” income -- marketincome after taxes and transfers -- to show the impact of thepublic financing system on the net income position of people atdifferent levels in the income distribution.

That effect is large, and provides a straight-forward explanationfor why political pressure for alternative approaches tofinancing comes primarily from the upper end of the incomedistribution, and why the “ public-private” debate never goesaway. Whatever else a change in the financing mix might do, itwill necessarily shift the distribution of the financing burdenacross income classes. Any change that weakened theconnection between total contributions (taxes, insurancecontributions, and out-of-pocket payment) and income levelwould shorten all the bars in Figures 5.2c and 5.2d, transferringincome from those with lower to those with higher incomes.

Whether this is good or bad policy is a matter of politicalpreference; economic analysis per se cannot answer such aquestion. But what it can do, and if conducted honestly mustdo, is make clear that these potentially large distributionaleffects are front and centre in all decisions on health care policy.

THE ARCHITECTURE OF CONFLICTING INTERESTSThe inherent conflict of economic interest graphically displayedin Figure 5.2, however, actually highlights only one of threedistinct axes along which such conflicts are played out indifferent health care systems. It embodies but obscures the

second, and ignores the third. Health policy in the real worldreflects the simultaneous tensions along all three axes, and shiftsover time and across countries according to the relative politicalstrengths of the contending interest groups. The outcomesvary, but the architecture of conflict is universal.

The three axes are:Who Pays for Care? (and how much); Who Gets Care? (what kind, when, from whom); andWho Gets Paid for Care? (how much, for doing what).

The “ official” answers to the first two questions, reflected inthe rhetoric of all public health care systems, are based on theclinical perspective described in Chapter 3 but have strongMarxian echoes. People should get the care they need, asjudged by clinical experts, and should contribute according totheir ability to pay.23 (Recall that Bismarck launched theGerman health insurance system in 1883 precisely to take thisvery popular issue away from the Socialists. Then and now,the Marxian answer seems to be the one that most people, inmost countries, support.) Who Gets Paid? has no explicitofficial answer; the implicit answer might be that people whoseeffort and skills are required to ensure that patients get the carethey need, should be paid appropriately to their skills and effort. An economist might answer that this rather vacuous answercould be given content by saying that people should beemployed as required by cost-minimizing firms (public orprivate) to produce “ needed’ care, and paid at rates determinedin a competitive labour market. The real answers given in any 23 Underlying this view is a general public perception that illness and injury are simply misfortunes, and not thevictim’s fault. Correspondingly advocates of more private funding tend to emphasize the extent to which peoplebring such misfortunes on themselves by bad behaviour (but see Chapter 1 on heterogeneity and the social gradient). The rhetoric of ”responsibility” is part of the conflict over “Who Pays?”

society are embodied in the way its health care system actuallyworks; what really happens will always fall short of the rhetoricto a greater or lesser degree. Certainly the answers differ fromone society to another.

WHO PAYS?Figure 5.2b represented, in the particular context of Manitoba inthe mid-1990s, how much was paid for hospital andphysicians’ services and long term care, on average, by themembers of different income groups. In that system, and forthose programs, contributions were not linked to illness status(or at least use of care). Inclusion of a more comprehensiverange of health care services would have shown a lessprogressive distribution of costs, because prescription drugs anddentistry (and some smaller categories of expenditure) are notfunded through the Medicare system. Private employer-paidinsurance premiums and out-of-pocket payments, which fundthe majority of drug expenditures and almost all of dentistry,are not linked to income level, and out-of-pocket costs areborne by the ill. not the well.24

The relative progressivity or regressivity of financing systemsvaries considerably across the high-income world. Thegenerally accepted “ ability to pay” principle implies that totalfinancial contributions should rise, on average, with income,and they do. But how fast? The major source of comparativesystem information is the ECuity Project, a collaboration ofresearch teams from the countries of the European Community(plus the United States) that has been assembling and analysing

24 This is not quite true. As noted earlier the tax-expenditure subsidyto employer-paid insurance in Canada is worthmore to people in higher tax brackets. In after-tax dollars, premiums are lower for higher income people -- who arealso more likely to have such coverage.

national data on financing and use of health care, and healthstatus, since the beginning of the 1990s. Their workdemonstrates the close relationship between the national mix offinancing channels -- the upper left branch of Figure 2.7 -- andthe answer to the question “ Who Pays?”

