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Chapter 1ACCOUNTING FOR FAIRNESS ANDEFFICIENCY IN HEALTH ECONOMICSJOSHUA COHEN AND PETER UBELExcerpted from The Social Economics of Health Careof legal rights to health care are specifically targeted at certain subpopulationssuch as Veterans, the elderly, and the very poor. Programs such as Medicare andMedicaid establish inalienable legal rights to the provision of health care servicesto those who qualify for them. These programs serve in part as a buffer against thevagaries of the market, making sure that inability to pay for health care servicesdoes not prevent eligible citizens from access to health care.Equality and efficiencyEquality as a proxy for fairness appears to be the guiding principle behinddecisions made in the rights domain, whereas efficiency (mediated by utility andprofit-maximizing behavior) appears to guide the decision making process in thedollars domain. Equality in this context implies that it is our duty to treat eachother as if we are equal, disregarding certain characteristics that make us differentsuch as race, gender, and socioeconomic status. This idea hinges on the Aristotelianprinciple that 'like cases be treated like.' The principle 'treat like cases like' seemsto underlie many, if not all, notions of fairness. But, it begs the question 'Whichcharacteristics do we consider morally relevant likenesses?' The various notions offairness differ not in whether like cases should be treated like, but instead withrespect to what are considered morally relevant likenesses. For example, when wehave life saving treatments that could either save the life of someone who couldbe returned to perfect health, or the life of someone who will have a disability, areboth types of patients alike because they are human beings, and therefore deservelife saving therapy? Or, are they unlike each other in that one will have a disabilityand the other will not (see Nord et al. 1999)?It would be presumptive to suggest definitive answers to the latter questions.However, we can say that unless everyone is equal with respect to the likenessesthat we may consider to be morally relevant, which of course is not the case,providing everyone with the same amount of health care would not make muchsense.Efficiency in this context comprises a technical element: Pareto-efficient andproduction and consumption; and a social element: the Pareto principle.Technically, a number of marginal conditions must apply. The first condition is thatthe marginal rates of substitution between any pair of distributable commodities,resources, or outcomes (for example, health care outcomes) must be the same forall individuals who consume both commodities or are beneficiaries of both9

Chapter 1ACCOUNTING FOR FAIRNESS ANDEFFICIENCY IN HEALTH ECONOMICSJOSHUA COHEN AND PETER UBELExcerpted from The Social Economics of Health Careresources or outcomes. The second condition is that the quantity of eachcommodity, resource, or outcome produced conforms with consumer (orbeneficiary) preferences. That is, the marginal rate of transformation in productionmust equal the marginal rate of substitution in consumption for every pair ofcommodities, resources, or benefits. If these conditions do not hold, a shift in thepatterns of production and/or consumption is possible which would benefit somewithout injuring others. These technical conditions imply the social elementassociated with Pareto efficiency, namely, the widely cited Pareto principle whichsays that a change (for instance, a health care policy change) is desirable if itmakes some individual(s) better off without making any others worse off.It should be noted here that the Paretian form of distributive justice merelyaccounts for a preference-satisfaction view of human well-being. It is far from clearwhether such a view suffices as an adequate account of wellbeing? especially inthe context of health. The preference-satisfaction view would appear in certaininstances to assume too tight a connection between choices and preferences and,in turn, too tight a connection between preference-satisfaction and well-being.Visible acts of choice are supposed to accurately reflect preferences. But, in fact,important choices in health care, choices made by patients and health careproviders alike, may be more reflective of certain moral constraints than they are ofpreferences. As for preference-satisfaction, it may fail to improve well-being if thepreferences being satisfied are irrational, poorly cultivated,or simply based onincomplete or false information.Equality-efficiency tradeoffAs noted above, equality (as a proxy for fairness) and efficiency are presumed torelate inversely. The inverse relationship between equality and efficiency can bedepicted using the indifference curve tool. In Figure 4.1 below, following Rawls(1971: 37-39), the indifference curves (I and I') represent possible combinations ofequality and efficiency that are considered by society to be equally just.5 Societycan attach weights to equality and efficiency given its respective notions ofdistributive justice, whether these are egalitarian, Rawlsian, utilitarian, orlibertarian. The slope of an indifference curve at any particular point expresses therelative weight allotted equality and efficiency. A more vertical curve (I) givesrelatively more weight to equality, while a more horizontal curve (I'), allots moreweight to efficiency. The more important and/or the more poorly satisfied a value10

