Transcript Forest, rather than trees - Health Services Policy and Management

Forest and Trees
HSPM J712
Free market
• Supply and demand work to allocate
resources and distribute goods and services
• Through prices
Independence of supply and demand
• Supply is the sum of the decisions of sellers
• Demand is the sum of the decisions of buyers
Supply curve
• Shows the relationship between the quantity
that sellers want to sell and the price
• Depends on costs (Costs  Supply)
– Opportunity costs of resources
• And competition (Competition  Supply)
– Number of sellers
– Freedom of entry
Demand curve
• Shows the relationship between the quantity that
buyers want to buy and the price
• Depends on
– Budgets (Budgets Demand)
• Opportunity cost of the good to the buyer
– Preferences, wants, needs (Wants Demand)
– Alternatives and their prices (Alternatives
Demand)
• Cross-price elasticities
– Competition (Competition  Demand)
• Number of buyers
Equilibrium
• Bubbles
– When expected future prices affect today’s supply
and demand
– Momentum of demand and price
• Fueled by debt
• Next slide
http://www.calculatedriskblog.com/2009/08/houseprices-real-prices-price-to-rent.html
Supply elasticity and housing (and
commercial real estate)
• Columbia: Elastic supply
– Higher demand led to more houses
• South Florida: Inelastic supply
– Higher demand led to higher prices
What makes health care special
in economic theory
HSPM J712
Is health care special?
• Does the free market give good results?
– What are good results?
Free trade makes things better,
if certain conditions hold
• As individuals pursue their self-interest in the
market, they work for the benefit of others,
“as if guided by an invisible hand.”
– Adam Smith (1776)
• Prices guide people to use their resources in
ways that most benefit others.
Reinhardt’s diagram to illustrate Pareto Optimality and the
Kaldor-Hicks criterion (which is behind cost-benefit analysis)
• If a
dictator
puts you
at X, free
trade
will
move
you to
between
Y and Z.
What is “optimal?”
What is “efficient?”
• Pareto criterion (strong): No one can be made
better off without making someone else
worse off.
• Kaldor-Hicks criterion (weaker): If the gains to
the winners total more than the losses to the
losers.
Free Trade and
Optimality or Efficiency
• Free trade will get you to an optimum
• If and only if …
– Buyers and sellers have full information about
quality and price
– No outside subsidies or penalties
– No external costs or benefits
– Everything that affects well-being can be bought.
• (The exclusion of externalities is a subset of this.)
– No collusion or entry barriers
How this works with Pareto optimality
• If there were a way for you to be better off
without making me worse off,
• Then we’d both know about it (perfect info)
• And we could engineer a trade in which you’d
gain the extra and give me some (free trade)
• And no one else would be hurt (no external
costs)
• And we wouldn’t be hurt indirectly (because
everything is for sale)
1st and 2nd optimality theorem
• 1st is that those conditions lead to an optimum
• 2nd is that, if those conditions hold, society can
get to any particular optimum by
manipulating the distribution of wealth
– So, OC’s (objects of compassion) should be given
money, not programs
For health care and the free market,
let’s start with …
1) Consumers must
– Know prices of all alternatives
– Know qualities of all alternatives
• Qualities = benefits to them
Arrow: Information uncertainty in
health care
• Consumers are uncertain about qualities and
prices.
• Much of what consumers buy from health
professionals is information.
• Buying and selling information – a problem for
free market theory
• How do you know how much you’re going to
benefit from information without knowing the
information?
How do these deals sound?
• “I have some information that it will benefit
you to know. Pay me $35 and I’ll tell you the
information.”
• “I have some information that it will benefit
you to know. Agree in advance to pay me
whatever I’ll ask and I’ll tell you the
information.”
Professionalism
Trust
• Arrow: Society develops solutions when
market is not optimal. Not necessarily
government solutions.
• Professionalism = Behave unlike unfettered
business.
• Professionalism encourages trust
– That the information will be worth what you are
paying for it.
This is an efficiency problem,
not an equity problem
• It’s not about fairness, or what to do about
the medically indigent.
• It’s about a free market not being able to
provide the right amount of medical care to
people who can pay.
