Lecture Introduction to economics: Social issues and economic thinking: Chapter 21 - Wendy A. Stock

Chapter 21 - The economics of health care. After completing this unit, you should be able to: Describe the trends in costs and quality of U.S. health care, compare the cost and quality of U.S. healthcare relative to other developed nations, describe the factors that have contributed to the rising cost of health care,…

Introduction to Economics: Social Issues and Economic Thinking

Wendy A Stock

PowerPoint Prepared by

Z Pan

Chapter 21

The Economics of Health Care

Ø Describe the trends in costs and

quality of U.S health care

Ø Compare the cost and quality of

U.S healthcare relative to other

developed nations

Ø Describe the factors that have

contributed to the rising cost of

health care

Ø Analyze the role that externalities play in the health care market

Ø Assess the potential impacts

of healthcare reform proposals

After studying this chapter, you should be

able to:

U.S health care spending has risen steadily

U.S Healthcare Spending

Share of healthcare spending in national

income

Ø The improvements in health have been smaller in the U.S than in other nations

Ø In the 1960s, America was similar to other

developed countries in terms of infant mortality and life expectancy

Ø Today, America has higher infant mortality rates and lower life expectancy than in other developed

nations, despite spending dramatically more on

health care

THE COST AND QUALITY OF HEALTH

CARE

THE COST AND QUALITY OF HEALTH

CARE

THE COST AND QUALITY OF HEALTH

CARE

Ø Improvement in technology in general

Ø Faster and higher rate of use of high-tech medical care in U.S

Ø Unhealthy lifestyle choices (behavior) in U.S

Causes for HEALTH CARE EXPENDITURES

Unhealthy lifestyle choices

Ø Improvement in technology in general

Ø Faster and higher rate of use of high-tech medical care in U.S

Ø Unhealthy lifestyle choices (behavior)

Ø Health insurance problems

Ø Third-party Payment

Ø Moral Hazard

Causes for HEALTH CARE EXPENDITURES

Ø A Third-party Payment occurs when the provider

or seller of a good or service is paid by someone other than the buyer of the good.

Ø Moral hazard occurs when people change their behavior to undertake more risk because they

have insurance against that risk

Causes for HEALTH CARE EXPENDITURES

Ø Improvement in technology in general

Ø Faster and higher rate of use of high-tech medical care in U.S

Ø Unhealthy lifestyle choices (behavior)

Ø Fee-for-Service

Ø Physician-induced Demand occurs when doctors prescribe

Causes for HEALTH CARE EXPENDITURES

Marginal Benefits and Marginal Costs of

Healthcare

Ø Externalities occur when some of the costs or benefits of a trade are imposed on people

outside the trade.

Ø Positive Externalities are benefits received by third parties.

Ø Negative Externalities are costs imposed on

third parties.

Externalities

Health Market with positive externalities

Ø Private Marginal Benefits (MBprivate) are marginal benefits that accrue only to individual decision makers.

Ø Social Marginal Benefits (MBsocial) are marginal benefits that accrue to society as a whole.

MBsocial = MBprivate + External Benefits

Private benefits vs social benefits

Ø President Theodore Roosevelt supported universal U.S government health care coverage In early

Ø 16% of population without health insurance

Ø U.S law requires hospitals and ambulance services

to treat people regardless of their ability to pay

Ø Cost burdens on hospitals and other patients 55%

of U.S emergency care is provided without

compensation, amounting to over $30 billion per

year

Expanding Insurance Coverage

Under PPACA:

Ø Insurance companies are prohibited from ending coverage when people get sick

Ø Children are now able to stay on their parents’

health insurance plans until age 26 rather than 19

Ø Businesses have access to tax credits to help them provide health insurance for their employees

Expanding Insurance Coverage

Ø Expanding Medicaid to include a larger share of the poor in 2014

Ø The payment rules for Medicare will be altered in

2015 to pay doctors based on quality of care rather than on the quantity of services provided

Ø Establish state health insurance exchanges

Ø By 2014, people are required to obtain health

Government Insurance

1 How does having insurance through third

parties affect people’s incentives to visit the doctor?

2 Would people obtain the optimal amount

of health care if the health care market were purely private and had no

government intervention? Explain.