Health Care Information

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Health Care Information

• Today More topics to help you think like an
  economist

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Today

• Three more mini-lectures
• Health care
• The economics of information
• Asymmetric information

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Health care

• By 2017, total health care spending will double
  to more than 4 trillion a year, accounting for
  one of every 5 the nation spends, the federal
  government projects.
• (Source AP article on CBS website, Health
  Care Will Cost 4 Trillion by 2017, posted Feb.
  26, 2008 see readings on class website for link)

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Health care

• More from the AP article, quoting Centers for
  Medicare and Medicaid Services economists
• "Health is projected to consume an expanding
  share of the economy, which means that
  policymakers, insurers and the public will face
  increasingly difficult decisions about the way
  health care is delivered and paid for"

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Health care

• As we will see, there is often too much money
  spent on health care, relative to the optimal
  amount of spending
• We will look at a simple case with constant MC

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Health care

• Health care services, like all goods and
  services, have a demand schedule
• Demand denoted by MB curve

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Health care

• Suppose that Angela has been admitted to the
  hospital after being in a car accident
• She has a substantial MB for the first night in
  the hospital, due to the care that she needs

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Health care

• As Angelas condition improves, her MB declines
• After Q2 days in the hospital, she is completely
  better

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Will Angela pay for the full cost of her hospital
stay?

• Not likely
• Most Americans have at least some health
  insurance
• Insured person usually pays a deductible or
  co-payment for medical services
• Some people have complete medical coverage
• No direct payment made to those that provide
  medical services

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Equilibrium length of hospital stay with
co-payment

• Assume that Angela pays X dollars (co-payment)
  for her hospital stay
• Let X be small relative to total hospital bill
• Angela will then decide to stay in the hospital
  as long as MB for each night exceeds its MC
• Note that Angelas private MC is zero under this
  form of insurance

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Equilibrium length of hospital stay with
co-payment

• PUBLIC MC is positive
• Angelas PRIVATE MC is zero
• If hospital lets Angela stay in the hospital as
  long as she wants, equilibrium occurs at Q2
• MB and private MC are both zero here

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What is optimal?

• Angelas optimal length of hospital stay occurs
  when the PUBLIC MC equals MB
• This occurs at point A

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What about a percentage co-payment?

• What if Angela had to pay 20 of her costs while
  in the hospital
• Her PRIVATE MC is now two-tenths of MC curve (See
  dashed line)
• Equilibrium is at the yellow circle

0.2 MC
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What are some possible solutions to this problem?

• Health Maintenance Organizations (HMOs)
• Patients less likely to receive services with low
  MB
• Higher deductibles
• Closer to optimal outcome, since out-of-pocket
  payments are higher
• Reimbursement policies for medical services
• Review boards
• Discharge criteria from hospitals

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Moral hazard

• With insurance, people are likely to do riskier
  activities, knowing that insurance will cover
  them if they get hurt
• Skydiving
• Bungee jumping
• Mountain climbing
• These activities lead to more medical costs,
  leading to higher premiums for everyone

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Health care costs

• Is there a single solution to lowering health
  care costs?
• No Many approaches will be needed
• Another issue Drug costs
• Research and Development Often millions of
  dollars for a single drug
• Patent protection ?? Market power

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Summary Health care

• Insurance often leads to more health care being
  used than what is optimal
• Co-payments help improve efficiency some, but not
  completely
• Some methods to help lower health care costs
  include the use of HMOs, higher deductibles, and
  reimbursement policies

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The economics of information

• Information is valuable, since the right buyer is
  more likely to find the right seller
• Middleman is often knowledgeable about a market,
  which is valuable
• This leads to the question How much information
  is optimal?

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Information is typically not complete nor perfect

• Since firms and customers are usually not fully
  informed, we lose efficiency
• Firms are unable to notify every potential
  customer that her/his business is ready to sell
• Customers may not know all options of companies
  that sells a good or service

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Do we want full information in every market?

• No
• Prohibitively costly, if it is even possible
• In our analysis, we will find the optimal amount
  of information

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The middleman

• A good middleman (or middlewoman) is
  knowledgeable about the market in question
• Some customers are willing to pay for this
  service
• Some information providers today are not human
• Google and many other search engines have paid
  advertising

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What is optimal?

