20 -- Part 1: CHAPTER 1 Five Foundations of Economics
We've come a long way in our exploration of microeconomics.
We apply our economic toolkit to health care.
The health care crisis in the United States is caused by the debate over healthcare spending.
Universal health care, also known as national health care, is the solution to the healthcare crisis because it would help to control costs.
The federal healthcare law often called "Obamacare" argues that expanding healthcare coverage will lower healthcare costs.
Supporters and opponents disagree.
The debate about healthcare is about trade-offs.
In this chapter, we discuss how the healthcare industry works and how the government and the market can make the delivery of health care more efficient.
We consider how health care is delivered, who pays, and what makes the provision of medical care unlike the delivery of services in any other sector of the economy.
Supply and demand analysis is used to look at the medical market.
Information plays an important role in the incentive structure of medical care.
There are many sides to the healthcare debate.
It's a big business to provide health care.
The education and automobile sectors make up 10% of the national economic output.
Almost $3 trillion is spent annually in the United States, or over $8,000 for every citizen.
That is a lot of money, no matter how you slice it.
The key issues in health care are how much is spent on it, where the money goes, and who the key players in the industry are.
The goal is to show you how the sector works.
We turn our attention to supply and demand.
We look at how health care has changed over time.
Life expectancy in the United States was less than 50 years at the start of the twentieth century.
It would have been unthinkable a few generations ago that life expectancy is close to 80 years.
Some of the advances that have improved the human condition can be seen in the way medical care was delivered.
In the United States, infectious diseases were the most common cause of death.
Major killers were tetanus, diphtheria, gangrene, gastritis, and smallpox.
A cure was often worse than the condition it was supposed to treat because of the poor state of medical knowledge.
Tobacco was used to treat bronchitis and asthma, and leeches were used to fight laryngitis.
In the first half of the twentieth century, a trip to the doctor was often painful and did not produce positive results.
Since 1950, advances in cellular biology have led to better understanding of diseases and more precise diagnostic tests.
In addition, discoveries in biomedical engineering have led to the widespread use of various diagnostic techniques.
The medical practices of the past have been replaced by technological innovations.
In addition, pharmaceutical companies have developed a number of "miracle" drugs for fighting many conditions, including high blood pressure, leukemia, and bad cholesterol.
Sometimes, the medical advances cost a lot of money.
In exchange for a longer life expectancy, we have made a trade-off: we now devote more of our budgets to health care.
The United States spends more on healthcare than any other country.
The expenditures in Canada and Mexico are similar, but this one is a bit higher.
Canada and Mexico both spend a bit more on health care.
Life expectancy in the United States is lower than in Canada because the United States spends more on health care.
Most countries agree that increased healthcare expenditures are making people healthier, happier, and more productive.
Environmental factors, genetics, and lifestyle choices are variables that are not constant across countries.
We should be asking if we are getting our money's worth, not how much we are spending.
The economists are most concerned with the obstacles to the efficient delivery of medical care.
There are many reasons.
Health insurance contributes.
When private insurance covers most treatment costs, many patients agree to tests or medical visits that they wouldn't be willing to pay for out of pocket.
If the patient isn't paying directly, doctors are more willing to order tests that aren't necessary.
Medicare and Medicaid add to the demand for medical services by providing coverage to the elderly and poor.
When there is more demand for services, the market price goes up, as long as supply remains constant.
The number of uninsured people in the United States is 35 million.
Uninsured people often seek care from emergency rooms and clinics, which raises costs in two ways.
Emergency care is more expensive than routine care.
Waiting until one has an acute condition that requires immediate attention often requires more treatment than would be done with preventive care or an early diagnosis.
An insured person who develops a cough with a high temperature is likely to see a doctor.
If the patient has bronchitis, a few days of medicine and rest will do the trick.
Uninsured people who develop bronchitis are less likely to seek medical help and are more likely to develop a more serious condition, such as pneumonia, which can be difficult and costly to treat.
When there is no competition, hospitals and other providers can charge what they want, and patients will have to pay.
Many people don't take care of their health.
Heroy end- of- life efforts are expensive.
These efforts come at a steep price and may extend life for a few months, days, or hours.
In the United States, no expense is spared in the effort to prolong life for a few days.
The orange curve shows a society's aggregate health production function, a measure of health reflecting the population's longevity, general health, and quality of life.
When small amounts of health care are provided, the function rises rapidly, but the benefits of additional care are smaller.
Compare points A and B to understand why.
