Public 6: Health Flashcards
What is adverse selection?
Suppose either party to a contract have private information that will affect the expected cost or quality of the contract. If consumers that will be more expensive to insure have higher willingness to pay, or producers with worse quality products have lower willingness to accept, adverse selection will occur. At a price based on average quality in the market, the high-quality producers (or low-cost consumers) will drop out of the market. Prices must adjust to make the contract break even in expectation, causing more dropouts. The market will completely or partially unravel.
Why do consumers end up fully insured against risk in a ‘first-best’ insurance market?
Consumers are risk averse, whilst firms are risk neutral or able to pool risk across a large number of consumers. It is therefore a Pareto improvement for the firm, rather than the consumer, to bear risk.
Are there any stable pooling equilibria in insurance markets with asymmetric information?
No. A pooling equilibrium in a competitive market would have to lie on the break-even line for average costs. But, at any point on this line, there exist contracts which would attract only low-risk consumers and make a profit for insurance companies. This would break the pooling equilibrium, as it is not profitable to only offer to low-risk types.
What empirical evidence is there for adverse selection in healthcare?
- Cutler and Zeckhauser (1997) analyse the choices of Harvard professors offered two different health insurance plans by their employer. The generous plan sharply increased in price over time, and enrolment dropped (particularly among the young and healthy). The generous plan was no longer viable after a few years.
- Olivella and Vera-Hernández (2013) - those who buy private medical insurance in the UK are significantly unhealthier than those offered it as a perk by their employers.
How can policymakers try to prevent adverse selection problems in healthcare?
- Adverse selection can be mitigated by using screening. Asking potential customers questions about their health can approximate the first-best solution.
- But, it will remain incomplete; and may be perceived as highly unfair.
- A pooling equilibrium can be forced by requiring everyone to have health insurance.
- If there is only one healthcare provider (eg the NHS), a pooling equilibrium is guaranteed.
- If there are competitive insurance providers, incentives against ‘cream-skimming’ such as risk-adjustment mechanisms will be required.
How can healthcare systems deal with moral hazard?
- Cost sharing through copayments, transferring some risk back to the consumer.
- Imposing a non-monetary cost on consumers on accessing healthcare services, eg waiting times.
Why would unregulated private markets for health insurance work very badly?
Arrow (1963) noted a significant number of market failures in private markets for healthcare:
- Externalities to public health and productivity
- Market power in specialist and rural services
- Information asymmetry from adverse selection and moral hazard
Could a private market for insurance against epidemics or rising life expectancy exist?
No. Private insurance markets redistribute from the lucky to the unlucky when risks are roughly independent. However, these risks are highly correlated, and private insurance companies will not have the funds to pay out when large numbers of their members face the same risk at once.
What externalities exist from healthcare? What policy do these justify?
- Many diseases are communicable, and so there are social costs of me being ill (the risk of me infecting others) beyond my private costs.
- → vaccination programmes, and similar, should be publicly subsidised, and encouraged with information campaigns
- Poor health results in reduced productivity, which harms firms and consumers.
- → subsidy for healthcare
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Antibiotic resistance is a public good, which individuals have incentives to free-ride on.
- → taxes, or otherwise constrained supply, on antibiotic usage
- Medical innovation is a positive externality from the use of new procedures.
In what cases might we be concerned about market power in healthcare?
- Areas with low population density: hospitals tend to have high fixed costs, so there is likely to be a low number of providers.
- Specialist care, especially where expensive capital equipment is required.
- Countries where access to medical training is controlled by a guild.
What is supplier induced demand? When is it likely to occur?
Doctors have better information than their patients about medicine and what treatments they will need. If doctors face no cost constraints (eg if they are reimbursed for any costs they undertake), they face incentives to be overly risk-averse and prescribe expensive and potentially unnecessary treatments. Patients and insurers cannot perfectly tell if this treatment is really required.
What is a prospective payment system?
A prospective payments system pays healthcare providers in advance of treatment. A fixed price is paid based on diagnosis for an ‘episode of care’. Doctors then face cost-containment incentives.
What is the Dorfman-Steiner condition? What does it imply about price competition in healthcare?
The Dorfman-Steiner condition considers competition between providers along multiple dimensions at once. If the elasticity of demand with respect to price falls more than the elasticity of demand with respect to quality, equilibrium quality will fall. Since quality is often difficult to observe in healthcare, this suggests that price competition will lead to sub-optimal quality.
Why did NHS internal market reforms in the 1990s lead to increased mortality rates?
Propper et al (2008) argue that competition between hospitals led to improvements along observed dimensions - price and waiting lists - but that quality was poorly observed, and thus fell, as predicted by Dorfman-Steiner.
What was ‘Choose and Book’ and ‘Payment by Results’?
‘Choose and Book’ was a reform to the NHS internal market under the Blair government in the 2000s. When referred to specialist care by their GP, patients were required to be offered a choice between different hospital providers. The aim was to increase patient choice.
Payment by Results is a system of paying NHS provides a standard national price for each patient, according to their diagnosis. This makes prices exogenous and not subject to competition.
