Healthcare markets Flashcards
How does the healthcare market deviate from standard markets
- rather than just two parties (buyers & sellers) there are Third parties—insurers, governments, and unwitting bystanders who often have an interest in healthcare outcomes.
- perfect information: patients cannot evaluate quality of treatment they are consuming
- Healthcare providers are often paid not by patients but by private or Gov health insurance
- Rules established by these insurers, more than market prices, determine allocation of resources
- because invisible hand is constrained allocative function can be highly inefficient
why is there no perfect information in healthcare markets & what is done to fix this
- The inherent uncertainty in evaluating the effectiveness of treatments, combined with the body’s natural healing processes, makes it challenging for patients to judge the success of a given treatment.
- Consequently, healthcare regulations, such as professional licenses for practitioners and oversight by organizations like the Food and Drug Administration (FDA), are in place to ensure the quality and safety of healthcare products and services.
- In addition to government regulation, the medical profession monitors itself
by accrediting medical schools, promoting best practices, and establishing professional norms of behavior.
Economic motive in healthcare
A physician’s advice is supposed to be based entirely on the patient’s best interest, not on the physician’s personal gain. When patients accept the advice, they rely on a degree of trust, which is often fostered by longterm relationships between doctor and patient.
Suspicions about the standard economic motive of self-interest and the role of trust in healthcare relationships may explain the prevalence of nonprofit hospitals. In some ways, hospitals are like hotels, but while most hotels are for-profit businesses, most hospitals are run by the government or established as nonprofit
entities. When consumers are not able to judge the quality of the product they are buying, they may be more willing to trust an institution that is not set up primarily to enrich its owners.
criticisms of regulations (public & private) of healthcare
- barriers to opening new medical schools create a medical profession monopoly, inflating doctors’ salaries and healthcare costs
- the FDA’s slow drug approval process, preventing some patients from accessing potential benefits of experimental treatments
- whats the right balance between safeguarding public safety and allowing individuals the freedom to make their healthcare decisions.
Moral hazard in healthcare insurance
- having health insurance reduces the incentive for responsible behavior in healthcare spending.
- Patients may overuse medical services for minor symptoms, and physicians may order unnecessary tests when the cost is covered by insurance.
- To address this, health insurance companies employ strategies like implementing co-pays (e.g., $20 per visit) to discourage unnecessary visits and imposing strict rules on when certain tests will be covered.
The problem of adverse selection in health insurance
- Customers with hidden health problems are more likely to buy insurance, making the insured pool more expensive to cover.
- As for an insurance company to cover its costs, the price of healthinsurance must reflect the cost of a sicker-than-average person. Even people with
average health may see the high price and decide to go without insurance. As people drop coverage, the insurance market fails to achieve its purpose of eliminating the financial risk from illness. - Adverse selection can lead to a “death spiral” in the insurance market: Uniform pricing may lead healthier individuals to drop insurance, causing costs to rise, prompting more healthy people to leave, and creating a cycle of increasing prices and decreasing coverage.
The Affordable Care Act 2010 (Obamacare)
- addressed adverse selection by preventing insurance companies from charging more for pre-existing conditions.
- However problem was that People with pre-existing conditions would view insurance as a better deal than those without them and, therefore, would be more likely to buy health insurance. Healthy people would have an incentive to wait until they got sick before buying insurance. To fix this obamacare required all Americans to buy health insurance and imposed a financial penalty
on those who did not.
What is health economics?
- Health economics is concerned with the problem of allocating health care resources under conditions of scarcity and uncertainty.
- Health economics is about using resources efficiently to improve the population’s health
- employing a range of methodologies to measure and understand what drives performance in health systems, and what underpins their costs and expenditure
- Cost-effectiveness of clinical treatments and public health interventions
Economics evaluation in healthcare
- Economic evaluation compares the costs and consequences of alternative courses of action
costs (i.e. health care resource use) & consequences (i.e. health outcomes) - The results of economic evaluations are used by health care decision makers such as NICE to determine whether or not to recommend the adoption of new treatments into routine practice.
- To see econ evals use the NHS Economic Evaluation Database (NHS EED) is an open access database
- types include cost–utility, cost–benefit, cost-effectiveness, cost-minimisation and cost–consequences analyses
How are health outcomes measured in economic evaluations
For the development of NICE guidelines, the preferred measure of health outcome is the Quality Adjusted Life Year (QALY)
For the development of NICE guidelines, the patient/carer perspective is preferred for outcomes (health benefits, adverse effects), and the NHS/Personal Social Services perspective preferred for costs.
Positives and negatives of growth in spending on healthcare
- As a country gets richer, spending a higher share of income on health may be optimal (Hall and Jones 2007)
- Countries with a higher level of output per capita tend to have a higher level of health expenditures per capita (Sawyer and Cox 2018)
- As the population ages, health deteriorates and health-care spending naturally rises.
- If productivity advancements are more rapid in tradable goods like agriculture or manufacturing than in services like health care or education, the latter will tend to rise in relative price and as a share of GDP (Baumol’s cost disease)
- However Rent-seeking, monopoly power, and other flaws in health-care markets sometimes result in unnecessary care or in elevated health-care prices
What was the RAND Health Insurance Experiment (HIE)
- the most important health insurance study ever conducted, addressed two key questions in health care financing:
How much more medical care will people use if it is provided free of charge?
What are the consequences for their health? - started in 1971 and was a 15-year, multimillion-dollar effort that to this day remains the largest health policy study in U.S. history
- RAND recruited 2,750 families encompassing more than 7,700 individuals, all of whom were under the age of 65.
Size and history of healthcare in US economy as of 2020
- 1950s: Healthcare costs were 4.5% of GDP, postwar era saw medication development, doubling hospital costs.
- 1960s: Medicare and Medicaid introduced for accessibility.
- 1970s: Costs surged due to unexpected Medicare spending, inflation, and tech expansion.
- 1980s: Corporate integration in healthcare, concerns over fee-for-service payments.
- 1990s: Costs rose double inflation rate, unsuccessful reform, high uninsured rate.
- 2000s: Continued cost rise, Medicare sustainability questioned.
- 2010: Affordable Care Act passed, aiming to expand coverage and efficiency.
- Late 2017: Healthcare becomes largest U.S. employer.
cost of specific health issues in USA according to CDC
- Heart disease and stroke, leading causes of death, cost $214 billion annually.
- Cancer, the second-leading cause of death, costs $174 billion yearly.
- Obesity, affecting 9% of children and 42% of adults, accounts for $147 billion annually.
- Costs related to the opioid crisis exceeded $1 trillion from 2001 to 2017, with an additional $500 billion estimated by 2020.
- COVID-19 pandemic costs estimated at approximately $16 trillion from March 2020 to fall 2021, including lost productivity and health reductions.
Facts about US healthcare in economy
- Health-care sector employs 11% of American workers (BLS 1980–2019b).
- Health-care accounts for 24% of government spending (CMS 1987–2018; Bureau of Economic Analysis 1987–2018).
- Health insurance makes up 26% of nonwage compensation.
- Health care constitutes 8.1% of consumer expenditures (BLS 2019a).
