The Supply of Medical Care, The Market for Health Insurance and Market Competition. Lecture 25. Economics 157 Health Economics Summer 2003

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1 The Supply of Medical Care, The Market for Health Insurance and Market Competition Lecture 25 Economics 157 Health Economics Summer 2003 Lectures 25; Graphic 25 No. 1

2 Announcements (1) Tuesday : Richard Kim on Enthoven and Managed Care Wednesday : Guest Lecturer; Phyllis Weber of the N. Calif Organ Retrieval Network Thursday : Guest Lecturer: Professor McCormick of UC Davis. Topic; Economics and Organ Donation Lectures 25; Graphic 25 No. 2

3 Announcements (2) Reading Assignments Tue ; Alain C. Enthoven on Manage Care (see course website) Mon ; Transplant articles Section VII of Syllabus (see course website) Tue Text Ch 18; National Health Insur. The Pauly Herring reading is dropped Lectures 25; Graphic 25 No. 3

4 Wrap Up on The Demand for Health Insurance Lectures 25; Graphic 25 No. 4

5 Concluding Comments on Risk Selection (Feldstein p. 140) Adverse selection would be limited if everyone were required to have health ins. Preferred risk selection could be limited if risk adjusted premiums. Make all patients equally attractive to insurers Practically: risk adjusted premiums has not been very successful. Examples. Lectures 25; Graphic 25 No. 5

6 The Rational Economic Consumer Will not Want Complete Comprehensive Health Insurance p 141 Without Moral Hazard: loading charges and transaction costs can be inefficient With Moral Hazard: leads to other inefficiencies such as dead weight loss Lectures 25; Graphic 25 No. 6

7 The Effect of Deductibles on the Demand for Medical Care: Deductibles May, but Not Necessarily, Reduce Moral Hazard D 1 If area A < B then consume Q 2 i.e. consume to the point of zero price with moral hazard playing a role P 1 Price P 1 Without Ins. Consume Q P 1 Deductible is P 1 x Q 3 A B P (s) Area B is consumer surplus if consume Q 2 at 0 price beyond deductible amount Q 3 0 Q 1 Q 3 Q 2 Q/T Figure 6.7B Q 1 Q Q 3 2 (B)

8 Feldstein s Conclusions on the Demand for Health Insurance p Insurance coverage for 100 % comprehensive services for all persons is not warranted; Why? With different demands and transaction costs, no single insurance policy is best for everyone Moral hazard only reinforces the social desirability of choice and variety in health insurance Lectures 25; Graphic 25 No. 8

9 (1) Summary of the Demand for Health Insurance pgs Very good and very long Note: Justification for Fig. 6.8 (pg.148) Indemnity Insurance: keeps relative prices intact and leads to cost minimization Lectures 25; Graphic 25 No. 9

10 (2) Summary of the Demand for Health Insurance pgs Capitation (prospective) payments also maintain relative prices and cost minimization Method of provider reimbursement has historically been shown to be important e.g. cost reimbursement leads to inefficiencies Lectures 25; Graphic 25 No. 10

11 When is the Quantity & Quality of Medical Care Consumed Optimal? When the price of care equals the cost of that care produced in a competitive system and which Equals The marginal benefit of that care Lectures 25; Graphic 25 No. 11

12 Fig. 6-8 (Feldstein) The effect of health insurance on the expected distribution of medical expenses among families Feldstein certainly Argues for insurance coverage at the high end Percent of families Deductible Co-payment Major medical or catastrophic insurance 0 Size of expenditure Lectures 25; Graphic 25 No. 12

13 The Supply of Medical Services Lectures 25; Graphic 25 No. 13

14 Fig. 7-1 The effect of different supply elasticities on the price, quality, and cost of national health insurance. S 1 Rapid price changes Smaller Q 1 P 1 Price P 2 S 2 D 2 D 1 Smaller price changes Larger Q 2 Q 1 Q 2 Quantity of medical services Lectures 25; Graphic 25 No. 14 Q/T

15 Figure 7-3 The industry and the firm under long-run competitive equilibrium. Price In short run, S 1 is sum of MC Curves S 1 Price MC AC P 0 P 0 D 1 In Long Run S 1 is horizontal in constant cost industry Q 0 Industry Q 0 Firm Lectures 25; Graphic 25 No. 15

16 The rate of output in a competitive industry is optimal since price reflects marginal benefit & is equal to marginal cost (with no externalities) pg 167 Lectures 25; Graphic 25 No. 16

17 Notes Can skim production and cost functions pgs Recommend problems 2 & 10 on p. 174 Lectures 25; Graphic 25 No. 17

18 The Efficiency and Equity Aspects of Community Rating Compared to experience rating; All pay the same; e.g. no adj for age Long history of Blue Cross Power Effect is subsidy to some (e.g. elderly) funded by a regressive tax (e.g. on young) Is inefficient to redistribute ms & has contrary redistributive effects (poor support the rich) Lectures 25; Graphic 25 No. 18

19 Other Conclusions Monopolies are bad; e.g. Blue Cross p 199 Another version of the benefits of competition National Health Insurance: do not build big power centers; rather many competitors; good histories (innovations and pricing) Lectures 25; Graphic 25 No. 19

20 (1) Benefits of Competition in the Market for Health Insurance p. 200 Forces insurers to minimize admin cost Forces more choice in policies & cost minimization behavior Work against community rating These findings are true for profit and nonprofit institutions. examples Lectures 25; Graphic 25 No. 20

21 (2) Benefits of Competition in the Market for Health Insurance p. 200 Some regulations and laws are pushing in wrong directions with adverse outcomes: Shorter waiting periods for preexisting condition Community rating (regressive tax) State mandates; higher cost of ins. decreasing the demand for health insurance Lectures 25; Graphic 25 No. 21

22 In conclusion (p. 235) Neither a market approach nor regulation alone will solve all the problems Redistribution of medical services requires government intervention Government intervention need not be direct Government intervention can be through the market mechanism such as vouchers Lectures 25; Graphic 25 No. 22

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