Health Economics & Policy 3rd Edition James W. Henderson Chapter 1 U.S. Medical Care: Crisis or Conundrum

Growth in Spending

U.S. Spending: Summary Measures

Why do Americans spend so much on medical care? Aaron (1991) Expansion of 3rd party payment system Aging of the population Expanded medical malpractice Increased use of medical technology Other factors Physician-induced demand Entry restrictions Predominance of not-for-profit providers

Changes in Medical Care Delivery Shift from private to public financing Shift to 3rd party financing Changes in hospital usage and pricing Deregulation and growth in managed care

Shifts in Financing

Third Party Insurance Spread the risk Spend other people’s money Prescription for overspending

Payment Structure Traditional fee structure Managed care Fee for service Retrospective payment Incentive to overspend Managed care Capitation and risk sharing Prospective payment Incentive to limit care

Changes in Hospital Usage and Pricing

Growth in Managed Care

Nature of Health Care As a Commodity Demand is irregular Transactions characterized by information problems Widespread uncertainty prevalent Reliance on not-for-profit providers Insurance has emerged as the primary means of payment

Health System Goals Access to care Quality of care Cost of care Who’s covered? What’s covered? Quality of care Medical efficacy Medical outcomes Cost of care Who pays? How much?

The Structure of Health Economics

Key Economic Concepts Scarcity and choice Opportunity cost Marginal analysis Self-interest Markets and pricing

Key Economic Concepts Supply and demand Competition Efficiency Market failure Comparative advantage

Where the Money Comes From…

Where the Money’s Spent…

The Medical Care Cost Problem