1. Healthcare and the Market
Lecture 9
Thursday, September 30
Healthcare
and the Market

2. WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY?
Extraordinary value of the service
Ethical issues in distribution: some rationing process is inevitable
Information costs for average consumer
The problem of preventative medicine: The market for Health vs the market for Treatment
Supply generates demand
Competition between providers leads to over-investment

3. The U.S. System
Extremely complex & incoherent
Most expensive in the world and rapidly increasing costs

5. The U.S. System
Extremely complex & incoherent
Most expensive in the world and rapidly increasing costs
Lower access than any other country. Only rich country without universal system.

6. 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Below poverty
line
% of
poverty line
% of
above 200% of
Private
insurance
through work
No insurance
Medicaid

7. The dilemma of private insurance exclusions & the problem of “mandates”
Insurance companies make money by selling insurance to people who are healthy. This means:
They increase their profits by refusing to insure people with existing health problem and by refusing to renew insurance once a person gets sick.
To guarantee universal access to insurance, these practices have to be prevented. Insurance companies have to be prevented from refusing insurance because of existing conditions. BUT
This is only possible if healthy people are required to buy health insurance. Otherwise they will wait until they get sick and then buy insurance.
SO, if you want (a) to guarantee universal access, and (b) maintain a private health insurance market, you have to (c) require all people to buy insurance. This is called a “mandate.”

8. The U.S. System
Extremely complex & incoherent
Most expensive in the world and rapidly increasing costs
Lower access than any other country. Only rich country without universal system.
Minimal concern with prevention
Worse health results than other rich countries

10. Rank = 6
Rank = 34

13. The “moral hazard problem”
The core reasoning behind the defense of a private health insurance system:
The “moral hazard problem”

14. The “Moral Hazard Problem”
A moral hazard =
A situation in which there is no incentive to worry about costs since someone else is paying the bill. Insurance sometimes creates a moral hazard by enabling people to engage in riskier behavior than they would otherwise.
Moral Hazard in Healthcare =
If you have insurance, you will tend to overuse medical services since you do not have to pay each time you go to the doctor. This has the effect of imposing costs on others.
Solution =
Rely on the market and competition to force down prices and enforce personal responsibility through co-pays and other charges.

15. Two Comparisons The U.S. Veteran’s Administration Hospital system
The Canadian Single-payer System

16. Administrative overhead
as a % of total costs, 2003
Source: New England Journal of Medicine 2003 (except for VHA estimate)

17. REASONS FOR HIGH QUALITY & LOW COST IN VETERANS HEALTH ADMINISTRATION HOSPITALS
Economies of scale
Ability to buy drugs at a reduced cost by negotiating discounts
Incentives for investing in quality
Strong incentives for preventive medicine because of the life-time link to the patient
Efficient medical record and information systems and health monitoring because of this life-time connection

18. THE CANADIAN SYSTEM
Universal
Comprehensive
Portable
Accessible
Publicly administered
Diversity in organization of actual delivery: single doctor practice; community clinics; group practices; public hospitals and clinics
Big Irony: In Canada there is universal public provision of insurance for everyone, but greater freedom of choice by patients and less bureaucratic hassle for doctors

21. Why does the U.S. not have a Universal Health System even with the new reforms?
Power and opposition of insurance companies
Power and opposition of pharmaceutical companies
Ideological anti-statism: strength of conservative opposition to public solutions
Massive misinformation campaigns about alternatives