The Fallacy of Composition - one more reason why microeconomics doesnt seem to apply to health care

This is my first blog from my MSc in Health Policy, Planning and Financing at LSHTM & LSE

Poorer countries spend less on health care. Fair enough. But they also spend less as a % of their GDP than richer countries. This means for them health care is a "luxury good", ie one that isnt as necessary as say, food and water, and will only be bought if they have spare cash.

However, studies have shown that if you increase the cost of health care within a country, people still buy the same amount. I.e. people dont care about the price, they just need the care, and they will even go bankrupt for it (and 60% of US bankruptcies are health-caused). Technically health care is called price "inelastic", and is called a "necessary good" in economics.

So how can health care be a necessary good to individuals, and a luxury good to countries?

This is the fallacy of composition, where you assume that because one thing is true for parts of an object, it is also true for the whole. This doesnt always follow, ie Human cells are invisible to the naked eye. Humans are made up of human cells. Therefore, humans are invisible to the naked eye.

This is a damning fallacy for the relevance of microeconomic theory and indeed for medical science or all science. It occurs because our reductionist sciences often does not take into account the relationship between the parts and the structure of the whole. This relationship and structure can be a bigger force than the individual components properties.

So in our example, microeconomic theory and evidence suggests individuals dont care about health costs, macroeconomic data says that countries do. This may be because of the relationship between rich and poor in a society. It makes sense once you realise that the bigger force in society is that in wealthy countries the poor are organised enough and powerful enough to demand decent care, and so good care is delivered in the public sector to lots of people, and this costs a lot of money. So richer countries have higher total expenditure. Whereas in poorer countries the state and the poor are less organised, so the rich are able to keep the system private and just for them, excluding the poor, which is overall cheaper.

Well thats my guess anyway. Any thoughts?

Pete