Health Care and Legislation, Policies

Chapter 9
Health Economics in a Health Policy Context

Chapter Overview
Provides a basic overview of economics and why it is important for health policymakers to be familiar with basic economic concepts
Focuses on:
How economists make decisions
Supply
Demand
Markets

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Economic Decision Making
Economists believe that people are rational actors who will never purposely choose to make themselves worse off.
People seek to maximize utility.
Given the scarcity of resources, decisions need to be made about the production, distribution, and consumption of healthcare resources.
Consider individual preference and efficiency.

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Demand

(1 of 2)
Demand—the quantity of goods and services that a consumer is willing and able to purchase over a specified time
Common demand shifters
Price of the original good, price of a substitute good, and price of a complementary good
Income
Quality (actual or perceived)

Demand

(2 of 2)
Price elasticity of demand—the percentage change in the quantity demanded resulting from a 1% change in price
If a product is elastic, a change in price will result in an equivalent or greater change in demand.
If a product is inelastic, demand for the good is not sensitive to a change in price.

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Health Insurance and Demand
Health insurance acts as a buffer between the consumer and cost of healthcare goods and services.
Goods and services cost the consumer less than the charged price because of the presence of health insurance.
Moral hazard
Because a consumer does not pay the full cost of a good, the consumer may purchase more goods than he or she would otherwise purchase without insurance.

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Supply

(1 of 3)
Supply—the amount of goods and services that producers are able and willing to sell at a given price over a given period of time.
Common supply shifters
Input costs
Sale price
Number of sellers
Change in technology

Supply

(2 of 3)
Supply elasticity—the percentage change in quantity supplied resulting from a 1% increase in the price (or other variables, such as inputs) of buying the good.
If a product is elastic, a change in price (or other variables) will result in an equivalent or greater change in supply.
If a product is inelastic, supply of the good is not sensitive to a change in price (or other variables).

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Supply

(3 of 3)
Suppliers are driven to maximize profit.
In a competitive market, profit is maximized at the level of output where marginal cost equals price.
Equilibrium exists in the market when there is a balance between the quantity supplied and the quantity demanded.

Health Insurance and Supply
The presence of health insurance may impact a provider’s willingness to supply goods and services.
Competing concerns
Providers act as patient’s agent and act in patient’s best interest.
Providers may have a financial incentive to act or refrain from acting in a certain way due to insurance arrangements or the lack of insurance.
Supplier-induced demand is the provider version of moral hazard.
Providers create a demand beyond the amount the well-informed consumer would have chosen.
It is debated whether supplier-induced demand actually occurs.

Markets
Market structures
Perfectly competitive market should efficiently allocate resources
Monopolies—single seller controls market
Oligopolies—few dominant firms, substantial barriers to entry
Monopsonies—few consumers who control price paid to sellers
Healthcare is a monopolistically competitive market.
Few dominant firms with significant market power and many smaller firms without market power

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Health Insurance and Markets
A typical market transaction involves two parties.
Consumer and supplier
Healthcare transaction with an insured patient involves three parties.
Consumer (patient)
Supplier (provider)
Insurers
Presence of third party (insurers) changes consumer and supplier analysis of costs and benefits of each transaction.

Market Failure

(1 of 2)
Market failure—resources are not produced or allocated efficiently
Traditionally, inequitable distribution of resources does not equal a market failure
Common reasons for market failures
Imperfect information
Concentration of market power
Consumption of public goods
Presence of externalities

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Market Failure

(2 of 2)
Ways to address market failure
Do nothing
Government finances or directly provides public goods
Government increases taxes, tax deductions, subsidies
Government issues regulatory mandates.
Government prohibitions
Redistribution of income

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