Chapter 1ACCOUNTING FOR FAIRNESS ANDEFFICIENCY IN HEALTH ECONOMICSJOSHUA COHEN AND PETER UBELExcerpted from The Social Economics of Health Caresuch as equality or efficiency is, the greater the increase in another value requiredfor compensating a loss. In this context, equality can be broadly measured byevaluating the variance in, for instance, wealth or health outcomes across thepopulation. Efficiency can be broadly measured by assessing the total productionof wealth or health outcomes divided by the inputs needed to produce them.Now imagine a three-person world, one impartial distributor and two beneficiaries,X and Y. The impartial distributor distributes health care resources necessary6 toproduce certain health outcomes. These outcomes can be measured in terms ofdecreases in morbidity and mortality? life expectancy discounted for the quality oflife expected, or quality-adjusted life-years (QALYs). Suppose that there is a line,MN, that represents the locus of possible Pareto-efficient points (see Figure 4.2below). At each point on the MN curve a Pareto-efficient allocation of healthoutcomes (for example, QALYs) exists. A Pareto-efficient allocation of healthoutcomes is one in which no individual can be made healthier? for instance, interms of QALYs? without making some other individual less healthy. In otherwords, there is no redistribution possible that makes either individual healthierwithout making the other less healthy.11

Chapter 1ACCOUNTING FOR FAIRNESS ANDEFFICIENCY IN HEALTH ECONOMICSJOSHUA COHEN AND PETER UBELExcerpted from The Social Economics of Health CareThe Pareto distribution rule appears to ignore the relative (in)justice of the statusquo. From a Paretian perspective, for instance, a distributive policy that increaseshealth outcomes of a few already healthy individuals, even if this increase is onlymarginal, while leaving many unhealthy individuals just as unhealthy, would beconsidered a Pareto improvement. 'A state can be Pareto optimal with some peoplein extreme misery and others rolling in luxury, so long as the miserable cannot bemade better off without cutting into the luxury of the rich' (Sen 1987: 32).From the Paretian perspective, the locus of points, MN in Figure 4.2, is not ranked interms of equality or fairness, but only according to efficiency. Giving M to Y isconsidered just as efficient as giving N to X, but we do not know whether it is fairerto give N to X, or M to Y. The only thing we do know is that if we give N to X, andnothing to Y, Y's well-being would stay the same, while X's would improve? aPareto improvement. Needless to say, it could be that Y has an intense need for M,while X's need for N is only slight. In this case, Y stands more to gain from gettingM than X stands to lose from not getting N. But, since the Paretian viewpointprecludes the possibility of interpersonal comparisons of need intensity, we cannotcompare X and Y's needs. This is an enormous limitation. In fact, the only thing wecan definitively say is that all points below MN are inferior distributions in terms ofPareto efficiency.If we add the 45-degree line representing a simple equal division of health12

Chapter 1ACCOUNTING FOR FAIRNESS ANDEFFICIENCY IN HEALTH ECONOMICSJOSHUA COHEN AND PETER UBELExcerpted from The Social Economics of Health Careresources, and we assume simplistically that resources and outcomes areproportionate, we can rank points on MN in terms of how much or little equalitythey denote (see Figure 4.3 below). For example, compare point C to point D. If weplace weight on an equal division of health outcomes, D would be considered a'better' distribution than C, despite the fact that they are both technically just asPareto-efficient.7Tradeoffsinevitable?Notice how in the case of the C-D comparison in Figure 4.3, the presumption thatthere is necessarily an equality-efficiency tradeoff is demonstrated to be false.Efficiency and equality do not always have to be balanced against each other. Movingfrom C to D improves equality while we remain on the same Pareto-efficientlocus.8There are in fact a number of other rules of distribution that do not have tradeoffimplications? are not zero-sum games. Positive- as well as negative-sum gamesare possible between equality and efficiency. One such rule? resourceequalization? is described in Culyer (1990). On the basis of a hypothetical case ofglobal-budget health care rationing, Culyer illustrates the tradeoff implications of13

