Home > Uncategorized > Should we use price signals for GP visits?

Should we use price signals for GP visits?

October 4, 2014

My suggested health reform compromise started with the assumption that price signals are useful in helping to ensure efficient and effective decisions. The question I was trying to solve was how to introduce a price signal in a way that did not disadvantage the poorest people in our society, and in that context I think my suggestion is better than the government’s current policy.

However, some people claim that we should not use price signals for GP visits… so it is worth addressing that claim. The argument against GP price signals is that they might discourage people from getting a check up, and those check ups could prevent future health costs that may well be higher.

Early detection of health problems is certainly a good thing. But that’s only half of the story.

The first thing to remember is that all behaviour in life has benefits and costs, and that people need to trade off between the benefits and costs when they make decisions. In deciding to get a GP check up, one benefit is potentially preventing future problems, and the cost is the use of scarce resources involved that could be used elsewhere. If you do a “benefit analysis” (without the cost) then obviously a GP check up is always a good thing for the reason outlined above; but if you do a “benefit-cost analysis” then things become a lot more complex, and different for different people.

It is certainly true that some people make mistakes. Some people will make mistakes about how much education to get, how many children to have, how much exercise to do, what sorts of food to eat, who they should marry, and what car to drive. And yes… some people will make mistakes about what health insurance to buy, or whether they should see a doctor. But the fact that some people make mistakes is not sufficient to justify a government subsidy.

Some people seem to suggest that people will buy the right number of GP visits if the cost is limited to exactly their transport and opportunity costs, but not a dollar more or less. That is a very specific estimate, and there isn’t any reason for that position except inertia.

My proposal is that the government subsidises GP visits at $31/visit and people contribute $5/visit… so the government is still paying 86% of the direct cost. If somebody is given an 86% price subsidy and asked to contribute a few dollars, but they decide that it’s not worth it, then the most obvious conclusion is that they do not put much value in that thing and it would fail a reasonable benefit-cost analysis.

(As a thought experiment, consider the same situation for any other good or service… if you were offered something valued at $36 for a price of $5 and you said “no” then what does that tell us about your preferences and what you value?)

Indeed, it could be argued that the subsidy should be dropped to zero. People already have a very strong incentive to stay alive and healthy… because it is their life; and if they do make mistakes there is no reason to think that they will be systematically in one direction. At the same time, it is not clear that politicians know better than each individual exactly how they feel, and what is the best trade off between benefits & costs in deciding how to spend their money. Indeed, we know for certain that the government has an extremely warped risk profile, bastardised incentives, limited knowledge, and also that they are unable to differentiate between the 22 million different people in our country who all have different preferences.

But even if we imagine that all people are the same, and that we systematically underestimate the benefit of a GP visit, and only our beloved politicians know the true benefit, which is higher… it seems baffling that people would insist that the true benefit is exactly $36 higher than what ordinary people think.

Bafflement turns into bemusement when you realise that the $36 subsidy was set based on estimates for how much doctors should be paid, rather than any serious attempt to “fix” our defective preferences. Clearly the logic for the subsidy does not match the reality of the subsidy. If somebody was to start with the assumption that a $36 subsidy is the magical amount then of course they would not want to change that subsidy; but there is no reason for that assumption (except that it is convenient) and it is almost certainly wrong.

That still leaves us with the question of exactly how much the GP subsidy should be? As mentioned above, it can be reasonably argued that the correct subsidy is zero. Others could argue that the government should provide a 10% or 30% or 50% subsidy to encourage more GP visits… and that could be the basis of an interesting debate. A subsidy of 86% is generous by any reasonable standards and much higher than the subsidy provided for many other things that are considered desirable.

Categories: Uncategorized
  1. Kenan
    October 5, 2014 at 1:01 am

    The right subsidy is 40$. So every time I visit the GP I should be paid 4$…

    Joking aside, I disagree with your argument. Zero price is special because it minimises transaction costs and decision costs. A lot of goods and services are provided for free for this reason (they rarely subsidise you further, imagine for example Facebook paying users a fee). In the GP case the zero price also still serves as good a price signal as any other price due to the costs you already mentioned (opportunity costs etc).

    • October 5, 2014 at 6:38 am

      Good point. I grant you that the zero price has the benefit of low transaction costs. This could be an argument against having a low price, except that (a) many middle and high income people already pay upfront and for them this is simply a $5 cut in middle class welfare; (b) under my proposal the GP doesn’t have to charge a fee; and (c) if we need to shift in the future to a system where people (as they get richer) pay for more of their own increasing health costs, then we need to start somewhere.

      On your second point, everything has an opportunity cost, but that doesn’t justify a 100% price subsidy. I think the 100% subsidy exists for equity reasons and not efficiency reasons. For a 100% subsidy to be efficient, that assumes a massive systematic error by us mere mortals about our own “true” preferences (and remarkable brilliance by the bureaucrats who have discovered our “true” preferences). If the real reason for the 100% subsidy is equity reasons… then providing low-income people with an equivalent welfare increase resolves that issue.

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