The Real Meaning of Rationing

Since the inauguration of President Obama in January 2009 and the subsequent passage of the Patient Protection and Affordable Care Act in March 2010, Americans have been saturated with debate about reform of the US health care system. Most of the issues and concepts are not new and focus on whether changes will make the health care system more efficient and equitable. Economists have specific definitions of these 2 attributes. Efficiency refers to the objective of maximizing the amount of goods and services and total societal welfare that are produced with a fixed level of resources. This implies a focus on costs. Equity refers to the distribution of goods and services across individuals in society, measuring who gains and who loses when some policy change occurs.

Because insurance allows consumers to purchase health care at a price below the price suppliers receive, economists predict that insured individuals will consume medical care beyond the level that reflects their true preferences, thus reducing total societal welfare.¹ This overconsumption and lack of concern about true costs is an important reason that the health care sector is highly inefficient and wasteful.² Indeed, ample empirical evidence demonstrates that consumers will reduce expenditures when they face higher prices.³ Thus, making consumers more aware of the real resource consequences of their actions is an important part of the discussions about efficiency.

To some, the optimal method is to allow consumers to know the full price, especially for services that are inexpensive and predictable. Catastrophic health insurance plans take this approach.⁴ Because some health services are unpredictable, very expensive, and necessary (eg, trauma care), this approach has limits. Markets for private insurance may develop to cover those risks. Governments also may subsidize or provide health insurance for low-income individuals on the basis of fairness or equity.⁵ To control costs, these insurance systems require an insurer or some other party to monitor the provision of covered services to determine what is necessary and appropriate. These mechanisms are referred to as “managed care” and force patients to either forgo care or pay for it themselves. Another approach to controlling costs taken by many countries with universal public insurance plans limits the total supply of services centrally.⁶ All these approaches are often viewed, typically pejoratively, as forms of rationing.

What does the term “rationing” really mean? In free markets, consumers incorporate their income and preferences to make decisions about how much they are willing to pay for a particular good or service. Similarly, suppliers consider the desired profit that would induce them to produce and sell that product. The price is the key variable that links consumers to suppliers and adjusts to determine what is produced and who consumes it. When consumer demand is high and supply is low, price is driven up. When supply is plentiful and demand is low, prices decline. Economic reasoning favors this approach because the consumers who are willing to pay a higher price for a good are likely the ones who place higher value on it. However, consumers' willingness to pay is driven not only by their preferences, but also by their income and wealth. For some goods and services like health care, housing, and food, the free market distribution is considered inequitable because individuals with low incomes and little wealth are unable to purchase some minimum level. In these cases, government subsidies arise to ensure that everyone receives these “merit goods.”

The term rationing implies that goods and services are allocated to consumers in a way that is disconnected from the price. That is, specific amounts of goods and services are allocated to consumers on the basis of criteria other than their actual preferences, willingness to pay, and income or wealth. The party making that decision has to determine what the person really needs or what is fair. If demand exceeds supply at that price, the price is not allowed to increase.

Societies have used rationing under a variety of circumstances. The classic use of rationing occurs in times of war when governments allocate specific services such as food, raw materials, energy, and equipment to the war effort and away from the rest of the market to ensure victory. To prevent the excess demand from producing a large price increase, consumers are issued ration tickets that give them a specific aliquot of those goods and services (to ensure equity) and the rest is expropriated for government use (to ensure it pays a low price). Rationing is often considered as a way for government to achieve directly what it cannot achieve through taxes, either because of practical or political constraints. The public may clearly debate the value of a war but rarely debates whether it is desirable to give government the power to win it.

In health care, the issue is not that government actions prevent individuals from purchasing health care even when they are willing to pay its full price. That is, they can always pay the cost directly. In that sense it is different than most rationing policies. The issue is instead that the riskiness of health care consumption creates a situation in which it makes sense to separate utilization of health care from its cost. Therefore, to limit utilization, decisions have to be made about the circumstances under which insurance will cover certain types of health care. When this care is very expensive, patients may be unable to pay for it if their insurance chooses to decline payment. Coverage policies, therefore, are rationing from a practical perspective just as much as rationing systems that are more explicit in preventing consumers from acting on their preferences.

Because discussions of health policy make it clear that rationing exists and that government plays a part in it, a significant proportion of Americans have opposed expanding the government's role (eg, “the public option”). Although many Americans dislike any form of government control,⁷ the government's role in health care seems to produce a higher level of passion. Perhaps the specter of rationing concerns Americans because they believe that health care services will be withheld from them and delivered to other persons, ie, that the distributional consequences will make them worse off.

Rationing already takes place in many ways in health care. Managed care is exactly a form of rationing in which a private insurer determines whether patients should or should not receive services. In addition, private sector rationing injects profit motives into the calculations. The recent debate over health care has centered around who should do the rationing: private enterprises, often driven by profit or other private objectives, or government officials who are easily characterized as motivated by the immediate political returns of lower taxes or hiding the true shortcomings of services they administer.

These perspectives are understandable. Yet attempts to resist change using the specter of rationing are not reasonable because rationing already exists and is inevitable. Acknowledging that the argument is not about whether rationing is required but rather who should be trusted to ration care is a start. What is needed is intelligent discourse on what approaches to rationing work best and what values Americans most wish to express as a nation to address this problem.

Such public discussion will not be easy at this time because US politics is currently so polarized. It can be difficult to separate good information from bad. For example, the challenges of rational discussion of health care reform in the United States can be illustrated by typing the words “mammography” and “rationing” into a Google search. Moreover, there are deeply vested interests: political parties, pharmaceutical and device manufacturers, physicians, hospitals, and patient special interest groups. Concerns about “death panels” and debates about rationing make better press than balanced discussions of who should or should not receive a mammogram, or the effects of co-payments on appropriate and inappropriate emergency department use. It is critical that Americans learn that rationing currently exists and is inevitable and focus their thinking on how its vagaries are best minimized, rather than use the word to instill fear.