Q 17Q 17
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Global Economic Watch and Case Study: The Marginal Value of Free Medical Care Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. Go to the menu at the top of the page and click on the tab for Browse Issues and Topics. Choose Health and Medicine. Click on the link for Access to Health Care. At the bottom of the Overview section, select View Full Overview. Read about access to health care in three categories of countries: developing nations, the United States, and industrialized nations with national health insurance systems. Describe the consumer surplus of the average citizen in each category of country.
Reference Case Study:
The Marginal Value of Free Medical Care Certain Americans, such as the elderly and those on welfare, receive government-subsidized medical care. State and federal taxpayers spend more than $750 billion a year providing medical care to 94 million Medicare and Medicaid recipients, or more than $8,000 per beneficiary. Medicaid is the largest and fastest growing spending category in most state budgets. Beneficiaries pay only a tiny share of Medicaid costs; most services are free.
The problem with giving something away is that a beneficiary consumes it to the point where the marginal value reaches zero, although the marginal cost to taxpayers can be sizable. This is not to say that people derive no benefit from these programs. Although beneficiaries may attach little or no value to the final unit consumed, they likely derive a substantial consumer surplus from all the other units they consume. For example, suppose that Exhibit 8 represents the demand for health care by Medicaid beneficiaries. If the price they face is zero, each beneficiary consumes health care to the point where the demand curve intersects the horizontal axis-that is, where his or her marginal valuation is zero. Although they attach little or no value to their final unit of Medicaid-funded health care, their consumer surplus is the entire area under the demand curve.
One way to reduce the cost to taxpayers without significantly harming beneficiaries is to charge a token amount-say, $1 per doctor visit. Beneficiaries would eliminate visits they value less than $1. This practice would yield significant savings to taxpayers but would still leave beneficiaries with abundant health care and a substantial consumer surplus (measured in Exhibit 8 as the area under the demand curve but above the $1 price). As a case in point, one Medicaid experiment in California required some beneficiaries to pay $1 per visit for their first two office visits per month (after two visits, the price of additional visits reverted to zero). A control group continued to receive free medical care. The $1 charge reduced office visits by 8 percent compared to the control group. Medical care, like other goods and services, is also sensitive to its time cost (a topic discussed in the next section). For example, a 10 percent increase in the average travel time to a free outpatient clinic reduced visits by 10 percent. Similarly, when the relocation of a free health clinic at one college increased students' average walking time by 10 minutes, visits dropped 40 percent.
Another problem with giving something away is that beneficiaries are less vigilant about getting honest value, and this may increase the possibility of waste, fraud, and abuse. According to President Obama, "improper payments" for Medicaid and Medicare cost taxpayers nearly $100 billion in 2009. Medicaid fraud has replaced illegal drugs as the top crime in Florida. Crooks were charging the government for medical supplies that were not delivered or not needed (some supposed beneficiaries were dead). People won't tolerate padded bills and fake claims if they have to pay their own bills.
Finally, program beneficiaries have less incentive to pursue healthy behaviors themselves in their diet, their exercise, and the like. This doesn't necessarily mean certain groups don't deserve heavily subsidized medical care. The point is that when something is free, people consume it until their marginal value is zero, they pay less attention to getting honest value, and they take less personal responsibility for their own health.
Some Medicare beneficiaries visit one or more medical specialists most days of the week. Does all this medical attention improve their health care? Not according to a long running Dartmouth Medical School study. Researchers there found no apparent medical benefit and even some harm from such overuse. As one doctor lamented, "The system is broken. I'm not being a mean ogre, but when you give something away for free, there is nothing to keep utilization down." Even a modest money cost or time cost would reduce utilization, yet would still leave beneficiaries with quality health care and a substantial consumer surplus. Research suggests that up to 30 percent of all medical care is unnecessary.
Federal legislation in 2010 expanded the coverage of Medicaid and extended insurance coverage to many without it. Research by Michael Anderson and others suggests that one result will be a "substantial increase in care provided to currently uninsured individuals." No question, better health care can improve the quality of life, but overusing a service because the price is zero also wastes scarce resources.