The ECuity Project analyses make use of the Kakwani Index,derived from a representation of income inequality called theLorenz curve (Figure 5.3a). If the members of a population areordered according to their incomes, from lowest to highest, theLorenz curve shows the relationship between successiveproportions of the population (on the x-axis) and thecorresponding proportions of the total population income thatthey account for (on the y-axis).

The curvature of this line reflects the relative equality orinequality of the income distribution within the population. Ifincome were equally distributed, the Lorenz curve wouldcorrespond to the 45o degree line from south-west to north-east; if all income were received by only one person, it wouldtake a reverse-L shape coinciding with the x-axis until the lastindividual was included and then rising to one hundred percent. A numerical measure of this curvature is given by the Ginicoefficient, defined as one minus twice the area under theLorenz curve, and thus running from zero in the case ofmaximum equality to unity in the case of maximum inequality.

The distribution of other quantities that vary across incomeclasses can be drawn in the same frame as the Lorenz curve, inthe form of concentration curves showing the proportions ofthose quantities accounted for by different proportions of thepopulation. Figure 5.3b, for example, includes concentration

curves of tax payments for tax systems that are progressive,strictly proportionate to income, and regressive. The KakwaniIndex can then be defined for each system as the differencebetween the areas under the Lorenz curve and under therespective concentration curves, providing a numerical measureof the degree of progressivity or regressivity of each taxssystem. Thus the Kakwani Index for the proportionate taxsystem is zero, for the progressive system is positive (theshaded area P), and for the regressive system is negative (theshaded area R). QZ CK SCALING ON THIS -- IS THATAREA DIVIDED BY THE UNIT SQUARE, OR THETRIANGLE?

Kakwani indices can be defined for other components of thehealth care financing mix. A community-rated insurancesystem, for example, charging the same premium to eachperson, would have a concentration curve coincident with the45o line in Figure 5.3b -- as would a poll tax -- and would havea substantial negative Kakwani index. The proportion ofincome that a person paid for health care would fall steadily asher income rose.

A system financed entirely from user payments, or from privatepremiums based on the expected value of user payments, couldhave an even larger negative Kakwani index insofar as peopleat lower incomes tend on average to be less healthy. If theiruse of care, and their expenditures, were proportionate to theirgreater illness, they would be spending more in absolute termsthan those at higher incomes, with a concentration curvebulging out into the upper left triangle of Figure 5.3b. But thispattern would be unlikely to develop in such a system, simplybecause people at the lower end of the income distribution

would not be able to afford the care they need.

All real-world systems, however, are financed from a mix ofsources, and a Kakwani index can be defined for each. Theindex for the system as a whole is the weighted average of theindexes for each component, with the weights representing theshare of total system finance coming from each source. Analyses of a number of countries in the European Community(Wagstaff et al., 1999) have demonstrated, as one wouldexpect, that tax financing tends to have a positive or smallnegative index (Figure 5.4a); the mix of taxation mattersbecause income taxes tend to be progressive and sales taxesregressive. Social insurance premiums can be either regressive(Germany, the Netherlands) or progressive (France), dependingupon the system structure, though there is some questionamong analysts as to whether the French social insurancepremiums might not more properly be defined as taxes. Usercharges of all types, however, are highly regressive, with largenegative Kakwani indexes, as are (with one qualification)private insurance systems. Figure 5.4b shows, for the samegroup of countries, the proportions of financing coming fromthe different sources.

One would expect, then, that systems with a higher proportionof tax financing (private financing) would have a moreprogressive (regressive) distribution of the overall burden ofpayment, and in general this has been shown to be true (Figure5.5). But the pattern is neither as strong nor as uniform as onemight expect. Interestingly, the degree of tax progressivity islower in some of the countries making the heaviest reliance onthis source (the Scandinavian countries) than in Germany,Switzerland, or the United States (at least at the time of the

study) where other sources predominate. This suggests apossible element of political trade-off, with less resistance to taxfinancing where taxes are closer to proportionate. But oneshould not make too much of this; it remains true that theburden of paying for health care, through all sources, falls muchmore heavily on the lower end of the income distribution in thelatter countries than in Scandinavia.

