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Economics6th editionChapter 5 The Economics of Health Care1

Copyright 2017 Pearson Education, Inc. All Rights Reserved

Copyright 2017 Pearson Education, Inc. All Rights Reserved

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Chapter Outline5.1 The Improving Health of People in the United States5.2 Health Care around the World5.3 Information Problems and Externalities in the Market for Health Care5.4 The Debate over Health Care Policy in the United States

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Copyright 2017 Pearson Education, Inc. All Rights Reserved5.1 The Improving Health of People in the United StatesUse data to discuss trends in U.S. health over timeHealth care expenditure in the United States is higher than anywhere else in the world.Why is this the case? Ideas:High quality of health careSystem of payment for health careHigher demand for health careIn 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 persons health.3

Copyright 2017 Pearson Education, Inc. All Rights ReservedTable 5.1 Health in the United States, 1850 and 2015The last couple of centuries have brought incredible advances in health outcomes for Americans.Explanations:Improvements in nutritionPublic health movement (late nineteenth, early twentieth century)Improvements in sanitation, food distribution, etc.Feedback from better health to higher incomes to better health4

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Copyright 2017 Pearson Education, Inc. All Rights ReservedFigure 5.1 The improving health of the U.S. population(1 of 2)

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).

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Copyright 2017 Pearson Education, Inc. All Rights Reserved

Copyright 2017 Pearson Education, Inc. All Rights ReservedFigure 5.1 The improving health of the U.S. population(2 of 2)

Medical advances in prevention and treatment are reducing the death rate.Notice in particular the fall in the death rate from cardio-vascular disease.However deaths due to some obesity-related illnesses have risen.

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Copyright 2017 Pearson Education, Inc. All Rights Reserved

Copyright 2017 Pearson Education, Inc. All Rights Reserved5.2 Health Care around the WorldCompare the health care systems and health care outcomes in the United States and other countriesThere 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 providers agreeing to pay some or all of the buyers 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.

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Copyright 2017 Pearson Education, Inc. All Rights ReservedFigure 5.2 Sources of health insurance in the United States, 2014In 2014, about 55 percent of people received health insurance through their employer, and about 36 percent of people received it through government programs.Some people have multiple sources of health insurance.About 10 percent of Americans had no health insurance in 2014.8

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Copyright 2017 Pearson Education, Inc. All Rights ReservedWhy are so many Americans uninsured?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, orBelieve it is unnecessary because they are healthy.9

Copyright 2017 Pearson Education, Inc. All Rights ReservedMaking the Connection: The increasing importance of health care in the U.S. economyIn most states, the health care industry is now the industry with the most workers.The BLS forecasts that 13 of the 20 fastest-growing occupations over the next 10 years will be in health care.10

Copyright 2017 Pearson Education, Inc. All Rights ReservedHealth care systems in comparison countriesCanada: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.Japan:Universal health insurance: every resident is required to enroll in a non-profit health-insurance society, or enroll in the national governments program.Individuals have substantial co-payments.UK:Socialized medicine: a health care system under which the government owns most of the hospitals and employs most of the doctors.Some (>10 percent) people supplement with private health insurance.11

Copyright 2017 Pearson Education, Inc. All Rights ReservedFigure 5.3 Levels of income per person and spending per person on health careHealth care is a normal good: higher income leads to higher expenditure on health care.But the United States spends a greater proportion of income per person on health care than other countries.12

Copyright 2017 Pearson Education, Inc. All Rights Reserved

Copyright 2017 Pearson Education, Inc. All Rights Reserved

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Table 5.2 Health outcomes in high-income countries (1 of 2)Comparing (2012) data across countries, it appears that America gets a bad deal for its high expenditure.13

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Copyright 2017 Pearson Education, Inc. All Rights ReservedTable 5.2 Health outcomes in high-income countries (2 of 2)Do you think these comparisons are very meaningful?14

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Copyright 2017 Pearson Education, Inc. All Rights ReservedProblems in comparing across countriesHowever 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:Quality of care is hard to measure.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.15

Copyright 2017 Pearson Education, Inc. All Rights Reserved5.3 Information Problems and Externalities in the Market for Health CareDefine information problems and externalities, and explain how they affect the market for health careThe 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 selectionMoral hazard16

Copyright 2017 Pearson Education, Inc. All Rights ReservedAdverse selectionSuppose you are looking to buy a used car. If someone offers to sell you a used car, would you believe:The car is high quality, and the seller just happens to want to sell it; orThe car is low quality (a lemon), and the seller is trying to unload their problems to you.If you offer a moderate price, then only people with low-quality cars will sell to you.So without further information, you dont want to buy a car from anyone who is willing to sell a car to you!I dont want to belong to any club that will acceptpeople like me as a member.-Groucho Marx17

Copyright 2017 Pearson Education, Inc. All Rights ReservedAdverse selection in the health insurance marketHealth 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.The people who want health insurance are 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 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.18

Copyright 2017 Pearson Education, Inc. All Rights ReservedCoping with adverse selectionHealth 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.2010 Patient Protection and Affordable Care Act (ACA) both introduced individual mandate to buy health insurance, and restricted exclusions of pre-existing conditions.19

Copyright 2017 Pearson Education, Inc. All Rights ReservedMoral hazard in health insurancepatientsMoral 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 dont