1. Introduction, Decision-making in healthcare and Insurance markets Flashcards
scarcity
occurs when the resources available to us are less than the resources required for everything we would like to do.
choices
must be made about how to use available resources
opportunity cost
benefit that a person could have received but gave up in order to take another course of action.
efficiency
maximize the health outcome (population average) given the available resources.
equity
reduce social disparities in health and health care.
target points in health economics
equity / efficiency
assumptions demand-side in markets (consumers)
consumers act rationally.
consumers have perfect information about the quality of services and products
scarcity = consumers have to choose between various goods ( = budget restriction)
rationality / information symmetry / scarcity
lower price –>
higher demand
formula of the slope of the demand line
change in price/change in quantity demanded: ∆𝑞 / ∆𝑝 < 0.
so the delta in quantity divided by the delta in price change.
decision criterion of demand
preference (relative valuation) for one good
relative valuation
preference
assumptions supply side of the markets (firms)
firms act rationally
firms have perfect information
firms maximize profit
formula for profit
Formula for profit = 𝜋 = pq – wx
𝜋 = profit, q = quantity of output, p = price of output, x = quantity of input and w = price of input
how do firms maximize the production function
function of input and output
input
labour time, materials etc.
output
products and services
decreasing marginal productivity
increasing one variable, while keeping others constant, may initially increase output, but eventually adding more of that one input leads to a diminishing rate of return.
higher price –>
higher supply, but lower demand
production function is reflected in …
the supply
market equilibrum
In markets with perfect competition, the supply equals demand. The price is determined by the equilibrium (intersect of demand and supply)
market failures
externalities, uncertainties and information asymmetry
healthcare markets
third parties have an interest in healthcare outcomes
pations don’t know what they need / cannot evaluate the treatment they are getting
healthcare providers not paid by patients, but by government / health insurance
rules established by insurers determine allocation of resources, not the market prices
invisible hand does not work, so allocation of resources can be very inefficient
externalities
an economic actor engages in behaviour that affects the utility of another actor (bystander) who neither receives payment from that actor nor compensates him or her
two sorts of externalities
positive externalities
negative externalities
uncertainty
healthcare spending is unpredictable since people (most of them at least) do not know when and whether they get sick and what kind of treatment they might need (and what the cost of such treatment are).
therefore, people like to take insurance (especially if they are risk averse and dislike uncertainty)
insurance
insurance covers part ( or all the risk ) for a premium
problems that may arise in healthcare markets with insurance:
adverse selection
moral hazard
adverse selection
before agreeing on some transaction, one of the two parties has some relevant information that is not known to the other party
moral hazard
after agreeing on some transaction, one party can take an action to its own benefit that is not observed by the other party.
risicoverhogend gedrag van partijen indien zij niet direct risico lopen voor hun daden
physician agency
incentives created by different reimbursement arrangements with reference to cost containment, quality of care and supplier induced demand
rothschild-stiglitz model
equilibrium in competitive markets: an essay on the economics of imperfect information.
Analyse insurance markets under adverse selection = show that there may be a separating equilibrium as well as a pooling equilibrium.
seperating equilibrium / pooling equilibrium
equilibrum
= when optimal is reached
seperated equilibrum
high health risk (more expensive) and low health risk (less expensive)
Supply side (providers) cost sharing
providers have discretion over quantity, inputs that affect costs, quality and prices of health care.
purely prospective payment
capitation / salary
provider receives a fixed amount of money for providing services. Provider carries complete cost risk
- high level of cost containment
purely retrospective payment
fee for service
provider is paid an additional amount for each service. Insurer carries complete cost risk.
- incentive for too many services
- low level of cost containment
supplier induced demand
can be defined as the amount of demand that exists beyond what would have occurred in a market in which patients are fully informed. Result of information asymmetry.
supplier can use superior information to encourage an individual to demand a greater quantity of the good
prospect theory
negative effect of a loss is larger than the positive effect of a gain.
biases in decision making
representativeness bias
availability bias
anchoring bias
representative bias
the more object X is similar to class Y, the more likely we think X belongs to Y.
availability bias
the easier it is to consider instances of class Y, the more frequent we think it is.
anchoring bias
initial estimate values affect the final estimates, even after considerable adjustment.
people’s tendency to rely too heavily on the first piece of information they receive on a topic
how do you overcome biases
nudging
nudging
soft/gentle policy interventions
nudges make use of human biases to steer behaviour in the desired direction or eradicate biases
Randomized Control Trials (RCTs)
Randomly allocate “patients” into groups
similar patients in each group so that any difference in outcomes can only be explained by the different treatments , not by underlying differences
