Chapter 7 Microeconomics

Asymmetric Information in the Market for Health Insurance

Assymetric info problems are particuarly severe in the markets for all types of insurance, including health insurance Insurance companies provide the service of rissk pooling when they sell policies to households -an insurance company can pool the financial risk of your house burning down by selling fire insurance policies to you and thousands of other homeowners -homeowners are willing to accept the certain cost represented by the premium they pay for insruance in return for eliminating hte uncertain- but potentially very large- cost should their house burn down for the insurance company to cover all of its cost, the total amount it receives in premiums must be greater than the amount it pays out in claims to policyholders -to survive, insurance companies have to predict accurately the amount they are likely to pay out to policyholders -a company that charges premiums that are too high will lose customes to other companies and may eventually be driven out of business

Canada Health Care Systems

Canada has a single-payer health care system, in which the government provides national health insurance to all Canadian residents Each of the 10 Canadian provinces has its own system, although each system must meet the federal government's requirement of covering 100 precent of the cost of all medically necessary procedures Individuals pay nothing for doctor's visits or hospital stays; instead, they pay for medical care indirectly through the taxes they pay to the provincial and federal governments As in the US, most doctors and hospitals are private businesses, but unlike in the US, doctors and hospitals are required to accept the fees that are set by the government Also as in the US, doctors and hospitals are typically reimbursed on a fee-for-service basis

The Aging of the Population and Advances in Medical Technology

As people age, they increase their spending on health care Firms continue to develop new prescription drugs and medical equipment they replace The aging of the US population and the introduction of higher-cost drugs and medical equipment interact to drive up spending on the federal government's Medicare program and on health care generally People over age 65 disproportionately use many newly introduced drugs and diagnostic tools. Partly as a result, health care spending on people over age 65 is six times greater than spending on people aged 18 to 24 and four times greater than people aged 25 to 44 In 2017, about 58 million people were enrolled in Medicare, and that number is expected to grow to 74 million by 2025 Even in the absence of the development of new drugs and other medical technology, low rates of productivity in the health care sector could be expected to drive up costs More of the increase in federal spending on Medicare and Medicaid benefits will be due to increases in the cost of providing health care rather than to the aging of the population An aging population and increases in the cost of providing health care are key reasons health care spending is an increasing percentage of GDP

Do Externalities in Health Care Justify More Government Intervention?

Aspects of the delivery of health care have convinced some economists that government intervention is justified for example, consuming certain types of health care generates positive externalities Being vaccinated against a communicable disease reduces not only the chance that the person vaccinated will catch the disease but also the probability that an epidemic of the disease will occur -therefore, the market may supply an inefficeintly small quanity of vacciniations unless vaccinations receive a government subsidy

The Improving Health of People in the US

200 years ago, the whole world was very poor by modern standards Today, an average person in a high-income country has a standard of living well beyond what even the richest people in the past could've imagined One aspect of this higher standard of living is the improved health the average person enjoys Today, the average life expectancy at birth in the UK and other high-income countries is around 80 years People were also shorter

ACA Provision: State health insurance marketplaces

Each state must establish a marketplace called an Affordable Insurance Exchange Separate marketplaces were established for individuals and small businesses with fewer than 50 employees The marketplaces offer health insurance policies that meet certain specified requirements Although the marketplaces were intended to be run by a state government agency or a nonprofit firm, a majority of states decided to allow the federal government to run their marketplaces Private insurance companies compete by offering policies on the marketplaces to individuals and small businesses Low-income individuals and small businesses with 25 or fewer employees are eligible for tax credits to offset the costs of buying health insurance The purpose of the marketplaces is to allow greater risk polling and lower administrative costs than existed in the market for health insurance policies sold to individuals or small businesses -If successful, greater risk pooling and lower administrative costs make it possible for individuals and small businesses to buy policies with lower premiums than were formely available Some insurance firms have pulled out of the marketplaces in at least some states These firms found that adverse selection probelms- with the proportion of older, sicker patients turning out to be higher than expected- and higher administrative costs resulted in their suffering losses on the policies they offered in the marketplaces

Conclusion

Economic analysis can provide important insights into the market for health care As with many other policy issues, economic analysis can help inform the debate but cannot resolve it Because health care is so important to consumers and health care services are such a large part of the US economy, the role of the government in the health care system is likely to be in subject of intense debate for years to come

Is Health Care a Public Good?

