Health Care 3: Dollars and Decisions

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The Law of Demand: if the price of something goes up, people by less of it

Corollary: if health care is "free" (paid for by insurance), people will consume too much of it

Objection 1: people don't like to go to the doctor, dentist, hospital, etc.

Counter: yes, there are non-monetary costs, namely time and discomfort. So the benefit of health care should be measured against the monetary and the non-monetary costs

Objection 2: people don't have a choice about health care--they either need it or they don't

Counter: there is a large "gray area"

--MRI for back pain

--frequent follow-ups with cardiologists

--new eyeglasses

--treatment for being shy or short

--cosmetic surgery

Is there a need to use economics in making health care decisions? Economists say "yes" (naturally)

Place a dollar value on benefit. For example, $100,000 for extending life by one year (assuming a good-quality year)

Dollar value of pain reduction? better eyesight? etc.

Need to estimate probability of benefit. Sometimes, going for an MRI or going to see a specialist will not affect the result.

Need to compare alternatives. Sometimes, a much cheaper approach will be almost as effective.

Example: routine colonoscopy

6 percent of population will develop colon cancer unless prevented

routine colonoscopy (every 5 years or so, starting at age 50) can prevent 80 percent of colon cancer

If it saves 5 years of life, then it is worth $500,000. Multiply by 80 percent (since doesn't save everyone) to get $400,000. Multiply by 6 percent (since that is the susceptibility rate), to get $24,000. If it costs $1500 and you have it done 5 times between age 50 and 70, then the cost is $7500. So it seems worth it.

However, suppose that low-cost alternatives can prevent colon cancer in 2/3 of people. Then perhaps the additional benefit of colonoscopy is not worth it.

Summary: economic analysis of health care decisions requires valuing the benefit of a procedure, estimating the probability that the procedure will provide that benefit, and comparing alternative procedures