Regressive systems for financing health care can nonethelessredistribute income progressively. Figure 5.6 shows the Lorenzcurve and financing concentration curve for a society with amix of financing sources that is in aggregate regressive, but inwhich people at lower incomes tend to use more health care,and generate more expenditure. The concentration curve forhealth expenditures thus lies well to the north-west of that forcontributions, so that even though lower-income peoplecontribute a larger proportion of their incomes to finance healthcare, their net benefits are still positive while those for higher-income people are on average negative. The vertical line isdrawn at the point where the slopes of the two concentrationcurves are equal; the population to the left of this line are netgainers while those to the right contribute, on average, morethan they use.

The redistributive impact of a country’s health care system willaccordingly depend upon the distribution of both the financingburden and the pattern of health care use by income class. Butit will also depend upon the scale of the health care systemitself. When health care absorbs about 14% of the GDP, as inthe United States, the proportion of incomes shifted acrossincome classes will be twice as large as in a country thatspends only 7% of its’ GDP on health care. It follows that

when health care systems expand over time as a share ofnational income, the redistributive effect of a given financingstructure (and utilization pattern) also increases.

Figure 5.7 (van Doorslaer et al., 1999) shows, for the same setof countries as in Figure 5.4, estimates of the overall extent ofincome redistribution associated with their health care financingsystems. It may not be coincidental that the countries spendingthe largest share of their national incomes on health -- theUnited States, Switzerland, and Germany, have the mostregressive financing systems. Where expenditures are veryhigh, those at the upper end of the income distribution havemore to lose from amore progressive financing system. QZADD A COMMENT OR TWO FROM TABLE? HOW DOTHESE COUNTRIES COMPARE WITH THE U.K.? ALSO,IF IT WORKS, THE ISSUE OF A FEEDBACK LOOPBETWEEN TOTAL COSTS AND SYSTEMFAINACING.COSTS ARE HIGH BECAUSE THE SYSTEM ISREGRESSIVE, BUT THESYSTEMIS REGRESSSIVEBECAUSE COSTS ARE HIGH. SEPARATE POINT--CHECK LIS FOR GINIS FOR US SIW AND GER.This relationship between total health expenditures andredistributive impact also suggests a link, at the political level,between cost containment and the “ public-private” debate. When health expenditures are growing faster than incomes, andthe extent of redistribution is increasing, political pressure buildsat the high end of the income distribution for an increase inprivate financing. This may be advocated as a way ofcontaining rising costs, but the real effect, and presumably theobjective, is to limit the extent of income redistributionassociated with rising costs.

These data from the ECuity Project are unfortunately growingquite elderly, and significant changes have taken place in anumber of health care systems since they were generated. Replication of the analyses is not, a simple task. What is mostimportant, however, is not so much the continuing validity ofparticular estimates as the demonstration of the relationshipbetween financing structures and the answer to the question“Who Pays?” The tension along that axis is resolved at verydifferent points in different countries, through the choices madeas to particular financing mechanisms, and that mix alwaysremains to a greater or lesser degree in contention.

WHO GETS?The central normative principle of the clinical perspective is alsocentral to all public health care programs -- people should getthe care they need regardless of their ability to pay. Yeteverywhere one finds some degree of tension between this, andthe economic norm that services should go to those willing/ableto pay for them. In several European systems physicians arepermitted both to work in the public system and to practiceprivately, offering care on preferred terms in return for a directcash payment. (Where such private payments are not formallypermitted they may occur “ under the table” being tacitlycondoned by those managing the public system.) The paymentmay be in addition to reimbursement from public plans payingphysicians on a fee-for-service basis (extra- or double-billing),or may be the full fee for the service , as when patients “ goprivate” in the British National Health Service.25 They mayeven be permitted to use public facilities, without payment, forthis purpose. The preferred terms typically include shorter 25 In principle this private activity is carried out over and above contractual commitments of time and effort to theNational Health Service -- a sort of voluntary overtime. The reality is often somewhat different.

waiting times for surgery and perhaps “ nicer” facilities; privatepractice may also be the privilege of the more senior andprestigious practitioners, perhaps offering higher quality care. .

Defenders of dual practice systems argue that private care takespressure off the public system thereby improving access foreveryone. But this argument makes no economic sense. Noone wouldpay extra, out of pocket, for health care if she did notbelieve that she was getting something for the money -- shorterwaiting times and/or superior quality care. The maintenance ofa care differential is essential to the survival of such systems. And since the private payments represent additional income forpractitioners -- in some systems and specialties a very largeamount of extra income -- practitioners face very powerfuleconomic incentives to make sure that access is better forprivate patients. Private practice (or extra-billing) in publicsystems is a way of preserving a certain degree of privilege forthose with greater ability to pay. It enables them to buypreferred care for themselves, without having to pay in taxes tosupport a similar standard for others.