Economists categorize goods on the basis of whether they are rival and excludable Rivalry occurs when one person consuming a unit of a good means no one else can cosnume it Excludability means that anyone who does not pay for a good cannot consume it A public good is both nonrival and nonexcludable Public goods are often supplied by a government rather than by private firms -ex" national defense Delivery of health care involves a number of complex issues BEcause public goods must be both nonrival and nonexcludable, health care does not qualify as a public good under the ususal definition More than one person can't simultaneously "consume" the same surgical operation performed by a particular doctor in a particular hospital And someone who will not pay for an operation can be excluded from consming it (most states require hospitals to treat patients who are too poor to pay for treatment, and many doctors will treat poor people at a reduced price. But health care does not fit the definition of a public good because there is nothing about health care that keeps people who do not pay for it from being excluded from consuming it)

Changes to Medicare and Medicaid

Eligibility for Medicaid was orginally expanded to persons with incomes up to 138 percent of the federal poverty line, although a 2012 Supreme Court Decision resulted in the states being allowed to opt out of this requirement In an attempt to control increases in health care costs, the Indendent Payment Advisor PBoard was established and given the pwoer to reduce Medicare payments for prescription drugs and the use of diagnostic equipment and other technology if Medicare spending exceeds certain levels Some Medicare reimbursements to hospitals and doctors were reduced

ACA Provision: Employer mandate

Every firm with more than 200 full-time employees must offer health insurance to its employees and must automatically enroll them in the plan In 2017, firms with 50 or more full-time employees must offer health insurance that meets certain requirements or paya fee of up to $3,390 to the federal government for every employee who receives a tax credit from the federal government for obtaining health insurance through a health insurance marketplace A worker is a full-time employee if he or she works at least 30 hours per week

Externalities in the Market for Health Care

For most goods and services, we assume that the consumer receives all the benefits from consuming the good and that the firm producing the good bears all of the costs of production Some goods or services involve an externality, which is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or serrvice Externalities interfere with the economic efficiency of a market equilibrium A competitive market achieves economic efficiency by maximizing the sum of consumer surplus and producer surplus -but when there is a negative externality in production, as with air pollution, the market will produce more than the efficient quantity When there is a positive externality in consumption, the market will produce less than the efficient quantity Many economists believe that several aspects of health care involve externalities -for example, anyone vaccinated agaisnt a communicable disease not only protects herself or himself but also reduces the chances that people who have not been vaccinated will contract the disease. The positive externality from vaccinations cause a difference between the private benefit from being vaccinated and the social benefit. The private benefit is the benefit you receive as a consumer of a good or service. The social benefit is the total benefit from consuming a good or service, and it is equal to the private benefit plus any external benefit, such as the benefit to others from a reduced chance of getting a disease for which you have been vaccinated BEcause of the positive externality, the social benefit of vaccinations is greater than the private benefit Externalities are important in health care markets, though economists and policymakers continue to debate the extent to which they require significant government involvement in health care

Reasons for Long-Run Improvements in US Health

For most of the country's history, the health of people in the US has steadily improved, with life expectancies increasing and death rates decreasing Mortality rate is "age adjusted" which means that it is not affectd by changes in the number of people in each age group Life expectancy at birth in the US increased from 47.3 years in 1900 to 78.8 years in 2016 The overall morality rate decreased by more than 25 percent between 1981 and 2015 -over this same period, deaths from cancer and from cardiovascular disease, such as heart attacks and strokes, declined significantly Cancer deaths were 23 percent lower in 2015 than they were in 1981, while deaths from cardiovascular disease declined by 60 percent -deaths from diabetes and kidney disease both increased during the period, largely due to the effects of increasing obesity The overall decline in death rates in the US since 1981 has been due to changes in lifestyle, particuarly a decline in smoking, and advances in new diagnostic equipment, prescription drugs, and surgical techniques Improvements in sanitation and in the distribution of food during the late 1800s and early 1900s led to better health during that period Process by which better health makes it posible for people to work harder as they become taller, stronger, and more resistant to disease Workign harder raises a country's total income, making it possible for the country to afford better sanitation, more food, and a better system for distributing the food -in Effect, improving health shifts out a country's PPF -higher incomes also allow the country to devote more resources to research and development, including medical research The US has been a pioneer in the development of medical technology, new surgical techniques, and new pharmaceuticals, which have played important roles in lengthening life spans and reducing the death toll from diseases

