Most other goods and services are similar to healthcare consumption.
The situation creates a unique set of incentives and leads to distortion in the standard supply and demand analysis.
It is important to understand how medical care is delivered and paid for, as well as the incentives that patients, medical providers, and insurers face when making decisions.
Patients and the government are the biggest consumers of medical care.
Medical care is demanded by patients.
Medicare is a program that provides medical assistance to the elderly and Medicaid is a program that provides medical assistance to the poor.
Over 40 million people are served by Medicare and Medicaid.
The two programs account for a third of all medical spending in the United States.
Millions of workers are employed in the medical care industry.
There are over 500,000 medical facilities in this country, including small medical offices, large regional hospitals, nursing homes, and stores that supply medical equipment.
In the United States, pharmaceutical companies make over $300 billion a year.
In the event of a serious condition, medical insurance allows consumers to budget their expenses and limit what they will have to pay out of pocket.
Copayments are used to share expenses with the insured.
The copay serves to prevent most medical service or filling a prescription when you receive a copay to cover a small portion of the costs.
Deductibles can sometimes be subject to exceptions, such as a visit to the emergency room or preventive before most of the policy's physician visits and tests.
Copayments and deductibles work to encourage consumers to use medical services less often.
The premiums, copayments, deductible, and policy's deductible are used by insurance companies to pay medical suppliers.
Health Insurance and Health Care customers will need to go to the doctor.
The company can estimate its costs in advance and set premiums that will generate a profit.
HMOs provide managed care for their patients by assigning them a primary care physician who oversees their medical care.
The primary care provider is monitored by the HMO.
Revenue from premiums, copayments, deductibles, and coinsurance is earned by HMOs.
The insured can make their own choices.
Medical mal practice, or negligent treatment on the part of doctors, can be covered by an insurance company.
If a doctor faces a malpractice claim, the doctor pays a set fee to the insurer, which in turn pays for legal damages.
Insurers can estimate the probability that a particular physician will face a malpractice claim by analyzing the number of malpractice cases for each type of medical procedure performed each year.
There are many pharmaceutical companies that develop the drugs used to treat a wide variety of conditions.
The global pharmaceutical market is over $1 trillion.
Billions of dollars are spent on the development and testing of potential drugs.
A single drug can take a long time to develop.
Before a drug can be sold, it must be approved by the FDA.
The development cost, time required, and risk that a drug may turn out to be problematic or ineffective combine to make the development of new drugs an expensive proposition.
The incentives that drive the decisions of the major players must be looked at to understand why medical costs are so high.
Consumers want every treatment to be covered, providers want a steady stream of business and don't want to be sued for malpractice, and the insurance companies and pharmaceutical companies want to make money.
The marginal cost of seeking medical treatment is low because patient copayments are only a tiny fraction of the total cost of care.
Consumers demand more medical care.
In order to earn more income and avoid malpractice lawsuits, some physicians prescribe more care than is medically necessary.
The doctor suggests that you get more exercise after your physical.
The gains from doubling your workout effort do not make you feel better.
More of a good thing isn't always better.
Quality of life is increased by physical activity.
Lifting more weights or running more miles after a certain point does not increase your overall health because it simply maintains your health.
A poorly designed incentive mechanism leads to escalating costs.
In the case of Medicare and Medicaid, the government tries to control costs by setting caps on the reimbursements that are paid to providers for medical treatments.
Government price setting forces physicians and medical centers to raise prices for procedures that are not covered by Medicare and Medicaid.
Incentives are an important part of the delivery of medical care.
There is a lack of information available to participants.
Most of us don't know much about medicine.
We seek medical attention when we don't feel well because we want to feel better.
Poor judges of quality are because we know very little about the service we are buying.
The party with limited information should be concerned about the quality of the other party's information in order to gain an advantage.
Gathering better information is the only way to avoid an adverse outcome when one side knows more than the other.
You need medical care if you are new in town.
You don't have a chance to meet anyone and find out where to go for care.
Ratemds.com provides patient feedback on the quality of care that they have received, which is a way to avoid the worst doctors.
You can ask to be treated by doctors you know to be competent and have strong reputations, if you have knowledge from sources like these.
New residents are helped avoid below average care by conducting research.
It is important for patients to take charge of their own health care and learn all they can about a condition and its treatment so they are prepared to ask questions and make better decisions about treatment options.
Adverse selection is minimized when patients are better informed.
If buyers are more likely to need it, adverse selection applies.
Consider a life insurance company.
Before selling a policy to someone who is likely to die early, the insurance company has to gather more information about the person.
Eligibility for full benefits can be delayed until it can be determined that the person has no health problems.
The process of gathering information is important to minimize the risk of adverse selection.
In automobile insurance, drivers with poor records pay higher premiums and drivers with good records pay lower ones.
Doctors are trusted by patients to make good treatment decisions.
The agent will be familiar with some non medical examples.
The babysitter might talk on the phone instead of watching the children in a satisfac if the parents hire the agent.
The agent might be more likely to grant favors to interest groups than to focus on the needs of the principal.
Doctors and hospitals may order more tests, procedures, or visits to specialists than necessary in medicine.
The doctor or hospital may be more interested in making money than ensuring the patient's health and well- being.
In order to maximize profit, insurance companies may want to save on treatment costs.
The objectives of the agents who deliver care conflict with the patient's desire for the best medical care.
It implies that some people are at risk.
This mentality can lead to inefficient outcomes, such as visiting the doctor more often than necessary.
The moral hazard problem can be lessened by restructuring the incentives.
A higher copayment will discourage unnecessary doctor visits for the patient.
The incentive structure needs to be fixed to solve a moral hazard problem in medical care.
Health insurance companies address moral hazard by encouraging preventative care.
Payment limits are imposed on treatments for preventable conditions, such as gum disease and tooth decay.