ECON MIDTERM

How can employess use the health production function to decrease their employees medical expenditures?

- Employers can use the health production function in many ways to decrease their employee's medical expenditure. First, they can take some of the money and put it towards programs that teach their employees about the importance of a healthy lifestyle. They could also start fitness and weight loss competitions amongst their employees. Things to help them get motivated to live a healthier life. A little friendly competition among the workplace would leave everyone a little bit healthier. This in return could lead to less people suffering from heart disease or even depression.

How do fee-for-service and capitation payment systems affect the physician's role as the patient's agent?

-Capitation affects the physician's role as the patient's agent because they want to keep the patient healthy and out of the hospital, they have more risk because if they do more they do not get paid more. This leads to them not wanting to treat patients that are ill because they take more time. They prefer patients that are healthy because it takes less time and will allow them to treat more people and make more money. This could also lead to physicians under treating sick patients to avoid spending the extra money. -Fee for service affects the physician's role as the patient's agent because it allows them to decide how they are going to treat a patient. This could lead to over treating if the doctor felt that they needed to pull more money into their practice.

Why do drug manufacturers charge different purchasers different prices for the same prescription drug?

-Drug manufactures charge different purchasers different prices for the same drug based off their flexibility. If a purchaser is price sensitive the manufacturer will charge them higher prices than the ones who are. Meaning that if the price of a drug goes up for the manufacture the companies that are willing to switch to a similar, cheaper drug the companies will charge them less.

Contrast the benefit-cost calculations of legislators under the public interest theory of government and the economic theory of regulation.

-The benefit cost calculations of legislators under the public interest theory is that they benefit the society as whole instead of companies or people that will benefit them. Under the economic theory of regulation, the legislators benefit the companies or firm who are going to be funding them and the company also benefits from the rules the legislator could potentially impose on their competition.

What are the unintended consequences of requiring insurers to have minimum MLRs?

-Unintended consequences of requiring insurers to have minimum MLR's are higher premiums. It also makes it to where smaller companies cannot keep up with the market and end up exiting, which in the end leads to less competition.

Contrast the likely effects of fee-for-service versus episode-based payment.

-With an episode based payment model, physicians were incentivized to schedule more visits and had no motivation to care for the overall health of the patient and coordination of care. This model also cannot assist with identifying a developing shortage in a geographic area or help eliminate them. On the other hand with a fee-for-service payment model, physicians tend to over prescribe medical services as they are reimbursed per service provided to the customer. Both methods do not provide the best care to the patient in terms of quantity or quality

How does a competitive market determine the types of goods and services to produce, the costs to produce those goods and services and who receives them?

A competitive market determines the types of goods and services to provide based on consumer sovereignty. By using consumer sovereignty - giving consumers what they prefer to make the cost worth it to them - they are able to produce what the consumers want and make the cost worth it for everyone. The consumers are the one who receives the goods and services.

What is adverse selection, and how do insurance companies protect themselves from it? If the government prohibited themselves against adverse selection, how would it affect insurance premiums?

Adverse selection is when either the buyer or the seller has more information about an aspect that the other party does not have. Usually the party with less information is at a disadvantage because the other party has more information that can be used at their convenience. Adverse selection can lead to higher health insurance premiums for consumers and financial risks for the companies. People with high-risk lifestyles are the ones that most of the time are involved in this because they sign up for insurance coverage withholding relevant information or providing false information about their health problems. They manage to obtain coverage at lower premiums than the insurance would charge if they were aware of their health status. It is important for companies to take all the steps possible in order to avoid adverse selection situations since exposes insurance companies to lose a high amount of money from premiums. Insurance companies protect themselves from adverse selection by refusing or restricting coverage for bad risks, engaging in medical underwriting which would charge them a higher rate for insurance coverage or excluding pre existing medical conditions from coverage for defined periods. Another technique would be designing insurance packages in a way to be more attractive to healthy persons than to unhealthy ones. If the government prohibited themselves against adverse selection premiums costs would have to increase in a way that less people would be able to afford them, and this would lead to fewer people willing to buy insurance because of the prices. Increasing premiums for high-risk policyholders, the company has more money with which to pay those benefits, but healthy people would be less happy about the prices and they would be able to afford insurance.

Why do inefficiencies exist in the use and provision of medical services?

Economic efficiency can also be difficult to obtain in terms of the use of medical services as individuals that do not have to pay for the full cost of their health care tend to over utilize health care services (due to having government aid or health insurance). A good example of this is employer based-health plans. These plans are not taxable and the government ends up taking a hit on these costs. As a result, the consumers over utilize these benefits when compared to consumers that do not have health insurance coverage and these consumers contribute to the inefficient use of medical care.

Why does the United States spend an ever-growing portion of its resources on medical services, although they are less cost-effective than other methods in improving health status?

Health insurance coverage, which is subsidized through the tax system, has been so comprehensive, with low deductibles and small copayments, that individuals face a very low out of pocket price when they go to the hospital or a specialist . The primary objective of government medical expenditures has not been to improve health and decrease mortality rates.

Do you think the cost of defensive medicine would be reduced under a no-fault system?

I do not think that the cost of defensive medicine would be reduced under a no-fault system. I think this because it has been found that some providers do not over prescribe tests to avoid malpractice, but more because the patient wants the test or its covered or partially covered under their insurance. I do think that it would end up raising the amount of money that is paid out by malpractice insurance companies, which in return would raise the cost of defensive medicine.

