Evaluating welfare losses in the health care market

According to traditional welfare analysis, consumers facing a price increase forego consumption of the least valued units of a commodity. Studies, such as the Rand HIE, show that patients decrease their consumption of all types of health care when faced with a price increase for health care. From this observation, Thomas Rice (1992) concludes that traditional welfare analysis is inadequate for evaluating insurance-related welfare losses in health care. In this note, I argue that it is not traditional welfare analysis which is inadequate, but the method of assigning marginal valuations to units of health care.