Healthcare – Categories of Care

“Healthcare” is commonly treated as if it were a single class of goods with relatively uniform characteristics.  In reality, healthcare represents a variety of services designed to address a variety of specific conditions.  If your goal is to provide efficient care (the greatest health benefit for the lowest cost), each category must be handled based on its unique features.

Four Categories of Care

While additional categories may be justified, I believe healthcare should be discussed as four major categories:

Each presents specific consequences for society, healthcare, and the patient.

Infectious Disease

Infectious disease is one of the most interesting categories of care and provides one of the largest opportunities for improving both efficiency and general welfare.  Unlike a variety of medical conditions, a patient that fails to care for their own infectious disease increases the odds that the disease is passed on to society.  For example, the risk of transmission is particularly severe when food and service workers have untreated infectious diseases.

When an economic transaction (getting care for the disease) has a positive side-effect on society (by reducing the odds of disease among others), economists call it a positive externality.  When a positive externality exists, efficiency (public welfare) is improved by subsidizing the cost of that purchase.  In the case of infectious disease, this means that society is better off if every citizen has easy, cost-effective access to care.

In this case, both individual welfare and general efficiency is served if some degree of public subsidies exist for the treatment of communicable disease.  Additional analysis would be required to determine the optimal degree and type of support.  However, we could imagine a world where everyone has basic (and federally subsidized) insurance for infectious diseases and can walk into any medical center (even at a CVS or Walmart) and get a quick diagnosis and prescription.

Chronic Disease

Chronic diseases are one of the most significant and growing concerns for healthcare.  However, there are significant differences between infectious and chronic diseases:

  • Role of Individual Decisions – In the case of infectious diseases, our choices are only slightly correlated with the odds of infection.  The progression of many chronic diseases, by contrast, are influenced by our choices and behavior.  Heart disease (the #1 killer), diabetes (the #7 killer), and obesity (a major contributor to both) are affected by diet, exercise, and other lifestyle choices. In addition, treatment of these diseases require that patients follow the regimen of pills or other procedures.
  • Lack of Externalities – Unlike infectious diseases, the odds of transmitting chronic diseases are minimal.  Lifestyle choices can increase the odds that a child or relative is also at risk for the disease, but the key justification for federal involvement in infectious disease is not paralleled in chronic disease.

These differences suggest that we should “care for” these conditions differently.

How We Pay.  Unlike infectious disease, there is no externality so efficiency is not improved by subsidizing this type of care.  Whether the government subsidizes this care is therefore a question of morality rather than efficiency.  Note, however, that the question of who pays for the care does not change the most efficient way to provide the care.  For the sake of the next step, assume that the patient has insurance for chronic disease and this insurance is paid (depending on your moral preference) either out of pocket or by the government.

How We Provide.  When a person’s decisions affect the progression of a disease, efficiency is improved when the individual experiences the financial consequences of their choices.  To avoid an “out of pocket” cost (and the associated debate of who can afford it), we assumed that everyone has insurance for this type of disease.

The problem with chronic disease is a problem of human behavior.  The costs of the disease are born in the long run while most of the decisions (exercise, diet, lifestyle) are made over the short term.  Even if we bear the total cost of the choice, humans tend to over-value the short term (an effect known as hyperbolic discounting).

In order to address this human failure, we need to change the way incentives are presented to the individual.  We must turn long term (anticipated) costs into short term (realized) costs.  In addition, we need to link those short term costs to behaviors contribute to long term disease progression.  While a complete solution would be more complex, here’s a simplified example of how this could work:

Assume that the single most significant contributors to diabetes is body weight.  Twice a year, patients are required to visit their primary care physician for a weigh-in.  If they are at a healthy weight they get a check for $250 (the average annual cost of obesity in the US).  If the patient is overweight, they get a progressively smaller amount.

