Healthcare and the Paretto Frontier

A classmate in Econ made a statement about Paretto efficiency when referring to our healthcare system. And, seeing that I pretty much got dusted in one of our negotiation exercises, but was still Paretto efficient, I think his statement ran very true.

If we consider the players in our healthcare system as the Providers, the Patients, and the Payers, we have a negotiation where each party is trying to achieve some benefit.

The Providers want to maximize profits. They want to be paid the most they can for the services they render.

The Patients want qualified service and to pay as little as possible.

The Payers want to maximize profits by paying as little as possible for those qualified services.

Here is where the rub is. In our system, the Patient and the Payer are different. So, the consumer of services is not the person applying price pressure on the market.

This means that the negotiation is between the Provider and the Payer (Insurance company). The consumer, the Patient, may use services beyond their normal ability to pay because they aren't paying. This leads to esalating costs for the Payer.

If the Patient had more of a financial responsibility for services, were are able to connect the consumer and the payer, then the pressure would narrow the ZOPA for services, and would shrink the efficient outcomes.