Guns and Butter, or Not

One of the first lessons in an introductory economics class is about “marginal utility.” The basic premise is that reasonable, informed people can make rational decisions about their willingness to trade one thing for another. We make decisions about what we value and trade our resources for what we lack. As we collect more of something, we value the next bit of it less in comparison to something we lack. The classic teaching example involves guns and butter. If you have a lot of butter stored away, you might trade some of it for a gun to protect the shed from the armed and hungry marauders on the other side of the hill. If you have a bunch of guns but are hungry…you get the idea. Let’s pause early for a big Yawn! Now stay with me, because this matters when it comes to healthcare.

Marginal utility is one of the primary bases for all of economics. Without rational consumers making informed choices between the money they have in their wallet (or the butter in their shed) and something else they want or need our understanding of trade falls apart. However, when it comes to healthcare, the theory doesn’t work. If we blindly apply the lessons of economics to health, we waste money and human beings suffer. Here’s why.

When I walk into a shoe store, I can look at the selection, try a few on, and make a reasonably informed decision about my preference for the money in my wallet or the brown loafers with the penny-holder (remember those?). I’m even somewhat covered, because if I get home and decide they don’t fit, I can probably bring them back. I can act rationally based upon my preferences and my “marginal utility” for a new pair of shoes. However, when a patient comes to see me for a cough, if I’m the “seller” of medical services and they’re the “buyer”, I’m in a very powerful position. The shoe salesman would be jealous. Let’s play act for a bit…

Doctor: “Well Mr. Jones you have a cough. I’ve examined you and it’s probably just a cold and will pass. However, there’s no way to know for sure that this isn’t pneumonia or even lung cancer. It’s very unlikely, but we’d need a chest x-ray to be more confident. What would you like to do?”

Translation: I know this is just a cold, but I like to be ‘conservative’ and cover all my bases. I’ve been busy seeing 30 patients a day for the last 10 years and haven’t really kept up with evidence-based indications for chest x-rays. An x-ray costs some money, but it’s not my money, and it’s not really his money either because he has insurance. Besides, he’ll think highly of me because I’m a thorough doctor who doesn’t send patients away without ordering impressive tests.

Mr. Jones: “Well doc…I don’t really want to die. My insurance will cover the x-ray, so let’s do it to be sure. By the way, thanks for being so thorough. I’ve gone to other doctors who didn’t even bother to order a chest x-ray.”

Translation: Marginal utility is out the window. “I’m no longer rational…I’m scared! He has a big diploma on his wall, wears a white coat and said the words ‘lung cancer’ followed by something I barely heard about it being “unlikely.” I’m getting a chest x-ray today. Thank goodness I pay $850 a month for health insurance so that I don’t have to pay the $150 the x-ray will cost. I like this doctor. He takes things seriously.”

Whether the doctor profits directly from the chest x-ray is beyond the point. There’s no medical need for the x-ray. In fact, over-testing causes medical harm (more on that in future articles). Overuse of technology largely drives the cost of healthcare. Cost keeps us from providing basic care to everyone. Cost forces employers to eliminate jobs to cover their healthcare costs. Cost of healthcare causes almost half the personal bankruptcies in the U.S. each year. Cost tears money away from other necessities like better public schools. Unless we can control cost, we cannot build a quality healthcare system.

Competition drives cost down in almost every industry, which is why you’ll hear phrases like “consumer-driven healthcare” thrown around as potential solutions to our cost crisis. The idea is that consumers will make rational choices with their money and force medical providers to charge less and order fewer expensive tests. However, convincing evidence shows that in healthcare competition drives cost up in the long term with no improvement in quality. Healthcare defies the normal rules of economics because Mr. Jones is not a rational consumer trading guns for butter. He’s a scared human being who can be directed by a hospital, pharmaceutical company, medical device company, or a physician to direct some of the trillions of healthcare dollars their direction in the hope of taking away the fear. Making things even worse, Mr. Jones has a false view of quality care, remember this is a “conservative’ doctor who ‘takes things seriously.” In fact, the doctor here is recklessly ordering unnecessary tests that can do harm. This is a recipe for high cost, poor quality care. It’s exactly the recipe we’re cooking daily in the U.S.