The Rising Cost of Health Care

Health care's share of gross domestic product, which is the total value of ouput in the economy, is increasing an increasing percentage of total production in the US is being devoted to health care Spending on health care has grown faster in the US than in other countries The shares of different products in total spendign change frequently -ex: spending on smartphones or streaming movies greater now, spending on food has been declining for decades -economists interpret these changes as reflecting in past consumers' preferences: Consumers choose to spend realtivey more of their incomes on smartphones and relatively lesss on food - most people pay for health care by relying on third-party payers, usch as employer-provided health insurance or government-provided Medicare or Medicaid Out of pocket spending, spending on health care that consumers pay out of their own incomes rather than through health insurance, has been declining Out of pocket spending on health care as a percentage of all spending on health care has fallen steadily since 1960 -as a result, in recent yeras, consumers of health care have been directly paying for only a small fraction of the true cost of providing health care, with third-party payers picking up the remainder As average incomes rise, consumers might be expected to spend a rising share of the increase on health care -but because consumers do not pay the full cost of increases in health care spending, they may not be willing to buy as much health care as they currently receive if they had to pay the full price Because the federal and state governments in the US pay for just over half of health care spending through Medicare, Medicaid, and other programs, increases in health care spending can cause problems for government budgets The Medicare and Medicaid programs began in 1965 -By 2017, spending on these programs had grown to 7% of GDP, that percentage is expected to double over the next 40 years unless health care costs begin to grow at a slower rate Congress and the president have been struggling to find ways to pay for the projected increases in Medicare and Medicaid without severely cutting other federal spending or sharply raising taxes

How Useful are Cross-Country Comparsions of Health Outcomes?

Health economists and other researchesr disagree strongly about the usefulness of cross-country comparisons of health outcomes in measuring the effectiveness of different health care systmes Factors that make cross comparsions difficult: Data problems -Countries do not always collect data on diseases and other health problems in the same way -There are not enough consistent data available to compare health outcomes for more than a few diseases Problems with measuring health care delivery -The easiest outcomes to measure are deaths because a specific event has occured -Meausres of life expectancy, infant mortality, and mortality rates from some diseases, such as cancer, are availe across contries -but much of health care involves treatment for injuries, simple surgeries, writing or pharmacutical prescriptions, and other activities for which outcomes are difficult to measure Problems with distinguishing health care effectiveness from lifestyle choices -health outcomes depend partly on the effectiveness of docotrs and hospitals in delivering medical services. But they also depend on the choices of individals. Problems with determining consumer preferences - In most markets, we can assume that the quantities and prices we observe reflect the interactions of the preferences of consumers (demand) with the costs to firms of producing goods and services (supply) -given their incomes and preferences, consumers compare the prices of different goods and services when making their buying decisions -the prices firms charge represent the costs of providing the good or service -in the market for health care, however, the government plays the dominant role in supplying the service in most countries other than the US, so the cost of the service is not fully represented in its price, which in some countries is zero - een in countries where consumers must pay for medical services, the prices they pay ususally do not represent the cost of providing the service - it is difficult to determine whether some countries do a better job than others in providing health care services whose cost and effectiveness are consistent with consumer preferences

Adverse Selection in the Market for Health Insurance

Health insurance companies face a key obstacle to accurately predicting the number of claims policyholders will make: buyers of health insruance policies always know more about the state of their health-- and therefore, how likely they are to submit medical bills for payment- than do the insurance companies -in other words, insurance companies face an adverse selection problem because sick people are more likely to want health insurance than are healthy people -if insurance companies have trouble determining who is healthy and who is sick, they are likely to sell policies to more sick people than they had expected, with the result that the premiums they charge will be too low to cover their costs an insurance company faces a financial problem if the premiums it is charging are too low to cover the costs of the claims being submitted -the company might ty to increase the premiums it charges, but this may make the avdverse selection problem worse -if premiums rise, then younger, healthier people who rarely visit the doctor may respond to the increases in premiums by dropping their insurance -the higher premiums make the adverse selection problem worse for the insurance company because it will have fewere healthy policyholdres than it had before the premium increase One way to deal with the problem of adverse selection is for the government to require every person to buy insurance -doing so would increase the ability of insurance companies to engage in risk pooling -most states require all drivers to buy automobile insurance so that both high-risk and low-risk drivers will carry insurance The Patient Protection and Affordable Care Act (ACA), passed in2010, requires residents of the US to buy health insurance or pay a fine -this provision of the law is known as the individual mandate and has been controversial

