Is healthcare a private good or a public good?

Determining which definition fits the US Healthcare system is a fundamental step toward fixing it. As it stands now, we treat healthcare as a private good. It’s viewed as a commodity to be provided by the free market. As a private good, competition and supply-and-demand are supposed to guarantee fair prices, provide ample access to resources by consumers, and allow the normal business cycle to run its course. Under these conditions, you’d expect a thriving market with countless providers. A certain percentage of these providers would fail- soon to be replaced by new competitors in the marketplace.

So, when was the last time you saw a healthcare insurance company fail due to providing healthcare? When was the last time you saw a hospital close? Or a doctor go out of business (other than committing a crime/malpractice)? If healthcare was a private good involved in perfect competition, these things would happen on a predictable basis.

A private good is both rival and excludable. Think of a soft drink. It is rival because if you drink it, it prevents another from consuming it. It is also excludable, because one can prevent another access to it (in this case, by refusing to sell it to someone who can’t pay a buck to buy one). The free market works very well with such products.

A public good is both non-rival and non-excludable. A classic example is missile defense. It is non-rival, because using it to protect your house doesn’t prevent it from being used by your next door neighbor. It is also non-excludable, because you can’t prevent your neighbor from taking advantage of the protection it provides. Another example would be a public sidewalk- using it doesn’t prevent your neighbor from using it (non-rival) and you can’t realistically prevent others from walking on it whenever they feel like it (non-excludable).

Public goods like missile defense and sidewalks are traditionally provided by the government. These goods don’t work well in a competitive marketplace, because they are normally expensive to provide and virtually impossible to sell to consumers- because people can’t be excluded from using it once it is built.

Now back to healthcare. Does healthcare meet the sniff-test to become a public good?

Is it non-rival? Utilizing healthcare does not prevent your neighbor from using it- to a point. In our soft drink example, drinking the Coke prevents another from consuming it. It is a classic private good. However, healthcare is not as simple. If you have a doctor’s appointment, it prevents the doctor from seeing other patients to a point. But, the doctor simply puts several patients in different rooms and churns through them more quickly, or double-books his appointments in order to speed up the process. It is sort-of non-rival, but not entirely.

Or look at another aspect of the healthcare system. Does having health insurance prevent others from having health insurance? Not at all. An insurer can provide services to multiple people at once. It is truly a non-rival service. So when looking at a doctor’s services, one can say it is kind of non-rival, and when looking at an insurance provider, once can say it is definitely non-rival. Regardless of the portion of healthcare you wish to examine, it’s almost entirely non-rival or partly non-rival. There isn’t anything (other than major surgeries) that indicate the healthcare system is meeting the definition of a rival product.

The other key component to a public good is non-excludability. Is healthcare non-excludable? In our soft drink example, the Coke was non-excludable since one can prevent another from access to it (by simply not selling it to them). But healthcare doesn’t work the same way. Can you prevent someone from seeing a doctor? Not under our current laws. While some doctors may refuse to provide elective services, it’s mandatory for hospitals to see urgent care patients regardless of their insurance or ability to pay. Under current law, you can’t exclude someone from seeing a doctor.

Insurance however? Different story, as insurance providers routinely prevent people from using their services- namely sick people with pre-conditions. Again, some aspects of the healthcare system meet the definition of non-excludability, while other s do not.

Using the two-pronged test of non-rivalness and non-excludability, it’s clear that some aspects of the healthcare system are truly public goods and not private goods. Public goods, such as doctor visits and emergency room visits, are exactly the things that a private market cannot provide efficiently because of the high cost of provision and the inability to prevent others from using these high-cost services for free once they are made available.

There are only two solutions to this problem:

  1. Make healthcare a true private good and allow the marketplace to dictate the supply and demand. To do so, we’d have to rescind laws saying that doctors must see patients and emergency rooms must see patients. We’d have to allow hospitals to refuse people. Simply put, we’d have to make access to healthcare excludable.
  2. Realize that healthcare is a public good, and allow the government to manage it. Government has no profit requirement, and generally takes on the provision of public goods since they are expensive to provide, hard to require payment for, and generally produce a positive benefit to society.

So which is it? We could continue on our current path of healthcare where we treat a quasi-public good as a private good, and watch this inefficient marketplace continue to enrich insurance companies and hospitals at the expense of the taxpayers. We could move healthcare into a more competitive environment by allowing doctors to refuse patients, making healthcare a private good that more closely resembles the purchase of a soft drink. Or realize that it’s a public good and allow the government to take control of the inefficient marketplace, which is one of the many roles of government.

Pre-emptive strike: Before I get a comment accusing the government of being useless in service management or business provision, let’s remember that the government manages the Armed Forces, water provision in urban areas, police and fire departments, sanitation pick-up, and a host of other things that work pretty damn well. Landing on the moon? That was the US Government. Ever drive to Florida? I-85 I-75 is a smooth ride, and that’s a federal government road. The government does plenty of things well, and plenty of things not-well, and there’s no indication that a federally managed healthcare system would automatically work poorly. Chances are, it’d be a damn sight better than the system we have now.