Chapter 2 Medical Care and Health Insurance

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Chapter 2 Medical Care and Health Insurance

• Amount of health at the end of the period
• H H0 l g(m)
• l illness event
• m medical care

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Demand for Medical Care

• Beyond illness events
• Systematic factors (age, gender including
  childbirth, genetic)
• Beliefs about the efficacy of medical care
• Advice from medical professionals
• Income health insurance
• Price (opportunity cost of time, money)

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Supply of Medical Care

• Price
• Input costs
• Regulation, taxes, subsidies
• Not-for-profit status under tax laws

4
Demand for Health Insurance

• Price (loading on top of expected benefits is
  the price of insurance)
• Risk aversion
• Tax laws (subsidies)
• Health insurance is not taxable income
• Your marginal tax rate determines the subsidy

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Demand for Health Insurance

• Example of expected benefit calculation
  0 (.95) 50,000 (.05)
  2,500
• What is this worth to you if you are risk averse?

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Expected benefit 0 (.95) 50,000 (.05)
2,500 Premium (1 L) x (expected benefit) L
loading fee expressed as a fraction of expected
benefits If L 0, premium expected benefit
(would you expect to see this?) Examples If the
insurance premium (what you pay) is 2,500, the
insurance is free (why?) If the insurance
premium is 3,000, the loading fee is 500 and L
.2 To check this, note that (1 .2) x 2,500
3,000
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Supply of Health Insurance

• Supply g(Price)
• Administrative costs
• Risk bearing costs
• Taxes/subsidies

Supply Curve shows that higher prices induce
new firms to enter (reflects increasing
opportunity costs of entrants)
P2
Price per unit of insurance
P1
Q1
Q2
Quantity (units of health insurance)
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Health Insurance vs. Other Insurance

• Health insurance acts to subsidize medical care
  at the point of purchase
• Consumer trades lower income (cost of insurance)
  for lower price of medical care
• Some policies limit your purchases with
  physician/gatekeeper/third party oversight and
  limits to coverage/lifetime limit
• Rationing (because the price mechanism is not
  rationing consumption)

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Health Insurance vs. Other Insurance

• Consumer insures against cost of medical care,
  not health events
• Example broken leg vs. broken fender

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Industry Structure

• Vertical integration
• Health Maintenance Organizations (HMOs) integrate
  provision and insurance (Kaiser or Facey)
• Preferred Provider Organization (PPO) (Blue
  Cross/Blue Shield)
• Integrated Delivery System (IDS) (contractual or
  ownership arrangement)
• Horizontal integration hospital industry
  consolidation

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Historical Perspective to Health Care Industry

• 1965 Medicare/Medicaid
• Paid whatever it cost to provide care
• Huge increase in demand for health care
  tremendous expense
• FMGs allowed to immigrate 1965-72 to keep prices
  down

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Historical Perspective to Health Care Industry

• Rising federal costs led the government to set
  reimbursement limits (monopsony pricing)
• Shift to outpatient procedures led to an excess
  supply of beds
• Shortage of primary care physicians
• Low reimbursement combined with requirement to
  accept all those who need emergency care caused
  some emergency rooms to shut down
• Increased use of physician extenders (physician
  assistants, nurse practitioners)

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How will this affect health care?

• Prime Healthcare Services (Dr. Prem Reddy) is
  buying hospitals
• They cancel all insurance contracts (which pay
  little)
• They stop services that dont cover their costs
  (so not full service)
• They encourage emergency room traffic (moved lab
  equipment to ER to speed things up goal of
  waiting time 20 minutes)
• The hospital charges rates that are not
  negotiated with insurers and the LA Times says
  insurers have to pay.
• Prime Healthcare is profitablehospitals that are
  doing poorly are calling him.

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Long run influences on demand for medical care

• Rising incomes
• Demographics (baby boom)
• Innovation and technical change
• Increased health insurance coverage

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Rising Prices and Expenditures

• Medical CPI has problems
• e.g. uses list prices, looks at cost-per-day,
  cant adjust for quality
• Combines components proportional to out-of-pocket
  for consumers not total expenditures
• Consumers better off if this spending reflects
  their preferences or higher quality
• Consumers worse off if government mandates higher
  quality/quantity than consumers would buy on
  their own

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Source Samel L. Baker, U South Carolina,
http//hspm.sph.sc.edu/Courses/Econ/Classes/nhe00/
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Health Care Spending

• Physicians direct over 85 of all spending on
  health care in the US
• Between 1950 and 2000
• Health care expenditures in 2000 were 11 times
  what they were in 1950
• biggest increase hospital expenditures
• but in per capita terms hospital expenditures
  fell from 1995 to 2000
• Spending on drugs rose a lot between 1950 and
  2000
• Health care expenditures increased from 5 to 14
  of Gross National Product
• 1965 Medicare/Medicaid legislation expanded
  health care for elderly in particular
• Real income doubled
• What can we say about the income elasticity of
  demand for health care?

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Chapter 2 End-of-Chapter Questions

• Problems 4, 5, 6, 7, 8, 9