The Patient Protection and Affordable Care Act

In 2009, President Barack Obama proposed a health care legislation that after much debate and significant changes was signed into law as the Patient Protection and Affordable Care Act (ACA) in March 2010 the act was long and complex at more than 20,000 pages and touched nearly every aspect of health care in the US

The Health Care Systems of Canada, Japan, and the UK

In many countries, the government either supplies health care directly by operating hospitals and employing doctors and nurses or pays for most health care expenses, even if hospitals are not government owned and doctors are not government employees

The UK Health Care System

In the UK, the govenrment, through the National Health Service, owns nearly all hospitals and directly employes nearly all doctors BEcause there are few private insurance plans and private hospitals in the UK, its health care system is often called socialized medicine the NHS is the largest-government run health care system in the world Apart from a small copayment for prescriptions, the NHS supplies health care services without charge to patients and receives its funding from income taxes The NHS concentrates on preventive care and care for acute coniditons Nonemergency care, also called elective care (such as hip replacements, knee surgery following a sports injury) is a low priority The nHS's goal result in waiting lists for ellective care that can be very long, with patients sometimes waiting a year or more for a procedure that would be avilable in a few weeks or less in the US -To avoid the waiting listts, mroe than 10 percent of the population also has private health insurance, frequently provided by employers, which the insured use to pay for elective care the NHS essentially trades off broader coverage for longer waiting times and performing fewer procedures, particularly nonemergency surgeries

Health Care around the World

In the US, private firms provide most health care, through either doctors' practices or hospitals -the main exception is the care the government provides through the network of hospitals operated by the federal government's Veterans Health Administration, although some cities also own and operate hospitals Governments in most countries outside the US have a more substantial direct role in paying for or providing health care Policymakers and economists debate the effects of greater government involvement in the health care system on health outcomes such as life expectancy, infant mortality, and successful treatment of diseases

Do Information Problems with Healh Care Justify More Government Intervention?

Information problems are also important in the market for private health insurance Consumers who buy health insurance often know much more about the state of their health than do the companies selling health insurance This information problem may raise costs to insurance companies when the pool of people being insured is small, making insurance companies less willing to offer health insurance to consumers the companies suspect may file to many claims Economists debate how important information problems are in health care markets and whether government intervention is required to reduce them

ACA Provision: Regulation of health insurance

Insurance companies are required to participate in a high-risk pool that will insure individuals with preexisting medical conditions who have been unable to buy health insuracne for at least 6 months All individual and group policies must provide coverage for dependent children up to age 26 Lifetime dollar maximums on coverage are prohibited Limits are also placed on the size of deductibles and on the waiting period before coverage becomes effective

How Insurance Companies Deal with Adverse Selection and Moral Hazard

Insurance companies can take steps to reduce adverse selection and moral hazard problems -for example, insurance companies can use deductibles and coinsurance to reduce moral hazard - a deductible requires the policyholder to pay a certain dollar amount before the insurance begins paying claims -With coinsurance, the insurance company pays only a percentage of any claim Deductibles and coinsurance make the policies less attractice to people who intend to file many claims, therby reducing the adverse selection problem Deductibles and coinsurance also provide policyholders with an incentive to avoid filing claims, thereby reducing the moral hazard problem Deductibles have been increasing in many employer-provided health insurance plans Deductibles and conisurance reduce, but do not eliminate, adverse selection and moral hazard -People who anticipate having large medical bills will still have a greater incentive than healthy people to buy insurance, and people with health insurance are still more likely to visit the doctor even for a minor illness than are people without health insurance Prior to the passage of the ACA in 2010, to reduce the problem of adverse selection, insurance companies typically limited coverage of prexisiting conditions -critics argue that by excluding coverage of prexisiting conditions, insurance companies were focing people with serious illnesses to pay the entire amount of what might be very large medical bills or go without medical care the insurance companies argued that if they did not exclude coverage of preexisting conditions, they might have been unable to offer any health insurance policies or might have been foced to charge premiums that were so high as to cause relatively healthy people to not renww their polciies, which would have made adverse selection problesm worse Many people do not want others to be without health insurance because they cannot afford it Congress incldued significant restrictions on the ability of insurance companies to limit coverage of prexisiting conidtions when it passed the ACA

Japan Health Care System

Japan has a system of universal health insurance under which every resident of the county is required to enroll either in one of the many nonprofit health insurance socities that are organized by industries or professions or in the health insruance program provided by the national government The system is funded by a combo of premiums paid by employees and firms and a payroll tax similar to the tax that funds the Medicare program in the US UNlike the Canadian system, the Japanese system requries substanial copayments, under which patients pay as much as 30 percent of their medical bills, while health insurance pays for the rest Japanese health insurance does not pay for most preventive care, unless complicatiosn result -Health insurance in the US and Canada typically does cover these expenses As in the US, most doctors in Japan do not work for the government, and there are many privately owned hospitals -the number of government-run hospitals, though, is greater than in the US

Do Information Problems with Healh Care Justify More Government Intervention of Should there be Greater Reliance on Market-Based policies?

