ECON 1201 Lecture Notes - Lecture 16: Health Insurance Mandate, Normal Good, Market Power
ECON 1201 – Lecture 15 – Economics of Health Care
Monday Recap
• We spend an enormous amount on healthcare
• The healthcare industry is the largest employer, 2/3 of our states
• Our outcomes are not as robust given how much we spend
• There is a significant amount of government regulation in healthcare because of
externalities
o Subsidize procedures, vaccines
o “sin” taxes adopted by many governments and states to solve issues like obesity
▪ Framework of Pigouvian taxes
• Third party payers – most service fees are covered by a third party, public/private
insurance
• There is a distinction between imperfect and asymmetric information
o Imperfect information – not certain on the quality/outcome
▪ “thin” markets, less market transactions
o Asymmetric information – one party to the transaction has more information
than the other
▪ Real issue with insurance
▪ Impacts a variety of markets besides insurance
▪ Adverse selection – hidden characteristics
▪ Moral hazard – hidden behavior
Adverse Selection and The Market for Lemons
• Used car market
o Buyers value the high-quality car at 20k and the low quality car at 10k
• Who knows whether the good is high quality or not?
What price will the rational buyer offer?
• Expected value of the car = ½ (10,000) + ½ (20,000)
• Buyer then offers $15,000 – what the rational buyer would pay
• What problem occurs?
Impact
• If buyer offers $15,000 for a car, what would happen?
o Owners of high quality cars won’t offer cars for sale
o Owners of low quality cars would offer cars for sale
o Underselling of high quality cars
o The used car market would be flooded with low quality cars
Implications for Health Care
• Adverse Selection
o One party is taking advantage of knowing more than the other party
o The same thing is happening in the insurance market because the people that
want insurance are the least healthy
o Healthy people do not want insurance
o The market is flooded with less healthy individuals
• Can an insurance company provide fair insurance by charging everyone a rate of
insurance equal to the average cost for the insurable population?
o NO
o High risk/less healthy – good deal to buy
o Less risk/more healthy – not so good and don’t buy
Example
• Population: 10
• Type Groups:
o Healthy 5: average health costs are $250
o Less healthy 5: average health costs are $750
• Average cost $500; actuarily fair premium $500
• Who is buying?
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Document Summary
Econ 1201 lecture 15 economics of health care. Imperfect information not certain on the quality/outcome: thin markets, less market transactions, asymmetric information one party to the transaction has more information than the other, real issue with insurance. Impacts a variety of markets besides insurance: adverse selection hidden characteristics, moral hazard hidden behavior. Impact: more unhealthy people buy insurance; raising average cost to insurance companies, raise premiums, accentuates problem, more unhealthy people don"t buy insurance. Why don"t insurance markets completely implode: people are wiling to pay, risk averse although not actuarily fair. Moral hazard: conduct or behavior that is hidden, acquisition of insurance changes behavior, because riskier, fire insurance less likely to check fire alarm, riskier health habits. In addition: reason for copays/deductibles prevent moral hazard, preexisting conditions to prevent adverse selection. Causes of increases in healthcare expenditures: healthcare is a normal good.
