The Economics of Health Care and the Economics of the Commons

Arthur Warmoth
Sonoma State University
© 2003

Finding solutions to the health care crisis requires considering health care as a complex economic system.  Recently, several analysts have pointed out the importance of "the economics of the commons," which includes all resources, goods, services, and assets that must be produced and/or consumed (used), at least in part, collectively. The economics of the commons functions according systems dynamics that are different from those of price auction markets, and in many ways, health care is a common good.

This paper will present a schematic overview of the systems components of health care economics, with a particular focus on the character of the political negotiations required to deal with those aspects of the system that represent collective, rather than individual, wealth and well-being.

The key to finding solutions to the health care crisis and developing an effective long term health care strategy is to look at health and wellness from an integrated, whole systems perspective. This includes the need to consider health care economics as a complex system that includes many different dimensions and dynamics. Recently, several analysts have pointed out the importance of "the economics of the commons" (1), which includes all resources, goods, services, and assets that must be produced and/or consumed (used), at least in part, collectively. The economics of the commons functions according systems dynamics that are different from those of price auction markets, and in many ways, health care is a common good. This paper will present a schematic overview of the system components of health care economics, with a particular focus on the character of the political negotiations required to deal with those aspects of the system that represent collective, rather than individual, wealth and well-being.

(1)   Jonathan Rowe (2001, 2002), David Bollier (2002), Lawrence Lessig (2001).  The term "commons" was first popularized by Garret Hardin's article "The Tragedy of the Commons" (1968).  In 1958, John Kenneth Galbraith observed that modern industrial societies are awash in private material goods and starved for public goods.  It is remarkable how little has changed in half a century.  In the 19th century Henry George (1879) argued that the wealth created by social organization per se should be taxed to fund social purposes.

The Structure of Health Care Economics

A comprehensive view of health care would include at least the following elements:

1. Prevention/Health Education

2. Managed Care: Predictable average medical care costs, amortized as health insurance, and including:

2.1. Health Care Providers (hospitals, doctors, nurses, complementary practitioners)

2.2. Technology and pharmaceuticals

2.3. A public component funded by government as part of a social safety net

3. Catastrophic Illness Coverage

4. Chronic Care Coverage

5. Public Health Services

6. Medical Research

Each of these areas has different microeconomic characteristics, with a different mix of components that can be organized in terms of marketable products (fee-based services and risk-pooling insurance) and public goods that require collective funding. Prevention, including health education and physical education in the schools, is an important component of an efficient and comprehensive health care system. Education and prevention should focus on mental as well as physical health, as research has found a negative correlation between mental health and physical illness (Robinson, 2000). Although education represents a very cost-effective investment, it is an area that is chronically underfunded, particularly for those segments of the population who, for socioeconomic or other reasons, have special needs for individual attention and mentoring. In other words, health care education is an aspect of the commons, and it suffers from our lack of understanding of the economics of the commons which we shall examine at greater length below.

In the current crisis, much of the attention has been focused on managed care as the way to provide a broad range of medical services, particularly the treatment of acute illness. This is the segment of the health care picture that is typically funded by health insurance. In recent decades, government has encouraged various managed care models in an effort to mobilize market forces to try to control escalating costs. The concept of insurance is based on the fact that there are actuarially predictable average medical care costs for any given population. These costs can be amortized over an individual's lifetime as health insurance, which covers the cost of health care providers (hospitals, doctors, nurses, complementary practitioners) and access to medical technology and pharmaceuticals. Ideally, these resources would be made available to individuals on the basis of need. However, increasing costs of technology and the aging of the population have are driving health care costs up.

Theoretically the average predictable costs of medical care can be amortized over an individual's lifetime as health insurance. However, there are several factors that have led to widespread public perceptions that the market-based managed care system is not serving us well. For one thing, a market-based system is tempted to look for the most profitable customers and avoid those that may need to be served at a loss. The fact that in most cases the purchaser is an employer contracting for a pool of employees, not an individual, mitigates this effect to some extent, but it also weakens the incentive for the individual consumers of health care to focus on cost-effectiveness considerations when they are actually using the services. At the same time, managed care has often implemented cost control approval procedures that focus on controlling costs in ways that ignore other factors that are important to patients, including choice of provider, and have thus led to widespread patient dissatisfaction with the managed care system. Furthermore, many contracts are written to avoid such things as pre-existing conditions, and when policies are theoretically available to individuals, the screening and cost factors tend to make them inaccessible.

The market value of medical care has a curious price structure. When you need it, you are willing to pay any price; but when you are only anticipating the possibility of future need, you want it as cheaply as possible and are willing to give other purchases priority. Thus both access and affordability are public concerns--part of the economics of the commons, which will be discussed in greater detail below--and therefore not subject to the conventional laws of the price auction market. The insurance model makes some sense for persons who enjoy stable employment with profitable employers, as it does permit the negotiation of contract that can be tailored to varying needs and circumstances. When the insurance market is relied upon exclusively to cover the cost of health care, there is an inherent tendency for profit oriented companies to skim off the profitable patients, and there is an inherent conflict between access and cost containment. In addition to the temptation for providers to control costs by limiting access, there is an incentive for purchasers to not want to pay for costs they are not likely to incur. For example, purchasers at low risk for AIDS are not enthusiastic about funding the high cost of AIDS treatment.

