Summary notes for Topic 1-2 Health Economics Autumn
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Course
Health Economics (ECO00006H)
Institution
The University Of York (UOY)
In these notes I've provided you with a summary of everything taught in the lectures for topic 1 and 2. This is especially useful if you had exceptional circumstances and missed these topics in the beginning of the module and have trouble navigating the university website, or taking notes. You coul...
Health Economics Revision
Topic 1 - Health Insurance:
Financing of Health care is not like other markets: the consumer is not the
payer. The consumer and payer relationship is like that of the principal-agent
relationship. The insurer usually pays healthcare expenditure. Health matters,
hence it isn’t simple to refuse service if the consumer cannot pay - behaviour
is very complex, insurance is usually based on contracts.
Health expenditure as a share of GDP
is on average, 9% for OECD countries.
The UK has a ratio of 8.4%. There is an
increasing trend due to technological
development and social choices in
healthcare spending.
The graph below shows the healthcare
spending on mandatory, voluntary and
out-of-pocket payments for different
countries. The US is the outlier.
, Health care expenditure are highly
concentrated
20/80: 20 percent of the population
is responsible for 80% of the total
healthcare expenditure
5/50: Top 5 percent of the
population is responsible for 50%
of the total healthcare expenditure
> This graph shows a Lorenz curve
based on expenditure
concentration.
Uncertainty is intrinsic to health.
Patients are uncertain about their
risk of being sick and the financial consequences. The main concern for
consumers is the ability to pay.
,This is another type of financing ratio. As shown by the graph, there is never
full coverage in any Healthcare systems, even though it is good to be fully
covered. Most healthcare systems have implemented a collective financing of
healthcare. Funds collected from individuals who pay insurance are pooled to
cover individuals against the financial consequences of ill health. No country
relies only on insurance. The majority of healthcare financing is mandatory
however, very little rely on the private market.
Section 1 – Optimal coverage
● Is health insurance welfare improving?
● How much health insurance coverage should be provided?
● What’s happening when individuals face different risks?
● Should health insurance be mandatory or voluntary?
Section 2 – Adverse selection
● Is the market able to offer efficient voluntary health insurance?
● Can government intervention improve welfare?
Section 3 – Moral hazard (theory)
● Why do health care systems not offer full coverage?
Section 4 – Moral hazard (empirical evidence)
● What is the impact of out-of-pocket payments on health care
consumption and health?
Further questions:
- Why do private markets have such a small role?
- Why not rely on private only?
- Why not fully cover with mandatory health insurance?
, We assume that there is a perfectly competitive health insurance market to
see the consequences of asymmetric information/ adverse selection.
Optimal coverage
We assess individuals' choices to see if health insurance is welfare improving
for individuals and how much coverage should be provided.
The Basic model considers first, the case of a risk averse individual seeking
voluntary coverage in a perfectly competitive market. How much people value
healthcare depends on their risk levels.
2 states of the world:
● Healthy
○ Exogenous income: Y
● Sick
○ Probability she falls sick: π
○ Exogenous income: Y
○ Exogenous medical treatment: M
Individuals derive a utility u(y) for a disposable
income y
Individuals are risk averse: u^′ (y)>0 and u^′′
(y)<0
Individuals can buy insurance
● Pay a premium P
● Receive benefits I if they are sick
Disposable income in the two states:
● Healthy: y_h=Y-P
● Sick: y_s=Y-P-M+I
Y doesn’t change in the model (exogenous), M is fixed and does not depend
on her behaviour. Before knowing if they are sick or not they pay premium, p,
and if they are sick then they receive I. We derive utility from the disposable
income, y. The utility function is concave (risk averse).
Maximise individual’s expected utility:
We need to characterise the premium P and assume that:
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