212 PART • Producers, Consumers, and Competitive Markets the maximum achievable health outcome for the population as a whole, as a function of the dollars spent per capita on health care inputs Points on the production function such as A, B, and C are by construction inputs that are being used as efficiently as possible to produce output Point D, which lies below the production function, is inefficient in that the health care inputs associated with D not generate the maximum possible health output Notice that the production function exhibits diminishing returns: it becomes relatively flat as more and more money is spent on health care For example, the health output at point B is quite a bit higher than the output at point A since the marginal productivity of health care expenditures is high Starting at point A, an additional $20,000 of health expenditures (from $10,000 to $30,000) increases life expectancy by years However, output at C is only slightly higher than the output at B, even though the difference in health inputs is large In moving from B to C, an additional $20,000 of health expenditures increases life expectancy by only year Why is this? The answer is that given current medical technologies, additional expenditures on medical procedures and/or the use of newer drugs has only a minimal effect on life expectancy rates Thus the marginal productivity of dollars expended on health has become less and less effective as the expenditure level increases We can now see one possible explanation for the high level of health-care expenditures in the United States The United States is relatively wealthy, and it is natural for consumer preferences to shift toward more health care as incomes grow, even as it becomes more and more expensive to obtain even modest increases in life expectancy (Recall our discussion of health care choice in Example 3.4.) Thus, Americans may have been seeking better and bet- ter medical outcomes, but with limited success, given the shape of the health care production function In other words, compared to other countries, the United States may be operating farther to the right along the flat portion of the health-care production function There is another explanation, however It may be that the production of health care in the United States is inefficient, i.e., higher medical outputs could be achieved with the same or similar input expenditures if those expenditures were more effectively utilized In Figure 6.3, this is shown as a move from point D to point B; here with no additional expenditure life expectancy is increased by year by using inputs more efficiently A comparison of various measures of health and health care across a number of developed countries suggests that this may indeed be the case First, only 28 percent of primary care physicians use electronic health records in the United States, compared to 89 percent in the United Kingdom and 98 percent in the Netherlands Second, the percentage of chronically ill patients that did not pursue care, did not follow recommended treatments, or did not take fully recommended medications was 42 percent in the United States compared to percent in the United Kingdom and 20 percent in Germany Third, the billing, insurance, and credentialing system is more complex and burdensome in the United States than in many other countries, so the number of health care administrative personnel per capita is greater Both explanations for U.S health care spending probably have some validity It is likely that the United States indeed suffers from inefficiency in health care production It is also likely that as U.S incomes grow, people will demand more and more health care relative to other goods, so that with diminishing returns, the incremental health benefits will be limited E XA MPLE 6.2 MALTHUS AND THE FOOD CRISIS The law of diminishing marginal returns was central to the thinking of political economist Thomas Malthus (1766–1834).6 Malthus believed that the world’s limited amount of land would not be able to supply enough food as the population grew He predicted that as both the marginal and average productivity of labor fell and there were more mouths to feed, mass hunger and starvation would result Fortunately, Thomas Malthus, Essay on the Principle of Population, 1798