Dr. Mike Walden
Recently, a proposal was made to require North Carolina Medicaid recipients, who now pay nothing upon hospital admission, to pay $50 if admitted.
The proposal's opponents argue it's unfair because Medicaid recipients typically are very low-income households, and even a modest $50 fee would be burdensome. Supporters say without a fee, users will undervalue the medical services and be motivated to over-use hospital facilities.
These kinds of arguments replay frequently in public-funding discussions. Recent skirmishes include college tuition, assistance for buying prescription drugs and public transportation. Battle lines are drawn between those wanting more governmental help and those watching the budgetary bottom line.
In economics, these countering positions are not new and are, in fact, expected. They're called the conflict between equity and efficiency. I call them the conflict between our heart and our head.
The equity, or heart, position is about compassion. We see a person living in poverty or with very limited financial resources, and our heart says to help them. Many of us help with our time or monetary contributions to charity. Or we willingly pay taxes to fund government programs, like Medicaid, food stamps and the earned income tax credit, to assist these persons and households.
The efficiency, or head, position is about possible negative consequences of this compassion. These consequences can come in three forms: to the taxpayers funding the programs, for both those receiving and those providing the assistance.
For taxpayers, the negative consequence of funding public assistance programs is that taxes reduce the reward earned from working. Studies find that people cut back on their work effort when taxes are taken from their income. This appears to be the case particularly when the tax revenues aren't used to fund something the taxpayer directly uses, like a road near their home or a school for their children.
For those receiving the assistance, the concern is what it does to their motivation to self-improve so they don't need more assistance. Of course, for some recipients, especially the disabled or elderly, self-sufficiency may not be an option. But for others, open-ended or very generous assistance can reduce the incentive to invest in their personal capabilities.
Finally, assistance providers like hospitals (and physicians in the case of Medicaid) can suffer the negative consequence of overuse. When a service like medical care is very cheap or perhaps free to public assistance recipients, a natural reaction is for them to use more of the service. This is straightforward economics: price goes down; use goes up. This may then strain the service providers and increase the need for further public funding and higher taxes.
At times, policymakers have tried to address these consequences by putting time limits on receipt of some public help or by directing more public funding to programs that promote self-sufficiency. But many public assistance programs are without limits and continue to grow in size.
The conflict between the heart and the head in public assistance programs
will likely never be resolved. Perhaps the best outcome is that both sides
be recognized and considered in public debates. You decide.
Dr. Mike Walden is a William Neal Reynolds Professor and extension