Healthcare

Notes

Complaints about third party intervention:

1. Third Parties

   • Insurers, governments, and unwitting bystanders are typically involved
   • Meaning, they have an interest in healthcare outcomes
   • Generally, market failures can be created when third parties enter a buyer/seller market

2. Seller receives payment from third party, instead of buyer

   • Healthcare providers are often paid not by the patients but by private or government health insurance
   • Generally, including a third party in the relationship of the buyer and select can create market failures

3. Allocation of resources are determined by rules established by third party

   • Rules established by insurers determine the allocation of resources
   • Allocation of resources should be determined by market prices in a perfectly competitive market

Complaints about lack of third party (less government intervention):

1. Prevalence of Externalities

   • Externalities in the healthcare market are extremely prevalent
   • Because externalities are so prevalent, they may need government action to remedy market failure

   • A few examples of externalities:

     • Getting vaccinated is a positive externality

       • Getting vaccinated has some cost: money or receiving side effects
       • Thus, too few people would decide to get vaccinated on their own
       • As a result, there wouldn’t be a huge need to develop vaccines, since it wouldn’t so profitable
       • Unless, the government requires vaccination
       • This subsidizes development, manufacture, and distribution of vaccines

     • The benefit of medical research is a positive externality to other physicians

       • Without government intervention, there would be too little research
       • Governments can incentivize research through funding and by granting patents

2. Everyone involved doesn’t have perfect information

   • Buyers rely on the advice of sellers for what the buyer needs (e.g. types of treatment)
   • Generally, knowledge needs to shared evenly between buyers and sellers to avoid market failures

   • This causes the need for:

     • Monitoring of the quality of a product
     • Buying leads to various regulations
     • Licensing requirements
     • Too difficult to open new medical schools
     • FDA regulations
   • The above regulations limit the supply of healthcare goods and services

3. Arguably: Healthcare is a public good

   • Market failure occurs with public goods

Complaints with the Insurance Market:

1. Problem of Moral Hazard

   • Moral hazard refers to the tendency of a person to engage in undesirable behavior because he/she is imperfectly monitored
   • If patients don’t pay for doctor visits, then they may go often for minor symptoms (e.g. cold, flu, etc.)
   • This leads to increased unnecessary costs and longer wait times
   • To avoid this, insurance companies charge patients co-pays (e.g. $20)

2. Adverse Selection

   • Some customers have preexisting conditions or chronic diseases, which aren’t observable by insurers
   • As a result, people with greater hidden health problems are more likely to buy health insurance than healthy people
   • In order for insurance companies to cover its costs, the price of health insurance must reflect the cost of a sicker-than-average person (since healthier people opted out)
   • As people drop coverage, the insurance market fails to achieve its purpose of eliminating the financial risk from illness
   • This is a phenomenon called the death spiral

The Affordable Care Act and Adverse Selection:

• The Affordable Care Act attempted to reduce the problem of adverse selection
• It required Americans to either buy health insurance or pay a tax (acting as a penalty)
• Specifically, it prevented insurers from charging more to cover people with pre-existing medical conditions
• The goal of the mandate was to increase the number of healthy people buying insurance
• Thereby, reducing the problem of adverse selection and lowering the cost of insurance

References

https://scholar.harvard.edu/files/mankiw/files/economics_of_healthcare.pdf