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Free National Health Services, Time is Price

Politics / NHS Sep 29, 2010 - 08:29 AM GMT

By: MISES

Politics

Best Financial Markets Analysis ArticlePredrag Rajsic writes: Canadian emergency rooms are infamous for their long wait times.[1] A recent study has shown that in most of them the average wait time exceeds 6 hours and sometimes reaches up to 23 hours. While some call for action in reducing these extremely high figures by increasing the supply of healthcare services, others try to present the situation as, in principle, an unavoidable fact of life.


Both of these arguments are missing the target. The long wait times are unlikely to be significantly reduced under the current institutional arrangement, because any serious reduction would require transferring a formidable amount of resources from the other sectors of the economy. At the same time, constantly full waiting rooms are not an unavoidable fact of life but a product of a "priceless" supply system, where waiting for service acts as a rationing substitute for the market price. The incentive structure created by this institutional arrangement is not conducive to providing shorter wait times.

The purpose of this article is to provide more clarity when it comes to these important points and their implications. I will first describe the dynamics of a typical emergency waiting room and then use economic theory to explain the persistence of these dynamics, the high costs of changing the situation under the current system, and some of the benefits of an alternative, money-price mechanism.

The Dynamics of a Waiting Room

Like most parents of young children in Canada, my wife and I have spent a fair share of our first six years of parenthood waiting for service in emergency rooms. Without any exaggeration, it can safely be said that we had ample time to observe and analyze the waiting process in a typical Canadian waiting room. One thing that we noticed is that there is a remarkable regularity and stability in this waiting process. This suggests that the long waiting times in the current system are in fact a stable equilibrium outcome rather than an unplanned disruption.

During our usual six or more hours of waiting, I noticed the following process over and over again: There were about 30 people waiting at all times (which is a relatively small number considering that this is the main emergency room for Kitchener-Waterloo, a city of 300,000 inhabitants). About once an hour, a nurse would come out and call in about 5 people to go from the main waiting room into the next room where they would, eventually, be seen by a doctor. About the same number of new patients would come to the waiting room over the course of an hour. Thus, the total number of people in the room would remain fairly stable.

However, there is an order in which different people are called in. Only if one has an extremely severe, life-threatening condition (which seemed to be quite rare) could he or she be admitted immediately upon arrival. Otherwise, one would need to wait until those that came before were taken care of.

The arithmetic of waiting is as follows: Whenever a new person comes into the waiting room, there are about 30 people waiting in front of him or her. Because the doctor examines about 5 people per hour, it takes approximately six hours until this new person is admitted. But, in six hours, there will be 30 new people in the room, because about 5 new people enter the room over the course of an hour.

Consequently, the waiting room could be likened to a pool that is being emptied at the same rate as it is being filled. The level of water in such a pool remains unchanged over time.

A person that does not understand the laws of economics might come to a "revelation" and proclaim that we just need to add a small amount of resources in order to increase the rate of the emptying of the "waiting pool" just slightly above the rate at which the pool is being filled up. This would solve the waiting problem permanently! However, this is not true.

Unlike many hospital brochures, which offer merely a description of the waiting process, the following section offers a real explanation based on the principles of economics.

Time as Price in a "Priceless" System

Prices have multifaceted functions in the market economy. First, they reveal some of the subjective and dispersed knowledge about the individual values of the millions of people constantly making production and consumption decisions. High prices send signals to entrepreneurs about the kinds of goods that are highly valued by the consumers. This in turn directs the allocation of resources into more highly valued purposes.

Another important function of the price mechanism is that it brings about the harmony between the quantity of goods that is demanded and the quantity that can be supplied at any given point in time. If a store keeper — let's call him Jim — sees people piling up in front of his store, he will interpret this as a signal that the price he is charging might be too low. By increasing the price, Jim achieves two outcomes at the same time: (1) he reduces the number of people piling up in front of the store without significantly reducing the number of customers per unit of time and (2) he increases his revenue.

"When the price is not allowed to perform its function of supply-and-demand rationing, something else will."

The money price of a particular good or service acts as a lever that determines the amount of other goods and services one needs to give up in order to acquire that particular good. As the money price increases, only those people that are willing to give up a lot of other things keep buying the particular product.

If Jim was not allowed to charge a money price for his services, he would have no way of affecting the number of people entering his store, other than locking the door from time to time and making the interested buyers wait. Those that value the products in the store highly would be willing to wait a long time to save their spot in line.

Some people would be willing to wait because their time (or, more specifically, the foregone use of that time) would now be the only price they are paying for the service. Others might just look for another store offering similar products. However, if the products offered by this particular store are unique or if others are prohibited by law from providing a similar service in exchange for money, the wait time people would be willing to accept might be quite high.

The same laws of economics apply to any other service, such as, for example, healthcare services that are very specific and, in Canada, provided by a centrally planned, legalized monopoly that does not charge a direct per-unit price. Instead of the money price, this organization must rely on a nonmonetary mechanism of managing the demand for its services, such as administrative procedures and, unavoidably, waiting times.

Most people have some mild health-related problem most of the time, but it would not be worth it to them to wait for six hours to receive treatment. They might, however, be willing to wait 20 or 30 minutes or even an hour. The wait time is the only price they pay for the service, but if the price is too high, these people will choose not to use the service offered by the healthcare provider.