Many economists believe that market-based policies are the best approach to improving the health care system the US is a world leader in innovation in medical technology and prescription drugs The market-oriented approach to reforming health care starts with the goal of improving health care outcomes while preserving incentives for US firms to continue with innovations in medical screening equipment, surgical proceduers, and prescription drugs Presently, markets are delivering inaccurate signals to consumers because when buying health care, consumers pay a price well below the true cost of providing the service -under current tax laws, people do not pay taxes on health insurance benefits they receive from their employers, and this benefit encourages them to want generous coverage that reduces incentives to control costs Market-based approaches to health care reform attempt to address these issues It remains an open question whether the US health care sstem will continue to move toward greater government intervention or whether market-based reforms will be implemented Because health care is so important to consumers and because health care is an increasingly large part of the US economy, the role of the government in the health care system is likely to be the subject of intense debate for some time to come

The US Health Care System

One important difference among health care systems in different countries is the way people pay for their health care Most people in the US have health insurance that helps them pay their medical bills Health insurance is a contract under which a buyer agrees to make payments, or premiums, in exchange for the provider's agreeing to pay some or all of the buyer's medical bills Many people receive health insurance through their employer, or from a individual or family health insurance policy from an insurance company, often using the state health insurance marketplaces Congress established under the Affordable Care Act Some people also received health insurance through a government program including Medicaid, Medicare, and the program run by the Departmnet of Veterans Affairs Most people who have private health insurance receive it through their employer Health insurance is a fringe benefit (non-wage compensation) to employees Private health insurance companies can be either not-for-profit firns or for-profit firms, which typically also sell other types of insurance Private health insurance companies sell group plans to employers to cover all of their employees and individual plans directly to the ublic Some health insurance plans reimburse doctors and hospitals on a fee-for-service baiss, whcih means that doctors and hospitals receive a payment for each service they provide -other health insruance plans are organized as health maintenance organizations, which typically reimburse doctors mainly by paying a flat fee per patient rather than paying a fee for each individual office viist or other service provided Many people lack health insurance because their incomes are low, and they beleive they cannot afford to buy private health insurance, even with government subsidiies Some low-income people iether do not qualify for Medicaid or choose not to participate in that program More than 70 percent of uninsured people live infamilies in which at least one member has a job -these indiviuals either were not offered health insurance through their employers or chose not to purchase it -Some young people opt of of employer-provided health insurance because they are healthy and do not believe that the cost of the premium their employer charges for the insurance is worth the beenfit of having the insurance Although most large firms offer their employees health insurance, fewer than two-thirds accept it -the remaining employees are covered by a spouse's policy, are not eligible for coerage, or have decided to go uninsured because they do not want to pay the premium for the insurance The uninsured must pay for their own medical bills out of pocket, with money from their own income, just as they pay their other bills, or receive care from doctors or hopsitals either free or below the normal price

Taxes

Several new taxes help fund the progam Workers earning more than 200,000 pay higher Medicare payroll taxes, and people who earm more than 200,000 pay a new 3.8 percent tax on their investment income Beginning in 2018, a tax is scheduled to be imposed on employer-provided health insurance plans that have a value above 10,200 for an individual of 27,500 for a family- so called Cadillac plans In 2017, Congress was considering proposals to repeal this tax Pharmaceutical firms, health insurance firms, and firms producing medical devices also pay new taxes

The Debate over Health Care Policy in the United States

Shortly after taking office in Jan 2009, President Obama proposed far-reaching changes in the US health care system -the result was the Patient Protection and Affordable Care Act Act (ACA), which Congress passed in March 2010 - the act was controversial, with every Republican member of Congress and 34 Democratic members voting against it -Since passage of the ACA, economists have vigorously debated its effects on health care and the economy During 2017, bills to significantly amend the ACA failed in Congress, although other propsoals to amend the ACA appeared likely to follow

