1) The law of one price is that identical products should cost the same everywhere, no matter what transaction costs are.

Transcription

1 1 Chap 16 Quiz 1) The law of one price is that identical products should cost the same everywhere, no matter what transaction costs are. False assuming transaction costs are zero

2 2 Chap 16 Quiz 3) Differences in the costs to supply a product to different customers enables firms to engage in price discrimination. False Price discrimination is charging different prices to different customers for the same product when price differences are not due to differences in cost

3 3 Chap 16 Quiz 6) Airlines tend to charge business travelers more than leisure travelers since business travelers demand for tickets is generally more price elastic. False business travelers are less sensitive to changes in price so their demand for tickets is more price inelastic than leisure travelers

4 4 Chap 16 Quiz 8) Retailers like J. Crew can charge less for its merchandise at outlet malls and still make profits because the merchandise is actually of lower quality. True 85% of goods sold in outlet stores are manufactured specifically for them and tend to be of lower quality and thus cost less to produce

5 Economics 6 th edition 5 5 Chapter 7 The Economics of Health Care

6 6 Chapter Outline 7.1 The Improving Health of People in the United States 7.2 Health Care around the World 7.3 Information Problems and Externalities in the Market for Health Care 7.4 The Debate over Health Care Policy in the United States

7 7.1 The Improving Health of People in the United States Use data to discuss trends in U.S. health over time. 7 Health care expenditure in the United States is higher than anywhere else in the world. Why is this the case? Perhaps High quality of health care System of payment for health care Higher demand for health care In this chapter, we will address some of the elements of health care that make it a rich field of study for economists. Health care: Goods and services, such as prescription drugs, consultations with a doctor, and surgeries, that are intended to maintain or improve a person s health.

8 Table 7.1 Health in the United States, 1850 and Variable Life expectancy at birth 38.3 years 79.6 years Average height (adult males) Infant mortality (death of a child aged 1 year or less) per 1,000 live births 6.2 per 1,000 live births The last couple of centuries have brought incredible advances in health outcomes for Americans. Explanations: Improvements in nutrition Public health movement (late nineteenth, early twentieth century) Improvements in sanitation, food distribution, etc. Feedback from better health to higher incomes to better health

9 Figure 7.1 The Improving Health of the U.S. Population (1 of 2) 9 The most dramatic gains in health have occurred in the twentieth century. (Mostly) steady increases in life expectancy. Corresponding decreases in the death rate (adjusted for life expectancy).

10 Figure 7.1 The Improving Health of the U.S. Population (2 of 2) 10 Medical advances in prevention and treatment are reducing the death rate. Notice in particular the fall in the death rate from cardiovascular disease. However, deaths due to some obesity-related illnesses have risen.

11 7.2 Health Care around the World 11 There are important differences between the health care systems of the United States and those of other countries, both in terms of who provides the health care, and who pays for the health care. Most health care in the United States is provided by private firms, and paid for through health insurance. Health insurance: A contract under which a buyer agrees to make payments, or premiums, in exchange for the provider s agreeing to pay some or all of the buyer s medical bills. Insurance payments can take the form of fee-for-service, where doctors and hospitals receive a payment for each service they provide; or Health Maintenance Organizations (HMOs), where doctors receive a flat fee per patient.

12 Figure 7.2 Sources of Health Insurance in the United States, 2013 & % 50% % 30% 20% 10% 0% Employer Non-Group Medicaid Medicare Other Public Uninsured Henry J. Kaiser Family Foundation website

13 Figure 7.2 Sources of Health Insurance in Oregon, 2013 & % 50% % 30% 20% 10% 0% Employer Non-Group Medicaid Medicare Other Public Uninsured Henry J. Kaiser Family Foundation website

14 Why Are So Many Americans Uninsured? 14 The proportion of Americans without health insurance is lower now than in recent years, partly because of the Affordable Care Act (2010). This law enacted subsidies for lower-income people, and introduced penalties for not having health insurance. However, many people still do not have health insurance, typically because they: Believe they cannot afford it, or Believe it is unnecessary because they are healthy.

