ch 1. factors accounting for the growth of importance in the health sector global health and...

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CH 1

Factors accounting for the growth of importance in the health sector

Global health and longevity gains Expansion of health sector throughout the world

Global Distribution of Longevity Gains

Global Distribution of LE

LE (China v.s. US)

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

(c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

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

Economic Model

X (quantity)

P (price)

E

A A’

B’B

Market Equilibrium

Supply curve(suppliers) Demand curve (consumers) Equilibrium price and quantity

Suppliers and Consumers

Suppliers Hospitals (clinics) Doctors Nurses

Consumers Patients

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

Share of health related research