– Without some substitute for consumer
sovereignty, which fails in health care
Professionalism in medicine
• Knowledge and training
• Agency
– The patient is the “principal.”
– The physician or other professional or the hospital
or other institution is the principal’s “agent.”
• Agents are supposed to apply their abilities on
behalf of their principals, not themselves.
Professionalism in medicine
• Serves a social purpose
• Moves away from the unfettered, anything
goes, market …
• … to make the outcome closer to optimal
• … to make the outcome more efficient
But violates other free market
optimality requirements
• Collusion
• Entry barriers
For health care and the free market,
let’s continue with …
2) No outside subsidies or penalties
– Subsidies unhook the relative prices that
individuals face from the relative costs of their
choices
Moral hazard
• Is a consequence of insurance
• But insurance is a rational market response to
the uncertainty of health care expense.
Insurance and expense uncertainty
• Consumers are uncertain about how much
they will be spending on health care.
• They may have a catastrophe and want to
spend more than they can raise.
• So they buy insurance.
Insurance and risk
• Insurance is a financial transaction
• You (the insured) pay the insurer to assume
risk for you.
• You pay more than the expected value of the
insurance payout. The difference is your risk
premium.
• The risk premium covers the cost of
administering the insurance.
Risk pool
• A way to think about it instead of expected
value
• You and a bunch of others agree that if any of
you suffer a loss, you will all chip in to pay for
it.
• Mutual insurance
Insurance leads to moral hazard
• Theory says that you will use any service to
the point where the marginal value to you
equals the price to you.
• If there are diminishing returns to using more
service, and the price to you is a fraction of
the cost, you will use services that have a
higher opportunity cost to society than their
benefit to you ...
• … and you won’t bother to shop for a lower
price.
Moral hazard
• When having insurance makes it more likely
that a claim-triggering event will happen.
– Example: The expectation of a rescue by the
government may induce a bank to take bigger
risks.
Health insurance
and the demand curve
• Insurance increases the demand
• And makes it less elastic
• 100% coverage pivots the demand curve
around the point where it meets the Quantity
axis, and makes the demand curve a vertical
line.
Moral hazard makes market inefficient
= not optimal
• Insurance with free choice induces people …
• … to get society to provide them with services
– Society = pubic or private insurance
• … such that there are other things that the
person is not getting that would be more
valuable to the person than the medical
service
– Violates the Pareto criterion
To reduce moral hazard within the free
market, conservatives advocate:
• Catastrophic insurance
– Insurance that only pays for big, bad, surprises.
Catastrophic-only insurance
For
• Less inducement to moral
hazard
– Because less is covered
• Less administrative cost
– Because fewer bills paid
• Selection
– Risky people want to avoid it,
– So low-risk people will pay a
premium closer to their
expected value.
Against
• Tilts incentive away from
primary care
– Discourages prevention
• Bargaining power and
market knowledge
– Insurer as monopsonist
• Individual payment has
administrative cost, too.
• Risk-adjusted premium can
stop selection.
The case for catastrophic-only
insurance part 1
• Less inducement to moral hazard
– Because less is covered
The case for catastrophic-only
insurance part 2
• Administrative cost
– Through your premium, you pay the insurance
company to do the paperwork for your bills.
– If the insurance company handles fewer bills, the
administrative cost is less.
– The insurance company can supply a catastrophic
policy at a higher medical loss ratio. That’s more
value relative to cost for you.
The case for catastrophic-only
insurance part 3
• Selection makes catastrophic insurance a
better deal
– Comprehensive insurance attracts people who
expect to have more health care. It’s premium
will rise accordingly.
• (Assumes competitive market for insurance.)
– Catastrophic-only insurance will have a less risky
pool, so the cost per member will be less, and the
premium will closer to an average person’s
expected payout plus administrative cost.
Irony of pre-existing condition
exclusions
• Selection by the company overcomes buyer
selection and enables lower-risk people to buy
comprehensive insurance at an appropriate
price.
The case against catastrophic-only
insurance, part 1
• Bargaining power and market knowledge
– The administrative cost argument assumes the
insurance company will pay the same prices for
services that you will. As a mass buyer, however, the
insurer (private or public) may get a better prices than
you can. This should mean a lower premium for you,
and lower total expected health care costs for you.