15 Making the Connection: The increasing Importance of Health Care in the U.S. Economy 15 BLS forecasts that 13 of the 20 fastest-growing occupations over the next 10 years will be in health care

16 Health Care Systems in Comparison Countries 16 Canada Japan UK Single-payer health care system: health care is provided by private firms, but paid for by the government (indirectly via taxes). Individuals pay nothing out-of-pocket for services. Universal health insurance: every resident is required to enroll in a nonprofit health insurance society, or enroll in the national government s program. Most hospitals & doctors are private. Individuals have substantial copayments. Socialized medicine: a health care system under which the government owns nearly all of the hospitals and employs nearly all of the doctors. Individuals pay little out-of-pocket (funded thr. taxes) Some (>10 percent) people supplement with private health insurance.

17 Figure 7.3 Levels of Income per Person and Spending per Person on Health Care Health care is a normal good; higher income leads to higher expenditure on health care. 17 But the United States spends a greater proportion of income per person on health care than other countries.

18 Table Health Outcomes in High-Income Countries (1 of 2) 18 United United OECD Health Care Outcome States Canada Japan Kingdom Average Life Expectancy Blank Blank Blank Blank Blank Life expectancy at birth 79.6 years 81.0 years 82.7 years 81.1 years 80.1 years Male life expectancy at age years 18.8 years 18.9 years 18.5 years 17.6 years Female life expectancy at age years 21.7 years 23.8 years 20.9 years 20.9 years Infant mortality (deaths per 1,000 live births) Health Problems Obesity (percentage of the population 33.7% 28.0% 3.3% 28.1% 23.4% with BMI > 30) Diagnostic Equipment MRI units per 1,000,000 population CT scanners per 1,000,000 population Cancer Deaths from cancer per 100, population Risk of dying of cancer before age % 10.8% 9.3% 11.3% 11.5% Mortality ratio for cancer 33.3% 34.9% 43.2% 40.3% 40.4%

19 Table 7.2 Health Outcomes in High-Income Countries (2 of 2) 19 United United OECD Health Care Outcome States Canada Japan Kingdom Average Life Expectancy Blank Blank Blank Blank Blank Life expectancy at birth 79.6 years 81.0 years 82.7 years 81.1 years 80.1 years Male life expectancy at age years 18.8 years 18.9 years 18.5 years 17.6 years Female life expectancy at age years 21.7 years 23.8 years 20.9 years 20.9 years Infant mortality (deaths per 1,000 live births) Health Problems Obesity (percentage of the population with 33.7% 28.0% 3.3% 28.1% 23.4% BMI > 30) Diagnostic Equipment MRI units per 1,000,000 population CT scanners per 1,000,000 population Cancer Deaths from cancer per 100,000 population Risk of dying of cancer before age % 10.8% 9.3% 11.3% 11.5% Mortality ratio for cancer 33.3% 34.9% 43.2% 40.3% 40.4% Do you think these comparisons are very meaningful?

20 Problems in Comparing across Countries 20 However comparing across countries is often difficult, and potentially misleading: Data problems: Countries may not collect data in the same way. Problems with measuring health care delivery: Death easy to measure, but much of HC involves treatment for injuries, simple surgeries, drug scripts, etc. Lifestyle choices: Obesity and diabetes, for example, may have more to do with the choices of consumers than the effectiveness of health care. Problems with determining consumer preferences: Disconnect between prices people pay and services received.

21 7.3 Information Problems and Externalities in the Market for Health Care 21 The health care market is characterized by asymmetric information: a situation in which one party to an economic transaction has less information than the other party. This can lead to market failure, the inability of the market to maximize economic well-being. Two main forms of asymmetric information: Adverse selection Moral hazard

22 22 Adverse Selection & Market for Lemons Suppose you are looking to buy a used car, but the seller of a used car will always have more info about true condition of car than you will. You will have trouble distinguishing good from bad used cars and will taken that into account in the price you re willing to pay. Imagine that half of 2014 Ford Escapes are well maintained and reliable and the other poorly maintained and may be lemons. Potential buyers willing to pay $10K for good Escape and $5K for bad, but don t have how to distinguish b/w the two If you offer an intermediate price ($7500), then only people with low-quality Escapes will sell to you. So without further information, sellers of lemons will likely take advantage of you and sellers of good used cars won t sell to you.