This approach turns a long-term health decision (body weight) into a short term financial incentive.  By changing the incentives, we encourage better decision making.  Of course, no system is perfect.  This simple example encourages patients to crash diet twice a year for their weigh-in.  This certainly isn’t the optimal/healthiest behavior, but it’s better than the current system.

More importantly, the accumulation of several payments for several diseases could make exercise an extremely rewarding activity.  The direct medical cost of being overweight or obese is estimated at $266 and $1,723 respectively (Tsai et al, 2011, and additional stats here).  This means that we could offer $1,723 ($861 per half year) to a normal weight person, $1,457 ($728 per half-year) to an overweight person, and progressively less to an obese person.  This is a significant amount of money and could lead to frequent and sustained efforts at lifestyle change.

A fully deployed system would go one step further.  In many cases, the short-term health goal (weight, cholesterol, etc.) can be achieved behaviorally or medically (pills or procedures).  When lifestyle change are impractical (or ineffective), patients should have the choice to select a medical solution in exchange for a reduction in their payout.  For example, statins (for cholesterol) can run  as low as $11 per month (Consumer Reports).  A patient with high cholesterol could chose to take the statins on the expectation that the payout from their reduced cholesterol will exceed the cost of the medicine. This has two additional advantages:

  • Patient are sensitive to the cost of medicines.  Patients won’t opt into a $1000 a year medicine unless they expect to get their money’s worth (see Healthcare – Over-consumption for a more in-depth discussion of this effect).
  • Patients see a direct, financial benefit if the treatment works.  This increases the odds that they will comply with the treatment protocol, for example, by taking pills on time every day.

This approach to providing chronic disease care is a win-win.  Patients are strongly incented to make healthy lifestyle decisions.  Not only are they healthier, but they could earn over a thousand dollars per year for their efforts.

The only disadvantage of this system is that the up-front cost of insurance must rise somewhat.  Future savings is turned into current costs.  In the end, however, someone is paying to treat these diseases.  They should be willing to front part (or all) of that cost so everybody is ultimately served by changing the nature and timing of those payments.

Life Extension

Life extension is technically a single category of care and refers to all treatments with the primary goal of extending the life (or the productive life) of an individual.  This includes most types of emergency care, setting of broken bones, treatment for cancer, etc.

In theory, life extension treatments are most efficient when the value of the life extension exceeds the cost of care.

(more coming soon)

Life Extension – The Special Case

While this represents a single category of care, emergency care is complicated by its special legal treatment.  Specifically, hospitals are not allowed to refuse emergency care to people that lack insurance.  This special legal status means that society already bears the cost of emergency care for the uninsured.

So long as this law exists, efficiency demands a different treatment for this class of care.  The logical approach is to attempt to minimize the cost of this care.  This is achieved partially through public coverage of infectious disease (logical in its own right).  However, it also demands that we find the best way to shift other cases from the emergency room to facilities with a lower cost of care.

Like chronic care, a major consideration is the role of behavioral choices in this costs.

(more coming soon)

Quality of Life

A final category of care are treatments of diseases that are primarily an inconvenience to the sufferer.  Joint replacement, minor allergies, and plastic surgery are all examples of this spectrum of treatments.  Since the benefit of these treatments are immediate and strictly individual, it’s not unreasonable to ask people to pay for them out-of-pocket.  More importantly, these treatments are extremely vulnerable to over-consumption when provided as part of a typical insurance plan (see Healthcare – Over-consumption).

It follows that these costs should be transferred substantially to the patient.  Because they are strictly “quality of life” treatments, I suspect that most advocates of government-subsidized healthcare either (1) agree that these costs should not be covered or (2) would be willing to give ground on this issue to improve the odds of obtaining consensus.


Healthcare is one of the most inefficient and highly-politicized issues of our era.  While this analysis still leaves room for the (valid) moral debate, I believe it highlights a number of opportunities to improve efficiency.  In most cases, these improvements are Pareto improvements (literally everyone is better off) and could be implemented in a bipartisan effort.

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