There are other ways of tempering the egalitarian thrust ofpublic systems. All systems impose user charges for certainservice ( especially pharmaceuticals), some in substantialamounts. These are known to reduce care-seeking by lower-income patients (their impact on total care use is less clear; seeChapter 6). In a capacity-constrained environment (hospitalspace, surgery, but not pharmaceuticals!) reducing use bylower-income people opens up greater access for those betterable to pay. (Studies of the introduction in 1970 of universal“ free” coverage for physicians’ services in the province ofQuebec, in Canada showed this process in reverse. Use of

physicians; services remained constant in total, but theproportion used by people with lower incomes rose.)

Yet again, systems with a “ private care” option typically offerprivate insurance (some with, some without tax expendituresubsidy) to cover part or all of the cost of “ going private” . Where user charges are high, one can purchase privatecoverage against those charges. (The net effect of suchapparently anomalous “ insured user charges” is to shift costsfrom an income-related tax to a flat, regressive payment.) Insystems with multiple public sickness funds, private insurance isavailable for people at higher incomes or members of selectedoccupations. By restricting access to these lower-risk pools,the financing system allows their members to enjoy preferredservices -- again, shorter waits and/or access to moreprestigious practitioners -- without contributing to a generalupgrading of standards.

These “ privilege-preserving” features do not vitiate the claimthat European countries provide universal, comprehensivepublic coverage for their citizens. That claim may be rathershaky in some countries in the “ Mediterranean tier” but ingeneral the public glass is better thought of as “ 90% full” (ormore) rather than “ 10% empty” . The persistence of suchfeatures, however, and the periodic attempts by governments toexpand or contract them, bear witness to the continuing tensionalong the “ Who Gets” axis. When people speak as citizens,most (even in the United States!) endorse the clinicalperspective that people should get the care they need,regardless of ability to pay. But as individuals, many of those inthe higher income brackets also believe that they should be ableto buy their way to the head of the queue, or to see the “ best”

doctors.

But to what extent does this actually happen, in differentcountries? Attempts to assess the extent to which care use indifferent income brackets matches the distribution of healthneeds are an order of magnitude more challenging than studiesof the distribution of the financial burden. Data on thedistribution of health care use by income class are very limited,and on health status are even more so. The matching byMustard et al. (1998) of individual-level census data on familyincomes to individual-level administrative data on health careuse is unique. But survey data on self-reported health status,health care use, and income are becoming increasinglyavailable. Recent studies of by the ECuity II Project have usedthe same approach of comparing concentration curves as wasused to identify the distribution of the financing burden, toexplore the distribution of need and use by income class.

These studies have found (in 1996 data) a common patternacross a number of the countries of the European Community. The concentration curves for both indicators of “ need” andfor use of general practitioners’ (GP) services are bowed outinto the upper left triangle of the Lorenz curve diagram, as inFigures 5.3b and 5.6 above. People at lower incomes tend tohave poorer health status and greater need for care. But theyalso tend to receive more care, or at least more GP services. When use of GP services by income class is adjusted forincome-related differences in estimated “ need” , no significantrelationship with income remains. In other words, the publicfinancing systems in EC countries have enabled people with thesame needs to use the same level of GP services, regardless oftheir income class (“ horizontal equity” , or equal care for equal

need).

For medical specialists’ services, however, the pattern is quitedifferent. After adjusting for need, the ECuity II Project findingsshow a significant “ pro-rich” bias in use in the EC membercountries, particularly in a greater probability of seeing aspecialist. This bias remains even after adjustment for theeffects of availability, i.e. there are typically more specialists (percapita) in regions with higher average incomes. The number ofvisits for those who have seen a specialist also tends to increasewith rising income (after adjusting for need), but this appears tobe related to greater density of supply in wealthier regions.

