All Goods are Rationed (Health Care Too)

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All Goods are Rationed (Health Care Too)

During the recent debate about paying for health care we have repeatedly heard the "R" word ‐ not recession, but rationing. The word often has a negative connotation. Will someone actually pull the plug on Granny? In fact, rationing is a fact of life. All societies must select the mechanism for deciding who will get the goods that are produced. This is rationing and it is part of everyday life in every culture.

The criteria for making rationing decisions can include age, eloquence, strength, public esteem, or almost anything else. Parents often ration goods and services among family members on the basis of gender, family order, or a child's positive behavior. In other cases, goods are rationed according to some form of a "first come, first served" rule. A local example of this would be the long lines of people waiting to enroll their children at certain schools. We ration goods according to some sense of who deserves it ‐ the GI Bill, which subsidizes education for veterans, is an example. Goods are also rationed according to age ‐ the aged may receive some things, such as Medicare, that younger people do not receive. Or, back to the Granny problem, older people might be denied certain types of medical treatment because of their age.

Importantly, each rationing criterion will create its own incentive for people to change their
behavior. For example, if a society rations on the basis of willingness to pay the price for
something, members of that society will strive to make money. If parents ration goods on the basis of good behavior, children may seek to please. And if colleges and universities use high school grades as an important criterion for selection, some students will compete for the top grades. When government officials determine who will receive the valued goods, people will compete with one another to find effective ways to influence the officials, a practice that seems to be epidemic in Washington.

Characteristically, we ration goods in our society on the basis of people's willingness to pay the price of the good. In addition to its efficiency, this rationing device has some advantages. For example, when a good is in short supply, prices will tend to rise. These higher prices encourage consumers to consume less and producers to produce more ‐ these responses to higher prices help establish a balance between how much is wanted and what is supplied at that price. But in the case of health care, the "consumer" does not directly pay the price; it is largely being paid through an insurance program offered by employers or by the government.

Consequently, rising prices of health care will not effectively decrease the amount demanded. Not surprisingly, evidence indicates considerable overspending on health care. The discipline of the market place is lost and the employer, the insurer or the taxpayer is left to meet those costs. Assuming there is a limit to what they will pay, other ways to ration the good must be used. It is not surprising that the there has been real concern about how health care will be rationed, for it will have a profound impact on consumer and producer behavior.

George Vredeveld is director of the Economics Center for Education & Research and the Alpaugh Professor of Economics at the University of Cincinnati's College of Business.