"Cost Disease" in the Health Care Sector

Some economists argue that health care suffers from a problem often encountered in service industries In the sectors of the economy that produce goods, productivity, or the amount of output each worker can produce in a given period, increases steadly -these increases in productivity occur because over tiem firms provide workers with more machinery and equipment with which to work, and because technological progress results in improvements in machinery and equipment and in other parts of the production process As workers produce more goods, firms are able to apy them higher wages By contrast, in service-producing indstries, increasing output per worker is more difficult In medicine, MRI units, CT scanners, and other medical technology have improved idagnosis and treatment, but most medicine still requires a face-to-face meeting between a doctor or medical technologist and patient As wages rise in industries in which productivity is increasing rapidly, service industries in which productivity is increasing less rapidly must match these wage increases or lose woerkers Because increases in wages are not offset by increases in productivity in service industries, the cost to foirms of supplying services increases the tendency for low productivity in service industires to lead to higher costs in those industries as "the cost disease of the service sector" Health care probably suffers from this cost disease because growth in labor productivity in the health care sector has been less than half as fast as labor productivity growth in the economy as a whole The slow growth in productivity can help explain why the cost of health care has been rising rapidly, thereby increasing health care's share of total spening and output

Should the Government Run the Health Care System?

Some members of Congress have proposed expanding the federal government's role in health care by adopting a system similar to the single-payer system used in Canada, under which the government would provide health care to all residents of the US What role the federal government should paly in health care is a controversiial public policy issue

Distorted Economic Incentives

Some part of the increase in health care spending over the years results from consumers' choosing to allocate more of their incomes to health care as their incomes rise Consumers usually pay less than the true cost of medical treatment because a third party often pays most of the bill -the result is that consumers demand a larger quantity of health care services than they would if they paid a price that better represented the cost of providing the service see section for graph Health insurancei s different from other types of insurance The basic idea of insurance is that the financial risk of an unpredictable, high-cost event is pooled among the many consumers who buy insurancee health insurance also typically covers many planned expenses, such as routine health checkups, annual physicals, and contraceptives, and other low-cost events, such as treatment for minor illnesses -by disgusing the true cost of these routine expenses, health insurance encourages overuse of health care services

Factors that Do NOt Explain Sustained Increases in Health Care Spending

Spending on health care has been growing faster than the economy as a whole for at least the past several decades Explaining the rapid growth of health care spending requires identifying factors that have more than a one-time effect. -ex: because the US health care system relies on many independent hospitals, medical practices, and insurance companies, some observers argue that it generates more paperwork, duplication, and waste than systems in other countries. Even if this observation is correct, it cannot account for health care's rising share of GDP unless paperwork and waste are increasing year after year, which seems unlikely. Unlike in most other countries, it is relatively easy in the US for patients who have been injured by medical errors to sue doctors and hospitals for damages. - The Congressional Budget office (CBO) estiamtes that the payments to settle malpractice lawsuits plus the premiums doctors pay for malpractice insurance amount to less than 1 percent of health care costs. -Other economists believe that the CBO estiamte is too low and that the costs of malpractice lawsuits are as much as 7 percent of total health care costs (costs have not been significantly increasing over time) Somewhere betwen 1 and 4 precent of health care costs are due to uninsured patients receiving treatments at hospital emergency rooms that could have been provided less expensively in doctors' offices -prior to the implementation of the ACA, this cost was not increasing rapidly enough to account for much of the increase in health care costs as a percentage of GDP, and as the implementation of the ACA has led to a decrease in the number of uninsured people, this cost has declined

The Debate over the ACA Part 2`

Supporters of market-based reforms note that employees have to pay federal income and payroll taxes on the wages their employers pay them, but in most cirumstances they do not pay taxes on the value of the health insurance their employers provide them -this feature of the tax law encourages employess to want generous health care coverage -the size of this tax break is quite substanital -Individuals typically get no tax break when buying an individual health insurance policy of when they spend money on health care out of pocket Some economists have proposed making the tax treatment of employer-provded health insurance the same as the tax treatment of individually purchased health insurance and out-of-pocket health care spending -they argue that this change could signficiantly reduce spending on health care without reducing the effectiveness of the health care received -such tax law changes would make it more likely that employer-provided health insurance would focus on large medical ills while consumers would pay prices clsoer to the costs of providing routine medical care Currently, the US health care system is a world leader in innovation in medical technology and prescription drugs -about two-thirds of pharmaceutical patients are isseud to US firms and about two-thirds of research on new medicines is carried out in the uS One goal of market-based reforms would be to ensure that US firms continue with innovation in medical screening equipment, surgical procedures, and prescription drugs Executives of US pharmacetucial firms have voiced concern over whether aspects of the ACA will affect their ability to profitably bring new prescription drugs to market -In particular, managaers at these firms worry that the new Independent Payment Advisory Board might reduce the payments Medicare would make for new prescription drugs Both critics of the ACA who favor government involvement in health care and those who favor market reforms raise questions baout the act's individual mandate, which requires every US resident to have health insurance -the mandate was considered necessary because otherwise health people might avoid buying insurance unitl they become ill Because insurance companies would not be allowed to deny corage for preexisitng conditions, they would end up paying large medical bills for poeple who had not been paying premiums to support the system whil they were healthy -people who do not buy insurance are subject to fines under the act, but there were questions about how effective the fines would be in pushing people to buy insurance