There is, then, some evidence that the various “ privilege-preserving” mechanisms in the European health care systemsare achieving their presumed purpose, of enabling those withgreater resources to purchase preferred care. The availability ofvoluntary private insurance, whether commercial or “ privatesocial” (Figure 2.6), appears to be the primary factor associatedwith this “ pro-rich” bias in medical specialist use. Theavailable data did not include waiting times for care; onesuspects that this would show an even more marked “ pro-rich” bias, particularly for access to specialty services. There isno way of knowing at this point, however, whether theseincome-related differentials have any impact on relative healthoutcomes.26

In interpreting the source of the bias in specialist use, it is worth 26 One should be cautious in labeling the greater use of specialists a ”quality” advantage. More may be better (byassumption) in economic theory, but not in medicine. One can get a good argument (from GPs) that a well-trainedand experienced GP can provide better care for most of the ills that flesh is heir to; hence the reference throughoutthis work to “preferred care”. The situation probably differs across countries depending on whether general practice isa recognized specialty in its own right, and the backbone of the system, or merely the resort of those unable toqualify for a specialty.

noting that a similar bias in favour of higher income groups hasbeen found in the Canadian health care system, where there areno “ privilege-preserving” features such as a separate privatesystem of care, extra-billing, or private insurance for servicescovered by the public plans. Care is available for all “ on equalterms and conditions” , and yet studies of cardiac patients in theprovince of Ontario have shown intensity of service for patientswith apparently similar problems varying by income class. Those studies, however, were based on self-reported data. Alater study linking self-reported health status to administrativerecords from the provincial reimbursement agency showed thataggregate health care expenditure, after adjusting for healthstatus, showed no relationship to income. This is consistentwith severalmuch earlier studies showing income-relateddifferences in use disappearing with the introduction of theuniversal public medical programs at the end of the 1960s. Onbalance it appears that there may be some forms of “ social”bias that persist after removal of financial barriers to care, butthe differences across countries in the public and privatefinancing mix show up clearly in the ECuity II Project studiesas differences in patterns of access -- particularly when theUnited States is included. In most of the European countries,care is universally available at low or zero cost for access -- butit is not necessarily the same care.

Does this matter? Does preferred access to preferred caremake any difference to therapeutic outcomes? Certainly thereare social gradients in mortality and morbidity in all theEuropean countries, though flatter in the more egalitarian onesand overall relatively much flatter than in, say, the Americas. But these have not been linked to differences in access to care.

Logically it would seem that either there are income-relateddifferences in therapeutic outcome, or there are not. If thereare, then the egalitarian claims made for these systems ring a bithollow. If there are not, then those who spend their ownmoney for access to preferred care are being taken for a ride byproviders and private insurers. The easy answer fortheirgovernments would be that there are no (systematic)differences in therapeutic outcomes; the “ privilege-preserving”features offer only convenience, amenities (carpets, notlinoleum) and timeliness. (Though if timeliness means nothaving to spend six months or a year in pain and dysfunction,waiting for orthopaedic surgery, that hardly seems like“ therapeutic equivalence!) But is this true? And if so, areprivate patients told so? One can understand a certain generalreluctance to resolve the ambiguities and compromises arisingfrom deeply embedded conflicting interests.

WHO GETS PAID?From the clinical perspective, health care systems are (large andcomplex) social institutions intended to ensure that people whocould benefit from health care services get the care they need. They are health care (and hopefully also health) generatingmechanisms. But from an economic perspective they are alsoinstitutions in which people supply resources for the productionof care, and are paid for those resources. They are income-generating mechanisms, and there is accordingly a permanenttension between those who pay, and those who are paid, overhow much will be paid for what resources -- or in UweReinhardt’s (QZ) compact phrase, “ the allocations of lifestylesto providers” . Economic theory has a well-developed storyabout how these questions will be settled in the marketplace,but it is a story with only occasional relevance to the processes

through which “ Who Gets Paid?” is answered in real-worldhealth care systems.27

The discussion of insurance in Chapter 4 illustrated very clearlyone of the major struggles along this axis, between public andprivate insurance. Private insurers have specialized skills in ratesetting, marketing, claims processing, and are paid for applyingthose skills. Human resources specialists in public and privateindustry have corresponding skills in negotiating with privateinsurers. In a universal public system, the market for thoseskills largely vanishes and their owners must look elsewhere foremployment. The net worth of the insurance firms employingthem must be written down as their sales and net revenueshrink -- and share values fall. Hence the “ no holds barred”struggles by private insurers in the United States to suppressnational health insurance.