However, there are always a small number of people that would be willing to wait six or more hours because the value they put on their particular health problem is quite high. Generally, as the wait time decreases, the number of people willing to wait increases. For example, in our city of 300,000 people, I would expect far more than 5 (or even 30) persons per hour coming into the emergency waiting room if they had to wait only five minutes to receive a service and not provide any money in return.

While the exact relationship between the wait time and the number of people willing to wait for service is an empirical question, it could be conceptually represented as in figure 1. The figure shows a hypothetical demand curve for an emergency room services in a medium-sized Canadian city. It indicates that, as the wait time decreases, more people would be demanding service. We say that the quantity demanded increases as the price (i.e., the waiting time) goes down.

Figure 1. The inverse relationship between the wait time and the quantity of medical service demanded

The current minimum average waiting time of six hours is probably somewhere at the steep end of the curve (point A). For example, most people would probably be willing to wait that long if their child split her eyebrow open, broke her arm, or if she was vomiting all night. But most people would probably refrain from going to the emergency room for a health problem that they believed might go away on its own in a few days or weeks. On the other hand, most people would likely show up at the emergency room even for mild problems if they knew it would only take 10 or 20 minutes to get admitted.

Now, if we wanted to put in practice the "revelation" that a noneconomist could have about adding some additional capacity to eliminate the wait time, figure 1 would show us where we could be going wrong.

Suppose we wanted to double the capacity of the emergency room from five (point A) to ten people per hour (point B) for a short period of time in order to empty the "pool" of people in the waiting room. In our city, that would only involve adding another doctor (provided there is an idle doctor somewhere). This is because, currently, there are ten small individual examination rooms behind the main waiting room served by only one doctor. Most people spend an hour or two just sitting in one of these rooms waiting to be examined. Thus, there is infrastructural capacity available to accommodate an additional doctor.

Adding one more doctor would allow for ten people to be admitted every hour. This would initially reduce the wait time. However, the shorter wait time would induce some additional people to seek medical service. These are the people that were not willing to wait six hours but might be willing to wait, say, four hours. Thus, the two doctors would now face a new wave of patients — all those with the waiting tolerance lower than six hours but higher than the newly established, shorter waiting period.

"While paying for a service with money represents an exchange of claims over resource ownership, paying for the same service with time represents outright resource destruction."

Suppose that the wait time of four hours is required to limit the number of new entrants to the total number of 10 people per hour. Then we would end up with the following situation: Two doctors are examining 10 people per hour. Ten new people are coming every hour. And, there are now 40 people in the waiting room, each being admitted after four hours of waiting. Thus, even though the waiting time is reduced, the reduction was not dramatic. Additionally, the number of people in the waiting room increased from 30 to 40, and the number of doctors needed to serve this demand would have to be doubled permanently.

Imagine now that every emergency room, every walk-in clinic, every MRI and CAT-scan clinic, and all other providers of medical services decided to double their capacity in the hope that they would significantly reduce the excess demand for their services. As shown in figure 1, a reduction in the wait time would be accompanied by an increase in the quantity demanded, in the same way a reduction in a money price would be. The higher the increase in supply and the corresponding reduction in the wait time, the greater the increase in the quantity demanded.

This indicates that the amount of resources needed to reduce the wait time in a system that does not directly charge a money price for specific units of service may be quite high. Moreover, the benefits to the healthcare-system employees and managers are not that clear, leading to weak incentives to alleviate the problem.

However, the healthcare employees are the last to be blamed for this situation, because they are just responding rationally to the incentive structure created by the given institutional framework. Who would want to stretch themselves beyond their capacity, for no apparent benefits? At the same time, starving the other sectors of the economy in order to provide the resources needed for a wait-free, priceless healthcare system would not be the wisest decision either.

Another issue that is often overlooked is the destructive nature of a system devoid of money prices. While paying for a service with money represents an exchange of claims over resource ownership, paying for the same service with time represents outright resource destruction. The time spent in waiting is lost forever and cannot be used in any productive activity, whereas the money paid for service could be used for purchasing goods and services that had already been produced. The time not spent in waiting could be used for the production of new resources.[2]

Conclusion

Given the current structure of the Canadian healthcare system, the long patient wait times are here to stay. Those that believe the problem could be solved by increasing the supply of health services ignore the large demand effect of a reduction in wait times. Others, who believe that waiting is an unavoidable fact of life, ignore the fact that the long wait times are an artifact of the "priceless," politically administered supply system.

When the price is not allowed to perform its function of supply-and-demand rationing, something else will.[3] In the case of the Canadian healthcare system, this price substitute is our time. But many of us may not be aware of the destructive nature of this hidden and steep price tag. While the unseen costs are always easily ignored, they are constantly eating up the economy's productive resources.

Notes
[1] The long wait times, in fact, prevail in most of the Canadian healthcare services, not only emergency rooms.

[2] Note that some people would not be able to perform any other productive activity due to their poor health. However, there are many people who would know how to better use their time if they had this option. These are the people with less severe health conditions, and the people that accompany those with more severe conditions, as well as parents with sick children. In addition, spending time resting at home instead of in a crowded waiting room would likely have positive health effects.

[3] Alchian, A.A. and H. Demsetz. 1973. "The Property Right Paradigm." Journal of Economic History, Vol. 33, No. 1, pp. 16–27.

Predrag Rajsic is a PhD candidate in the Department of Food, Agricultural, and Resource Economics at the University of Guelph in Ontario, Canada. Send him mail. See Predrag Rajsic's article archives.

© 2010 Copyright Predrag Rajsic- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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