micro ch7 ppt

R. GLENN

HUBBARD

MicroeconomicsFOURTH EDITION

ANTHONY PATRICK

O’BRIEN

2 of 36© 2013 Pearson Education, Inc. Publishing as Prentice Hall

Chapter Outline and Learning Objectives

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77.1 The Improving Health of

People in the United States

7.2 Health Care around the World

7.3 Information Problems and Externalities in the Market for Health Care

7.4 The Debate over Health Care Policy in the United States

The Economics of Health Care


Small Businesses Feel the Pinch of Escalating Health Care Costs

• Owners of small businesses face challenges as they compete with similar stores in their area.

• For several decades, health care spending has been steadily increasing as a fraction of GDP, from 5.2 percent in 1960 to 17.5 percent in 2011.

• The U.S. Congressional Budget Office projects that Medicare and Medicaid spending will increase from 5.6 percent of GDP in 2011 to nearly 12 percent in 2050.

• In 2010, President Obama and Congress enacted the Patient Protection and Affordable Care Act, which made major changes to the U.S. health care system.

• AN INSIDE LOOK AT POLICY on page 230 discusses government projections of future health care costs.


Why Is It Difficult for People Who Are Seriously Ill to Buy Health Insurance?

If you become ill and don’t have health insurance, you are likely to be stuck paying large medical bills. Even a brief stay in a hospital can result in a bill of thousands of dollars.

You may conclude that people with chronic illnesses are most likely to buy health insurance to help reduce their medical bills. But if you are chronically ill and don’t currently have health insurance, buying it can be very difficult.

See if you can answer this question by the end of the chapter:

Usually, people who demand a service can easily find a provider of that service. So, why is it difficult for people who are seriously ill to buy health insurance?

Health care The goods and services, such as prescription drugs and consultations with a doctor, that are intended to maintain or improve a person’s health.

Economics in Your Life


Discuss trends in U.S. health over time.

7.1 LEARNING OBJECTIVE

The Improving Health of People in the United States


Changes over Time in U.S. Health

Health in the United States, 1850 and 2011

Table 7.1

Variable 1850 2011

Life expectancy at birth 38.3 years 78.4 years

Average height (adult males) 5’7” 5’9”

Infant mortality (death of a person aged one year or less)

228.9 per 1,000 live births 6.1 per 1,000 live births

Note: The data on heights for 1850 include only native-born white and black citizens.The data on heights for 2011 were gathered in 2003–2006.

The Rise and Fall and Rise of American Heights

A person’s height relies partly on his or her nutritional status.

The public health movement in the late nineteenth and early twentieth centuries contributed to increases in height that began around 1890, which can give us insight into health and well-being that we could not obtain by looking only at income.


The Average Height of Adult Males in the United States, 1710–1970

Figure 7.1

The average height of adult males has increased over time in the United States, with the exception of the period from 1830 to 1890, when the average male born in those years lost 2 inches in height in part due to limited distribution of food, particularly protein, and poor sanitation in cities. Note: Values are for native-born adult males.


Reasons for Long-Run Improvements in U.S. Health

The Improving Health of the U.S. PopulationFigure 7.2a

Since 1900, life expectancy in the United States has increased and mortality rates have decreased. Note that the increase in mortality and decrease in life expectancy in 1918 are due to the severe influenza epidemic of that year.


The Improving Health of the U.S. PopulationFigure 7.2b

Since 1981, rates of death due to cancer, cardiovascular diseases, and diseases of the liver have been declining. Rates of death due to kidney disease and diabetes increased slightly, largely due to the effects of increasing obesity.


The overall mortality rate decreased by more than 25 percent between 1981 and 2009 due to changes in lifestyle, particularly a decline in smoking, and advances in new diagnostic equipment, new prescription drugs, and new surgical techniques.

Nobel Laureate Robert Fogel of the University of Chicago and Roderick Floud of Gresham College, along with coauthors, have described a process by which better health makes it possible for people to work harder as they become taller, stronger, and more resistant to disease.

Working harder raises a country’s total income, making it possible for the country to afford better sanitation, more food, and a better system for distributing the food.

In effect, improving health shifts out a country’s production possibilities frontier.

Higher incomes also allow the country to devote more resources to research and development, including medical research.


Compare the health care systems and health care outcomes in the United States and other countries.


Health Care around the World


Sources of Health Insurance in the United States, 2009

Figure 7.3

A majority of people in the United States live in households that have private health insurance (provided by an employer or purchased directly).Government programs insure about 29 percent of the population.

The U.S. Health Care System


Private health insurance firms sell group plans to employers to cover all of their employees or individual plans directly to the public.

