Broback's Blog

Efficiency is generally thought of the relationship between inputs and outputs. Economic efficiency is defined by Paul Heyne here.

“To economists, efficiency is a relationship between ends and means. When we call a situation inefficient, we are claiming that we could achieve the desired ends with less means, or that the means employed could produce more of the ends desired. “Less” and “more” in this context necessarily refer to less and more value. Thus, economic efficiency is measured not by the relationship between the physical quantities of ends and means, but by the relationship between the value of the ends and the value of the means.”

I’ve been meaning to respond to the many posts and articles that strongly assert that rising health care costs are best dealt with by more collectivization. The model for this collective effort is usually Medicare, and enthusiasts for the Blue model can usually conjure up data and anecdotal assertions that fit the bill as needed. Examples are trotted out that imply/signal efficiency like “great reports” etc.

Sadly, idealized signals are no substitutes for reality — and I recently came a concrete example of inputs vs outputs that went way beyond mere signaling or tortured data.

Imagine you are checking into the hospital for surgery and are evaluating the payment options. You ask the administrator what your choices are regarding paying cash or using your Medicare coverage. Which of the following two scenarios makes more sense to you:

1) The Collectivist Scenario:
You: “How much will it cost if I pay you with cash vs Medicare?”
Administrator: “Luckily you have Medicare coverage. Due to their negotiating clout and reduced administrative overhead, the regular cash cost of $11,000 is only $3,400, and with your 80% coverage, you only pay $680.00.”

2) The Market Scenario:
You: “How much will it cost if I pay you with cash vs Medicare?”
Administrator: “You paying now will greatly simplify things. Sparing us from the administrative hassle of the Medicare paperwork and the long wait to be reimbursed has value. A cash payment now would be $3,400. Otherwise, we will bill Medicare for an effective rate of $11,000 and you will pay the 20% of $2,200.”

Whatever your idealogical predilections, #2 is the reality of what I faced recently when I checked a relative into the hospital — and it’s not an anomaly. Play with Google a bit, and you’ll find a nearly inexhaustible set of accounts similar to mine. Help your hospital avoid the “efficiency” of Medicare and they will eagerly reward you. That’s IF they even accept medicare. As the NY Times reports, finding doctors who accept Medicare can be a challenge. As I learned, “reimbursement rates are too low and paperwork too much of a hassle.”

Efficiency? Let’s ponder. I think it’s safe to say price as a proxy for inputs is more than an accepted approach.

In terms of my personal inputs and outputs, Medicare is significantly more efficient than paying cash. I allocate 54% more cash inputs to garner the same output. Cash is only 65% as efficient as Medicare.

In terms of overall efficiency, things swing dramatically the other way. Cash inputs vs output now show the market route as being 3.23 times as efficient as the collectivist option.

Consider the societal impact for the pool of non-beneficiaries. Quite literally the difference is infinite. Zero payment vs $8,800. Given the incentive to save $1,200, most would be more than willing to impose a $8,800 cost upon that group of non-beneficiaries.

Welcome to Public Choice Theory.