A small amount of medical care is provided, but it has a large impact on health.
The marginal product of medical care is the slope at point A.
Higher medical care expenditures are unlikely to improve longevity and quality of life because many other factors, such as disease, genetics, and lifestyle, also play a key role in determining health, quality of life, and longevity.
The slope of the health production function indicates that B medical care is higher at point A than point B.
Over half of health retirement communities care expenditures are for nursing care facilities and continuing care.
"National Health Expenditure clinics Data" can be found at cms.gov.
It's not surprising that medical costs rise because extending life becomes more difficult.
Society must answer two questions.
The figure shows where the health dollar goes.
Half of all medical expenses are spent on hospital care, sicians and clinics.
After that, prescription drugs, dental care, home health care, and nursing homes represent smaller parts of healthcare expenditures.
There is a contradiction here.
Medical care has become more efficient as medical records are computerized and many procedures that used to take days of hospitalization can now be done on an outpatient basis.
Reducing medical costs through efficiency gains is ongoing.
Costs continue to rise.
The incentives that patients, providers, and insurance companies face when making medical decisions are examined in the next section.
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.
The employees are whipped into shape by the morning exercises.
The amusing episode shows how well-intentioned moral hazard makes Homer decide to policies can be abused.
When your sister's regular tutor is out of town, you hire a substitute tutor and agree to pay $40 up front for one intense tutoring session.
Since you paid up front for a one- time session, the substitute tutor has less incentive to help compared with your sister's regular tutor, who expects repeat business and a tip.
The moral hazard problem is reflected in the poor outcome.
The substitute tutor doesn't have the same incentives as your regular tutor so you're more likely to slack off.
You decide to use an online dating site, but you're not sure if the posted picture of someone is accurate.
Adverse selection is being done.
The person you are interested in knows more about themselves than you do.
She would probably post a flattering picture of herself.
When you are on spring break, you hire a friend to feed your cat and change the litter twice a day.
Your cat uses your bedspread as a litter box because your friend only visits your apartment once a day.
This is a good example of the agent problem.
You can't tell how often your friend goes to your house because you are out of town.
Your friend knows that cats are self sufficient and figures that you won't be able to tell how often she changes the litter.
With a basic understanding of how the healthcare industry works and who the key players are, we can look at how demand and supply operate in the market for health care.
When you need health care, it's not about the price, it's about getting the care you need.
You can begin to understand why medical expenses have risen so rapidly when you consider this fact and the presence of third-party payments.
Medical licensing requirements help explain why the supply of medical services is limited.
Strong inelastic demand and limited supply push up prices for medical services.
It doesn't have many good alternatives for health care.
The demand for health care iselastic because of these two facts.
When you need a heart transplant, going without one is not an option.
A 2002 study by the RAND Corporation found that health care has an average price elasticity of 0.17.
A 1% increase in the price of health care will result in a 0.17% reduction in healthcare expenditures.
As an elasticity approaches zero, demand becomes more inelastic.
The demand for medical care iselastic.
There are situations in which healthcare expenditures can be reduced.
Home remedies, such as drinking fluids and resting, can be used by healthy people with minor colds and other Viruses, instead of going to the doctor.
The price elasticity of demand is determined by the severity of the medical need and the sense of urgency involved in treatment.
The most inelastic demand is for urgent needs.
The demand for health care becomes elastic as the time horizon expands.
Treatments that are not emergencies have the greatest price elasticity.
When a tooth goes bad, some people choose to have it removed, which is less expensive than root canals and crowns.
Demand for health care has grown.
Hearing aids, replacement joints, and assisted living and nursing home facilities are some of the expensive medical goods and services that demand increases as people live longer.
Cancer and Alzheimer's disease are two of the illnesses that increase in an aging population.
New technologies have made it possible to treat medical conditions that used to be impossible.
Medical advances have improved the quality of life for many consumers, but they drive up demand for more advanced medical procedures, equipment, and specialty drugs.
People who are risk averse generally choose to purchase health insurance because it protects them against the possibility of extreme financial hardship in the case of severe illness or other medical problems.
The moral hazard problem is caused by the fact that insurance may distort their idea of costs and cause them to change their behavior.
If an insurance policy does not require the patient to pay anything, or requires very little to see the doctor, the patient may wind up seeing the doctor more often than necessary.
John Q's demand for this surgery is inelastic because the child will die without a transplant.
John Q's insurance won't cover his son's transplant.
It doesn't stop John Q from taking desperate steps.