1. CH 1

2. Factors accounting for the growth of importance in the health sector  Global health and longevity gains  Expansion of health sector throughout the world

9. Global Distribution of Longevity Gains

10. Global Distribution of LE

11. LE (China v.s. US)

16. Health Care Expenditures in the United States, 1960-2007 1960197019801990200020052007 Nominal health expenditures$27.574.9253.9714.01,353.31,987.72,241.2 (billions of dollars) Annual rate of growth-- 10.5%13.010.95.98.96.2 (average annual % change from previous period shown) Nominal per capita health$1483561,1022,8134,7906,6977,421 expenditures Health expenditures as5.2%7.29.112.313.816.016.2 percentage of GDP Source: CMS Homepage: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf

17. The Health Care Industry is Rapidly Evolving l Advances in medical technology and drugs are dramatically improving patient care  But, these improvements are costly l Aging U.S. population % 65 years+ 1950 8.1 1970 9.8 2008 12.8

18. Which category has the largest share of health care expenditures? l Hospital Care l Physician Care l Prescription Drugs

19. Uses of Health Care Funds in the United States 2006 (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

20. PHARMACEUTICAL INDUSTRY l U.S. prescription drug expenditures reached $228b in 2007 l Industry highly dependent on research and development (R&D)  $897m to bring a new drug to market l Aggressive marketing to physicians, hospitals, pharmacists, and even the patient

21. PHARMACEUTICAL INDUSTRY l Pfizer  $48.3b in sales in 2008  40.8% of sales come from 4 drugs: Lipitor, Lyrica, Celebrex, Norvasc.

22. Important Institutional Features of Health Care  Asymmetric Information  Health insurance  Externality  Government intervention

23. Economic Model X (quantity) P (price) E A A’ B’ B

24. Market Equilibrium  Supply curve(suppliers)  Demand curve (consumers)  Equilibrium price and quantity

25. Suppliers and Consumers  Suppliers Hospitals (clinics) Doctors Nurses  Consumers Patients

26. Equilibrium quantity and prices  Quantity Visits Admissions (hospital days)  Price Payment per visit Payment per hospital day

27. Assumptions for efficient market  Numerous consumers  Numerous suppliers  Consumers search for the quality of care  Consumers search for the low price  Suppliers compete with each other  In the end, efficient market ensures that consumers can purchase quality care at the low cost

28. Information  Do consumers (patients) know the quality of care?  Do consumers (patients) search for the low cost?  Do suppliers (doctors) compete with each other?

29. Asymmetric information  Asymmetric information refers to the case that one party to a transaction has information pertinent to the transaction that the other party does not possess  Examples The doctor knows more than the patient The insurance purchaser knows more than the insurer  Competition is a big issue in light of asymmetric information

30. Health insurance  Because the health expenditure is random, risk adverse people would seek to reduce expenditure risk by obtaining health insurance (e.g. dialysis patients)  Nonetheless, consumption decisions would be distorted due to health insurance. Consumers would like to use more than they want when facing the lower prices (moral hazard)  Also, asymmetric information would patients to conceal personal information---high risk consumers purchase good insurances, and good insurances need to charge a even higher price to cover its costs. In the end, no insurers are willing to offer insurance contract (adverse selection)

33. Externality  Consumption externality (e.g. vaccinations)  Financial externality  Moral externality (access of care)

34. Government intervention  Health sector is highly regulated industry  Entry barriers Doctors Hospitals Drugs  Price Regulated prices Insurer sets up the payment price to doctors

35. Government intervention  Providing health insurance US: Medicare (the elderly), Medicaid (the poor) Taiwan: National Health Insurance  Provision of health care Public clinics or hospitals  Financing the health care Taxation Subsidy

37. Share of health related research