• Health care as a merit good

    I mentioned health care as a merit good in an post last week. What I want to emphasize about all the discussion in that post (and a related one) about market failures is that it has little to do with the health aspect of health care. Market failures are about economic inefficiency, the suboptimal allocation of resources that can’t be resolved by a market. What underlies it all is utility which is not necessarily or exclusively health.

    To put it in simply and crudely, even if all the health care provided by an efficient (perfectly competitive) market harmed people — killed them even — economists acting only as economists would still bless the market as the “welfare” maximizing one. And, health care that is provided at marginal cost above marginal benefit is economically inefficient even if it is via the most amazing, life enhancing/saving procedure ever discovered. Economists may be pleased with themselves, but most people would just shake their heads. What’s wrong with those bean counters?

    Enter the idea of health as a merit good, something we should have — we’re entitled to have — because it is inherently good for us, whether we like it or not. Paternalism, yes, but it’s worth taking seriously if only because many people think this way, at least subconsciously.

    I’m not saying it is wrong headed. Or, if it is, I readily excuse it. I think it’s a natural, human way of thinking. It relates to why we hate to have restrictions on our care, why many want it to be (or appear) free or low cost for everyone, why many want more, more, more, for everyone, price be damned.

    My point only is that welfare economics doesn’t fully capture this special nature of health. It does seem to be treated as a merit good. Where does that leave us in terms of reconciling cost, quality, and access? For a merit good, how much is too much? How little is not enough?

    I actually find the notion of health as a merit good perfectly fine as a positive description, but normatively unnecessary as far as welfare economics goes. If one wants to justify government action in health, one need not invoke the “merit good.” There are plenty of market failures in health, some of which quite compellingly call for government involvement. I’m thinking specifically of information asymmetries (even more specifically, adverse selection) and incomplete markets. Appealing to health as a public good and pointing out certain externalities could do it too.

    But then there’s equity, which is quite distinct from efficiency. Welfare economics pertains to the latter, not the former. Viewing health as a merit good is a justification for a more equitable distribution of its benefits and costs. It justifies, in particular, in-kind redistribution, the provision of health or health insurance benefits based on needs for them (as opposed to need in general). Here, think of Medicaid and CHIP (which are based on income), but also Medicare (which is largely income-blind).

    To put it more plainly, why do we provide highly subsidized health insurance for wealthy senior citizens? Ignoring the political reasons (which I think really do explain it), another could be that health* is a merit good. If that’s the justification, it means that we simply think older, and likely sicker, people should consume more health care* because it is good. It’s really cultural, not economics. (Not that there’s anything wrong with that.)

    * To be really precise, by providing subsidized health insurance to wealthy senior citizens we may be revealing that we perceive health insurance as a merit good (apart from what it reveals about politics). That is, it suggests we think it is good to protect (in part) the wealth of all Medicare beneficiaries from the costs of health care they may wish to consume.

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    • Welfare economics:

      if it involves how well income distribution occurs, ie, efficiency, is equity not an offshoot as well?

      also, does a merit good imply that the usual rules of marginal cost and benefit are “suspended,” or at least how an economist would define them in traditional terms?

      • @Brad F – Efficiency and equity are different things. The latter is not an offshoot of the former. Keep in mind the very specific, narrow notion of “efficiency” in welfare economics, that which is obtained by a perfect market, also known as Pareto efficiency — a state in which nobody can be made better off without making someone else worse off. You can’t redistribute income without making someone worse off.

        A merit good is just a name for something we think people ought to have independent of any other consideration (like basic education, basic — in the US, very, very basic — level of access to health care, clean water, air). As I said, one can make arguments within the framework of welfare economics for such things, but they wouldn’t get you as far as providing Medicare for wealthy people. How do you explain that (apart from politics)? At this point, it’s just cultural. Call it a merit good: health insurance when you reach 65, independent of all other considerations.

    • Is merit good the same as saying there is a positive consumption externality? meaning I am happy when you get health care? Could that get you to medicare for wealthy people, or is it just restating merit good….