Transcript Economics of Health Care

Part Two
Economics of Health Care
Is Health Care similar to other commodities?
Craig A. Pedersen, R.Ph., Ph.D.
Competitive Market Model
Assumptions
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Homogenous Products
Full and Free Information
Freedom of entry and exit
Many buyers and sellers
No collusion
Market Forces: Supply
• # Suppliers
– Entry restrictions
• Individual Supply Factors
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Quality
Technology
Input Prices
Supplier Behavior
Market Forces: Demand
• # Demanders
• Individual Demand Factors
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Income
Prices
Behavior
Quality
Tastes and Preferences
• Health Status
• Health Perception
Medical Market Models
• Demand Generation Model
– “A built bed is a filled bed”
• Complex Market Model
Consumer
Insurance Co.
Producers
(Hosp, MD, etc)
Types of Cost Sharing
• Deductible - Fixed $ paid by insured prior
to benefits being received
• Copayment - Fixed $ amount per service
• Coinsurance - Fixed % per service
• Maximum limits (Caps or Stop Loss)
– On benefits
– On out-of-pocket
Insurance
• Premium Calculations
– Actuarial analysis
• Buying insurance is rational
– Expected value from loss is greater than
premium
• Induced demand
– Think supply and demand curve, as price
decreases (copay) quantity demanded increases
• Target income hypothesis
– “Just tell me the rules”
RAND Health Insurance
Experiment
• Largest and most comprehensive study of
price responsiveness of consumers
• 1974-1977
• Coinsurance of 0, 25, 50, 95 percent
• Stoploss of 5, 10, 15 percent of income up
to $1,000
• Results:
Imperfections in the
Medical Market
• Consumers do not have perfect information
• Patients and providers do not have incentives to
minimize their costs of buying and selling medical
care
• Substantial barrier to entry into the market
• Market for medical care is not well defined
– it is a mix of institutional markets, manpower
and factor markets, and educational markets
which are not well defined
Demand vs. Need vs. Want
• Demand function: A multivariate
relationship between quantity demanded
and the determinants of
demand.......Q=f(P,P0,Y,Popn,T&P)
• Need: Normative judgment of medical
services that should be consumed
Demand vs. Need vs. Want
• Need estimate assumes Knowledge of:
– How to measure health
– How healthy population is
– What the impact of medical science will be on
health
• Wants: Quantity of medical services that a
group feels they should consume
– Influenced by customs, religion, education,
social status, perceived wealth
Relationship Between
Demand & Need
• Do not assume that if you give health care away
that consumers will take it
• Given population has perfect knowledge of
health, the quantity demanded is not likely to
equal the quantity “needed”. Why?
– Financial barriers to access
– Non-financial barriers to access
– “Wants” are less than “needs”
• If consumers have imperfect knowledge may
have to pay them to get medical treatment, i.e.
Prenatal care
This Concludes Part Two.
Economics of Health Care
Is Health Care similar to other
commodities?
Craig A. Pedersen, R.Ph., Ph.D.