23 Adverse Selection in the Health Insurance Market 23 Health insurance suffers from a similar adverse selection problem: Adverse selection: The situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction. Buyers of health insurance know more about their health than insurers The people who want health insurance tend to be the ones who are likely to use it. So the premiums need to be high to cover the expected costs. But now people with only moderate needs (younger, healthier) may find health insurance too expensive, causing them to drop out, etc. This problem is lessened if people are very risk-averse: wanting to avoid risk.

24 24 Coping with Adverse Selection Health insurance companies have tried to lessen the impact of adverse selection by excluding pre-existing conditions. It is a normative (value judgment) question whether the gains for society through avoiding adverse selection outweigh the costs to society through reductions in health insurance coverage. An alternative way around the adverse selection problem is to mandate that individuals carry insurance. Example: most states require automobile accident insurance Patient Protection and Affordable Care Act (ACA) both introduced an individual mandate to buy health insurance or face a fine ACA also mandates restricted exclusions of pre-existing conditions.

25 Moral Hazard in Health Insurance Patients 25 Moral hazard refers to actions people take after entering into a transaction, that make the other party to the transaction worse off. Example: People with car insurance might drive less carefully, knowing they are financially protected if they crash. People might use more health care when they don t have to pay for its full cost: Going to the doctor unnecessarily Engaging in risky behavior Accepting excessive treatment options Such actions would increase the cost of health care to society, perhaps without providing substantial benefits.

26 Moral Hazard in Health Insurance Doctors 26 The financial structure of insurance contracts (fee-for-service) may make doctors change their behavior also: Ordering unnecessary tests and procedures Since patients pay little out-of-pocket for the additional care, they are likely to agree to extra treatment This illustrates the principal-agent problem: a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them. The insurance company ( principal ) must delegate decisionmaking power to the doctor ( agent ), who may not have the same interests as the company.

27 27 Do Doctors Succumb to Moral Hazard? While the number of medical procedures has been increasing, doctors tend to claim that they do not order extra tests and procedures for financial gain, but either: Out of genuine concern for their patients, or As defensive medicine, in order to avoid malpractice lawsuits.

28 Coping with Moral Hazard in Health Care 28 The key to dealing with moral hazard is to try to make sure people don t change their behavior too much. Patients: Deductibles (patient pays first $X of treatment cost) Coinsurance (patient pays Y percent of treatment cost) Doctors: Standardized payments for particular illnesses Such methods reduce but do not eliminate moral hazard problems.

29 29 Adverse Selection vs. Moral Hazard Both result from information asymmetries Adverse selection occurs at time of entering into transaction Moral hazard occurs after entering into the transaction

30 Externalities in the Market for Health Care 30 Recall that an external cost or benefit will result in market failure, because (from society s perspective) the wrong quantity will be consumed. Positive externalities: Vaccinations reduce chance of others getting sick Healthy population good for employers (fewer sick days) Negative externalities: Poor health choices (like obesity, smoking) are paid for by others (higher premiums, taxes)

31 Figure 7.4 The Effect of a Positive Externality on the Market for Vaccinations 31 In the figure, we assume people pay the full price of vaccinations P Market. Vaccinations have positive externalities, so the marginal social benefit curve D 2 is higher than the marginal private benefit curve D 1. Consumers will purchase Q Market vaccinations too few, resulting in a deadweight loss. In practice, subsidized vaccinations reduce this externality problem

32 Making the Connection: Should the Government Run the Health Care System? 32 If health care were a public good, that would be a strong argument for government involvement. Is health care Non-rival in consumption? Non-excludable? Neither of these seem likely, so health care seems to be a private good. However the externalities and information asymmetries may generate enough market failure to prompt government involvement. Overall, the government s role in health care is controversial.

33 7.4 The Debate over Health Care Policy in the United States Explain the major issues involved in the debate over health care policy in the United States. 33 The Patient Protection and Affordable Care Act (ACA) was passed by Congress in 2010 but remains controversial. The United States spends more per person on health care than any other country, without getting better outcomes. And this cost appears to continue to rise. What should be done about this? We will explore this topic in this section.

34 Figure 7.5 Spending on Health Care around the World (1 of 2) 34 Expenditure on health care in the United States, as a percentage of national income, has been rising. It is projected to continue to rise.