The Debate over the ACA

The ACA has remained the source of considerable debate among policymakers and economists President Trump vowed to repeal and replace the act Chagnes to the act proposed by the Trump administration focused on incorporating market-based incentives intended to reduce the costs of providing health care and to improve economic incentives Other critics of the act, argued that the act should be amended (or replaced) to allow for an expanded role of the government in health care similar to the role played by governments in other high-income countries Some economists and policymakers beleive that information problems and externalities in the market for health care are sufficiently large that the government should either provide health care direcrly through government-owned hospitals and government-employed doctors or pay for health care through national health insurance (that is, a single-payer system) Those in favor of moving toward greater government involvement in health care often raise three arguments 1. A single-payer system would reduce the paperwork and waste caused by the current system 2. The current Medicare system- which is essentially a single-payer system for people over age 65- has had lower administrative costs than have private health insurance companies 3. The systems in most other high-income countries have lower levels of health care spending per person and lower rates of increase in total health care spending, while providing good health outcomes Some economists and policymakers support market-based reforms which involve changing hte market for health care so that it becomes more like the markets for other goods and services With such reforms, the prices consumers pay and suppliers recieve would do a better job of conveying information on consumer demand and supplier costs - the expectiation is that increased competition among docotrs, hospitals, pharamaceutical companies, and other providers of health care would reduce costs and increase economic efficiency Economists who support market-based reforms as the best way to improve the health care system were disappointed that the ACA did not adopt this approcach -Currently, markets are delivering inaccurate signals to the consumers becaus when buying health care, unlike when buying most other goods and services, consumers pay a price well below the true cost of providing the service

The Continuing Debate over Health Care Policy

The US has been unusual among high-income countries in relying on private health insurance, usually purcahsed throguh employers or the health insurance marketplaces, to provide health care coverage to the majority of the population -most other high-income countries eitehr provide health care directly, through government-owned hospitals and government employed doctors, or provide health insurance to all residents without directly employing doctors or owning hospitals There have been several attempts to reorganize the US health care system to make it more like the systems in other countries -in 1945, President Truman proposed a plan for national health insurance, under which anyone could purchase health insurance from the federal government. The health insurance would have covered treatment received from docotrs and hospitals that agreed to enroll in the system. Congress declined to enact the plan. - in 1993, President Clinton proposed a health care plan intended to provide universal insurance coverage. While somewhat complex, the plan was based on requiring most businesses to provide health insurance to their employees and new government-sponsored health alliances that would ensure coverage for anyone who otherwise would not have health insurance. After a prolonged political debate, Congress chose not to enact President Clinton's plan

Moral Hazard in the Market for Health Insurance

The insurance market is subject to a second consequence of asymmetric info Moral hazard refers to actions people take after they have entered into a transaction that make the other party to the transaction worse off Moral hazard in the insurance market occurs when people change their behavior after becoming insured One way to think about the basic moral hazard problem with insurancei s to note that normall there are two parties to an economic transaction: the buyer and the seller -the insurance company becomes a third party to the purchase of medical services because the insurance company, rather than the patient, pays for some or all of the service - for this reason, economists refer to traditional health insurance as a third-party payer system -because of this system, consumers of health care do not pay a price that reflects the full cost of providing the service - the lower price leads consumers to use more health care than they would otherwise would Third party payer health insurance can also lead to another consequence of moral hazard,known as the principal-agent proble, because some doctors may be led to take actions that are not necessarily in the best interests of their ptients, such as increasing their incomes by prescribign unnecessary tests or other treatments for which the doctors receive payment the principal-agent problem results from agents pursuing their own interests rather than the interests of the principals who hired them If patients had to pay the full price of lab tests, MRI scans, and other procedures, they would be more likely to question whether the procedures were really necessary -because health insurance paysm ost of the bill for these proceudres, patients are more likely to accept them -note that the fee-for-service aspect of most health insuance in the US can make the principal-agent problem worse because doctors and hospitlas are paid for each service perfomred, whether or not the service was necessary or effective the number of medical procedures performed in the US has been continually increasing -many doctors argue that the increasing number of medical procedures is not the result of third-party payer health insurance, instead, the increase is due to the improved effectiveness of the procedures in diagnosing illness and the tendency of some doctors to practice "defenseive medicine because they fearthat if they fail to correctly diagnose an illness, a patient may file a malpractice lawsuit against them