How would you use information on price sensitivity of medical services for policy purposes-for example, to increase the use of mammograms?

I would utilize this information by lowering the copayments owed on mammograms or making mammograms free to patients over the age of 45. This would lead to the rise in patients utilizing mammograms.

What are the changes required for medical care to more closely approximate a competitive market?

In order to more closely approximate a competitive market, changes need to occur with employer paid health insurance. One of the changes are that the tax policy that excludes employer paid health insurance from taxable income needs to be changed. The argument is to have it treated as regular income and be taxed. This would ultimately affect the amount of insurance a consumer would purchase, the health plans that they choose, and how much medical services are utilized. Overall, this change would stimulate more competition.

What is moral hazard and how does its existence increase the cost of medical care?

Moral hazard is when people who are insured use more medical care services than people who do not have health insurance. Individuals who do not have to pay for medical services usually seek more expensive and even riskier services since those services are covered by their insurance. Moral hazard occurs when patients with insurance demands more health care resources than they actually need; an example could be spending an extra day at the hospital even if it is not required but since that person has health insurance and they know it will be covered they decide to stay there. It increases the cost of medical care because people tend to be less careful about their health status and this increases the demand of health care services. People who have health insurance are less likely to avoid health risks and this is not good for the system overall because if people would take care of themselves they would not need to go to the emergency rooms/doctors offices as often as they do and this would help decrease the spending in the health care system. As a result of not taking care of themselves they will go to the doctor and use medical services more often and that has the potential to increase the healthcare costs.

Is the high price of drugs determined by the high cost of developing a new drug?

Often drug manufacturers claim that their prices are determined by the high costs of developing the drugs. However, most of the time prices have already been set in order for the companies to not lose money. If the drugs were priced lower to its production costs, there would be less barriers for people with low income or those without drug coverage. The types of drugs have changed overtime, and this has affected how fast drug expenditures and prices have grown. When a new drug enters the market, its price is usually extremely high but once a substitute enters the market the price drops. Most of the time drugs are priced higher than its actual costs of production.

How well does the malpractice system compensate victims of negligence?

The malpractice system does not compensate people that well because there is a low percentage of negligence claims filed, too few of those injured by negligence are compensated under malpractice system. There is a poor relationship between medical negligence and malpractice claims because those who experienced medical negligence did not sue. Some of the reasons for the low percentage of negligence claims is because patients may not know that negligence caused injury, or some are difficult to prove. Recoverable damages are less than the litigation costs.

How well does the medical care market meet the criteria of a competitive market?

The medical market does not meet the criteria and part of it is because the government regulation and the private sector needs to improve their rules in medical care. A reason why the market does not meet the criteria of a competitive market is because the market does not perform efficiently, and this is because the prices are still out of their budget for some people; there will always be people who cannot afford care and if the government does not do anything to stop the rising prices of healthcare services less people are going to be able to afford these services. The costs and benefits for both the supplier and the purchaser must be equal to meet the criteria. Also, the lack of success in the medical care market is caused by demand side failures, such as tax-exempt employer-paid health insurance and lack of consumer information about healthcare.

Contrast the predictions of the public interest and economic theories regarding redistributive policies.

The public interest theory sees society as a whole choosing policies that can help achieve efficiency and equity in the healthcare system helping people who are least able to purchase medical insurance. The public interest theory has as a goal achieve economic efficiency and if a policy does not have redistribution as an objective, they try to change that in order to make it favorable for every individual in society. The public interest theory eliminates barriers in the system since their goal is to provide medical services to people with low income. The economic theory of regulation states that political and economics markets are the same. The redistributive policy says that legislators make clear what population group will benefit in order to receive political support from that group.

What were the reasons for developing a new Medicare physician payment system?

There was an urgent need to reform the payment system because the rising costs of Medicare were increasing a burden on current taxpayers as well making it harder for elderly people to get services. Limiting the increase in the federal budget deficit was something that they needed to take action on because more money was being spent than it was coming in and this was making the system weaker. If they did not do anything respect to this situation, they were going to keep losing money and at the end of the day Medicare could have disappeared. Another reason why a new payment system was needed was to ensure Medicare services were available for elderly. Medicare is only for those over 65 but there was starting to be a physician shortage because most physicians did not like how the system was working. The most affected were old people because quality health care for American seniors was being threatened by losing their doctors. Lastly, the previous system was inequitable and inefficient. The payment system that they used to have was fee-for-service which encouraged the delivery of more services. The result of this is an inefficient delivery system that promotes the use of medical services and encourages the use of expensive technology. This was not helping the healthcare system because the spending was rising extremely fast and the providers were not doing anything in order to stop this. Medicare needed to find ways to reduce their spending in order to help the federal budget and the quality of their services.

How might a decrease in physician income, possibly as a result of an increase in the number of physicians, affect the physician's role as the patient's agent?

When their own income is dramatically affected, physicians tend to act differently. A fall in income, will force the physician to reevaluate their work methods. If they are imperfect agents, they will prescribe their patients with additional services and influence the patients demand of service by rationalizing this is beneficial to them. In order to maintain their own level of income, a physician can induce the demand of services as seen in target income theory or also give out information. In a perfect agent no matter the rise or fall of income, they will act on the behalf of the patient to guide them to make the better decision when it comes to their health choices.