Module 2: Defining Health as a Commodity

In the economics of healthcare, scholars and policy-makers have found the need to define health in an organizational context to evaluate its optimal production, distribution, and delivery. Like other commodities subject to economic analysis, healthcare is scarce and must be allocated among different populations. However, distinguishing features suggest that it is not simple to delegate healthcare freely to traditional market forces and perfect competition.


Characteristics that separate healthcare from other goods and services include:(1)

Although some people believe that healthcare is still subject to pure market organization despite its unique characteristics, other critics note shortcomings in the model of perfect competition. For instance, modern economics is based on an assumption of rational behavior. In health, however, consumer rationality and sovereignty cannot be guaranteed. Mental illness, physical or psychological disability, and unconsciousness limit decision-making ability according to utility-maximization – the combination of resource allocation that will maximize personal benefit. Additionally, the costs of healthcare are relatively high and unpredictable, introducing great risk and uncertainty. Although the mechanism of insurance is designed to help reduce this uncertainty, both private and public schemes are still limited in how much they can eliminate risk. Many insurance plans even exclude high-risk individuals, preventing access to care based on age, initial state of health, or ability to pay.(2) Those with severe medical problems (called “pre-existing conditions”) are often excluded from health insurance because they are too expensive for companies to insure, though these are consequently the individuals who require the most medical attention.(3)

The failure of perfect competition to reflect actual circumstances is also due to limited or hidden information in the market about health. The lack of consumer knowledge may result from patient urgency for care, infrequency of market entry, reluctance among providers, level of technical expertise required, or ethical controls on health-related disclosure. Most markets are susceptible to some imbalance of information, but when the scales are tipped too heavily to one side, decisions are no longer made by the appropriate actors. In the healthcare market, patients as consumers delegate decisions to physicians, and healthcare utilization may not accurately reflect consumer demand. In most developed countries, barring the United States, healthcare is provided through the federal government. In these systems, a percentage of individual taxes goes towards healthcare so that services are uniform and have no additional expenses. In the United States, free-market economics govern the healthcare system, where some people pay out-of-pocket for medical expenses and still others pay for insurance. The American Medicare system helps elderly citizens pay for healthcare just as Medicaid partially finances medical expenses for low-income families, but costs often exceed the level of care in the United States. Healthcare is a commodity, especially in the United States, and this often means that unnecessary or excessive medical care is pushed on the patient by the provider in order to make a profit. In light of this over-supply of healthcare, private insurers have begun to monitor physician treatment plans by requiring second opinions and restricting specific and expert care to extreme emergency cases.(4)

On the supply side, the variability of externalities and spillover effects from healthcare supply also prevent appropriate production, allocation, and delivery from market forces alone.(5) In economics, supply and demand generally have a polarized relationship: one increases when the other decreases, creating a balance. Usually, as demands increase exponentially in the economic market, they eventually abate as alternative commodities and services are explored, or as the consumer learns to live without the product. For healthcare, the consumer cannot live well without it, so the supply and demand relationship becomes irregular.(6) For instance, the administration of vaccines to a threshold level in a population induces herd immunity – the protection of the greater community due to the majority receiving the vaccination. Without accounting for benefits of herd immunity, market mechanisms may lead to over-production and allocation of preventive measures. In healthcare, both positive and negative externalities may disrupt appropriately scaled market provisions. Conversely, controls in the form of professional licensing or the maintenance of standards of practice may limit supply and reduce competition. In the United States, for example, there are those on both sides of the debate; some believe that healthcare must become integrated for all citizens, while others argue that it should be allowed to flourish entrepreneurially as a business in the free market.(7) The Patient Protection and Affordable Care Act (PPACA) that passed in 2010 is a reform to improve medical care by protecting those who fall ill under insurance, to ensure that they are not dropped (as is often the case with private insurance companies). This also provides those who already have “pre-existing conditions” with health benefits equal to those of anyone else seeking medical attention.(8)

The process of optimization, where commodities are treated against the model of perfect competition, is integral to economics. However, evaluation of the production, allocation, and delivery of healthcare requires that we distinguish healthcare from traditional commodities.

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Footnotes

(1) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <http://helid.digicollection.org/en/d/Jh0197e/1.html>.

(2) Ibid.

(3) Stonebraker, Robert J. "Health Care." The Joy of Economics: Making Sense out of Life. Winthrop University, 9 July 2012. Web. 24 Aug. 2012. <http://faculty.winthrop.edu/stonebrakerr/book/medicalcare.htm>.

(4) Ibid.

(5) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <http://helid.digicollection.org/en/d/Jh0197e/1.html>.

(6) Quatre, Tannus, PT. "Supply and Demand in Primary Care: Not What One Would Expect (or Want)." Vantage: Clinical Solutions. N.p., 18 June 2008. Web. 24 Aug. 2012. <http://www.vantageclinicalsolutions.com/blog/2008/06/18/supply-and-demand-in-primary-care-not-what-one-would-expect-or-want/>.

(7) Ibid.

(8) Stonebraker, Robert J. "Health Care." The Joy of Economics: Making Sense out of Life. Winthrop University, 9 July 2012. Web. 24 Aug. 2012. <http://faculty.winthrop.edu/stonebrakerr/book/medicalcare.htm>.