Outside the United States, commercial insurance firms’ growthprospects depend upon undermining universal public systems --from their point of view this is simply part of marketing. Nothing personal, or even necessarily ideological, but requiredby their responsibility to shareholders to maximize profits.

In this process, however, their interests overlap with those ofhigher-income individuals. As pointed out in Chapter 4, normalcommercial underwriting segments markets and differentiatespremiums by risk status. Essentially the “ product” that theysell, and that public insurance does not, is inequality and 27 A major weakness of the story in economic theory is that it assumes resources are undifferentiated, and can betransferred costlessly from one production sector to another -- failure to recognize heterogeneity again. In reality,resource-owners (which includes individual people supplying their own time, effort, and skills) fight to keep themarkets/jobs for which they have become specialized through training and experience. For the health care sector,this fight is routinely carried on in the political arena.

regressivity of burden distribution. Where public insurance ismore or less universal, they sell preferred access -- the ability to“ jump the queue” and pay off the maitre d’ for quick seatingat the best table -- to those willing and able to pay forinsurance.

But they also sell regressivity of burden distribution in financingsystems that save taxpayer contributions by imposingsignificant user fees and then permitting, encouraging, or evensubsidizing private insurance coverage for those charges(private “ Medigap” insurance in the United States, themutuelles in France, etc.) As noted above, the net effect forthose who buy such coverage is to shift the flow of funds in theupper left branch of Figure 2.7 from an income-related channelto a flat-rate equivalent to a poll tax. (For those who do not,the shift is to out-of-pocket payment or simply no care.) Theoutcome of struggles over “ Who Gets Paid?” thus has a directinfluence on “ Who Pays? and “ Who Gets?” -- the axes are notorthogonal.

There is indeed a further linkage to the interests of (some)providers of care. Physicians’ scope for steering patients into“ going private” or extra-billing patients in fee-for-servicesystems is enhanced when patients have private insurance forall or part of those private payments. On the other side of thecoin, the market for private insurance coverage is increased, aspatients perceive a greater need to pay privately for care. There is a positive feed-back loop through which moreextensive private insurance sustains more private charging, andmore private charging encourages more purchase of privatecoverage. The natural dynamics of private markets areinimical, not surprisingly, to the sustainability of public health

care systems.

But the issues of “ Who Gets Paid?” are far broader than thoseraised by the private insurance industry. A second major arenain which the struggle goes on is the reimbursement forprescription drugs. Here there is no question as to theimportance of the industry’s product for clinical care. But thereare major questions over which drugs should be paid for, forwhom, and at what prices. The struggle is made more intenseby the peculiarities of the industry’s cost structure, with veryhigh fixed costs and low marginal costs.

The standard models of competitive, for-profit firms analysed inelementary economic theory offer their products at a price (P)equal to their marginal costs of production (MC), i.e. at the costof producing an additional unit of output. If P > MC (P < MC),then they should produce and sell more (less) because eachadditional unit adds to (subtracts from) their total profits. Butpharmaceutical firms must sink very large amounts of money,tens or even hundreds of millions of dollars or euros, intobringing a drug to market before they see any sales at all. Torecoup these fixed costs they must, and do, set prices far abovemarginal production costs -- tens or even hundreds of timeshigher. “ Pricing at marginal cost” -- a standard condition for“ allocative efficiency” in the technical, economic sense, wouldswiftly lead to bankruptcy.

This cost structure has several implications. First, it means thatif new drug development is to continue, drug firms must beprotected against competition from other firms that have notincurred the development costs and thus can afford to set muchlower prices -- perhaps even at the economist’s optimum of

marginal costs. The standard response is a state-grantedmonopoly, a patent, issued for a term of years and permittingthe firm to exploit its monopoly position to sustain P >> MC.(There are alternative mechanisms, though this is the industry’spreference; we shall deal in more detail with this issue below.) But the monopoly profits that a patent makes possible are in noway linked to the initial fixed cost of bringing a drug to market. The patent does not guarantee that these will be recouped, nordoes it expire once they have been recouped. The longer andtighter the protection, the greater the firm’s return.

The industry’s profitability is thus necessarily heavilydependent upon the extent and terms of the privileges grantedby governments, the protections from market competition. Theindustry as a whole are correspondingly adept at manipulatingthat process both within countries and increasingly throughinternational trade agreements that restrict the policy options ofindividual governments.