– The doctor, as your agent, as supposed to charge you
a fair price. The insurance company handles lots of
bills and knows what’s customary. “Trust, but verify.”
The case against catastrophic-only
insurance, part 2
• Billing individuals has administrative cost,
more per bill than billing a big insurer.
• Big savings if you don’t bill patients.
– In Canada, hospitals operate on lump-sum annual
payments from government. There are no patient
copayments. Hospitals there have tiny billing
departments, only to charge foreigners. The
paperwork cost reduction is substantial.
The case against catastrophic-only
insurance, part 3
• Tilts incentive away from primary care
– If you have to pay for your car’s oil changes, but
will get a new engine for free if needed, will you
stop changing your oil?
– Do people think like that regarding medical care?
Getting a new tooth or new lungs is a lot of
trouble, even if you don’t have to pay.
– On the other hand, it’s tempting to be shortsighted
• When the big dollars flow, moral hazard is
back.
The case against catastrophic-only
insurance, part 4?
• The selection problem can be solved two
ways:
1.Make insurance mandatory and community
rated
– Which is a further departure from the free market
2.Fine tune risk adjustment of premiums to
each person’s riskiness
– Provide information to make the free-market work
better (but that has costs – like people avoiding
getting diagnosed)
… which leads to another free market
optimality condition violated
3) … that you can buy anything you need
In a free market for insurance …
• … there will be a range of coverage options
– high or low copayments
– stricter or looser exclusions
• People with risks will pay more for their
insurance
– By flocking to more comprehensive plans, which
raises the average cost of those plans
– By paying risk adjusted premiums
Non-marketability of risk insurance
• You can’t buy insurance against having a risk
– in a free competitive market
• Having a risk identified is a financial
catastrophe
• You might be willing to pay to cover that risk,
but you can’t.
Risk insurance example
• You can buy: Insurance that pays for
treatment if you get cancer.
• You can’t buy: Insurance that will pay you if
you need more money to pay for your health
insurance because you have a family history of
cancer.
Solving the lack of risk insurance?
• Put everyone on Medicare
• Mandate that everyone buy insurance
– While prohibiting risk adjustment of premiums or
coverage (no “pre-existing conditions” conditions)
• Either takes us further from the free market
Mike Huckabee
at the Value Voters Summit
– Sept. 17, 2010
• “… from a common sense perspective …”
• = “unencumbered by the thought process”
• http://sambaker.com/Econ/Clips/Huckabee.m
p3
• Fries 1993 and Richter 2009 – distractions in
the health reform debates
External benefits of health care
• Another free market condition violated
4)No external costs of benefits
• Already talked about external benefits of
immunizations – the herd effect
– In a free market, too few people might get
immunized
External benefit of health care
– Normative and positive economics intertwined
• People (except Rush Limbaugh) have “concern for
the health of others.”
• If you can’t buy the health care that I think
you need, I get sad. If you get the health care
that I think you need, I’m happier.
• A free market would provide less health care
than what would make everybody happy
External benefit of health care
– Normative and positive economics intertwined
• A free rider problem:
– I’m happier if others get health care, but I’m also
happier if someone else pays than if I pay.
– The external benefit to me justifies taxing me to
help pay for others’ health care
– But what about Rush Limbaugh, who doesn’t care.
He gains no external benefit, so should he be
taxed anyway?
Can there be market justice in health
care?
– Information
– Moral hazard
– Impossibility of risk insurance
– External benefits
• These are all efficiency issues
• Not just fairness issues
Conclusion:
• There will be a healthy dose of societal
intervention in health care. No society can
tolerate leaving health care to the free
market.
• Providers developed our health care system.
• It has evolved since, through market forces,
into a mess that is not efficient or equitable.
• http://theincidentaleconomist.com/wordpress
/wp-content/uploads/2010/09/Aboveexpected.jpg
Health Savings Accounts
• Catastrophic-only insurance
• With tax-break-subsidized out-of-pocket
spending
• “Consumer-driven”?
– Like Fred Farmer, Marina Perez, Jake, or Jenny
drive their health care