Health Care Policies: Assignment Week 4

Chapter 8:

Health Economics in a Health

Policy Context

Chapter Overview

• Chapter 8 provides a basic overview of

economics and why it is important for health

policymakers to be familiar with basic

economic concepts.

• Chapter 8 focuses on:

– How economists make decisions

– Supply

– Demand

– Markets

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 health care resources

– Consider individual preference and efficiency

Demand

• 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

• Demand elasticity: the percentage change in

the quantity demanded resulting from a 1%

change in price or income.

• If a product is elastic, a change in

price/income 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/income

Health Insurance and Demand

• Health insurance acts as a buffer between the

consumer and cost of health care 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 than goods

than he would otherwise purchase without

insurance

Supply

• 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

• 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)

Supply

• 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

• 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

• Health care is a monopolistically competitive market

– Few dominant firms with significant market power and many smaller firms without market power

Health Insurance and Markets

• A typical market transaction involves two parties

– Consumer and supplier

• Health care 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

• A market failure means that 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

Market Failure

• Ways to address market failure

– Do nothing

– Gov’t finances or directly provides public goods

– Gov’t increases taxes, tax deductions, subsidies

– Gov’t issues regulatory mandates

– Gov’t prohibitions

– Redistribution of income