Lecture 9
Tuesday, October 2
Healthcare
and the Market
WHAT ARE THE DISTINCTIVE FEATURES
OF HEALTH CARE AS A COMMODITY?
1. Extraordinary value of the service
2. Ethical issues in distribution: some rationing
process is inevitable
3. Information costs for average consumer
4. The problem of preventative medicine: The market
for Health vs the market for Treatment
5. Supply generates demand
6. Competition between providers leads to overinvestment
WHAT ARE THE DISTINCTIVE FEATURES
OF HEALTH CARE AS A COMMODITY?
1. Extraordinary value of the service
2. Ethical issues in distribution: some rationing
process is inevitable
3. Information costs for average consumer
4. The problem of preventative medicine: The market
for Health vs the market for Treatment
5. Supply generates demand
6. Competition between providers leads to overinvestment
WHAT ARE THE DISTINCTIVE FEATURES
OF HEALTH CARE AS A COMMODITY?
1. Extraordinary value of the service
2. Ethical issues in distribution: some rationing
process is inevitable
3. Information costs for average consumer
4. The problem of preventative medicine: The market
for Health vs the market for Treatment
5. Supply generates demand
6. Competition between providers leads to overinvestment
WHAT ARE THE DISTINCTIVE FEATURES
OF HEALTH CARE AS A COMMODITY?
1. Extraordinary value of the service
2. Ethical issues in distribution: some rationing
process is inevitable
3. Information costs for average consumer
4. The problem of preventative medicine: The market
for Health vs the market for Treatment
5. Supply generates demand
6. Competition between providers leads to overinvestment
WHAT ARE THE DISTINCTIVE FEATURES
OF HEALTH CARE AS A COMMODITY?
1. Extraordinary value of the service
2. Ethical issues in distribution: some rationing
process is inevitable
3. Information costs for average consumer
4. The problem of preventative medicine: The market
for Health vs the market for Treatment
5. Supply generates demand
6. Competition between providers leads to overinvestment
WHAT ARE THE DISTINCTIVE FEATURES
OF HEALTH CARE AS A COMMODITY?
1. Extraordinary value of the service
2. Ethical issues in distribution: some rationing
process is inevitable
3. Information costs for average consumer
4. The problem of preventative medicine: The market
for Health vs the market for Treatment
5. Supply generates demand
6. Competition between providers leads to overinvestment
WHAT ARE THE DISTINCTIVE FEATURES
OF HEALTH CARE AS A COMMODITY?
1. Extraordinary value of the service
2. Ethical issues in distribution: some rationing
process is inevitable
3. Information costs for average consumer
4. The problem of preventative medicine: The market
for Health vs the market for Treatment
5. Supply generates demand
6. Competition between providers leads to overinvestment
The U.S. System
1. Extremely complex & incoherent
2. Most expensive in the world and rapidly
increasing costs
The U.S. System
1. Extremely complex & incoherent
2. Most expensive in the world and rapidly
increasing costs
7,000
United States
Spending per capita on healthcare (in $ U.S.)
6,000
5,000
4,000
Norway
Canada
3,000
France
UK
Japan
2,000
1,000
0
1960
1970
1980
1990
1995
2000
2004
The U.S. System
1. Extremely complex & incoherent
2. Most expensive in the world and rapidly
increasing costs
3. Lower access than any other country.
Only rich country without universal
system.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Below poverty
line
Private
insurance
through work
100-150% of
poverty line
Medicaid
150-200% of
poverty line
above 200% of
poverty line
No insurance
The dilemma of private insurance exclusions
& the problem of “mandates”
1. Insurance companies make money by selling insurance to people
who are healthy. This means:
2. They increase their profits by refusing to insure people with existing
health problem and by refusing to renew insurance once a person
gets sick.
3. To guarantee universal access to insurance, these practices have
to be prevented. Insurance companies have to be prevented from
refusing insurance because of existing conditions. BUT
4. This is only possible if healthy people are required to buy health
insurance. Otherwise they will wait until they get sick and then buy
insurance.
5. SO, if you want (a) to guarantee universal access, and (b) maintain
a private health insurance market, you have to (c) require all people
to buy insurance. This is called a “mandate.”
The U.S. System
1. Extremely complex & incoherent
2. Most expensive in the world and rapidly
increasing costs
3. Lower access than any other country.
Only rich country without universal
system.
4. Minimal concern with prevention
5. Worse health results than other rich
countries
The U.S. System
1. Extremely complex & incoherent
2. Most expensive in the world and rapidly
increasing costs
3. Lower access than any other country.
Only rich country without universal
system.
4. Minimal concern with prevention
5. Worse health results than other rich
countries
Japan
France
Germany
United Kingdom
Italy
Cuba
United States:
everyone
Rank = 35th in the world
United States:
blacks
0
2
4
6
8
10
12
Infant deaths per 1,000 live births
14
Japan
Rank = 6
Canada
France
Sweden
Italy
Germany
United
Kingdom
United
States
Rank = 34
76
77
78
79
80
81
82
Life expectancy at birth, both sexes
83
Two arguments in defense of a
private market-based health
insurance system:
1. Competition spurs cost saving
and innovation
2. Free-markets solve the “moral
hazard problem”
The “Moral Hazard Problem”
A moral hazard =
A situation in which there is no incentive to worry about
costs since someone else is paying the bill. Insurance
sometimes creates a moral hazard by enabling people to
engage in riskier behavior than they would otherwise.
Moral Hazard in Healthcare =
If you have insurance, you will tend to overuse medical
services since you do not have to pay each time you go
to the doctor. This has the effect of imposing costs on
others.
Solution =
Rely on the market and competition to force down prices
and enforce personal responsibility through co-pays and
other charges.
Two Comparisons
1. The U.S. Veteran’s Administration
Hospital system
2. The Canadian Single-payer System
Administrative overhead
as a % of total costs, 2003
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Canada
Medicaid
Medicare
Veterans
Administration
Private
Insurance
Source: New England Journal of Medicine 2003 (except for VHA estimate)
REASONS FOR HIGH QUALITY & LOW COST IN
VETERANS HEALTH ADMINISTRATION HOSPITALS
• Economies of scale
• Ability to buy drugs at a reduced cost by negotiating
discounts
• Incentives for investing in quality
• Strong incentives for preventive medicine because of
the life-time link to the patient
• Efficient medical record and information systems and
health monitoring because of this life-time connection
THE CANADIAN SYSTEM
• Universal
• Comprehensive
• Portable
• Accessible
• Publicly administered
• Diversity in organization of actual delivery: single
doctor practice; community clinics; group practices;
public hospitals and clinics
Big Irony: In Canada there is universal public
provision of insurance for everyone, but
greater freedom of choice by patients and
less bureaucratic hassle for doctors
Why does the U.S. not have a Universal
Health System even with the new reforms?
1. Power and opposition of insurance companies
2. Power and opposition of pharmaceutical
companies
3. Ideological anti-statism: strength of conservative
opposition to public solutions
4. Massive misinformation campaigns about
alternatives