Question

Consider marginal cost and marginal benefits of a service that is at least partially covered by insurance. What other considerations make healthcare different from other products and services?

Answer 1

Marginal cost refers to the cost added by producing one additional unit of good or service. Marginal Benefit is the extra satisfaction that a customer gets when he purchases additional unit of good or service.

Purchasing healthcare is more complicated as insurance is involved into it. A person will consume as much health care as he thinks, it is worth for the transaction price i.e. his co payment if he is insured. If the price is low the person will consume more of health care. If the price is high he will consume less of health care. He will keep using the health care services until the marginal benefit falls below the marginal cost. Suppose a person is fully insured.This means that he has to pay no co payment. He will pay nothing for each health care service. If it costs him $0 for a service then he will use as much of that service until the marginal benefit is $0. This means that until a service is providing even a tiny bit of benefit, he will keep using it.

However health care is different from other products and services. It is not discretionary like other grocery items like coffee, sugar, clothes and other articles. If I have a heart problem then I will have to get medical care at any cost. I have no other option. Just to get the benefit of insurance I will not create problem in the functioning of my heart.

In economics it is said that if something is free then it will be consumed overly. If you are getting free groceries you will definitely try your best to get more and more of them. But this does not apply to medical care. If some organization is providing free operations for organ transplant, or some heart disease , you will not get your well functioning heart or organ get operated, just because it is available free of cost. If I a person is  sick he will spend whatever it takes to get better. If he is  not sick he won’t spend anything. There is no marginal cost or marginal benefit decision.

An additional complication is that there is no relationship in medical care between cost and benefit so no one can make a cost/benefit calculation. If a person gets sick, he will do whatever his doctor says. He has no other option. There is no surety that even having costly treatment from best doctor a sick person will be cured. So, the question is that do marginal cost and marginal benefit curve exist in healthcare.