Market Insurance, Public Insurance and the Rate of Technical Change in Medical Care

Abstract

A distinguishing characteristic of medical goods and services in all developed countries is technical progress. New pharmaceuticals and devices, new diagnostic equipment, new procedures, and ways to use older inputs are continually being introduced. Research indicates that some (though by no means all) of the improvements in population health status in such countries are due to this progress. Research also shows that some (and sometimes almost all) of the reason for growth in real medical spending per capita is due to technological change. Improving health is usually counted as a societal benefit while increasing spending is usually counted as societal cost (although, as we shall see, there are reasons to question both). If this is the case, the optimal rate of growth in spending must be linked to the optimal rate of improvement in health and wellbeing. It will not be a happy country that experiences maximum rates of health improvement but spectacular spending growth, or one which stops spending growth entirely but has lower levels of improvement in health. There are, in short, trade-offs that reflect a balancing of the marginal benefit for health improvement with the marginal cost associated with increased spending. An inordinately self-confident analyst could propose to determine both ideal rates by measuring the value of the benefits and the value of the costs, and comparing them. However, such an exercise is unlikely to succeed because of the difficulty of measuring the value of benefits and costs, and of measuring the variation in the value of benefits across citizens. The alternative strategy is to analyse mechanisms for deciding on resource allocation; in medical care the primary resource allocator is insurance. This insurance can in theory either be chosen in competitive markets or closer in a political choice process. In terms of approximating the ideal rate of growth in spending, which is likely to be better? Analysing the actual behavior of real governments is a difficult problem, and judging the efficiency of public planning and provision is even harder. In this paper I will therefore primarily focus on analysing the impact of hypothetical and actual private insurance markets and spending. I will limit myself to asking how the rate of growth that would emerge for such market arrangements compares to a realistic optimum. I suggest that the answer is that market-based growth rates tend to be less than or equal to the optimum, not excessive. If (as seems to be the case informally) greater public and less market control is associated with lower rates of spending growth, the implication is generally that public insurance falls further short of the ideal, although there are obviously exceptions for particular countries.