Health insurance A contract under which a buyer agrees to make payments, or premiums, in exchange for the provider’s agreeing to pay some or all of the buyer’s medical bills.

Fee-for-service A system under which doctors and hospitals receive a separate payment for each service that they provide.

Other health insurance plans are organized as health maintenance organizations (HMOs), which typically reimburse doctors mainly by paying a flat fee per patient, rather than paying a fee for each individual office visit or other service provided.

Uninsured individuals must pay for their own medical bills out-of-pocket, with money from their own income, just as they pay their other bills, or receive care from doctors or hospitals either free or below the normal price.


Single-payer health care system A system, such as the one in Canada, in which the government provides health insurance to all of the country’s residents.

The Health Care Systems of Canada, Japan, and the United Kingdom

Canada

Japan Japan has a system of universal health insurance under which every resident of the country is required to either: (a) enroll in one of the many non-profit health insurance societies that are

organized by industry or profession, or

(b) enroll in the health insurance program provided by the national government.

Socialized medicine A health care system under which the government owns most of the hospitals and employs most of the doctors.

The United Kingdom


Levels of Income per Person and Spending per Person on Health Care, 2009Figure 7.4

Comparing Health Care Outcomes around the World

The United States is well above the line showing the average relationship between income per person and health care spending per person, which indicates that it spends more per person on health care than do other countries, even taking into account its relatively high levels of income. Note: Income per person is measured as real GDP per person.


Health Care OutcomeUnited States Canada Japan

United Kingdom

OECD average

Life Expectancy

Life expectancy at birth 78.2 years 80.7 years 83.0 years 80.4 years 79.3 years

Male life expectancy at age 65 17.3 years 18.1 years 18.2 years 18.1 years 17.1 years

Female life expectancy at age 65 20.0 years 21.3 years 24.0 years 20.8 years 20.4 years

Infant mortality (deaths per 1,000 live births)

6.5 5.1 2.6 4.7 4.7

Health Problems

Obesity (percentage of the population self-reported)

27.7% 16.5% n/a n/a 15.5%

Diabetes hospital admissions per 100,000 population

57 23 n/a 32 21

Health Outcomes in High-Income CountriesTable 7.2

Note: The data are the most recent available, typically 2009. n/a means that there are no data available.


Health Care OutcomeUnited States Canada Japan

United Kingdom

OECD average

Diagnostic Equipment

MRI units and CT scanners per 1,000,000 population

60.2 19.4 n/a n/a 27.2

Cancer

Deaths from cancer per 100,000 population

104.1 113.3 94.8 115.8 114.7

Risk of dying of cancer before age 75

11.2% 11.8% 9.7% 11.9% 12.0%

Mortality ratio for cancer 39.5% 40.4% 52.3% 47.6% 48.1%

Health Outcomes in High-Income CountriesTable 7.2

Note: The data for cancer are for 2008, its last column presenting data for the 27 countries in the European Union rather than for the OECD. Cancer mortality rates are age adjusted, which means they are not affected by differences in age structure across countries. n/a means that there are no data available.


We can consider some of the difficulties in making cross-country comparisons in health care outcomes:

• Data problems. There are not enough consistent data available to compare health care outcomes for more than a few diseases.

• Problems with measuring health care delivery. Much of health care involves care of injuries, simple surgical procedures, writing pharmaceutical prescriptions, and other activities where outcomes are difficult to measure.

• Problems with distinguishing health care effectiveness from lifestyle choices. Health care outcomes depend on both the effectiveness of doctors and hospitals in delivering medical services and on the choices of individuals.

• Problems with determining consumer preferences. It is difficult to determine whether some countries do a better job than others in providing health care services whose cost and effectiveness are consistent with consumer preferences.


Discuss how information problems and externalities affect the market for health care.


Information Problems and Externalities in the Market for Health Care

Asymmetric information A situation in which one party to an economic transaction has less information than the other party.


Adverse Selection and the Market for “Lemons”

If potential buyers of used cars know that they will have difficulty separating the good used cars from the bad used cars, or “lemons,” they will take this into account in the prices they are willing to pay.

Adverse selection The situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.

Asymmetric Information in the Market for Health Insurance

Insurance companies provide the service of risk pooling when they sell policies to households.

Adverse Selection in the Market for Health Insurance Insurance companies face an adverse selection problem because sick people are more likely to want health insurance than are healthy people.

In a provision of the law known as the individual mandate, the Patient Protection and Affordable Care Act (PPACA) passed in 2010 requires that beginning in 2014 residents of the United States must carry insurance or pay a fine.


