Healthcare is one of largest US industries

Twin problems that involve cost + access

• Cost of healthcare risen in response to higher prices + increase in quantity of services provided

• Many Americans don’t have coverage

Health care spending

• Deductibles - The insured pays the first $250 or $500 of each year’s health care costs before the insurer begins paying

• Copayments - The insured pays, say, 20 percent of all health care costs and the insurance company pays 80 percent

• US healthcare spending increasing as % of GDP

• Incidence of disease declining + quality of treatment improving

Economic implications of rising costs

• Reduced access to care

• Labor market effects

  • Slower wage growth

  • Use of part-time + temporary workers

  • Outsourcing + offshoring

• Personal bankruptcies

• Negative impact on gov’t budgets

US spending too much on healthcare

• Beyond MB = MC point

Peculiarities of the healthcare market

• Society regards healthcare as an “entitlement”

• Healthcare buyers have no understanding of treatment procedures

• Positive externalities

• “Excess” consumption of healthcare services

Increasing demand for healthcare

• Normal good - Increases in income → Increases in demand for healthcare

• Inelastic demand - Increases in domestic income have caused increases in the demand for health care

• Aging population - Older people encounter more frequent and more prolonged spells of illness

• Unhealthy lifestyles - The abuse of alcohol, tobacco, and illicit drugs damages health and is therefore an important component of the demand

• Role of doctors

  • Supplier-induced demand (asymmetric information)

    • Fee-for-service - Doctors paid separately for each service they perform

  • Defensive medicine - Doctors recommend more tests and procedures than are warranted medically or economically in order to protect themselves against malpractice suits

  • Medical ethics

Role of health insurance

• Moral hazard problem - Tendency of one party to an agreement to alter her or his behavior in a way that is costly to the other party

• Know they have insurance → More risky behaviors

• Overconsumption - Because diagnostic tests and complex treatments are covered by health insurance, insured people go to doctors more often than needed

• Tax subsidy - Federal tax policy toward employer-financed health insurance strengthens the demand for health care services

• Trade-off exists between efficiency + equity

• Greater availability + equity → Greater overallocation of resources

Supply factors in rising healthcare prices

• Supply of physicians has increased

• Slow productivity growth of healthcare industry

• Development of advanced medical technology

Reform of healthcare system

• Play-or-pay - All employers would be required to either provide a basic health insurance program for their workers and their dependents (“play”) or pay a special payroll tax to finance health insurance for uninsured workers (“pay”)

• Tax credits + vouchers

• National health insurance (NHI) - The Federal government would provide a basic package of health care to every U.S. resident at no direct charge or at a low cost-sharing level. The system would be financed out of tax revenues rather than out of insurance premiums.

  • Pros - Reduce administrative costs, patients choose own physicians, etc.

  • Cons - Gov’t price ceilings not likely to control costs, doctors can hold strikes against low payments, etc.

Cost containment

• Deductibles + copayments

• Managed care

  • Preferred provider organizations (PPOs) - Require that hospitals and physicians accept discounted prices for their services as a condition for being included in the insurance plan

  • Health maintenance organizations (HMOs) - Provide health care services to a specific group of enrollees in exchange for a set annual fee per enrollee

• Medicare + DRG

  • Diagnosis-related-group (DRG) system - A hospital receives a fixed payment for treating each patient; that payment is an amount associated with one of several hundred carefully detailed diagnostic categories that best characterize the patient’s condition and needs.

Recent laws + proposals

• Medicare Part D - Medicare enrollees can shop among private health insurance companies to buy highly subsidized insurance for prescription drugs

• Health savings accounts (HSAs) - Individuals can make tax-deductible contributions into their HSAs, even if they do not itemize deductions on their tax forms. Employers can also make tax-free contributions to workers’ accounts if they choose. Earnings on the funds in HSAs are not taxable and the owners of these accounts can use them to pay for qualified medical expenses'

• Limits on malpractice awards