An effective health care system would require that all of the components of basic medical service be operating at optimum efficiency, in terms of both effectiveness and fairness. From this perspective, regional managed care providers that be responsive to both providers and consumers can reasonably compete in a regional market on the basis of different cost-benefit models (e.g. Kaiser, PPO plans).(2)  The role of large scale purchasers (such as PERS, large employers, and governments) should be both to assure local choice and to use their market power to make sure that all providers in a given region have access to the technology and pharmaceuticals sold in the global marketplace at a reasonable cost.

(2) Kaiser is a staffed-based HMO (health maintenance organization), that is it maintains it own facilities and staff.  Other health plans offer contract-based HMOs, PPOs (preferred provider organization), and POS (point of service) options.  In general, these options offer choice greater levels of choice at somewhat higher costs.

However, it is clear that there are aspects of access and cost control that require political negotiation in order to create optimal arrangements across the full socio-economic spectrum. Government at various levels should cover the cost of the public goods components, a function that requires different taxation and funding mechanisms at different levels of government, based on those aspects of the total health care system each level of government is best equipped to manage. At the minimum, the ethical responsibility for universal access that is recognized by all modern industrial societies except the United States requires a public component funded by government as part of a safety net for the working poor and those unable to work.  (Even in the U.S., we recognize a universal right to treatment for immediately life-threatening conditions.)  Catastrophic and, frequently, chronic care are beyond the range of costs that can efficiently be covered by the insurance model.  In other words, again, access and affordability are part of the health care commons.

Public health services are clearly understood to be an aspect of the commons and are funded as such. Public health services deal with epidemiological and demographic factors of the health care systems and would not be funded at all without government support. The political issue is to assure that, like health care education, they are funded at a level that optimizes their effectiveness in reducing the cost of individuals getting sick. Research, particularly basic research, is also recognized as an aspect of the commons and is publicly funded through institutions such as the National Institutes of Health. The profit motive supports privately funded research in the pharmaceutical and health care technology industries, but some level of public oversight is important in order to assure that the allocation of resources reflects societal priorities.

The Health Care Commons

The commons includes all resources, goods, services, and assets that must be produced and/or consumed (used), at least in part, collectively. In other words, the commons includes all social system and ecological system assets essential to, or useful for, human wealth and well-being that cannot be produced and/or distributed to individuals operating in price auction markets. Today we find that most aspects of the commons, ranging from the integrity of the environment to the social fabric of our communities, are in a state of crisis. This is because we simply do not know how to think about the economics of these critical systems, including politics, health care, education, public safety, retirement security, employment security, energy, transportation, environmental quality, land use, affordable housing, and culture and the arts.

As we have seen in the previous section, all aspects of a comprehensive health care system participate at least to some degree in the economics of the commons. The public and non-profit sectors require adequate resources to address at least the following public goods components of a comprehensive wellness system, which would provide for optimal states of both physical and mental health:

1. Education

2. Public Health Services

3. Health Care for Chronically Underserved Populations:


--The elderly

--Chronic care

--Catastrophic care

--The working poor

--Homeless, especially the homeless mentally ill

--Mental health service in general

--Unemployed or underemployed disabled

--Prisoners (especially in terms of the post release transition)

4.  Medical/Managed Care Oversight (licensing, regulation, etc.)   5.  Research:  
--Needs Assessment

--Basic Research (and in a regional system, the local application of basic research)

The single payer option may well turn out to be the most efficient mechanism for achieving coordination and minimizing overhead and coordination costs (Shaffer, 2003).  That seems to have been the European and Canadian experience.  However, the United States has invested substantial resources in the insurance model and as a consequence has created  large constituencies that resist change.  It might therefore be worthwhile to consider the variety of specific roles government needs to play in the health care system as we respond to the current crisis by redesigning it.

A particular concern is the role of educational models focused on prevention and the positive development of our human potential.  This aspect of health care tends to be undervalued in approaches that focus on the treatment of illness.  As we have noted, research has shown that metal health is one of the best preventative measures against physical illness. Therefore, the community has a responsibility to provide its members with: 1) An educational system that acknowledges the lifeworld of the person and provides resources to develop multiple intelligences, including emotional intelligence, in ways that enables her/him to become a productive stakeholder in society and live a healthy lifestyle. 2) A health care system that serves all members of the community with education for wellness and disease prevention as well as with acute, chronic, and catastrophic health care services that are responsive to the lifespan developmental stages and the cultural and environmental context of clients. 3) A mental health care system that supports the healing of emotional, as well as the physical, wounds, including those inflicted by child abuse and neglect

One of the consequences of the globalization of the trade economy has been to reduce the resources that are available to support the social services safety net of national and state governments. (See Lietaer & Warmoth, 1999.) As a consequence, local and regional communities are thrown back on the necessity of solving local problems using local human and natural resources. Since many of these problems, including health care, reside in the domain of the commons, a better understanding of the political economy of the commons is desperately needed.

