Health Economics & Policy 2 nd Edition James W. Henderson Chapter 1 U.S. Medical Care: Crisis or Conundrum Copyright 2002, South-Western, a division of Thomson Learning, James W. Henderson, Health Economics and Policy, 2e

Growth in Spending

U.S. Spending: Summary Measures

Why Do Americans Spend So Much on Medical Care? l Aaron (1991) –Expansion of 3 rd party payment system –Aging of the population –Expanded medical malpractice –Increased use of medical technology l Other factors –Physician-induced demand –Entry restrictions –Predominance of not-for-profit providers

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

Shifts in Financing

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

Payment Structure l Traditional fee structure –Fee for service –Retrospective payment –Incentive to overspend l 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 l Demand is irregular l Transactions characterized by information problems l Widespread uncertainty prevalent l Reliance on not-for-profit providers l Insurance has emerged as the primary means of payment

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

Issues in Health Economics and Health Policy l Questionnaire from Victor R. Fuchs, “Economics, Values, and Health Care Reform,” American Economic Review 86(1), March 1996, 1-24 l Answer each question l Aggregate answers l Discuss

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

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

Where the Money Comes From…

Where the Money’s Spent…