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Caffeineconomics

23 Jul

Jason Shafrin writes the Healthcare Economist blog and it’s pretty good. The other day, he used coffee brewing to demonstrate the economic principles of optimization, constrained optimization, and public goods. The question is how many scoops of coffee grounds to use when brewing a pot — and Shafrin walks the reader through the competing values of taste and cost (based on price per scoop). Two separate goals might be to maximize taste or to minimize cost. As it turns out, these two goals pull us in opposite directions, because the lowest cost is achieved when we use no coffee at all, which ends up making some pretty flavorless coffee (a.k.a. water). And, on the other hand, the most delicious coffee gets to be expensive. Of course, how much we value taste versus cost tends to depend on whether or not we’re paying the cost directly or indirectly.

What might this look like in health care? Well, for starters, it’s worth noting that there is a certain number of inputs that yields the best output. Shafrin finds 9 scoops per pot to yield the best tasting coffee. Beyond this point, the coffee doesn’t continue to taste any better. In fact, it will actually start to taste worse — but will cost us more and more. This is precisely what happens when we use to much medical care. People don’t want to believe it, but there comes a point where additional medical care is likely doing more harm than good and yet we’re still paying for it. What a waste.

The other issue is that who’s paying matters. We know that when the individual bears the full cost of their care, they are likely to avoid seeking necessary care. At the same time, if the individual bears none of the cost of their care, they are likely to seek unnecessary care. Insurance is the best mechanism we have devised thus far that spreads the financial risk of illness across large groups of people — allowing them to seek what we hope is an optimal level of care. We aren’t there yet. Some people are drinking hot water while others have coffee they could eat with a spoon. Neither condition is ideal. We devote more than enough resources to making the perfect pot of “health care” coffee large enough for all to enjoy their fill. The problem is simply one of resource allocation.

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1 Comment

Posted by on July 23, 2010 in Uncategorized

 

One response to “Caffeineconomics

  1. Jan Baer

    July 23, 2010 at 11:25 am

    At times I regret that health insurance was invented. It seems that once 60% of Americans were covered by group policies, provider costs surged and insurance premiums followed suit.Many people with expansive group plans (paid for in large by employers) take little responsibility for personal health, as the consequences cost them little or nothing.Skyrocketing prescription and physician costs mean nothing to them since they pay such a small share.Had health care been truly consumer-driven and paid for by those same consumers, prices would never have escalated as they have because patients would simply have refused to buy the expensive coffee.It's possible there would have been less incentive for research, yet good research was done long before medicine reaped such huge profits.

     

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