Second, because each unit of product sold brings in far morethan its cost of production (gross margins are huge) there areboth powerful incentives and enormous resources to engage inintense advertising and other forms of marketing. In factstudies in the United States (where data are available) havefound that on average pharmaceutical firms spend twice asmuch on marketing as they do on research. In a very realsense, modern pharmaceutical firms are marketing companieswith sidelines in research and manufacturing. These costs are,of course, carried forward in product prices.

Third, because each product developed comes with such aheavy initial investment in development costs, its’ marketers

cannot afford to be too conscientious about its actual benefits. If, after spending tens of millions, one discovers that a newdrug is no better than, or even inferior to, one already on themarket, that is simply an additional marketing challenge. (Seethe references at the beginning of Chapter 1.) Even if the drugactually harms some of those to whom it is offered, carefullydesigned evaluative studies can usually find a silver lining in thecloud -- it must be good for something! -- particularly sincemost of the evaluative process is conducted by, andincreasingly controlled by, the industry itself.

The very large margins for prescription drugs imply that thereis correspondingly great scope for payers to negotiate lowerprices, while the extraordinarily wide range of different drugson the market with varying effectiveness -- the good, the bad,and the ugly -- offer corresponding opportunities to reduceexpenditures by weeding out those of dubious effectiveness, oroffering no benefits for their extra costs, as well as trying toimprove the rationality and appropriateness of the prescribingprocess itself. In the process, restrictions on the industry;senormous advertising budgets could yield correspondinglyenormous reductions in costs that could, in principle, bereflected in lower prices. But any resulting savings from thesestrategies would come straight off the industry’s bottom line --or off the revenues of the electronic and print media. At presentthe almost universal rapid escalation of drug costs suggests thatthe industry at present has the upper hand in the struggle over“ Who Gets Paid?”

The third major arena of conflict over “ Who Gets Paid?” is theemployment and payment of personnel. Standard labourmarket economics assumes a competitive supply of labour of

different types, with wages and other forms of remunerationbeing set by “ supply and demand” . If employers do not paythe going wage, they do not get the labour. But professionallabour markets are more complicated, and conflict over wagesand professional fees is commonplace. The outcomes of theseconflicts vary depending upon the institutional structures indifferent countries, most obviously and in particular on therelative strengths of health sector unions and public sectorbargainers, but at a more fundamental level on the organizationof the payment system itself.

It has long been understood, for example, that public “ single-payer” systems place monopsony (single buyer) power in thehands of payers, which they can use to contain overall costs. Physicians’ historical opposition to universal public healthinsurance in North America has been rooted not in an inabilityto understand the elasticity of demand but in a very realisticunderstanding of the significance of relative bargaining power.Individual patients have almost no power to bargain over fees;they are in a “ take it or leave it” situation where the risks of“ leaving it” are mostly on their side. Bargaining withgovernments is a whole different matter; this is reflected in thefact that physicians’ fees and incomes are much higher in theUnited States than in any other country, not just in absoluteterms but relative to the general price level and average wagerates, respectively.

ALSO CLEARLY IDENTIFIES QUESTION OF “ ONUS” --WHO BEARS THE COST? QUARANTINE, FOREXAMPLE, OR IMMUNIZATION -- MAKE IT FREE BUTTHEN REGULATE -- SCHOOL CHILDREN, OR CAREWORKERS. CONFLICTS OF PERCEIVED RIGHTS. AND

WHAT ABOUT NEGATIVE EXTERNALITIES ANDTHREATS?EMPHASIZE THE DISCONNECT BETWEENCONTAGION AS THREAT, AND CONTAGION ASGENERATOR OF COSTSOF CAREPERSE. SOARGUMENT FOR FREE CARE BASED ONEXTERNALITIES BREAKS DOWN QUANTITATIVELYAS WELL AS ON ISSUE OF WHO PAYS GO ON TOEXTENDED UTILITY FUNCTION, THEN BACK TO WHOPAYS? THE MANDATION OPTION.

SUBSIDY POLICY IN THE CONTEXT OFINFORMATIONAL ASYMMETRY

Proposals for a minimal public program, of subsidy to orsupplementation of private insurance, were made by the privateinsurance industry and the medical associations to the RoyalCommission on Health Services before the Canadian Medicaresystem was introduced. They were also brought forward beforethe United States enacted Medicare, and remain an importantcomponent of the periodic American debates over nationalhealth insurance. They have also been attractive to someCanadian provincial governments wishing to enter the dentalinsurance field on a small scale, and at minimum risk. TheReport of the Hall Commission, and the actual health insuranceprograms developed in Canada, represent a decisive rejection ofthis approach, but proposals for modifications to the presentsystem along such lines continue to surface regularly from themedical community, with the details rather fuzzy.

