The economics of health care delivery

• The rapid escalation in medical expenditures since World War II is attributable in large part to the spread of first-dollar insurance coverage, which encourages people to behave as if medical services were free of charge. Total economic surplus would be larger if we switched to insurance coverage with high deductibles because such policies provide an incentive to use only those services whose benefit exceeds their cost.

• The switch to HMOs addresses this problem because the standard HMO contract provides a strong incentive for physicians not to prescribe nonessential services. Some voice concern, however, that HMO contracts may lead physicians to withhold services that satisfy the cost-benefit test.

• Mounting insurance premiums have caused many people in good health to do without health coverage, resulting in higher premiums for those who remain insured. The Affordable Care Act of 2010 was enacted in an attempt to remedy market failures that exist in attempts to provide health care access through unregulated private insurance contracts. The act's three key provisions are that:

  • Insurance be made available to all at rates independent of preexisting conditions

  • Everyone be required to purchase such insurance

  • Low-income people receive subsidies to help meet this mandate.

• First-dollar insurance coverage: insurance that pays all expenses generated by the insured activity.

• Health maintenance organization (HMO): group of physicians that provides health services to individuals and families for a fixed annual fee.

Workplace safety regulation

• Most countries regulate safety a in the workplace, a practice often defended as needed to protect workers from being exploited by employers with market power.

• Yet safety regulation might be attractive even in perfectly competitive labor mar kets because the social payoff from investment in safety often exceeds the private payoff. An injury tax set at the marginal cost of injury would encourage optimal investment in workplace safety.

• Workers' compensation: government insurance system that provides benefits to workers who are injured on the job.