Tools for Health Policy
Transcript Tools for Health Policy
This material draws heavily from Santerre & Neun: Health Economics, Theories Insights and
Industry Studies, Southwestern Cengate 2010
Causes and consequences of
government intervention in health care.
Types of government intervention.
– Cigarette taxes.
– Price ceilings on health care services.
– Hospital antitrust litigation.
Criteria for perfect
All firms and consumers are price
Consumers and firms have perfect
All firms produce an identical product.
Firms can freely enter an exit an
Market imperfections may lead to inefficient
or inequitable distribution of resources.
Imperfect consumer information
intervenes to restore
efficiency and/or equity.
• “Public interest theory.”
An opposing theory: The amount and types
of government intervention are determined
by supply and demand.
Vote-maximizing politicians “supply”
Wealth maximizing special interest
groups are the buyers.
Successful politicians stay in office by
satisfying special interest groups.
“Special interest group theory”
Extended patent protection for brand
Rejection of national health insurance in
favor of private insurance companies.
Special interest group theory claims that special
interest groups gain at the expense of the general
Consumers are diverse, fragmented,
more costly for them to organize.
Inefficient, inequitable resource
allocation by government.
Which theory do you believe?
C-B analysis is needed to identify
winners and losers.
Types of Government Intervention
Provide public goods.
Fund medical research.
Correct for externalities
Tax cigarettes, pollution.
Enforce antitrust laws.
Bar hospital mergers.
Medicare and Medicaid.
>1 individual simultaneously receives
benefits from the good.
no rivalry in consumption.
Costly to exclude nonpayers from
consumption of the good.
Private firms unwilling to produce and sell
Are most medical services public goods?
Definition: An unpriced byproduct of
production or consumption that adversely
affects another party not directly involved
in the market transaction.
treatment for cyclists who don’t
Marginal Social Benefit Marginal
Marginal Social Cost Marginal Private
Cigarette smoking is an example of a
(negative) demand-side externality.
Smokers impose work-related costs on
Health insurance, pensions, sick leave,
disability, group life insurance financed
collectively by smokers and
smokers, die earlier, pay less taxes,
Smokers also impose health care
costs on nonsmokers.
Smokers usually incur higher health
nonsmokers die prematurely from
passive smoking, smoking-related fires.
The total external costs of cigarette
smoking are estimated to be 15¢ per
(Manning et al., 1991)
Keep in mind:
The problem which calls for government
intervention is external costs, not
The full extent of external costs must be
measured using a lifetime approach.
Manning et al.’s methods
Lifetime external costs
# packs smoked
Numerator takes into account life
expectancy for smokers and the costs
(savings due to early death) incurred
External Cost Components
Covered medical costs.
Covered work loss and disability.
Group life insurance.
Widow’s social security bonus.
Covered nursing home costs.
Taxes on earnings.
At Q0 MSC0 > MSB0
Cigarettes are being over-consumed.
Government can use taxes and subsidies to
alter economic incentives, correct for
Charge a tax on cigarettes that reduces
consumption to the socially optimal level
a per-unit tax T on cigarette
makers equal to vertical distance
between MPB and MSB at Q1.
Market price of cigarettes = P1
Cigarette manufacturers receive P2 per
pays P1 - P0
Seller pays P0 - P2
The relative tax burden on consumers vs.
producers depends on price elasticities for
supply and demand.
If demand for cigarettes is inelastic,
consumers bear a larger?/smaller?
Share of the tax burden.
The current tax per pack exceeds
external costs. Is this “OK”?
Should smokers or cigarette companies
be responsible for the external costs of
“Thank you for smoking.” Is this
Government can attempt to control
price, quantity, or quality of health care
Example: Price Ceilings in The
Canadian Health Care System.
– Consumers are fully insured by the
– The government fixes the price the
physician receives for each visit.
Because consumers are fully insured,
they will demand the number of visits as
if the price per visit = 0.
Assume that the government sets a
reimbursement rate for physician visits
equal to PC.
With full insurance, consumers want QD
But the government has fixed the price
of visits at PC.
– Only QS visits will be provided.
of physician visits = QD - QS.
1)Physicians may treat patients on 1stcome, 1st-served basis, regardless of
2)Patients will have to queue for care/not
3)Unethical doctors may take bribes from
patients trying to jump the queue.
Lesson: There is no free lunch under cost
containment. Price ceilings can lead to:
2) Longer waiting lines.
3) Nonprice rationing.
4) Poorer health outcomes.
Antitrust: Sherman Antitrust Act
Every contract, combination in the form
of trust or otherwise, or conspiracy, in
restraint of trade or commerce among
the several states or with foreign
nations, is hereby declared illegal.
Every person who shall monopolize, or
conspire with any other person or
persons to monopolize any part of the
trade or commerce among the several
states, or with foreign nations, shall be
guilty of a misdemeanor.
The Act prohibits anticompetitive business
practices that promote inefficiency and
inequity in the marketplace, such as:
Price fixing - when business rivals enter
a collusive agreement to refrain from
price competition; fix the price of a good
in a given city cannot jointly
establish the price of various hospital
Boycott - agreement among competitors
not to deal with a supplier or a
in an area can’t collectively
agree to deny services to a particular
managed care organization.
Market allocation - when competitors
agree to compete with one another in
specific market area.
in the same city can’t collectively
set geographic service boundaries.
Price fixing, boycotting, and market
allocations are illegal per se.
plaintiff must only prove these actions
took place for the defendant to be in
violation of the Act.
In contrast, rule of reason doctrine is
used to evaluate horizontal mergers
under the Act.
horizontal mergers may force price
above the competitive level, they may also
create benefits which could be passed on
to the customer.
The government often taxes one group
and uses the revenues to subsidize
Interdependent utility functions.
get utility from increasing the
welfare of recipients.
Why is the government involved?
Two notions of equity in redistribution
should be treated unequally.”
People who earn more should pay higher
should be treated equally.”
Two persons with the same income level
should pay the same in net taxes.
Vertical equity in practice
How much more in taxes should higher
income people pay?
Suppose high income households pay
$4,000 in taxes on average, and low
income households pay $2,000. Is this
If the high income household makes
$100,000, they pay a 4% tax.
If the low income household makes
$10,000, they pay a 20% tax.
notion of equity in taxation depends
not just on total tax revenues, but on
income levels and tax rates as well.
In practice, vertical equity is achieved
when the net tax system is sufficiently
as a fraction of income rise with
Federal income tax system.
Other forms of redistribution
fraction of income going to taxes is
constant as income rises.
The Medicare tax is a fixed % of payroll
fraction of income going to taxes falls
as income rises.
funding aimed at reducing the
costs of producing a consumer good or
Subsidy to a public hospital.
Tuition for nurses or doctors.
Potentially violates notion of vertical
all persons have equal access to the
Demand-side subsidies - government
funding for consumers.
In-kind: vouchers or reimbursements for
stamps, Medicare, Medicaid
Cash: government-provided income that
people can use at their own discretion.
Supplemental Security Income
Keep in mind: It is difficult to guarantee
horizontal equity with multiple programs
Consumer Groups Accuse U.S. of
Negligence on Food Safety
– The New York Times, October 15, 2002
Back to the Start
Does government intervention correct
for market imperfections, or is it ruled by
special interest groups?
A Final Caveat
Market failure is a necessary, but not
sufficient condition for government
It may cost the government $10m to
correct a problem in the marketplace,
which imposes $8m in damages.
While markets may fail and impose
societal costs, the costs of government
intervention may be greater.