Chapter 1ACCOUNTING FOR FAIRNESS ANDEFFICIENCY IN HEALTH ECONOMICSJOSHUA COHEN AND PETER UBELExcerpted from The Social Economics of Health Carethree different distributive rules. Culyer shows the effects the different rules haveon the degree of efficiency, measured in terms of population health outcomes perresource unit expended, and the degree of equality, measured in terms of variancein population health outcomes. The first rule Culyer considers, the radicallyegalitarian distribution rule, equalizes health outcomes across the population.Given differing individual health care needs, such a distributive rule impliesallocating the medically neediest a disproportionate share of resources. It mayeven imply allocating all resources to the medically neediest depending on theinitial dispersion of health care needs across the population. A completely evenspread of health outcomes raises the health outcome levels for some (the initiallysickest) while possibly lowering the outcomes for others (the initially healthiest) asthis rule implies actively lowering the latter's health to the lowest commondenominator. The population's overall health outcome level may drop as theinitially healthiest may stand more to lose than the neediest stand to gain. Culyerstates, therefore, that radical equality comes at a price: an inefficient allocation ofresources.Culyer next considers the utilitarian distribution rule which aims to maximizeaggregate health outcomes. This rule is maximally efficient, given Culyer'sdefinition of efficiency, as the outcomes per unit of input are maximized. However,the gain in efficiency is offset by a loss of equality; the variance in healthoutcomes across the population increases, leaving the initially sickest even sicker,while the initially healthiest either remain healthy or get healthier. Culyer statestherefore that utilitarian efficiency comes at a price; an unequal allocation of bothresources and outcomes.The third and most interesting case Culyer considers is a compromise between theutilitarian and egalitarian rules. He calls this compromise resource equalization. Thisegalitarian rule is less radically egalitarian than outcomes equalization. It isinspired by Dworkin's equality-of-resource-endowment rule (see Dworkin 1985).The point of this rule is to give everyone an equal 'minimally adequate' share ofscarce health care resources. People can do what they want with the resources attheir disposal, in line with their health-related preferences. As a result, societalhealth care resource utilization will reflect differing preference and initial healthendowment patterns among people. If people start out with equal resources, ahealth care market allocation will result in some people benefitting more, andothers less from their initial resource endowment, depending on their initial healthstatus and their preferences. Access to health care resources is spread evenly across14

Chapter 1ACCOUNTING FOR FAIRNESS ANDEFFICIENCY IN HEALTH ECONOMICSJOSHUA COHEN AND PETER UBELExcerpted from The Social Economics of Health Carethe population. But health outcomes are unevenly distributed, both becauseindividuals' needs and preferences are different to begin with, and because eachindividual's capacity to benefit from resources is different. However, theunevenness of distribution is less than it would have been in the utilitarian case.Additionally, resource equalization is more efficient than a radically egalitariandistribution. This compromise case of resource equalization does not necessarilyimply a tradeoff between equality and efficiency. Compared to initial degrees ofequality and efficiency, resource equalization may improve both.9The Oregon initiativeThe first and second sections above describe in abstract terms the relationshipbetween fairness and efficiency, against the backdrop of Paretian welfare analysis.These two sections also theoretically describe how the fairness-efficiency tradeoffplays itself out both within the dollars domain and between the dollars and rightsdomains. In this section we evaluate a practical case of explicit health carerationing, the Oregon health care initiative. This initiative is assessed in terms ofhow it has promoted fairness and efficiency both within the dollars domain andacross the dollars and rights domains. The inevitability of a fairness-efficiencytradeoff is called into question.In 1983, the President's Commission for the study of ethical problems in medicineand biomedical and behavioral research asserted health care's special statusamong 'goods' that 'society has a role in distributing as equitably as possible.'Evidently, there is something special about health care. In a way different fromother kinds of services, health care services allow us to pursue important life goalsthat could not be pursued without them (Daniels 1985). Because of health care'sspecial place in society, it is often argued that health care should not bedistributed solely according to either ability, or willingness, to pay. Given healthcare's unique status, the Commission suggested that 'all Americans should haveadequate access to health care resources,' access being defined by the Commissionas the ability each citizen has to secure necessary health care without being barredfor reasons of social status, income, ability to pay, place of residence, or otherfactors extraneous to the appropriate delivery of health care services.10 For allintents and purposes, however, the federal government has since abandonedfairness as a goal of health care policy (Caplan 1997: 148). If there is a commonpurpose to government health care policy today, it appears to be cost containment15