The weakness of such proposals is not that they are illogical,

but that they are incomplete. They rest on the assumption thathealth care is in fact a commodity like any other, except for itspeculiar interpersonal significance, and its uncertainty ofincidence. If the supply side of the market were as describedabove, offering care at a price more or less corresponding to itsmarginal resource cost, and if buyers were sufficiently informedas to make their own consumption choices, then a good casecould be made for public subsidy of private insurance, withperhaps some additional institutional modifications to deal withthe problems of incompleteness in private insurance markets.Externalities per se do not support Canada's rejection of thisapproach; and while the universal public insurance programdoes respond to specific identifiable failures in private insurancemarkets, it is rather a massive response.

But the supply side of the health care market is not perfectlycompetitive. It is shot through with all sorts of institutionalrestrictions on entry to the market and on conduct in it.Licensure has been the traditional mode of restricting entry; tothis has now been added the attainment of approval forreimbursement. Self-regulation, backed up by threat of de-licensure, is used to regulate conduct, in particular competitivebehaviour. Not-for-profit motivation dominates in the hospitalsector. And so on. If the sole peculiarities of health care wereuncertainty and external effects, none of the regulations on thesupply side would be justified. Insurers, public or private, mightstill wish to use disinterested experts to certify the health statusof claimants for reimbursement, and consumer/patients who feltthemselves inadequately informed might also prefer care fromcertified suppliers.13 But all this would be voluntary. There is nojustification, in the discussion of either of the two previouschapters, for the extensive network of direct and "self"-

regulation which surrounds the supply of health care.

The existence of such a web of regulation, then, raises twotypes of questions. First, to what extent can it be justified, if atall, by intrinsic peculiarities of health care as a commodity? Andsecond, to what extent is the analysis of the effects of, andappropriate responses to, uncertainty and external effectsmodified by either these additional peculiarities, or the veryexistence of the regulatory structure itself, however justified?

In this respect, some of the right-wing critiques of health caredelivery in the United States are intellectually quite consistent.They argue that the regulation of the supply side is not, in fact,justified in terms of market failure, and that its effects on thedelivery, and costs, of health care are harmful and profound.They then argue for massive deregulation of health care,including removal of all licensure or other restraints on entryand conduct, along with, or before, specific (minimal) policiesto deal with uncertainty or external effects. Considering therange of vested interests threatened by such a strategy, as wellas the implausibility of its underlying assumptions, its politicalfeasibility is probably minimal. But it is honest.

What is not consistent, or honest, is simply to ignore the wholequestion of the organization of health care delivery, and toanalyse and propose policies for insurance markets and publicsubsidy programs as if this organization were indistinguishablefrom purely private, competitive industries. To assume, as inFigure 2-2 or 3-1, that the market price of health care in theabsence of subsidy equals its marginal resource cost, is toassume either that the regulatory structure does not exist, orthat it is without effect. Neither assumption seems defensible.

Further, to assume a demand curve which defines the utilizationresponses of consumers to prices of care, independently of anyinfluence by suppliers, and to use these hypothesized responsesas a basis for policy evaluation, is to assume away the problemof imperfect patient/consumer information which, rightly orwrongly, forms the primary argument for regulation of thesupply side.

Suppose, however, that one is unable to accept the assumptionsboth that imperfect information is not a serious problem forpatient/consumers of health care, and that the elaborateprofessional/regulatory structure which purports to address thisproblem is either, despite appearances, not really there, or elseis without influence on the prices, quantities, qualities, and typesof health care offered. Then the argument for a restriction ofpublic intervention to subsidy and supplementation of privateinsurance against expenditures on privately provided healthcare falls to the ground. Of course, a corresponding argumentfor either universal public health insurance or a national healthservice does not necessarily rise from the ruins. Rather, wemust proceed to explore the implications of this imperfectinformation, and of the institutional responses to it, which makethe organization and delivery of health care so unusual relativeto other commodities. We shall find that one cannot begin tounderstand the utilization of health care without considerationof the conditions of its provision. The converse is also true.14