Profit, Incentives, and Innovation in the American Healthcare Model

This column was written by Stephen Allen, a student majoring in Economics at the University of Alabama, in reply to Healthcare is not a Commodity‘ by Tarif Haque.

Some argue that we should follow the model of other industrialized nations in regard to healthcare. I almost feel compelled to agree, as I will explain later, but first let us look at the incentives — or economics — of healthcare today.

Economics is the science of incentives, not money. Money is a simple and widespread incentive, so Economists prefer it to quantify incentives.

America is the Atlas of the world and has the most productive health care system in the world because of the profit motive. There is no denying this fact when you look at the statistics and science of the situation.

When the American Medical Association asked doctors what they believed to be the greatest innovation in medicine in the past 50 years, the answer was overwhelmingly the MRI and the CT scan. If one looks at the numbers for how available these are in OECD countries, one sees a glaring outlier: the United States.

The US has more than three times as many CT machines per person than Canada and more than four times as many as the UK. The figure becomes is more staggering when it comes to MRI machines — the US has more than four times as many per person than Canada and nearly five times as many as the UK.

When it comes to out of pocket expenses burdening the middle class, its just as clear that America has the best health system in the world. Remember that no one goes broke on buying insurance, but they do when they pay out of pocket.

In the US, only 23.4% of healthcare costs are paid for out of pocket. It sounds high until you hear what other countries pay. In the United Kingdom, a nation of supposed shared responsibility, 62% of healthcare costs are paid out of pocket (for considerably lower quality care). In Canada, it isn’t much better: 49.6% of health care costs are paid not by the insurance provider, the government, but individuals out of their own pockets. It can hardly be considered insurance if you are footing half the bill yourself.

As far as out of pocket expense as percent of total expense, America comes fifth in the world in lowest costs and first among the OECD. The only countries with lower percentages include two tiny islands as well as Suriname in South America and Namibia in Africa.

What makes America unique? Why is it that our citizens get such higher quality care at such a lower out of pocket cost? We are one of the few industrialized nations that still has a thriving private medical insurance market. Here there is the incentive and reward of money for health providers to improve quality of care. This is only basic economics at work.

But what about all the expensive experimental treatments that only the rich can afford? Only the rich can afford them. It is very expensive to do medical research. In America, the rich subsidize research for the rest of the world by paying exorbitant amounts for experimental pills and operations. Those that work become cheaper as risks go down and methods improve, eventually becoming affordable to the middle class and everyone else in the world.

This brings me to the reason that I half seriously think that maybe the United States should adopt the healthcare policies of Europe. America is propping up the entire world’s healthcare system with innovations being driven by the dollar chasers in America. Perhaps we should let them see just how much they need us, the men whom they curse as selfish, in order to survive.

Even so, people will dispute that the profit motive is needed for medical research. Doctors want to cure patients and not make money, right? This is true, but doctors need to spend money to do research, and they need to have money in order to spend it. This money comes from private investors who are in the business of making money. They do not invest in markets where there is no profit. In short, and oversimplification, no profit = no innovation.

If you enjoyed this column, you may like Stephen Allen’s first column on healthcare, Freedom from Nature is not Free.

  • yudi

    “But what about all the expensive experimental treatments that only the rich can afford? Only the rich can afford them. It is very expensive to do medical research. In America, the rich subsidize research for the rest of the world by paying exorbitant amounts for experimental pills and operations. Those that work become cheaper as risks go down and methods improve, eventually becoming affordable to the middle class and everyone else in the world.”
    No they don’t. Aproximately 48% of medical research in this country is funded by the American goverment. Another 5% is funded by charities. The rich do not fund research.
    “This is true, but doctors need to spend money to do research.”
    Doctors that treat patients are usually not involved in research. Once again, the largest body of researchers work for the government.
    You are either misrepresenting the facts and cherry picking statistics to support your ideology or ignorant about what actually goes on in medical research.