Chapter 7
Chapter 7 - Health Care as an Economic Commodity
Week 7 2C03/2CC3 Fall 2024
Importance of Health Care as an Economic Commodity
The nature of health care as an economic commodity has significant implications for:
(a) Efficient and equitable allocation of health care resources
(b) Appropriate models and methods for analyzing the health care sector
Defining Health Care
Health care consists of goods with the purpose of health improvement:
Goods sold through individual exchange (e.g., aspirin from a grocery store)
Services provided by health professionals aimed at health improvement (e.g., appendectomies)
Services provided by health professionals that do not necessarily aim to improve health (e.g., cosmetic surgery)
Relevance for Policy
Distinctions between types of health care are crucial:
Guides insurers' health care coverage decisions
Public insurance often covers only effective health improvement services
Defines important regulatory categories (e.g., drugs vs. food products)
Facilitates the calculation of health care expenditures for international comparisons of health systems
Characteristics of Health Care as an Economic Commodity
Key characteristics central to economic analysis:
Derived Demand for Health Care
Externalities
Informational Asymmetry between providers and patients
Uncertainty regarding need and effectiveness of health care
Vulnerability of individuals at the time of consumption
Demand for Health Care as a Derived Demand
Demand for health care is driven by the demand for health:
Consumption of health care services aims to improve health, not direct utility
Function represented as: U = f(H(Z, HC), HC, X)
U: Utility
H: Health status influenced by health care (HC) and other goods (Z)
Health care may have direct negative effects on utility (e.g., unpleasant treatment) but overall contributes to well-being from improved health
Assessing Efficiency of Health Care Consumption
Allocative efficiency is often judged based on health improvement:
A person benefits from health care consumption only if health improves
If consumed health care does not improve health, it cannot be allocatively efficient ex ante
Efficiency can be assessed by effectiveness in improving health outcomes
Judging Allocative Efficiency
Allocative efficiency can sometimes be assessed without knowing patient preferences:
Evaluating health gains from health care
Measuring direct disutility experienced from health care
Areas of health economics research:
Small area variations
Appropriateness of health care utilization
Small Area Variations and Appropriateness
Small-area variation in health care utilization involves comparing rates across geographic areas:
Identifies services with higher than expected variation rates
This serves as a flag for potential inefficiencies without confirming them
Appropriateness involves:
Reviewing clinical research to establish criteria for appropriate service provision
Analyzing medical records for inappropriate service decisions
Need vs. Want in Health Care
The distinction between need and want is crucial for publicly financed systems:
Canada Health Act: Ensures access to medically necessary services
Need implies a moral obligation to act, while want does not
Distinguishing need from want can be complex, leading economists to be skeptical of need claims
Derived demand concept helps clarify needs for health care consumption
Need for Health Care
Relationship between health care and health provides insights into need:
Need exists only if:
i) The service is effective in achieving health objectives
ii) The objective justifies resource allocation
Distinctions from other goods:
Limited substitutability among health care services
Many health care situations can be unpleasant or painful
Types of Externalities
Externality: One's utility is affected by another's decisions outside of the market price mechanism:
Physical (Selfish) Externalities: One's health impacted by another's health status (e.g., flu shots)
Caring (Altruistic) Externalities: One's utility impacted by another's health status, representing concern for others (e.g., seeing a friend receive treatment)
Combination of both externalities can occur
Seeking Medical Advice
People generally consult physicians for:
Diagnosing ailments: “What is wrong with me?”
Guidance on actions: “What should I do?”
Physician's information advantage complicates health care market dynamics:
Market efficiency requires sufficient information from both parties
Asymmetry may result in exploitation of the less informed buyer by an informed seller
Informational Asymmetry Between Providers and Patients
Providers possess more information than patients regarding:
Expected health service impacts
This asymmetry can lead to inefficiencies in consumption
Situations may arise where buyers are more informed than sellers, leading to complications in decision-making
Limitations on Learning in Health Care
Features of health care reduce opportunities for learning:
Gathering Information: Technical demands focus on timing rather than usage
Urgency: Need for quick decisions limits research into alternatives
Learning Through Experience: Risk of severe side effects complicates trial and error learning
Counterfactual Problem: Difficulty in assessing treatment effectiveness for individuals due to uncertainty
Policies Addressing Information Asymmetry
Provider Regulation in Canada includes:
Licensure for qualification exams
Certification for both members/non-members to provide services (with professional designation for members)
Controlled acts system regulating specific tasks across various professions
Physician Agency: Ideal is acting in the patient's interest, though some self-interest will exist
Positive and Normative Analysis
Standard positive economic analysis assumes supply and demand independence:
Physician influence on both demand and supply questions this assumption
Lack of consensus on how much physician market power affects predictions of standard economic models
Normative implications arise when information asymmetry alters welfare economics interpretations
Uncertainty in Health Care
Demand for health care is uncertain due to health outcomes being random events:
Creates demand for health care insurance to mitigate financial risks
Insurance broadens access but complicates market operations
Arbitrary pricing: Consumer prices may not reflect societal costs
Insurers can influence medical transactions, leading to inefficiencies
Unique Characteristics of Health Care Markets
Health care markets are prone to multiple failures and equity concerns:
No good or service shares all unique economic characteristics of health care
The simultaneous presence of these features complicates economic analysis and policy formulation
Health care economics has developed frameworks to analyze these deviations from idealized market conditions
Comparison of Health Care with Other Commodities
TABLE 7.1: Derived Demand, Externalities, Uncertainty, and Information
Health care shares certain characteristics with education, auto repair, and financial services but presents unique complexities especially in areas like:
Derived Demand
Externalities
Uncertainty
Asymmetry of Information
Vulnerability varies across commodities, indicating differential treatment needs
Second-Best Analysis
Second-best refers to contexts where not all market failures can be corrected:
Corrections for one issue may worsen another
Example: Cost sharing reducing access without effectively targeting frivolous usage
Policy approaches must adapt when multiple failures exist in health care settings
Conclusion
Health care is not a single commodity; it encompasses diverse goods/services with differing characteristics:
Importance of assessing specific characteristics per analysis context
Recognizing the variability helps deepen understanding of health care sector challenges and guides policy formation.
Key Areas of Importance for Health Care as an Economic Commodity
Efficient and Equitable Allocation of Resources: Understand how health care resources are allocated and the implications of these allocations.
Types of Health Care Goods and Services: Distinguish between goods sold for direct health improvement and those provided by professionals without a health improvement focus.
Relevance for Policy: Recognize how different types of health care shape insurer coverage decisions and regulatory frameworks.
Characteristics of Health Care as an Economic Commodity: Review key characteristics such as derived demand, externalities, and informational asymmetry.
Allocative Efficiency in Health Care: Analyze how efficiency is assessed through health outcomes and consumption.
Need vs. Want in Health Care: Differentiate between needs and wants, especially in publicly financed systems like Canada's.
Externalities and Their Impact: Understand the role of externalities and their effect on health care demand and consumption.
Informational Asymmetry: Explore how the knowledge gap between providers and patients creates inefficiencies in the health care market.
Unique Characteristics of Health Care Markets: Identify factors that differentiate health care markets from other commodities, such as uncertainty and market failures.
Second-Best Analysis: Consider policy implications in the context of existing market failures and the challenges of health care economics.