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Comprehensive summary of the articles of the course Healthcare Management and Organisation (in English).
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Healthcare Management and Organisation | LiteratuurModule 1 Decision-making in healthcare
The economics of healthcare
Mankiw
Healthy life often requires the input of scarce resources, and that makes it, at least in part, an
economic problem. About one out of every six dollars spent in the U.S. economy goes to some
form of healthcare, including spending on physicians, nurses, dentists, hospitals, pharmaceutical
drugs, and medical research scientists. Understanding the modern economy, therefore, requires
an appreciation of the special economics of healthcare.
The Special Characteristics of the Market for Healthcare
The standard theory of how markets work is the model of supply and demand, in which buyers
and sellers are guided by prices to an e cient allocation of resources (vraag en aanbod).
Notable features model of supply and demand
1. The main interested parties are the buyers and sellers in the market.
2. Buyers are good judges of what they get from sellers.
3. Buyers pay sellers directly for the goods and services being exchanged.
4. Market prices are the primary mechanism for coordinating the decisions of
market participants.
5. The invisible hand, left to its own devices, leads to an e cient allocation of resources.
For many goods and services in the economy, this model o ers a reasonably good description.
Yet none of these ve features of the standard model re ects what goes on in the market for
healthcare.
Notable features healthcare
1. Third parties—insurers, governments, and unwitting bystanders—often have an interest in
healthcare outcomes.
2. Patients often don’t know what they need and cannot evaluate the treatment they are getting.
3. Healthcare providers are often paid not by the patients but by private or government health
insurance.
4. The rules established by these insurers, more than market prices, determine the allocation of
resources.
5. In light of the foregoing four points, the invisible hand can’t work its magic, and so the
allocation of resources in the healthcare market can end up highly ine cient.
But healthcare may be the most important good or service that departs so radically from this
benchmark. Examining the special features of this market is a good starting point for
understanding why the government plays a large role in the provision of healthcare and why
health policy is often complex and vexing.
The Prevalence of Externalities
Market outcomes may be ine cient when there are externalities. An externality arises when a
person engages in an activity that in uences thew well-being of a bystander but neither pays nor
receives compensation for that e ect (if it is bene cial, it is called a positive externality). Because
buyers and sellers neglect the external e ects of their actions when deciding how much to
demand or supply, the externality can render the unregulated market outcome ine cient.
Externalities in the healthcare market are prevalent (veel voorkomend). These externalities can call
for government action to remedy the market failure. An example of an externality in the healthcare
system concerns medical research. When a physician gures out a new way to treat an ailment,
that information enters society’s pool of medical knowledge. The bene t to other physicians and
patients is a positive externality. Without government intervention, there will be too little research.
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, Governments respond to this externality in many ways. Sometimes, the government grants the
researcher a patent on the new product, as is the case with new pharmaceutical drugs. The
patent gives an incentive for research because the patent holder can pro t from a temporary
monopoly. The monopoly price is higher than the marginal cost of production. This reduces
consumption of the patented treatment, leading to ine cient as measured by the deadweight
loss.
Another approach to dealing with the positive externality from medical research is for the
government to subsidize the research - and indeed it does. This policy requires taxation to raise
the necessary funds, and taxation entails deadweight losses of its own. But if the externalities
from the funded research exceed the cost of the risk aversion a dislike of uncertainty research,
including the deadweight losses, overall welfare can increase.
The Di culty of Monitoring Quality
When you get sick, you may not know what the best treatment is. You rely on the advice of a
physician, who has years of specialized training. And even with hindsight, you cannot reliably
judge for yourself whether the treatment the physician o ered you was the right one.
Government regulation and medical monitoring
The inability of healthcare consumers to monitor the quality of the product they are buying leads
to various regulations. Most important, the government requires physicians, dentists, nurses, and
other health professionals to have licenses to practice (schooling and tests). In addition to
government regulation, the medical profession monitors itself by accrediting medical schools,
promoting best practices, and establishing professional norms of behavior.
Nonpro t
Suspicions about te standard economic motive of self-interest and the role of trust in healthcare
relationships may explain the prevalence of nonpro t hospitals. When consumers are not able to
judge the quality of the product they are buying, they may be more willing to trust an institution
that is not set up primarily to enrich its owners.
These public and private regulations of healthcare have their critics. Some economists have
argued that there are too many hurdles to opening new medical schools. Other economists have
argued that the FDA is too slow in approving new drugs. The proper balance between protecting
public safety and giving people the freedom to make their own healthcare decisions is a subject
of ongoing debate.
The Insurance Market and Its Imperfections
Because people don’t know when they are going to get sick or what kind of medical treatments
they will need, spending on healthcare is unpredictable. This is the key reasons we have the
health institutions that we do.
The value of insurance
Most people are risk averse (a dislike of uncertainty). This is why people pay insurance. The
general feature of insurance contracts is that a person facing a risk pays a fee (called a premium)
to an insurance company, which in return agrees to accept all or part of the risk. There are many
types of insurance.
Markets for insurance are useful in reducing risk, but two problems hamper their ability to do so
fully and e ciently.
Moral hazard
Moral hazard is the tendency of a person who is imperfectly monitored to engage in dishonest or
otherwise undesirable behavior. When people have insurance to cover their spending on health-
care, they have less incentive to engage in behavior that will keep that spending to a reasonable
level. Health insurance companies try to reduce the problem of moral hazard by nding ways to
encourage people to act more responsibly (for example co-pays, not picking up the entire cost of
a visit to a physician).