Moral Hazard in the Market for Health Insurance

Moral hazard The actions people take after they have entered into a transaction that make the other party to the transaction worse off.

Principal–agent problem A problem caused by agents pursing their own interests rather than the interests of the principals who hired them.

How Insurance Companies Deal with Adverse Selection and Moral Hazard Insurance companies can use deductibles and coinsurance to reduce adverse selection and moral hazard problems.

The PPACA included significant restrictions on the ability of insurance companies to limit coverage of pre-existing conditions, which are medical problems that the buyer already has before purchasing the insurance.

Don’t Let This Happen to YouDon’t Confuse Adverse Selection with Moral Hazard

It may help to remember that a comes before m in the alphabet just as adverse selection comes before moral hazard.

Your Turn: Test your understanding by doing related problem 3.9 at the end of this chapter.MyEconLab

Economists refer to traditional health insurance as a third-party payer system, meaning that consumers of health care do not pay a price that reflects the full cost of providing the service.


Dealing with Adverse SelectionIn 2011, the company Off Your Desk offered consumers a service that would handle all the paperwork involved with health insurance for a fee of $65 per month. A newspaper article on the service noted that: “Still, the service does have an adverse selection problem.…”

a. What adverse selection problem does the firm face?Be sure to define adverse selection in your answer.

b. How might the firm attempt to deal with this adverse selection problem?

Solved Problem 7.3

Solving the Problem

Step 1: Review the chapter material.

Step 2: Answer part a. by defining adverse selection and explaining how the concept applies in this example.Off Your Desk runs the risk of attracting a disproportionate number of customers who have extensive paperwork needs that will cost the company more than $65 per month to process.

Step 3: Answer part b. by explaining how the firm might deal with the problem of adverse selection.The firm could restrict its service to only covering bills its customers receive after they sign up or put a limit on the number of bills that it would process for the flat fee of $65.

Your Turn: For more practice, do related problem 3.11 at the end of this chapter.MyEconLab


Externalities in the Market for Health Care

Many economists believe there are several aspects of health care that involve externalities, which are benefits or costs that affect someone who is not directly involved in the production or consumption of a good or service.

Vaccinations may result in a positive externality because they not only prevent communicable diseases in those who get vaccinated, but also reduce the chances that people who haven’t been vaccinated will contract such diseases.

Obesity may involve a negative externality because people who are not obese may pay for some of the health care costs obese people incur.

Economists and policymakers debate whether the existence of externalities requires significant government involvement in health care.


Should the Government Run the Health Care System?Making

the

Connection

Congress passed, and President Obama signed, the Patient Protection and Affordable Care Act in 2010.

What role the federal government should play in health care remains a controversial public policy issue.

Because public goods are both nonrivalrous and nonexcludable, health care does not qualify as a public good under the usual definition.

Consuming certain types of health care generates positive externalities, convincing some economists that government intervention is justified.

Many economists believe that market-based solutions are the best approach to improving the health care system.

Your Turn: Test your understanding by doing related problems 3.13 and 3.14 at the end of this chapter.MyEconLab


Explain the major issues involved in the debate over health care policy in the United States.


The Debate over Health Care Policy in the United States


Spending on Health Care around the World

Figure 7.5a

The Rising Cost of Health Care

Health care spending has been a rising percentage of GDP in the United States from less than 6 percent in 1965 to about 17.5 percent in 2011, and it is projected to rise to about 19.5 percent in 2019.


Health care spending per person has been growing faster in the United States than in other high-income countries.

Spending on Health Care around the World

Figure 7.5b


The Declining Share of Out-of-Pocket Health Care SpendingFigure 7.6

Out-of-pocket spending on health care has declined sharply as a fraction of all health care spending.


Explaining Rapid Increases in Health Care Spending

Factors That Do Not Explain Sustained Increases in Health Care Spending Explaining the rapid growth of health care spending requires identifying factors that have more than a one-time effect.

While some observers argue that the U.S. health care system generates more paperwork, duplication, and waste than systems in other countries, it cannot account for health care’s rising share of GDP unless paperwork and waste are increasing year after year.

Unlike in most countries, it is relatively easy in the United States for patients who have been injured by medical errors to sue doctors and hospitals for damages, but these costs have not been significantly increasing over time.

“Cost Disease” in the Health Care Sector Because increases in wages are not offset by increases in productivity in service industries, the cost to firms of supplying services increases.

Growth in labor productivity in health care has been less than half as fast as labor productivity growth in the economy as a whole.


Reasons for Rising Federal Spending on Medicare and MedicaidFigure 7.7

Although the aging of the U.S. population will increase federal government spending on the Medicare and Medicaid programs, increases in the cost of providing health care will have a larger effect on government spending on these programs.

