Health Economics: Market Structures, Externalities, and Medicare Models

Moral Hazard in Nyman Model

Moral hazard can be both efficient (consumption of cost-effective, life-saving care enabled by subsidized prices) and inefficient (over-consumption of unnecessary or low-value services).

Nyman Model's Core Function

The real social value of insurance is income transfer rather than risk transfer; people buy insurance for the 'access motive' to afford valuable care.

Competitive Market (Structure)

Many small firms, identical products, easy entry and exit; firms are price-takers.

Monopoly (Market Structure)

A market dominated by a single seller with no close substitutes.

Oligopoly (Market Structure)

A market dominated by a few large firms, characterized by interdependence (e.g., insurance or pharmaceutical industries).

Monopsony (Market Structure)

A market dominated by a single large buyer (e.g., a major insurer or Medicare) that can influence prices paid to providers.

Herfindahl-Hirschman Index (HHI)

A measure of market concentration found by summing squared market shares of all firms; ranges from 0 (competitive) to 10,000 (monopoly).

Negative Supply Externality (Santerre Neun)

Occurs when the cost of production is artificially low, creating an inequitable form of income redistribution.

Negative Demand Externality

When a consumer's action imposes a cost on others (e.g., not vaccinating).

Positive Demand Externality

When a consumer's action benefits others (e.g., vaccination contributing to herd immunity).

Public Interest Theory

Legislation promotes society's general interest, focusing on restoring efficiency and equity (MSB = MSC).

Special Interest Group Theory

Legislation is shaped by supply and demand for political favors; politicians seek votes, and special interest groups seek wealth.

Definition of a Public Good

A good that is non-rival (one person's use does not reduce availability) and non-excludable (hard to prevent non-payers from using it).

Williamson Merger Trade-Off Model

Antitrust model balancing deadweight loss from market power against efficiency gains from a merger.

Medicare Crowding Out

When expansion of public insurance causes individuals to drop private coverage in favor of public programs.

Medicare Part A

Mandatory Hospital Insurance covering inpatient hospital, skilled nursing facility, hospice, and home health care.

Medicare Part B

Supplemental Medical Insurance covering outpatient care, ambulance services, durable medical equipment, mental health, and preventive services.

Medicare Part C

Medicare Advantage Plans offered by private insurers combining Parts A and B (usually D) with extra benefits.

Medicare Part D

Voluntary prescription drug benefit established in 2006.

MACRA (Medicare)

Medicare Access and CHIP Reauthorization Act of 2015; replaced SGR and shifted payments toward value-based models.

MIPS (Medicare)

Merit-based Incentive Payment System adjusting physician payment based on Quality, Improvement Activities, Promoting Interoperability, and Cost.

Medicaid

Joint federal-state program run at the state level providing coverage to low-income individuals and families.

Medicaid Expansion (ACA)

ACA provision expanding Medicaid to 138% FPL; non-expansion states have a coverage gap.

Dominant Firm Pricing Model

Model where a dominant firm sets price like a monopolist over residual demand (market demand minus fringe supply).

Supplier Induced Demand (SID)

Occurs when providers use informational advantage to shift patient demand upward; prevalent in fee-for-service systems.