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, Adverse selection
If customers di er in their relevant attributes (such as whether they have a chronic disease) and
those di erences are known to customers but not observable by insurers, the mix of people who
choose to buy insurance may be especially expensive to insure. As a result, for an insurance
company to cover its costs, the price of health insurance must re ect the cost of a sicker-than-
average person. Even people with average health may see the high price and decide to go without
insurance. As people drop coverage, the insurance market fails to achieve its purpose of
eliminating the nancial risk from illness.
Adverse selection can lead to a phenomenon called the death spiral. Suppose that, because a
person’s health pro le is private information, insurance companies must charge everyone the
same price. At rst, it might seem to make sense for a company to base the price of insurance on
the health characteristics of the average person in the population. But after it does so, the
healthiest people may decide that insurance is not worth the cost and drop out of the insured
pool. With a sicker group of customers than expected, the company has higher costs and
therefore has to raise the price of insurance. The higher price now induces the next healthiest
group of people to drop insurance coverage, which drives up the cost and price again. As this
process continues, more people drop coverage, the insured pool gets less healthy, and the price
keeps rising. In the end, the insurance market may disappear.
The problem of adverse selection has been central in the debate over health policy. For example,
the A ordable Care Act (signed by President Obama in 2010 and often called “Obamacare”)
prevented health insurance companies from charging more to cover people with pre-existing
medical conditions. This was a recipe for adverse selection. Lawmakers were aware of this
problem and to combat it, the A ordable Care Act required all Americans to buy health insurance
and imposed a nancial penalty on those wo did not.
Healthcare as a Right
Normally, when some people don’t buy a good or service, perhaps because they think it costs too
much given their income, that outcome is not a major problem for society. Healthcare is di erent.
When a person gets sick, it seems wrong that a low income would be a reason to deny treatment.
Healthcare is arguably a human right. This goes beyond the scope of economics. By contrast,
because the cost of state-of-the-art healthcare has risen rapidly, a ording it has required an
increasing share of the typical household’s budget.
Healthcare being viewed as a right, along with its rising cost, has led to a large role for the
government. In many nations, such as Canada and England, the government runs the healthcare
system, nanced mostly by taxes. This system is sometimes called single payer because one
entity—the government’s health service—pays all the bills. By contrast, in the United States, most
people have private health insurance, often through their employers, but the government still has
a sizable presence.
But there is little doubt that, with healthcare often viewed as a human right, the government will
continue to play a large role in the healthcare system.
The Rules Governing the Healthcare Marketplace
The importance of health insurance, whether provided by private companies or the government,
requires that the market for healthcare work di erently than most other markets in the economy.
The typical market looks like panel (a) of gure 1. The market for healthcare looks more like panel
(b).
This process requires three set of rules to guide behavior
1. The nancing: who pays for the insurance and how much they pay. If the insurer is the
government, paying for healthcare becomes part of designing the tax system. If the insurer is
a private company, healthcare is nanced by the price that health insurance purchasers pay
for their coverage. The price is then set in the insurance market. In may cases, however, state
governments regulate the market for private insurance.
2. A patient’s access to healthcare: because insured patients do not pay the marginal cost of
each medical service they consume, there is a possibility of overuse (moral hazard). The
insurer has therefore rules to limit access.
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, 3. Payments from insurers to providers: these rules establish both what an insurer will pay and
how much they will pay. Treatment prices in uence which treatments providers guide patients
toward. Insurers may deem some treatments too expensive, experimental or insu ciently
valuable to pay for all of them. In such cases providers will not o er the patients the services
(or let them pay the full costs of the treatment).
The rules regarding nancing, access, and payment are related, and together they shape the kind
of healthcare system a nation has. For nations with a government-run system, these rules are set
by public policy. For nations with more private insurance, such as the United States, these rules
are set by insurance companies as they compete for customers, subject to various government
regulations.
Key Facts about the Healthcare System
Now that we understand the main economic forces at work, let’s look at some data that describe
the U.S. healthcare system.
People Are Living Longer
People are living longer than ever before. A large part of the increase in life expectancy is due to a
decline in infant mortality. Much of the credit for the increase in life expectancy goes to advances
in medical technology.
Healthcare Spending Is a Growing Share of the Economy
Health spending has risen from 5 percent of GDP in 1960 to 18 percent in 2015, and there is no
sign that this increase is about to stop in the US. Several forces explain this trend.
Baumol’s cost disease
First, some medical care is a personal service. Baumol pointed out long ago that for many
providers of personal services, productivity does not change much over time. But as the rest of
the economy experiences technological progress, labor productivity and overall wages increase.
Those supplying personal services will come to expect rising wages along with the rest of the
labor force. Yet without much productivity growth in those sectors, the only way to give these
service providers higher wages is for the prices of their services (adjusted for overall in ation) to
increase. Thus, a sector with low productivity growth is increasing costs and prices. This
phenomenon is called Baumol’s cost disease. And if the demand for the services of these sectors
is price inelastic, as it is for healthcare, spending on those services will increase as well.
Expensive new treatments
Second, while there have been signi cant advances in medical technology, many of these
advances, rather than being cost-saving, have increased spend- ing.
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