Part Two Economics of Health Care Is Health Care similar to other commodities? Craig A. Pedersen, R.Ph., Ph.D.

Competitive Market Model Assumptions 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 –Quality –Technology –Input Prices –Supplier Behavior

Market Forces: Demand # Demanders Individual Demand Factors –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 ConsumerInsurance 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 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,P 0,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.