Economics of HealthTuesday, 1/08/13Health care DOES NOT = health insurance- HC (or med care): goods and services that maintain, improve, or restore individuals physical, social, or mental being- 6 health inputs: med care, lifestyle, SES, technology, environment, profile (gender, etc), lifestyle- Health insurance: protection against financial loss from illness or bodily injuryo Unexpected: prob is estimated. It is between 0 and 1 but not 0 or 1.o Insurance (in general): promise of compensation for potential future loss in exchange for a periodic payment (premium)- HC is the actual good or service by Dr.’s, H Insurance is how people pay for itMoral hazard- When individuals change behavior because they are protected from risko Ex) stossel building on beach- The peltzman effect: when the potential benefit of a safety regulation is offset by an increase in risky behaviorHealth Insurance in WWII- Most US adults obtain health insurance through employer- WWII wage freeze- Tax exempt if through employer- Companies gave benefits to hire new workers because could not offer higher wages (wage freeze)Thursday, 1/10/13Health Insurance through EmployerPro: economies of scale (employer can buy in bulkRisk poolingDiscountedCon: ”too much” insuranceLack of choiceLose job means you lose insuranceJob lock, especially lower income single mothers1Economics of HealthProductive Inefficiency1. Failure to undertake an action where the benefits exceed the cost 2. Undertaking action when costs exceed benefits - If either 1 or 2 happens, we have inefficiency - OR statements Two ways to organize Economic ActivityMarket- Voluntary exchangeGovt- involuntary (in)action, taxes, regulationShortcomings of the market (aka market failures)1. Lack of competition2. Externalities3. Public Goods4. Lack of InformationLack of competitionWhen firms have market power, aka monopoly power- Tend to produce too little and charge too much- Theory: anti-trust law- Practice: The monopolist could decrease the quality The monopolist could shut downExternalitiesWhen a third party is impacted by actions of buyer or seller“How economics saved Christmas”Ex. Dog barking at cars, both positive and negative externality. Not always clear. Negative Externality2Economics of Health- When third parties harmed by actions of buyer or seller- “too much” is produced- The price is “too low”Positive Externality- When third parties receive a benefit from the actions of buyer or seller- “too little” is produced- The price is too highHow should Government enhance efficiency?Negative Theory: tax itPositive Theory: SubsidizePractice: Costs and benefits are unknown- Externality has diminishing effect with each additional (aka first person vaccine)Public Goods1. Non-rival in consumption : making a good available to one consumer does not reduce its availability to others. Example: YouTube video2. Non-excludable : it is impossible to exclude nonpaying customers from receiving the good. Example: Fireworks show.Examples: - Spraying to prevent mosquito, everyone wins not just your yard.- National defense“Too little” is producedHow could government enhance efficiency?Theory: Government taxes citizens and provides the goodPractice: What is the correct amount? (Too much or too little national defense?)Private Goods1. Rival in Consumption2. ExcludableJust because it’s publically provided, doesn’t make it a public goodExamples of private goods: Health care, health insurance, education, mail delivery, water, parksInformation ProblemsImperfect Information: both the buyer and the seller lack important information about the good or service.- Example: Reaction to drug or treatment. Both Doctor and patient do not know.Asymmetric Information: One party (the buyer or the seller) has more information than the other.3Economics of Health- Buyer knows more: Insured knows more about their own habits than the insurance company. For example lying about smoking.- Seller knows more: Doctor knows more than patient about it.Lack of informationTheory: - Government can provide information of the drug.-FDA-Licensing, regulationPractice: - FDA imperfect at gathering the information delaying time to the market. Also tends to increase the cost.Info problems are more likely when:- Seldom buy and difficult to inspect- Capable of serious harm to consumerTheory Vs. PracticePrivate Sector: Lowering costs, selling more means more profit, performing bad means out of businessPublic Sector: Lowering costs means lower budget, performing bad is often an argument for more fundingOBJECTIVESCH. 1Health Care Resources- Resources are scarce, wants are unlimited. Trade offs are a fact.Normative Economics: opinionsPositive Economics: Hypotheses about what will happen, hypotheses can be tested.“Not enough Health care to go around”- Not if we should ration care, but HOW and WHO should ration it.- All countries ration care: UK about 50K per life yearo UK has National Institute Clinical Excellence (NICE) Run Cost effectiveness studies to find cost per life year Based on findings, approve or reject drugs/procedures - Things that won’t solve scarcity: emphasis on preventive care, “best practices”, electronic medical recordsTuesday, 1/15/13Last class recap:- Health care V. health insurance- Positive efficiency:o All B > C4Economics of Healtho No B < C- Market Shortcomings:o Lack of competitiono Externalitieso Public Goodso Lack of informationProduction Possibility Curve- Opportunity Cost : value of the next best alternative that is given up- Law of increasing opportunity cost : o Society gives up ever increasing units of one good to receive more equal increments of another goodo Resources are not perfect substituteso Production Possibility Curve (PPC)- We want to be on the PPC, normative question is where on it?Movement from A to B costs fewer goods than movement from CWhat should be Produced?- Normative question- What combo of medical goods/other goods?- What types of med goods?Who will receive the output?- Normative question5Economics of Health-Allocative efficiency- Choosing the “best” point on the PPC- How are resources distributed?- Pure market system : Goods distributed on willingness and ability to pay Incentive to be productive- Perfect egalitarian : objective of distributing goods equally to all  Can obtain good without as much regard to incomeHow to get most output?- Positive topic- Getting the max output from limited