WE - Health and Health care 1

Issues threatening sustainable healthcare costs

1) ageing, excess medical inflation
2) Ageing population = birth rates, population increase
3) Excess medical inflation

Baumol’s cost disease

measures the extent to which the prices of services rise faster than prices generally

Baumol’s cost disease - Roots

1) labor productivity rises = increases wages
2) service productivity rises more slowly
= rising wages are not offset by rising productivity

Def. Piggy bank function

1) providing insurance against risks
2) redistributing income across the life course to periods of greater need or lower incomes

What are the objectives of policy

1) aims based on personal values and ideology
2) normative ideological issue

Normative and ideology issue for policy

trade-off social justice and economic efficiency

By what methods are those objectives best achieved

1) Methode of provision
2) positive and technical issue

Positive and technical issue of policy

Income transfers, regulation, taxes/subsidies or public production

Difference between Health and Health care

Health = individual attribute
Healthcare = provision of care

Health is affected by

1) individual-level characteristics
2) group-level characteristics

Individual-level characteristics that affect health

choice like died or lifestyle, having a job, inheritance related to physical/emotional strength

Group-level characteristics that affect health

living standards, external environment (pollution, quality and availability of health care)

Why is there a need for public policy in healthcare

due to market failures and redistribution matters

Def. Market failure

an inefficient market (allocation of goods and resources) that occurs, failure to deliver an optimal results (or optimal price) which reduces welfare

Considerations in market for health care

1) efficiency considerations
2) equity considerations

Efficiency consideration in market of health care

Costs and benefits
Macro-efficiency, Micro-efficiency

Macro-efficiency

devote the op mal frac on of GDP to health care

Micro-efficiency

division of total medical resources between the different parts of the health-care syste

Equity consideration in market of health care

1) Equality of use
2) Equality of outcome
= factors like income should be irrelevant

Equality of use

everyone in a given condition should receive the same quantity of health care

Equality of outcome

implies an unequal allocation such that everyone enjoys an equal state of health
= not fully feasible

Equality of opportunity

any individual should receive as much health care as anyone else in the same medical condition, regardless of any factors such as income

How to evaluate costs and benefits of health care

look at health outcomes

Assessing efficiency

1) Cost-benefits
2) Cost-effectiveness (treatment comparison)
3) Cost-utility (quality and quantity)

Measurement issues

1) benefits are more difficult to measure
2) what to measure? (subjective health or objective health)

Why should the state intervene?

Market failures due to efficiency reasons

Market failures - efficiency reasons

1) imperfect information
2) Bounded rationality
3) incomplete contracts
4) Incomplete insurance
5) Externalities

Def Incomplete insurance

uncertainty about the future, people do not know when and how much health care they demand

How is health demand affected by failures?

Holding the supply constant, demand can go up (overestimating value) or down (ignorance)

Why does the state intervene - Equity reasons

1) horizontal equity
2) vertical equity

Horizontal equity

1) Perfect information (necessary for rational decisions)
2) equal power (necessary to enforce those decisions)

Options to ensure horizontal equity

Regulation,subsidy

Vertical equity

redistribution from rich to poor
rich person pays more than others

Why could there be underconsumption of healthcare?

Price is too high = positive externalities would justify a lower price (or higher subsidy)

Why would there be overconsumption of healthcare?

Price is too low = inefficiency (market failures) would justify a higher price

How to address market failures?

1) providing information
2) Regulation

Types of regulation to address market failures

1) quality standards (supply side)
2) quantity limits (demand side)
3) price control (both sides possible)

Options for financing and producing health care

1) private finance and private production
2) public finance and public production
3) mixes

Problems of Private finance and production of healthcare

1) equitable access
2) cost containment

Problems of public finance and public production

1) waiting lists
2) consumer choice

Conditions for free market to be enough to ensure efficiency

1) independent probabilities across individuals
2) Probability < 1
3) Probability is known/estimable
4) No information asymmetry (adverse selection, moral hazard)

Health - Independent probabilities across individuals

health risks are largely independent (except major epidemics)

Health - Probability is less than 1

there must be some possibility that an individual does not experience the insured event
= not for chronic diseases
= Solution is state intervention as regulation

Health - Probability is estimable

insurer needs to be able to estimate the probability of claims for the population
= problem of future uncertainty over a long time (old-age)

Health - Adverse selection

Individuals may know more about their health risk than the insurer

Health - Moral hazard

Once someone is insured, their behaviour may change because they dont bear the full costs of healthcare

What leads to adverse selection in health care?

1) only less healthy people are willing to buy health insurance
2) price increases as pool of people willing to buy health care decreases

Market failure due to adverse selection

missing market = many healthier people who would like to buy insurance will remain uninsured

What leads to moral hazard

1) not paying the costs leads to fewer health precautions
2) third-party payment problem

Third party payment problem

if the insurer pays all medical costs, both doctor and patient can act as though health care costs nothing, even though the social cost is positive

Private insurance works well when …

1) risks can be pooled
2) risks are uncertain
3) the insurer can estimate the overall risks
4) the insurer and insured have roughly the same relevant information

Two balancing acts for the sustainability of the healthcare sector

1) underconsumption with negative externalities vs overconsumption due to moral hazard
2) efficiency from innovation vs market power

Incentive-based mechanisms to influence individuals behaviour

1) copayment
2) deductibles
3) coinsurance

Copayment

a fixed payment when individuals receive a medical good/service

Deductibles

individuals face the full cost of their care but only pay up to some limit

Coinsurance

the patient pays a percentage of each medical bill