Cobb: Put a Figure On It

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August 15, 2005

Put a Figure On It

In the movie Trading Places starring Eddie Murphy, we find two old codgers betting a dollar between them that they could manipulate the lives of two young men. One of them is something of a pansy associate, the other a streetwise stranger. It was a pretty popular movie in those days.

Our TCB associate has brought up the question of the value of human life and asks us to put a figure on it. It's absolutely impossible, and yet it's done every day. The extraordinary thing about economics is that it shows how people vote with their feet. It's not just about what people say they will do, but what they actually do. People collectively put a value on everything, including human life. A market economy tries with varying successes to put the price that everyone puts on everything into currency controlled by the government. And so in America, we can count gains and losses in terms of dollars. What a country!

The important thing to remember is that people have short attention spans sometimes. Other times they are obsessive. So the girl that you paid no mind yesterday can suddenly become a goddess at the center of the universe. You discover she has bad breath... well, you get the picture.

I think that when it comes to a good portion of those things associated with quality of life, we Americans have a fairly efficient market. What is the cost of pollution? Find a neighborhood that's polluted and check the property values. It's almost second nature for us to understand that rich people don't live on toxic waste dumps. But most of us don't either. How much toxicity will we stand? These are economic arguments.

When it comes to healthcare, we Americans have a very inefficient market. There are a lot of interests who resist the very idea of having prices available to the public. How much does it cost to set a broken leg? 'That depends' is about the best answer anyone can give. Last year, my mother underwent surgery to remove a liver cancer. According to a number of doctors, liver cancer is the best cancer to have - the success rate is pretty good. My understanding is that her procedures and treatment were worth about $750,000 and it was completely covered by Medicare. There all kinds of experts and all kinds of quacks and all kinds of suggestions when it came to how and when, and we could not have made any real decision based on cost. It was too complex, not to mention emotional. But all emotions aside, somebody knew how to get paid and what they wanted to charge.

So no matter what people think, despite the fact that we are blind to the complexities of the system, there are price tags associated with human life.

I'm in the business of Business Intelligence. I make systems that help businesses keep track of all their money and help them make rational decisions. I can tell you from experience that the Insurance business is way ahead of the Healthcare business when it comes to using this technology. I also have a very strong feeling that the government's ability to adjust is way outmaneuvered by the healthcare and insurance. So from my perspective, it is very difficult for any entrepreneurial doctors to find a way to help consumers of healthcare, because most of the money is tied up in slow government rules and quick insurance hedges. By the time government figures out a way to arrange public benefits, insurers will have squeezed all the profit out of it and healthcare providers are left holding the bag. We consumers take what we can get, and feel lucky if we get anything at all.

This is obviously, obviously wrong, and it's an enormous problem, because it requires cooperation and coordination across insureres, doctors, governments, consumers and a million lawyers. In that regard, I think the only way to fix it is by government decree, but we are a long way from securing bipartisanship.

There are going to have to be some consumer advocates and some healthcare providers who are going to have to advertise a new way of getting our attention. When it comes to benefits election time, once a year, we hear from the insurers, but never from the hospitals in our community. I'd like to see a range of hospitals in LA tell me how I could go COBRA and save based on a lower granularity of a mix of services and benefit than just picking co-pay and deductibles. I'd like my employer to allow me to decide how to spend my fringe benefits with a bit more control.

Until such time as there is smarter public pricing, more comsumer choice and more flexibility with fringe benefit spending, the same people are going to dictate the price of life. And we won't be able to do a damned thing about it.

Posted by mbowen at August 15, 2005 11:24 AM

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Comments

It would take days to cover it all, but you've actually touched on an example that is covered in almost every graduate economics course and textbook in the United States.

A large part of the problem, which generally goes unrecognized, is the behavioral tendencies of the consumer to "consume" more than they actually need, often because they know that the real cost of the service is not likely to affect them directly. This, in a sense, is a tragedy of the commons problem, although that's oversimplifying a bit.

Ultimately, the individual incentives of consumers and providers are twisted to the point that high prices and inefficiency are inevitable. The best we can do in the current system is just to make sure that we keep it from getting any worse than it already is.

Posted by: Kirk at August 15, 2005 07:43 PM

I have a healthcare frustration as well. I am now shopping for healthcare coverage for out-of-state-college students because neither my wife's nor my coverage is much use for them where they are. A few years back we learned the hard way and had some out of pocket medical expenses we are still seeking reimbursement for.

The interesting twist is that we got charged less for out of pocket expenses than the insurance would have been charged. Every dollar savings is money in the bank, and fortunately this was not as expensive as liver surgery, but the system works against, instead of for, the insured. BTW, if you had to pay for that surgery, I bet the bill would have been more like $300,000.

Posted by: brotherbrown at August 16, 2005 08:34 AM