ch 1. factors accounting for the growth of importance in the health sector global health and...
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Factors accounting for the growth of importance in the health sector
Global health and longevity gains Expansion of health sector throughout the world
Health Care Expenditures in the United States, 1960-2007
1960 1970 1980 1990 2000 2005 2007
Nominal health expenditures $27.5 74.9 253.9 714.0 1,353.3 1,987.7 2,241.2(billions of dollars)
Annual rate of growth -- 10.5% 13.0 10.9 5.9 8.9 6.2(average annual % changefrom previous period shown)
Nominal per capita health $148 356 1,102 2,813 4,790 6,697 7,421expenditures
Health expenditures as 5.2% 7.2 9.1 12.3 13.8 16.0 16.2percentage of GDP
Source: CMS Homepage: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf
The Health Care Industry is Rapidly Evolving
Advances in medical technology and drugs are dramatically improving patient care But, these improvements are costly
Aging U.S. population
% 65 years+ 1950 8.1 1970 9.8 2008 12.8
Which category has the largest share of health care expenditures?
Hospital Care
Physician Care
Prescription Drugs
Hospital services 31%
Physician services 21%
Dental services 4%
Other 8%
Public health 3%
Program administration 7%
Prescription drugs 10%
Investments 7%
Home health care 3%Nursing homes 6%
Uses of Health Care Funds in the United States 2006
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PHARMACEUTICAL INDUSTRY
U.S. prescription drug expenditures reached $228b in 2007
Industry highly dependent on research and development (R&D) $897m to bring a new drug to market
Aggressive marketing to physicians, hospitals, pharmacists, and even the patient
PHARMACEUTICAL INDUSTRY
Pfizer
$48.3b in sales in 2008
40.8% of sales come from 4 drugs: Lipitor, Lyrica, Celebrex, Norvasc.
Important Institutional Features of Health Care
Asymmetric Information Health insurance Externality Government intervention
Equilibrium quantity and prices
Quantity Visits Admissions (hospital days)
Price Payment per visit Payment per hospital day
Assumptions for efficient market
Numerous consumers Numerous suppliers Consumers search for the quality of care Consumers search for the low price Suppliers compete with each other
In the end, efficient market ensures that consumers can purchase quality care at the low cost
Information
Do consumers (patients) know the quality of care?
Do consumers (patients) search for the low cost? Do suppliers (doctors) compete with each other?
Asymmetric information
Asymmetric information refers to the case that one party to a transaction has information pertinent to the transaction that the other party does not possess
Examples The doctor knows more than the patient The insurance purchaser knows more than the
insurer
Competition is a big issue in light of asymmetric information
Health insurance
Because the health expenditure is random, risk adverse people would seek to reduce expenditure risk by obtaining health insurance (e.g. dialysis patients)
Nonetheless, consumption decisions would be distorted due to health insurance. Consumers would like to use more than they want when facing the lower prices (moral hazard)
Also, asymmetric information would patients to conceal personal information---high risk consumers purchase good insurances, and good insurances need to charge a even higher price to cover its costs. In the end, no insurers are willing to offer insurance contract (adverse selection)
Externality
Consumption externality (e.g. vaccinations) Financial externality Moral externality (access of care)
Government intervention
Health sector is highly regulated industry
Entry barriers Doctors Hospitals Drugs
Price Regulated prices Insurer sets up the payment price to doctors
Government intervention
Providing health insurance US: Medicare (the elderly), Medicaid (the poor) Taiwan: National Health Insurance
Provision of health care Public clinics or hospitals
Financing the health care Taxation Subsidy