Information Problems and Externalities in the Market for Health Care

The market for health care is significantly affected by the problem of assymetric information, which occurs when one party to an economic transaction has less information than the other party Understanding the concept of assymetric information can help us analyze the actions of buyers and sellers of health care and health insurance and the actions of the government in the health care market The consequences of asymmetric info may be easier to understand if we first consider its effect on the market for used automobiles, which is the market in which economists first began to carefully study the problem

Adverse Selection and the Market for "Lemons"

The seller of a used car will always have more information on the true condition of the car than will potentail buyers If potential buyers of used cars know that they will have difficulty distinguishing good used cars from bad used cars, or "lemons" they will take this fact into account in the prices they are willing to pay The sellers know how well they have maintained their cars and whether they are reliable, but the buyers do not have this information and so haven o way of distinguishing the reliable used cars from the unreliable ones -in this situatation, buyers will generally offer a price somewhere between the price they would be willing to pay for a good car and the price they would be willing to pay for a lemon -with a 50-50 chance of buying a good car or a lemon, buyers might offer a price halfway between the price they would pay if they knew for certain the car was a good one and the price they would pay if the knew it was a lemon Unfortunatley for used car buyers, a major glitch arises at this point - From the buyer's perspective, given that they don't know whether any particular car offered for sale is a good car or a lemon, but the sellesr do know whether the cars they are offering are good cars or lemons As sellesr of lemons take advantage of knowning more about the cars they are selling than buyers do, buyers in the used car market will fall victim to adverse selection: Most used cars offered for sale will be lemons -in other words, because of asymmetric information, the market has selected adversely the cars that will be offered for sale -notice as well that the problem of adverse selction reduces the total quantity of used cars bought and sold in the market because few good cars are offered for sale

Comparing Health Care Outcomes around the World

Typically, the higher the level of income per person in a country, the higher the level of spending per person on health care Health care is a normal good Health care spending per person in the US is higher than in other countries, even taking into account the relatively high income levels in the US the US does relatively poorly with respect to infant mortality, while it does somewhat below average with respect to life expectancy at birth but about average with respect ot life expectancy at age 65 People in the US are signficicantly more likely to be obese than are people in other high-income countries which can lead to developing diabetes and other health problems The US rates well in the availability of medical equipment that can be used in diagnosing and treating illness The US also appears to do well in cancer treatment, with a lower rate of cancer deaths, particuarly given that people in the US are more likely to develop cancer, and a relatively low morality ratio from cacner The morality ratio measures the rate at whcih people die from cacner relative to the rate at which they are diagnosed with cancer A low cancer morality ratio indicates that the US health care system does a relatively good job of reducing the death rate among people diagnosed with cancer

Changes over Time in US Health

When economists measure changes over time in the standard of living in a country, they usually look first at increases in income per person. However, changes in health are also important because health is an essential part of a person's well-being and, therefore, of his or her standard of living The health of the average person in the US improved signficiantly during the 1800s and 1900s, and by and large, it continues to improve today individuals in the US today are taller, live much longer, and are much less likely to die in the first months of life than was true 165 years ago Economists often use heigh as a measure of long-run changes in the average well-being of a population. A person's heigh depends partly on genetics but also on a person's net nutritional status Net nutritional status depends on a person's food intake relative to the work the person has to perform, whether the person is able to remain warm in cold weather, and the dieases to which the person is exposed Over time, people in the US and other high-income countries have become taller, which is an indication that their nutritional status has improved

ACA Provision: Individual mandate

The act requires that, with limited exceptions, every resident of the US have health insurance that meets certain basic requirements Individuals who do not acquire health insurance are subject to a fine In 2017 the fine was $696 or 2.5 percent of income, whichever was greater.