Health markets Flashcards
What is a free market?
Simple supply and demand.
In a free market the price is determined by how much supply there is and how much demand.
Optimal allocation is when supply= demand, and the price is at the equilibrium.
What are the two actors involved in an economic market?
Consumers: These are assumed to be utility maximisers, unlimited wants but scarcity of money, so they will pay the price that reflects the goods benefit (Marginal benefit)
Sellers: These are assumed to be profit maximisers, and the price reflects the cost to produce the good (marginal cost)
Optimal market when the marginal cost=marginal benefit. This dictates the price therefore.
The invisible hand impact in a free market?
Price and quantity act as signals to direct the market towards equilibrium.
If demand increases, price increases, more producers move into the market so supply increases, price therefore decreases again.
Or if supply increases, price decreases, more demand until again supply=demand.
Health economics involves which two points of view?
Positive: Fact driven e.g. ‘the elderly have very high medical expenses.
Normative: Value judgement driven, e.g. ‘therefore, we should subsidise their healthcare’.
Why do we need health economics?
Because the demands are unlimited, but the money and resources are finite. Therefore, decisions need to be made for what to fund.
A free market fails in the case of healthcare, therefore economic evaluation is needed.
What is different about health as a good?
- No exchange value. Health is not a good you can trade, but is produced through healthcare.
- Equity of health, people care about the health of others, equal opportunity for health? (normative judgements)
- Health has a value beyond itself, it enables other actvities such as leisure, employment, and a good investment for future health.
- Uncertainity -subject to external shocks e.g. sudden heart attack which you can’t prepare for.
- production and consumption affects others e.g. vaccination has positive impact on others.
- We as consumers have a lack of expertise, therefore we rely on agents (Doctors) to advise us, and health economists to say if the good is cost effective.
What two things in healthcare allocation need to be balanced?
Efficiency: Max benefit
Equity: Fairness of provision- hard to measure. (normative judgements)
E.g. a screening programme that is very efficient but likely to make the healthy healthier and the more deprived/less educated less likely to go? Hard to balance up. And those that strive for equity are often less efficient.
What are the two types of efficiency that need evaluating?
Technical efficiency: For a given objective, what is the best way to achieve this? Given a fixed resource.
Allocative efficiency: Should resources be allocated to this? Does it increase societal well-being, ethics?
What is opportunity cost?
Because money/resources are finite, the choice to fund one intervention / buy a good, this means that next best option will be forgone. This is the opportunity cost.
E.g. To fund a new cancer treatment costs £50,000 but saves 400 lives, say a cystic fibrosis drug costing £50,000 that only saves 360 lives will be forgone.
What is the definition for economic evaluation?
What questions are economic evaluations aiming to answer?
Basic task of economic evaluation is to identify, measure, value and compare the costs and consequences of the alternatives under consideration i.e. efficiency
The questions we ask are:
How much more are we paying for an additional unit of benefit if we use the new alternative?
Are we as a society willing to pay that much (if it is more than for existing care)?
We are interested in the opportunity cost of a new intervention
Assumptions for a perfect competitive market? (7)
- Rational, self-interested consumer & profit maximising sellers
- Many sellers and buyers with no market power
- Sellers can easily enter and leave the market
- Perfect knowledge
- Certainty
- Homogenous product
- No externalities or spillovers
What is meant by the assumption of “rational consumers and profit-maximising suppliers”?
Consumers are rational in maximising their utility by only buying goods where the marginal benefit out weights/ weighs up to the marginal cost.
Sellers will then supply goods to the maximum price that the consumers will pay.
Consumers have some control over the market, e.g. if a product is not wanted, they dont buy, the product is withdrawn.
How is the market assumption of “rational consumers and suppliers” violated in healthcare?
Rational consumers- the consumers have no concept of a price to pay for healthcare services due to a lack of knowledge. Maximising price is also a violation of equity, if only well off people can afford a drug its not very fair.
What is meant by the assumption of “lots of sellers and buyers”?
Lots of sellers and buyers with no individual market power. E.g. if only a few buyers (oligopoly) or 1 pharma company for a patented drug (monopoly) can artificially set the price high. E.g. a few oil companies. Competition keeps prices low and encourages high quality products.
How is the market assumption of “lots of sellers and buyers” violated in healthcare?
The supply is limited by drug patents- meaning that only one pharma company will provide a certain drug, no competition, but without would be no innovation. Only one main healthcare provider/buyer e.g. NHS. (monopsony)
Also the limiting of doctor training affects demand as having to wait for a doctors appointment deters non-important demand.
What is meant by the assumption of “free entry and exit from the market”?
sellers can easily join (when demand increases) and leave the market (when demand reduces) which ensures appropriate competition and balance of supply amount and demand.
How is the market assumption of “free entry and exit from the market” violated in healthcare?
Entry into the market for pharma companies requires huge set up costs, and time developing a drug, and this also means exit is hard due to huge investment into it.
Consumers: Cost barriers to set up new hospital/ and cap medical degrees so the demand is contained.
What is meant by the assumption of “perfect knowledge”?
Buyers know all of the options available to them, their price and their marginal benefit- they make their rational choice depending upon maximising their utility.
How is the market assumption of “perfect knowledge” violated in healthcare?
Consumers have very little knowledge of their options available, let alone the price. They also don’t have that much of a say in their treatment. Instead there is an agent (doctor) which acts on behalf of the patient, both supplying the healthcare to the patient and creating a demand on their behalf.
The doctors therefore influence the demand and could encourage consumption the patient would not otherwise buy- supplier induced demand.
What is supplier induced demand?
Where the supplier impacts the demand. For example a doctor could encourage consumption the patient would not otherwise buy.
what is provider moral hazard?
Where the provider has a biased opinion on the marginal cost/ benefit balance. E.g. when doctors income is related to the services they provide (e.g. US), or they have incentives given for the prescription of certain drugs, their judgement is not unbiased and they may over consume at a price where the cost outweighs the benefit.
What is meant by the assumption of “certainity”?
When the consumer knows that something is going to happen so buys a good accordingly e.g. know it is lunch time so will buy a sandwich from the selection at tesco.
How is the market assumption of “certainity” violated in healthcare?
Health is not always predictable, a consumer cannot know if they are going to have a heart attack. In other markets where this is an issue (and some countries- US), insurance is used to negate this.
What is meant by the assumption of “homogenous product”?
For a given good at a given price all of the products are identical and of identical quality.
