health and policy

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Chapter 9

Health Economics in a Health Policy Context

Chapter Overview

  • Provides a basic overview of economics and why it is important for health policymakers to be familiar with basic economic concepts
  • Focuses on:
  • How economists make decisions
  • Supply
  • Demand
  • Markets

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Economic Decision Making

  • Economists believe that people are rational actors who will never purposely choose to make themselves worse off.
  • People seek to maximize utility.
  • Given the scarcity of resources, decisions need to be made about the production, distribution, and consumption of healthcare resources.
  • Consider individual preference and efficiency.

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Demand
(1 of 2)

  • Demand—the quantity of goods and services that a consumer is willing and able to purchase over a specified time
  • Common demand shifters
  • Price of the original good, price of a substitute good, and price of a complementary good
  • Income
  • Quality (actual or perceived)

Demand
(2 of 2)

  • Price elasticity of demand—the percentage change in the quantity demanded resulting from a 1% change in price
  • If a product is elastic, a change in price will result in an equivalent or greater change in demand.
  • If a product is inelastic, demand for the good is not sensitive to a change in price.

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Health Insurance and Demand

  • Health insurance acts as a buffer between the consumer and cost of healthcare goods and services.
  • Goods and services cost the consumer less than the charged price because of the presence of health insurance.
  • Moral hazard
  • Because a consumer does not pay the full cost of a good, the consumer may purchase more goods than he or she would otherwise purchase without insurance.

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Supply
(1 of 3)

  • Supply—the amount of goods and services that producers are able and willing to sell at a given price over a given period of time.
  • Common supply shifters
  • Input costs
  • Sale price
  • Number of sellers
  • Change in technology

Supply
(2 of 3)

  • Supply elasticity—the percentage change in quantity supplied resulting from a 1% increase in the price (or other variables, such as inputs) of buying the good.
  • If a product is elastic, a change in price (or other variables) will result in an equivalent or greater change in supply.
  • If a product is inelastic, supply of the good is not sensitive to a change in price (or other variables).

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Supply
(3 of 3)

  • Suppliers are driven to maximize profit.
  • In a competitive market, profit is maximized at the level of output where marginal cost equals price.
  • Equilibrium exists in the market when there is a balance between the quantity supplied and the quantity demanded.

Health Insurance and Supply

  • The presence of health insurance may impact a provider’s willingness to supply goods and services.
  • Competing concerns
  • Providers act as patient’s agent and act in patient’s best interest.
  • Providers may have a financial incentive to act or refrain from acting in a certain way due to insurance arrangements or the lack of insurance.
  • Supplier-induced demand is the provider version of moral hazard.
  • Providers create a demand beyond the amount the well-informed consumer would have chosen.
  • It is debated whether supplier-induced demand actually occurs.

Markets

  • Market structures
  • Perfectly competitive market should efficiently allocate resources
  • Monopolies—single seller controls market
  • Oligopolies—few dominant firms, substantial barriers to entry
  • Monopsonies—few consumers who control price paid to sellers
  • Healthcare is a monopolistically competitive market.
  • Few dominant firms with significant market power and many smaller firms without market power

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Health Insurance and Markets

  • A typical market transaction involves two parties.
  • Consumer and supplier
  • Healthcare transaction with an insured patient involves three parties.
  • Consumer (patient)
  • Supplier (provider)
  • Insurers
  • Presence of third party (insurers) changes consumer and supplier analysis of costs and benefits of each transaction.

Market Failure
(1 of 2)

  • Market failure—resources are not produced or allocated efficiently
  • Traditionally, inequitable distribution of resources does not equal a market failure
  • Common reasons for market failures
  • Imperfect information
  • Concentration of market power
  • Consumption of public goods
  • Presence of externalities

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Market Failure
(2 of 2)

  • Ways to address market failure
  • Do nothing
  • Government finances or directly provides public goods
  • Government increases taxes, tax deductions, subsidies
  • Government issues regulatory mandates.
  • Government prohibitions
  • Redistribution of income

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