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Student’s name
Tutor
Health economics 1
Date
You MUST answer this question
1. Describe fully why the market for health care services is substantially different than
the market for typical goods and services.
The structural differences between the healthcare market and the normal market for goods and
services are gaping. For a start, the healthcare market is not necessarily controlled by the forces
of demand and supply. This is because the healthcare product is not clearly defined, coming
across as largely vague and immeasurable according to the standards of normal goods and
services. The patients do not know the amount of product and services they need and cant
accurately gauge how much they have to pay for it. This means that pricing the product is not
easy and there will always be inconsistencies in pricing depending on the provider. One of the
reasons for this scenario is because the outcomes of healthcare provision are not predictable. For
example, a patient of Medicare can die within a year or live for an extra fifteen years receiving
care at the expense of the government. The demand for services is also not by decision making
like in normal markets but by necessity to live, posing a lot of interference by moralists.
Additionally, the provision of healthcare services is not specified to individual providers who
wish do so. Healthcare services are provided by government facilities with huge moral debates
going into the level of government involvement in healthcare expenditure. Certain quarters feel
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that the governments should become more involved in the provision of healthcare to its citizens.
The baseline is that the government would always have to regulate prices in most countries to
protect the interest of the citizens. The market prices are thus largely controlled by insurers and
the government. This eliminates the force of the invisible hand that controls normal markets.
Additionally, in countries like Japan and USA, the government and other insurance institutions
pay a large amount of the health budget with a limited amount of money coming from the
pockets of individuals. This lowers the flexibility of these prices.
All these reasons can be summarized into five main points as follows;
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The presence of overwhelming number of externalities with interest n the market.
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The difficulty of monitoring the quality of services.
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Presence of the insurance market and the imperfections it presents.
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Moral obligation of healthcare i.e. a basic right in most jurisdictions.
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The rules governing the system that makes it a panel like system with unequal partners.
Choose any Four (4) of these questions.
2. Explain, in words and functional forms, the relationship between the consumption
of goods and services, health, and utility and the relationship between health care
services and health. Explain how the latter relationship is dependent on the disease
in question.
The consumption of goods and services on one hand is dependent on the invisible hand that
controls demand and supply. Some of the factors include the prices of the goods and services as
well as the income of the consumers that could affect purchasing power and the presence of
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alternative products. The health of consumers on affects their demand of healthcare services
while the consumption of goods is stopped when the marginal utility is reached by the
consumers. In a health setup, this means that consumers will stop accessing health services
when they get better, a point that illustrates how utility functions in the healthcare market.
Healthcare services on the other hand rely on health to thrive. The market for healthcare services
has been described as a monopsony or a dual monopoly since the consumers of the services
determine the price of the services. This is because, without poor health, there is no need for
healthcare forming a dependency. In return, the access to healthcare also affects whether one gets
to live longer and enjoy better health. Barriers to services like inaccessibility and high costs
hamper the overall health of a population. This is why governments have put in place measures
to ensure a majority of citizens have access to healthcare services.
When a particular disease rises in infections, the healthcare providers are obliged to expand their
services to cater for more patients, increasing their customer base. However, once the disease is
brought under control is declared extinct, the services are shrunk. Thus the market is largely
impulsive to the general health of the public.
3. Discuss the shape of the expansion path for health care services and the sanitation
effect, the fast lane effect, the pure income effect and the health spa effect.
The shape of the expansion path for health care services has a linear correlation with the fast lane
effect as it explains and demonstrates the fastness and conciseness with which alleviation of
disease is undertaken in the treatment and prevention stages. The pure income effect is used to
refer to the economic capacity of an individual which is affected by their income. This affects the
purchasing and demanding power of the individual in a market. The growth in the pure income
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effect increases the demand for healthcare services as people have more money to pay for it. This
is reflected in better funding for research and preference for otherwise expensive and foregone
procedures. On the other hand, the health spa is used to refer to the consideration of the
influence of access to healthcare on general health of persons. More access means the expansion
path grows and in turn enhances the overall health of a community. The sanitation effect has a
converse relationship with expansion path for healthcare services. Better sanitation means less
need for healthcare and vice versa.
4. Discuss the difference between productivity on the “extensive margin” and
“intensive margin” (doing so in the context of health care spending).
On a general basis, extensive margin refers to the quantity of labor dispatched or employed, the
number of resources. On the other hand intensive margin refers to the quantity assigned to every
unit that requires the labor; the efficiency of the resources. In the context of healthcare spending,
the extensive margin refers to the number of people that are enrolled in an insurance or
healthcare spending plan. Intensive margin on the other hand refers to the quality of services that
are accessed by the enrollees. This could be broken down to the number of visits to the physician
and the types of drugs covered in the care. Additionally, it covers the premiums paid, the risk,
deductibles, copayments and out of the pocket expenditure.
5. Show the impact of a deductible on the demand for health care services. Discuss
why it matters how much certainty or uncertainty there exists for the patient in
terms of how it affects their demand for health care services.
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In the context of healthcare services, deductibles indicate the amount of money that person is
required to pay from their pockets before their insurance cover begins to pay for their healthcare
costs. When deductibles are high, the monthly premiums are lower and vice versa depending on
the cost of the cover, highly applicable for higher cost covers. This method is used to keep
people in check on their medical spending and reduce the risk for insurance companies. This is
because people don’t love spending out of their pockets thus will think twice before accessing
medical services that they don’t need. Lower deductibles on the other hand could spike demand
for health services since the patients are will spend little for their pockets. In essence people with
higher premiums and lower deductibles would see the physician more than their counterparts
who spend less on health insurance. Framing of the cost sharing perspective of health insurance
affects the demand for health services. Consequently, when patients know that with a certain
scheme, they will benefit or lose their money, they are motivated to make particular choices. E.g.
when they are certain to lose money through deductibles in a certain scheme, they go for
schmees with less deductibles or high deductibles accompanied with a health savings account.