Chapter 1ACCOUNTING FOR FAIRNESS ANDEFFICIENCY IN HEALTH ECONOMICSJOSHUA COHEN AND PETER UBELExcerpted from The Social Economics of Health Carewhich, if viewed charitably, is supposed to be synonomous with efficiency. Thegrowth in health expenditures has been contained over the last 8 years followingincreased enrollment in managed care. Managed care has managed to controlcosts somewhat by way of capitation, or prospective payments of lump sums tohealth care providers per patient, rather than retrospective payment per medicalintervention as under fee-for-service.The exponential rise in health care costs over the last three decades, from 7percent of GDP in 1968 to over 15 percent of GDP in 1998, raises the specter of ahealth care system out of cost control. However, this cost problem should not maskthe problems related to lack of fairness in the health care system. Despite moremoney being pumped into health care during the last three decades, the numbersof uninsured (more than 44 million in 1998, or 17 percent of the Americanpopulation) and underinsured have risen dramatically while population-widehealth-outcome measures have not improved significantly during this timeperiod.11Rising costs related to the Medicaid program,together with federal Medicaidbudget cuts in the 1980s, led many state governments to arbitrarily limit Medicaideligibility by lowering the income threshold level by as much as 35 percent. On theface of it, this seems to be grossly arbitrary. Limiting eligibility on income groundsrather than medical necessity does not even seem rational, given that one of theoriginal goals of the Medicaid program was to protect the poor from being infinancial dire straits due to the costs of health care. In fact, this way of rationingseems to institutionalize rationing according to ability to pay rather than medicalnecessity.In 1989, John Kitzhaber, a physician, community leader, and then state senatechairman in Oregon,12 launched an initiative designed to reduce the arbitrarinessassociated with Medicaid rationing. Kitzhaber was fundamentally opposed torationing according to ability to pay. Instead, he wanted to construct a 'rational,'publicly accountable rationing system. Kitzhaber gathered the support of manylocal politicians, community activists, physicians, patient representatives, and stateMedicaid officials to push the initiative through the state legislature. Theinitiative's main purpose was to improve the poor's access to Medicaid by addingas many uninsured people to the Medicaid rolls as possible. All residents withincomes below the federal poverty level would become eligible for Medicaid, notjust the very poor. As a result, the option of arbitrarily rationing people out of the16

Chapter 1ACCOUNTING FOR FAIRNESS ANDEFFICIENCY IN HEALTH ECONOMICSJOSHUA COHEN AND PETER UBELExcerpted from The Social Economics of Health Carehealth care system no longer existed. Rather than rationing by excluding people,the initiative proposed rationing by way of exclusion of health care services.The Oregon initiative constitutes an effort to develop an integrated social policyapproach, not strictly a health care policy approach. Dollars spent on health careimply an opportunity cost in terms of forgone alternative spending outlets.Resource allocations for health care are balanced with allocations in related areaswhich also affect health, such as education. The Oregon initiative proposes asystem of resource allocation that recognizes scarcity and opportunity cost, andhence the need to allocate funds and resources among many

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