The Aging of the Population

Note: “effect of excess cost growth” refers to the extent to which health care costs per person grow faster than GDP per person.


Distorted Economic Incentives Consumers demand a larger quantity of health care services than they would if they paid a price that better represented the cost of providing the services.

Doctors and other health care providers also have a reduced incentive to control costs because they know that an insurance company will pick up most of the bill.

By disguising the true cost of routine expenses, health insurance encourages overuse of health care services.

The Debate over Health Care Policy

The Patient Protection and Affordable Care Act (PPACA)

Patient Protection and Affordable Care Act (PPACA) Health care reform legislation passed by Congress and signed by President Barack Obama in 2010.

Advances in Medical Technology Even in the absence of the development of new drugs and other medical technology, low rates of productivity in the health care sector could be expected to drive up costs.


Here is a summary of only the act’s main provisions:

• Individual mandate With limited exceptions, every U.S resident will be required to have health insurance that meets certain basic standards.

• State health exchanges Each state will be required to establish an Affordable Insurance Exchange.

• Employer mandate Small firms will have to offer health insurance to their employees and large firms will have to automatically enroll their employees.

• Regulation of health insurance Lifetime dollar maximums on coverage will be prohibited and limits will be placed on the size of deductibles and on waiting periods before coverage becomes effective.

• Medicare and Medicaid Medicaid eligibility was expanded and an Independent Payment Advisory Board (IPAB) was established to monitor Medicare spending.

• Taxes Several new taxes will help fund the program.

The Debate over the PPACA Critics of the act can be divided into two broad groups: Those who argue that health care reform should involve a greater movement toward a system similar to the European, Canadian, and Japanese systems, and those who argue that health care reform should include more market-based changes.

Market-based reforms Changes in the market for health care that would make it more like the markets for other goods and services.


How Much Is That MRI Scan?Making

the

Connection

A goal of market-based reforms of the health care system is to give patients an incentive to pay more attention to the prices of medical services.


City Highest price Lowest price Difference

New York, New York $9,300 $2,400 $6,900

Orlando, Florida 6,800 2,250 4,550

Dallas, Texas 6,500 2,100 4,400

San Francisco, California 7,200 2,850 4,350

Chicago, Illinois 6,100 2,100 4,000

Omaha, Nebraska 5,700 2,000 3,700

Baton Rouge, Louisiana 5,600 2,025 3,575

Atlanta, Georgia 5,500 2,100 3,400

Lexington, Kentucky 5,100 2,000 3,100

Charlotte, North Carolina 4,500 2,100 2,400

The prices of abdominal MRI scans vary widely.


Health Exchanges, Small Businesses, and Rising Medical Costs

Makingthe

Connection

By 2014, every state is obligated toset up an Affordable Insurance Exchange that must operate a SHOP where private insurance companies will offer small firms health insurance plans that the firms can purchase for their workers.

Supporters of the exchanges hope that they will reduce administrative costs while opponents argue that the exchanges are likely to increase the demand for medical services, further driving up their costs.

As of 2011, the health exchanges, as well as other aspects of the PPACA, were subject to lawsuits from states that claimed that the act violated the U.S. Constitution. Some members of Congress were also attempting to amend the act.


Will the Small Business Health Options Program (SHOP) help small businesses keep health insurance costs down?


Why Is It Difficult for People Who Are Seriously Ill to Buy Health Insurance?

At the beginning of this chapter, we asked:

Why is it difficult for people who are seriously ill to buy health insurance?

Insurance companies are reluctant to provide insurance to someone who is already seriously ill because the premiums they receive from the person are certain to be less than the person’s medical bills—which the insurance company will have to pay.

In order to remain in business, insurance companies will either not insure people with preexisting medical conditions or will insure them only after a waiting period of perhaps years.

The PPACA attempts to make it easier for people with preexisting conditions to buy health insurance. Under the act, each state will run a health exchange that will offer policies to individuals who cannot be excluded because of preexisting conditions and who will pay premiums varying only by their ages and whether they are smokers.

Economists and policymakers debate whether the act will be effective.

Economics in Your Life


Health Care Spending Expected to Increase 70 Percent by End of Decade

AN

INSIDE LOOK

AT POLICY

In the United States, there has been an increase in health care spending as a percentage of GDP and a decrease in out-of-pocket health care spending by consumers since 1965.An analysis by Medicare officials claims that the PPACA will result in only a 0.1 percent additional increase in annual health care spending over the next decade.

micro ch7 ppt

Economy & Finance

health health

health insurance

persons health

better health

health care policy

health care spending

economics of health

health care system