35 Figure 7.5 Spending on Health Care around the World (2 of 2) 35 The figure shows health care spending per person, Growth in health care spending has been faster in the U.S. than in other high-income countries.

36 Figure 7.6 The Declining Share of U.S. Out-of-Pocket Health Care Spending 36 At the same time, Americans are paying a smaller and smaller proportion of health care costs out-of-pocket. Americans would likely not choose the same level of health care expenditure if they had to pay a higher out-of-pocket share. Combined with rising health care costs, this presents particular problems for government budgets.

37 Why Are Health Care Costs Rising So Fast? 37 Paperwork? While paperwork is significant, it s not increasing fast enough to explain the rise in spending. Malpractice lawsuits? Significant cost (Congressional Budget Office says 1 percent, economists estimate as much as 7 percent of total health care cost). But again, not rising fast enough to explain changes. Uninsured patients? Increase in costs of 1-4 percent due to getting treatment in wrong places (emergency room vs. doctor s office). Still not rising enough to explain changes.

38 Primary reason #1: Health Care Cost Disease 38 Service providers (like health care providers) have not seen huge productivity gains like in manufacturing. Labor productivity in health care has risen about half as much as in the economy as a whole But in order to keep workers, wages have risen in service sector also. Including health care, of course. Increases in wages are not offset by increases in productivity, so the cost to firms supplying services increases cost disease of the service sector

39 Figure 7.7 Reasons for Rising Federal Spending on Medicare and Medicaid 39 Primary reason #2 is the aging population. Older people require more health care, and as medical advances keep people alive longer and birth rates slow, the proportion of elderly people will rise. However, as the graph from the CBO shows, the effect of the aging population should not be overstated.

40 Figure 7.8 The Effect of the Third-Party Payer System on the Demand for Medical Services 40 Primary reason #3 is the distorted economic incentives in heath care arising from insurance. The disconnect between service and payment means consumers have little reason to accept fewer services for lower cost. The overconsumption of health care (relative to efficient levels) creates a deadweight loss.

41 The Continuing Debate over Health Care Policy 41 Extending health care coverage to be more universal has been attempted and rejected several times: 1945: President Harry Truman proposed national health insurance. 1993: President Bill Clinton proposed a universal public/private plan. Each time, Congress declined to enact the plans.

42 The Patient Protection and Affordable Care Act (2010) 42 In 2009, President Barack Obama proposed significant health care reform in the form of the ACA; in March 2010, Congress approved the legislation. Scheduled to be fully implemented by 2019, PPACA includes: Individual mandate to obtain health insurance State health exchanges to increase access to policies Employer mandate for most firms to provide health insurance Regulation of health insurance altering how health insurance companies can act Expansion of Medicaid eligibility and Medicare cost controls Increased taxes on high-income individuals, high-cost insurance plans, and some health care related industries

43 43 Debate over the ACA The ACA is expected to increase health care coverage to 30 million additional people. CBO estimates that federal spending will increase by about $2.0 trillion over as a result, with taxes and fees reducing the net increase to ~$1.4 trillion. Debate remains over whether the ACA is the right approach for America, or whether we should: Emulate other western countries with more government control, or Adopt more market-based reforms, trying to reduce costs by making health care markets more like normal markets for goods and services.

44 Making the Connection: How Much Is That MRI Scan? 44 In a well-functioning market, competitive forces will help to keep prices similar. Consumers will shop around to find low prices, forcing high-priced firms to lower their price. The table shows ranges of prices for an abdominal MRI in various cities. Can you identify why this market is failing so badly? City Highest Price Lowest Price Difference Houston, Texas $4,800 $675 $4,125 Baton Rouge, Louisiana 4, ,800 Chicago, Illinois 4, ,750 Atlanta, Georgia 4, ,700 Omaha, Nebraska 4, ,500 Lexington, Kentucky 4, ,450 Charlotte, North Carolina 3, ,900 Orlando, Florida 2, ,825 San Francisco, California 2, ,750 New York, New York 2, ,375

45 45 Conclusions about Health Care With health care expenditure projected to consume almost 20 percent of national income by 2020, we must find a way to control costs. Are people willing to accept service reductions in exchange for cost reductions? Or can we find a way to reduce costs without giving up the quality and/or quantity of health care consumed? Health care policy is sure to remain a topic of heated debate.