1. Introduction to Economics: Social Issues and Economic Thinking Wendy A. Stock PowerPoint Prepared by Z. Pan CHAPTER 21 THE ECONOMICS OF HEALTH CARE Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: © Ferli Achirulli/iStockphoto

2.  Describe the trends in costs and quality of U.S. health care  Compare the cost and quality of U.S. healthcare relative to other developed nations  Describe the factors that have contributed to the rising cost of health care  Analyze the role that externalities play in the health care market  Assess the potential impacts of healthcare reform proposals Copyright © 2013 John Wiley & Sons, Inc. 2 AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

3. U.S. health care spending has risen steadily Copyright © 2013 John Wiley & Sons, Inc. 3 U.S. HEALTHCARE SPENDING

4. Copyright © 2013 John Wiley & Sons, Inc. 4 SHARE OF HEALTHCARE SPENDING IN NATIONAL INCOME

5.  The improvements in health have been smaller in the U.S. than in other nations  In the 1960s, America was similar to other developed countries in terms of infant mortality and life expectancy.  Today, America has higher infant mortality rates and lower life expectancy than in other developed nations, despite spending dramatically more on health care Copyright © 2013 John Wiley & Sons, Inc. 5 THE COST AND QUALITY OF HEALTH CARE

6. Copyright © 2013 John Wiley & Sons, Inc. 6 THE COST AND QUALITY OF HEALTH CARE

7. Copyright © 2013 John Wiley & Sons, Inc. 7 THE COST AND QUALITY OF HEALTH CARE

8.  Improvement in technology in general  Faster and higher rate of use of high-tech medical care in U.S.  Unhealthy lifestyle choices (behavior) in U.S. Copyright © 2013 John Wiley & Sons, Inc. 8 CAUSES FOR HEALTH CARE EXPENDITURES

9. Copyright © 2013 John Wiley & Sons, Inc. 9 UNHEALTHY LIFESTYLE CHOICES

10.  Improvement in technology in general  Faster and higher rate of use of high-tech medical care in U.S.  Unhealthy lifestyle choices (behavior)  Health insurance problems  Third-party Payment  Moral Hazard Copyright © 2013 John Wiley & Sons, Inc. 10 CAUSES FOR HEALTH CARE EXPENDITURES

11.  A Third-party Payment occurs when the provider or seller of a good or service is paid by someone other than the buyer of the good.  Moral hazard occurs when people change their behavior to undertake more risk because they have insurance against that risk. Copyright © 2013 John Wiley & Sons, Inc. 11 CAUSES FOR HEALTH CARE EXPENDITURES

12.  Improvement in technology in general  Faster and higher rate of use of high-tech medical care in U.S.  Unhealthy lifestyle choices (behavior)  Health insurance problems  Fee-for-Service  Physician-induced Demand occurs when doctors prescribe more treatment than is necessary in order to increase their own incomes. Copyright © 2013 John Wiley & Sons, Inc. 12 CAUSES FOR HEALTH CARE EXPENDITURES

13. Copyright © 2013 John Wiley & Sons, Inc. 13 MARGINAL BENEFITS AND MARGINAL COSTS OF HEALTHCARE

14.  Externalities occur when some of the costs or benefits of a trade are imposed on people outside the trade.  Positive Externalities are benefits received by third parties.  Negative Externalities are costs imposed on third parties. Copyright © 2013 John Wiley & Sons, Inc. 14 EXTERNALITIES

15. Copyright © 2013 John Wiley & Sons, Inc. 15 HEALTH MARKET WITH POSITIVE EXTERNALITIES

16.  Private Marginal Benefits (MB private ) are marginal benefits that accrue only to individual decision makers.  Social Marginal Benefits (MB social ) are marginal benefits that accrue to society as a whole. MB social = MB private + External Benefits Copyright © 2013 John Wiley & Sons, Inc. 16 PRIVATE BENEFITS VS. SOCIAL BENEFITS

17.  President Theodore Roosevelt supported universal U.S. government health care coverage In early 1900s  Medicare and Medicaid in 1965  COBRA in 1985  SCHIP in 1997, (the State Children’s Health Insurance Program)  2010 Patient Protection and Affordable Care Act (PPACA) Copyright © 2013 John Wiley & Sons, Inc. 17 HISTORY OF HEALTHCARE REFORM

18.  16% of population without health insurance  U.S. law requires hospitals and ambulance services to treat people regardless of their ability to pay  Cost burdens on hospitals and other patients. 55% of U.S. emergency care is provided without compensation, amounting to over $30 billion per year.  Health care providers have an incentive to charge higher fees to those who can pay in order to cover their costs Copyright © 2013 John Wiley & Sons, Inc. 18 EXPANDING INSURANCE COVERAGE

19. Under PPACA:  Insurance companies are prohibited from ending coverage when people get sick  Children are now able to stay on their parents’ health insurance plans until age 26 rather than 19  Businesses have access to tax credits to help them provide health insurance for their employees  Health insurance companies will not be allowed to exclude people from coverage due to preexisting conditions Copyright © 2013 John Wiley & Sons, Inc. 19 EXPANDING INSURANCE COVERAGE

20.  Expanding Medicaid to include a larger share of the poor in 2014  The payment rules for Medicare will be altered in 2015 to pay doctors based on quality of care rather than on the quantity of services provided  Establish state health insurance exchanges  By 2014, people are required to obtain health insurance coverage or pay a tax penalty Copyright © 2013 John Wiley & Sons, Inc. 20 GOVERNMENT INSURANCE

21. QUESTIONS/DISCUSSIONS Copyright © 2013 John Wiley & Sons, Inc. 21 1.How does having insurance through third parties affect people’s incentives to visit the doctor? 2.Would people obtain the optimal amount of health care if the health care market were purely private and had no government intervention? Explain.

22. Copyright © 2013 John Wiley & Sons, Inc. 22 KEY CONCEPTS Third-party payment Moral hazard Physician-induced demand Positive externalities Negative externalities Private marginal benefits Social marginal benefits