Traditionally, the commons has been economically supported from two basic fiscal sources: philanthropy and taxes. Philanthropic sources distribute financial resources in the form of endowments and grants. Government authorities generally distribute resources in the form of grants, contracts, and direct government services. In the interests of fairness, the commons should ultimately be supported by taxing all of the citizens who enjoy its benefits. That is why all industrial democracies except the United States have adopted publicly financed universal health care. However, public funding often suffers the defects of inefficiency and even corruption. Therefore, a cost-effective funding strategy would suggest that innovations could initially be funded through the more creative and efficient resources of philanthropy and non-profit entrepreneurialism, while sustainable funding over time needs to be assured by politically negotiated and widely accepted forms of taxation.

In terms of the transition to a sustainable regional health care system for Sonoma County a viable sequence might be to fund the initial stages by a combination of comprehensive insurance negotiations combined with targeted grants and endowments to address specific, particularly urgent, health care issues such as children's health, mental health crisis care, and care of the aging. This could be followed up by a targeted local tax designed to assure access and affordability by guaranteeing access for those unable to afford insurance contracts and covering the marginal costs of catastrophic illnesses and exceptionally expensive technology and pharmaceuticals. It would also be reasonable to expect the state and federal governments to assume responsibility for reinsuring smaller jurisdictions for the unexpected costs of catastrophic illnesses, just as they already assume responsibility for other forms of natural disaster.

Democracy and the Politics of Health Care Planning

The solution of the current health care crisis will require extensive planning based on the interpretation and integration of complex theory and data. Our commitment to democratic values requires that all of the stakeholders should be involved in the attendant negotiations. As has been pointed out above, the principal areas of health care that fall into the domain of the commons are access and affordability. In order to assure the optimal outcome, access and affordability should be negotiated across the entire community embracing all consumers, providers, and contract negotiating organizations (including both insurers and governments).

In Sonoma County, the groups representing consumers include unions, large employers, chambers of commerce, and low income advocates. The contracting agencies primarily include Kaiser (offering the HMO option), Health Net and Blue Shield (offering the preferred provider option), and Sonoma County government (which provides mental health services and emergency medical services for many of the uninsured). The provider community includes a complex array of hospitals, doctors, nurses, licensed mental health professionals, and a variety of complementary practitioners. An effective political strategy for dealing with the crisis could involve a series of conferences in which each of these sectors--consumers, contractors, and providers--would define its interests and priorities in the areas of access and affordability.

This could be followed by a series of negotiations between representatives of the three groups, possibly hosted or facilitated by local community or political leaders. These negotiations would address the issues of benefits packages, actuarial models, reinsurance, and the nature and scope of the public contribution that is required by a realistic understanding of the economics of the commons. It would include addressing in a comprehensive way the major factors driving health care inflation, including:


High technology (initial introduction may cost substantially more; then ongoing use may reduce costs significantly, including providing tighter compliance with necessary care)

Pharmaceuticals (Pharmaceutical companies spend more on advertising than on clinical trials costs and often enjoy exorbitant profits; this can be seen in major differences in costs by country , for example the lower drug costs found in Canada)

Poor design & management of health care systems (often driven by free market fundamentalism and inappropriate competition among providers )

(Cf. Sharon Levine, 2002, and Walter Zelman, 2002.) Furthermore, current thinking about the health care crisis is primarily addressed toward innovations that can be achieved within the parameters of conventional health insurance. (Ibid.) In addition, we need to look at innovations that place the commons (the public interest and "public goods") component of the health care crisis in the center of public discussion. At the low tech, low cost end of the economic spectrum of the domain of the commons, we must examine the educational dimension of prevention and the possibility of mobilizing semi-skilled volunteer and lost cost labor. In the proposed negotiating model, the negotiating group would arrive at appropriate formulae covering all of these issues. The results would then be taken back to the respective stakeholder groups for ratification.

At the high tech, high cost end, we must squarely face the fact that the public generally wants state of the art medical care at an affordable cost. This particularly involved looking at the high cost of dying, that is the cost of high tech terminal care coverage. Meeting the public demand for high cost high tech care will require redistributive (progressive) taxation for some components of a comprehensive health care system. This redistributive element should cover the middle class, the working poor, and those who are unable to work. and this will require redistributive (progressive) taxation for some components of a comprehensive health care system. This redistributive element should cover the middle class, the working poor, and those who are unable to work.

The health care crisis is a particularly acute symptom of a larger political, economic, and moral crisis facing 21st century society as a consequence of radical new technologies and the attendant phenomenon of the global integration of communications and economies. Fortunately, it is a crisis that can be largely solved at the local level using local resources and establishing precedents that can be replicated elsewhere. The whole systems perspective that is necessary to understanding the problem, including a whole systems understanding of the political economy of the commons, also has implications for addressing other aspects of the crisis of the commons including education, public safety, retirement security, employment security, sustainable energy, public transportation, environmental quality, land use, affordable housing, and culture and the arts. Effective democracy requires a widespread public discussion of the complex issues involved in effective comprehensive health care. This includes exploring both system design and ethical questions. This is the responsibility of political leadership as well as of the press. It should also be a major responsibility of higher education.

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