The R Word

As a species, our wants and needs are without bounds. We make competing claims for finite resources. This condition is called scarcity. We deal with scarcity through different forms of rationing. A speaking event can ration seats among attendees by “first come, first choice.” Rioters can ration their spoils by ability and willingness to loot. (Naked coercion can provide a decentralized solution, “free from meddling bureaucrats or improving intellectuals.”) And markets ration by price, that is by ability and willingness to pay.

As economist Uwe Reinhardt said, “markets are not an alternative to rationing. They are just one particular form of rationing. Ever since the Fall from Grace, human beings have had to ration everything not available in unlimited quantities.” The libertarian professor who taught me Price Theory 301 also defined rationing as a means of dealing with scarcity. Like Reinhardt, he did not shrink from using the R word in describing markets. Instead, he claimed markets were the best of all possible rationing mechanisms. Although Reinhardt would challenge my professor’s claim with regards to health care, they agreed on usage:

When a government insurance program refuses to pay for procedures that the managers of those insurance pools do not consider worth the taxpayer’s money, these critics immediately trot out the R-word. It is the core of their argument against cost-effectiveness analysis and a public health plan for the nonelderly.

On the other hand, these same people believe that when, for similar reasons, a private health insurer refuses to pay for a particular procedure or has a price-tiered formulary for drugs—e.g., asking the insured to pay a 35 percent coinsurance rate on highly expensive biologic specialty drugs that effectively put that drug out of the patient’s reach—the insurer is not rationing health care. Instead, the insurer is merely allowing “consumers” (formerly “patients”) to use their discretion on how to use their own money. The insurers are said to be managing prudently and efficiently, forcing patients to trade off the benefits of health care against their other budget priorities.

One must wonder where people worried about “rationing” health care have been in the last 20 years. Could they possibly be unaware that the United States health system has rationed health care in spades for many years, on the economist’s definition of rationing, and that President Obama and Congress are now desperately seeking to reduce or eliminate that form of rationing?

While some health care reforms increase non-price rationing, they may “reduce rationing on the basis of price and ability to pay in our health system.” In this sense of the word, it is incoherent to ask whether there should be rationing. That’s like asking whether there should be scarcity. Instead, the relevant questions are how it should be done and for what purpose.