Question

 

What is the total amount of healthcare expenditures in the US? Provide a specific amount in dollars and percentage with respect to GDP.

During the first part of the semester we have spent a great deal of time reviewing general concepts of economics to build the foundation to understand specific issues of the healthcare sector. What general economic assumptions do not apply to healthcare? Explain why.

Define the concept of adverse selection and explain why it is important in healthcare insurance markets.

Briefly explain what is moral hazard and describe an example in healthcare.

Calculate the elasticity of demand using the data shown in the table below. Explain what methods you used to arrive at your answers.

Price Per Hour of Therapy	Demand for Therapy
0	16
1	15
2	14
3	13
4	12
5	11
6	10
7	9
8	8
9	7
10	6
11	5
12	4
13	3
14	2
15	1
16	0

The Karl Challenge: Consider the following hypothetical three-stage screening test for a cancer with the following rates of detection and costs:

Stage	Number of Cases Detected	Total Costs
1	100	$200,000
2	105	260,000
3	106	300,000

Calculate the average cost per cancer detected in the three stages.

Calculate the marginal cost per cancer detected in the three stages

Suppose that the marginal benefit per treated case is $12,000 per person. What would be the optimal screening, given the costs?

Consider the graph below and explain the meaning of it.

The Isabel Challenge: Suppose that Nathan’s employer provides a health insurance policy that pays 80 percent of $1 over the first $100 spent. If Nathan incurs $1,000 in expenses, how much will he pay out of pocket? What percentage of his expenses will this be?

Explain the meaning and interpretation of the following two graphs:

The Danny Challenge: Suppose that a consumer makes V₀ physician visits each year at a price of P₀. If the price elasticity is -0.4, what will happen to the number of visits if the price increases by 10 percent? What will happen to total physician expenditures? Explain your answers.

Answer 1

• NHE grew 4.3% to $3.3 trillion in 2016, or $10,348 per person, and accounted for 17.9% of Gross Domestic Product (GDP).
• General assumptons not applicable in the health care market

A market that meets all necessary conditions for efficient resource allocation is an ideal in economic theory but not in reality. Markets do fail because necessary conditions for perfect/free markets are rarely met in any industry especially health care. When the necessary conditions of the ideal free market are not met, there can be market failures some of which are not easily corrected by the market and therefore require government intervention.

Free markets are not a desirable feature of a health care system. It requires an examination of the culture and beliefs of the country about health and health care. Health care is not a commodity to be bought and sold for profit but it is a basic human right that should be accessible to all citizens.

CONSUMER RATIONALITY AND ABILITY TO MAKE THE BEST JUDGMENTS ABOUT THEIR WELFARE

Consumers seeking care are not always in a position to make the best judgment about their welfare even if they have the ability and freedom to do so. For one, they lack necessary information about their illness or the effective treatment. Moreover, there are some situations of extreme stress making it impossible for the individual consumer to make the judgment (e.g. someone in a car accident, passed out on the roadside). Furthermore, consumers cannot accurately predict the results of consuming health care. When visiting a doctor for a particular condition, the consumer is not able to predict accurately what the results of the visit will be, even if they have been through similar circumstances before. A treatment regimen that worked previously might not work the same way.

Economists consider an individual to be rational if they made consistent and transitive decisions. “Consistent” means that when faced with the same conditions they make the same decisions every time. “Transitive” is used in the mathematical logic sense that, in a relation between three elements, if it holds between the first and second, and it also holds between the second and third, it must necessarily hold between the first and third. For example, an individual is offered three choices A, B, and C. If they prefer choice A over B and they also prefer choice B over C then they must prefer choice A over C. Economists would consider an individual rational if they decided/acted in this manner. However there are numerous findings of consumers acting irrationally.15 This is why we all ask ourselves the question “What was I thinking?” after realising that we acted irrationally. Thus there is evidence that consumers do not always act rationally thus the condition is not met in health care.

ADVERSE SELECTION

Individuals in poor health have a greater incentive to purchase health insurance than those in good health. Individuals in poor health make greater utilisation of health care than the healthy, leading to higher payouts by the insurance company. To avoid incurring losses, insurance companies might raise premiums. Higher premiums will further discourage healthy individuals from purchasing health insurance so that only the very ill buy insurance leading to losses by insurance companies and eventually this might mean the demise of a market.12 This market failure can be corrected by universal coverage, i.e. everyone buys coverage so that insurance companies have a pooled risk which on the average is lower than the risk from covering only the very ill. The other solution is screening and experience rating that allows insurance companies to change different premiums according to risk levels.13 Studies indicate huge welfare losses due to adverse selection

MORAL HAZARD

Individuals covered by insurance tend to use more health care and they might not take necessary precautions to stay healthy because they know they have insurance coverage. This leads to inefficient use of resources. Insurance companies try to correct this by employing gate-keepers who monitor and restrict health care access and by charging co-payments and deductibles. Unfortunately, these are applied to everyone including those not overusing services, which make these solutions inefficient.