CIE: economics of health

Question 1

Barr (1998) suggests that there are three main types of healthcare models:

Answer 1

• Quasi actuarial approach, where individuals purchase medical insurance and medical services are provided privately (e.g. US)
• Earnings related social insurance contributions, earnings related employer and employee contributions, often supplemented by general taxation (e.g. Germany)
• Universal medical care, paid for by general taxation, medical services are publicly owned and controlled (e.g. UK).

Question 2

Why do governments intervene in the market for healthcare?

Answer 2

• equity/fairness
  Market Failure

Merit good.

Healthcare would be under-consumed if left to individual choice

Individuals are myopic, they are short-term utility maximizers and may neglect the long term benefits.

External benefits (Marginal Social Benefit > Marginal Private Benefit) e.g. contagious disease. Social welfare loss.

Imperfect information.

Markets are only efficient if there is full information.

Asymmetric information

Patients (consumers) are typically less well informed

Treatment one-off and urgent

Question 3

Issues with private health insurance

Answer 3

• Adverse Selection
  Insurer has less information about individual’s risk, premium charged based on average risk.
  Individuals who face a lower risk have less incentive to purchase
  Higher risk customers left in the market (e.g. pre-existing conditions or the elderly).
  Increase costs to the insurance company who have an incentive to ‘cherry pick’
  Cover refused to highest risk
• Moral Hazard
  Insurance company does not have full information about each individual’s subsequent action.
  Insured individuals will not seek to minimize healthcare bill e.g. less careful/more visits
  Third-party payment problem: oversupply of services by providers. Those providing treatment will have no incentive to minimize costs if the insurance company will meet them.