Healthcare and the Cost of Non-Price Rationing

The orthodox approach to health policy is obsessively focused on the burdens of price barriers to care, and at the same time inordinately oblivious to the burdens of non-price barriers. Yet non-price barriers to care can be very costly. This is an important point that dooms many healthcare proposals, as I explain in my book Priceless: Curing the Healthcare Crisis.

In Britain, for example, hundreds of thousands of patients relying on the British National Health Service are waiting months for hospital surgery. Many are waiting in pain. Many are risking their lives by waiting. The cost of such waiting for many of them is undoubtedly greater than the cost (to the government) of their surgery.[1]

Not only is rationing by waiting costly, it is usually socially wasteful. To employ a numerical example, consider a hospital emergency room where people come for free primary care. Let’s say the real cost of a doctor visit is $100 per patient, on the average. In a normal market, the market-clearing money price of care would also be $100—and that would be the fee patients pay.

If the services are free, however, a much larger group of patients will try to take advantage of them, including patients who value doctor visits at only $5 or $10. Since demand greatly exceeds supply at a price of zero, the doctor’s time is available in this example only to those who are willing to wait the longest. How long will people wait, on the average? Someone who values a doctor visit at $100 will be willing to spend $100 worth of time. (Consider a patient who values his time at his wage rate. If he is paid $20 an hour, he will wait five hours; if he is paid $25 an hour, he will wait four hours, and so on.)

Just as price rationing produces a market-clearing money ­price ­of care, rationing by waiting time produces a market-clearing time­ price ­of­ care. In this example, the market will clear at $100 worth of time for the marginal patient. But remember, other people (probably taxpayers) have to pay the doctor $100 in money. That means that the care ­is­ being­ paid­ for twice:­ once­ with­ time­ and­ again ­with­ money. Non-price rationing, in this example, effectively doubles the social cost of medical care.

By the way, a surprising number of patients—about one in five, on the average—get discouraged and leave emergency rooms without ever being seen. Just as people at an auction get outbid by others who are willing to pay a higher money price, patients in emergency rooms often get outbid by others who are willing to pay a higher time price for their care.

Notes:

1. “Hospital Waiting Times/List Statistics,” Department of Health, United Kingdom, 2nd Quarter, 2008/2009, http://www.performance.doh.gov.uk/waitingtimes/index.htm.

[Cross-posted at Psychology Today]