Chapter 21: The Economics of Health Care

Today, the America has higher infant mortality rates and lower life expectancy than in other developed nations, despite spending dramatically more on health care.

• The drastic increase in spending on U.S. health care raises many issues.
• Individuals who pay for their health care have seen a larger share of their income going to health spending, leaving less available to spend on other goods and services. Employers who pay health insurance for their employees have been faced with choices between cutting worker pay and cutting worker benefits.
• An increasing share of government spending has been devoted to health care over the past half-century, and that share is predicted to continue to increase into the future.

The cost of health care has increased over time due to several reasons including technology, behavioural factors, insurance, and our fee-for-service health care payment system.

• TECHNOLOGY:
• One reason for the relatively larger increase in health care costs in America versus similar countries is America's faster and higher rate of use of high-tech medical care.
• The U.S. tends to adopt the usage of prescription drugs about 18 months faster than similar countries, and Americans use advanced laboratory and un-aging facilities at higher rates.
• Health interventions like fetal monitoring and C-sections can result in improved health outcomes. At the same time, however, they come at a higher cost than lower-tecll options.
• BEHAVIOURAL FACTORS:
• Americans are less healthy than similarly aged residents of other countries.
• Although the rate of smoking has dropped in the United States over time, U.S. obesity rates have been rising much more rapidly than in other countries.
• Americans also have higher rates of hypertension, heart disease, diabetes, stroke, lung disease, and cancer than people in Europe.
• Thus another reason for high amount of spending on health care is because of our life style choices that make us more prone to diseases.

A third-party payment occurs when the provider or seller of a good or service is paid by someone other than the buyer of the good.

Moral hazard occurs when someone changes their behavior because they are insured against risks associated with that behavior.

^^Moral hazard in the health care market means that people with health insurance have an incentive to consume more health care services than may be optimal since having insurance gives them incentives to engage in more risky health behaviors.^^

Physical induced demand occurs when doctors prescribe more treatment than is necessary in order to increase their own incomes.

As more and more health-improving activities are done, the marginal costs of additional health improvements are likely to increase.

• Once we improve our health through simple measures like washing hands or not eating spoiled food, additional health-improving activities are likely to involve more technology, including the development of vaccines, medicines, or improved food preservation methods.

• ^^Further health improvements, such as those that come from intensive care or medical interventions, are likely to come at even higher marginal cost.^^

  

• The figure above provides an illustration of the marginal benefits and marginal costs of doing health-improving activities.

• The horizontal axis measures the quantity of health-improving activities per period.

• Health-improving activities include things like regular hand washing, getting vaccinations, healthy eating, and regular doctor visits.

• The MC curve represents the marginal cost associated with health-improving activities.

• When people do low levels of health-improving activities, the marginal cost of additional health-improving activities is likely to be small.

• These marginal costs could include the time it takes to wash hands to remove germs or avoid consumption of obviously spoiled food.

• As more and more health-improving activities are done, the marginal costs of additional health improvements are likely to increase.

Recent health care reform bills include several methods to expand insurance coverage.

• First, insurance companies are prohibited from ending coverage when people get sick.
• Second, children are now able to stay on their parents' health insurance plans until age 26 rather than age 19 or when they finish college.
• Third, small businesses have access to tax credits to help them provide health insurance for their employees.
• Fourth, health insurance companies will not be allowed to exclude people from coverage due to pre-existing conditions.

Policies to expand health insurance coverage involve trade-offs.

• Expanding insurance coverage to the previously insured will generate improved access to health care for that group.
• Mortality rates are higher for those without insurance, and people without insurance who have chronic health conditions are less likely to see a doctor, go to the hospital, and fill prescriptions than their counterparts with health insurance.
• The risk of losing health insurance keeps many workers from moving to another job that may be a better fit, so expanding coverage may generate more job mobility among workers.
• On the other hand, expanding coverage will involve costs to insurers and their customers.