Medical decision criteria and policy for an efficient allocation of resources.

This paper approaches health care criteria by maximizing society's consumption possibilities in a model where health is a special case of a good produced, consumed, and used as an input in production, and the patient chooses from alternative therapies. It complements the conventional approach, in providing conditions under which it is optimal to provide care beyond the public health standard. It is shown to be optimal to provide health care beyond the previously obtained optimum where the marginal product generated by the care equals its marginal social cost, up to the point where the sum of the marginal product and the marginal utility equals that cost--but only if the patient is willing to pay the full marginal social cost of the part that exceeds the marginal product, out of his after-tax income, the part corresponding to the marginal product being deductible from taxable income. For the decision, the social planner needs to know the costs of different therapies and the times they take to bring the patient to working condition, as well as the patient's labor income in this condition, but not the patient's preferences. The higher the patient's labor income, the more it is optimal to spend on more efficient therapy, and provide a "tax subsidy" by keeping the expenses for the investment part tax-deductible. An increase in hospital capacity leads to treating patients with cases medically minor to those treated before, incomes equal, if rationing is done optimally so that this finding is not necessarily a sign of demand-shifting.