PUBLIC HEALTH CARE AND ECONOMIC CALCULATION

  – Ignacio Almará – 

  The economic crisis has reignited a controversial issue: the debate on budget cuts in health care. In Spain, this debate has filled the newspaper’s headings for the last eight years. The most recent example could be the announcement made by the president of the autonomous government of the Canary Islands of putting an end to cuts in health care and increasing the budget on €5 million with the objective of improving the waiting list for medical assistance.

  Budget cuts consist in an inferior quantity of money budgeted for public activity. The economic harm produced by the currency and credit political manipulation that drove us into the crisis has led many politicians and bureaucrats to consider the possibility of applying budget cuts in many public activities, like education and health care, the sanctasanctorum of modern social democracies.

  Every day in Spain there are public debates and discussions on this topic. In general, the majority of politicians do not agree with budget cuts, but there are still some who support them. The debate divides people into those who think that the cuts have to stop and those who think they were not enough.

  However, we cannot actually know if cuts were enough or insufficient. We cannot know if they were made in the right amount or if we need more. We cannot even know if healthcare is sufficient or deficient, if there are enough public employees or instead if fewer beds and doctors are needed. This last topic goes deep into the essence of health care. It alludes to the political decision-making on this area.

  Nowadays, policy-making is based on what is called “health care intelligence”. This term refers to the ability of politicians and bureaucrats to take rational decisions in health care, to the process of collecting and interpreting information and how this information is passed on from scientists to politicians. The information utilized in this process has an epidemiological (statistical) and technical character about new advances based on evidence level. For instance, it is supposed that if we know the number of cardiac conduction problems in a year within a certain population, we may know how many instruments may be needed in order to solve the problem. The selection of the appropriate instruments and machines is based on the scientific and technical evidence of which ones are the better suited to solve the problem. Grosso modo this is the fundamental data used in healthcare policy-making.

  But this may raise some doubts. For instance, how do we know if pacemakers are more urgently needed than dialysis machines or if more staff is needed in pediatrics instead of more cardiology treatments? The allocation of resources is the fundamental problem of public health care systems (as well as of any other activity managed by the State). How do we decide the use of the resources that we have?

  Resources are scarce and therefore we need to allocate them in such a way that we do not subtract them from more valued activities. In this world of multiple ends and limited resources, economic calculation is the guide that allows us to efficiently allocate resources.

  In social life, human beings process tons of information and a large amount of this information is subjective, practical and non-articulable. This means that we only know it through our own personal experiences, impressions, and nuances and that it can hardly be fully transmitted to other people. This information basically consists of our own valuations and those of others.

  When there is an exchange, such as a purchase, the information about both parties valuations is contained in the price. A price is nothing but a record, in currency units, of how many goods were exchanged by other quantity of goods. However, prices have a special attribute: the ability to convey information about valuations in a summarized way. Thanks to prices we can know the relative valuation of a good in society. Changes in prices inform us about changes in valuations, which gives us an idea of the social importance of a specific good in a given moment.

  Economic calculation allows entrepreneurs to know if the estimated benefits exceed the incurred costs. This profit and loss balance is essential for social life since is the only method to allocate resources to the most valued activities. If the balance is positive at the end of a production process it means that we have made a good use of the resources at our disposal. The profits obtained show that we have used the resources in the right way. From a social point of view, the earning of profits means that we have correctly served the needs of the consumers. Through buying our product or service people have shown their preferences. If the product were not considered to be able to satisfy consumer’s needs, due to its low quality or high price, it would not have been bought, and the result of the production process would be monetary losses. We need market prices in order to use economic calculation.

  State intervention disrupts the whole system and tends to eliminate market prices. For instance, the management of a public hospital does not know the price of a blood analysis, only the total costs of the laboratory. There is no price for the sale of medical assistance either and prices of private companies are presumably distorted. This makes the balance of profit and losses an impossible task and therefore public hospitals are unable to know if profits outweigh costs, which would mean that the resources are being well used, or instead if costs outweigh profits, which would mean that a change is needed. It is possible that resources are being used in less valued activities. This is what happens with the aforementioned pacemakers. The hospital management does not know the price of a by-pass operation, therefore, they cannot establish the balance and they cannot know if resources are being allocated to their most valued uses.

  The impossibility for public hospitals of resorting to economic calculation makes impossible to know if they are carrying out the most highly valued services and if they are allocating the necessary resources in the right way at any given moment. This has extremely serious consequences. When an entrepreneur decides to spend an amount of money on a specific machine his decision is based on his perception of the most efficient way of producing a good valued by the public. The anticipated final price and the estimated benefits show him the costs he can afford. Public services cannot resort to this method, and therefore they take arbitrary decisions based on what politicians think is better for the population.

  Evidence levels and epidemiology data are just a mere patch that cannot solve the lack of information that the State suffers in order to make decisions on activities and resources. We can only make a rational use of resources and we can only have a patient-oriented health care in a system able to use economic calculation, which it is only possible in a free-market economy.

  If we consider all these circumstances, brilliantly exposed by such scholars as Ludwig von Mises or Jesús Huerta de Soto, we will understand that, ultimately, the problem does not lie in the extension of budget cuts. We should be thinking about what kind of system will make possible a sustainable and efficient health care.

  The efficient functioning of public health care is impossible due to a characteristic connatural to every socialist or public institution: the impossibility of knowing if the benefits obtained outweigh the costs incurred. Only individuals, in a spontaneous and decentralized manner, can organize a complex activity like health care, which should be understood as any other service, an economic activity that needs to make use of economic calculation to be properly managed.

 

2017-04-30T11:53:30+00:00 December 9th, 2016|Articles|0 Comments

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