• As usual, we will use marginal analysis
• We will search for information is long as MB MC
• The middleman often provides this information,
  but at a cost

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More on the middleman

• Basic information can be provided at low cost,
  since many people are usually knowledgeable in
  the topic
• Very specialized information can be costly
• Someone may have to do substantial research to
  get this specialized information

? MC of information usually increases at an
increasing rate
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Marginal benefit of information

• Basic information about a product is usually very
  valuable
• Very specialized information usually has little
  value

? MB of information typically gets steeper as the
number of units increases
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Some examples of MC and MB curves of information
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Optimal amount of information?

• Find the point where MB MC
• Example Use MC1 and MB1 curves
• Optimal amount of information is 7 units, at a
  cost of 15 per unit

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Summary The economics of information

• Information is useful, and thus has value
• MB/MC analysis still applies
• The middleman often provides information, at a
  price

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Asymmetric information

• Some markets have sellers knowing more about
  their product for sales than buyers
• This is known as asymmetric information
• Most common example Used cars
• Buyer knows less about the car than the seller
• Some cars are good plums
• Some cars are bad lemons

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Lemons model

• When buyers do not have information as to which
  cars are lemons and which cars are plums,
  sometimes only the lemons go on the market
• We will go through two examples to show a case
  where only lemons are available on the market

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Example 1
Yugo car

• A used car dealer has the following information
  about used Yugo limos
• Plums are worth
• 3,000 to the dealer
• 1,200 to the owner
• Lemons are worth
• 250 to the dealer
• 100 to the owner
• 100 Yugo limos owned privately
• Half of the limos are plums, half are lemons

Yugo limo
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What should the used car dealer offer for Yugo
limos?

• Suppose the used car dealer offers 1,201 for
  used Yugo limos
• 1,201 1,200 ? Plum owners sell to dealer
• 1,201 100 ? Lemon owners sell to dealer
• Profit if all 100 are bought
• Total value 50 ? 3,000 50 ? 250 162,500
• Total cost of buying Yugos 100 ? 1,201
  120,100
• Total profit 162,500 - 120,100 42,400

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What should the used car dealer offer for Yugo
limos?

• Should the used car dealer offer an amount other
  than 1,201?
• Offer a higher price ? increased cost for no gain
  in value
• Offer a price below 1,200 ? only the lemon
  owners would sell their cars
• Profit if 101 was offered ? 50 ? (250 101)
  7,450

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What is the best price to offer?

• Offer 1,201 ? profit is 42,400
• Offer 101 ? profit is 7,450
• Highest profit occurs if 1,201 is offered

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Example 2 Everything is the same except the
last bullet point

• A used car dealer has the following information
  about used Yugo limos
• Plums are worth
• 3,000 to the dealer
• 1,200 to the owner
• Lemons are worth
• 250 to the dealer
• 100 to the owner
• 100 Yugo limos owned privately
• One-quarter of the limos are plums,
  three-quarters are lemons

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What should the used car dealer offer for Yugo
limos?

• Suppose the used car dealer offers 1,201 for
  used Yugo limos
• 1,201 1,200 ? Plum owners sell to dealer
• 1,201 100 ? Lemon owners sell to dealer
• Profit if all 100 are bought
• Total value 25 ? 3,000 75 ? 250 93,750
• Total cost of buying Yugos 100 ? 1,201
  120,100
• Total profit 93,750 - 120,100 26,350

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Notice here that the dealer will never offer
1,201

• Why?
• Profits are negative
• Profits can be zero by not attempting to buy Yugo
  limos

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What should the used car dealer offer for Yugo
limos?

• Offer a price below 1,200 ? only the lemon
  owners would sell their cars
• Profit if 101 was offered ? 75 ? (250 101)
  11,175
• Offer 101 to maximize profit

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What else could the car dealer do?

• The dealer could hire a mechanic to try to
  determine if the Yugo limos are lemons or plums
• Will do it if MB of information exceeds MC

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Summary Asymmetric information

• The Lemons model
• Under what conditions will plums never enter the
  market?

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Wednesday

• Other topics
• E-mail me by tonight if you want to see any of
  the following topics covered
• Public goods
• Labor markets (value of work human capital more
  on unions discrimination income distribution)
• Government failure
• Taxation
• The internet and information

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Sick? ? lemons are good (Vitamin C)Driving? ?
lemons are bad