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Health Economics
Lecture 6Health Care Systems
and Institutions
1. What would you prefer?
A. WIN 500 riyals
or
B. Flip a coin:
50 percent chance you WIN 1,000 riyals
50 percent chance you lose nothing
2. What would you prefer?
A. LOSE 500 riyals
or
B. Flip a coin:
50 percent chance you lose nothing
50 percent chance you LOSE 1,000 riyals
Who gets the Benefits?Me Not Me
Me
NotMe
Who pays the Costs?
Balanced Too Cautious
Too Risky Don’t Care
Milton Friedman(1912 - 2006)
Nobel Prize1976
Friedman MatrixWho’s Money?
My Not Mine
Me
NotMe
Spent on Who?
Price: YesQuality: Yes
Price: NoQuality: Yes
Price: YesQuality: No
Price: NoQuality: No
Heath Care SystemThe organizational
arrangements and processes through which a society makes choices about the production, consumption, and distribution
of health care services
Four Questions
Who decides? Who finances?
How reimbursed?How produced?
Claims
BuyersConsumers
Patients
SellersProducersProviders
Medical Services
Fees
Insurers or Third-Party Payers
Money - Fixed orVariable
PremiumsCoverage Government or Employer
Taxes or lower wages
Premiums
Direct Relationship to Indirect with two intermediaries
Adds complexityChanges incentives
Centralized Decentralized
Who makes the choice?
Government Individual
AdvantagesEconomies of scale
Everyone equal
Lots of choicesCompetition
Simple
Disadvantages
No incentivesNo innovation
High costs of collecting informationComplexity
Lack of efficiency
Private Government
Choice Voluntary Mandatory
Financing Premiums Taxes
Payment Based on risk Same for all
NormalMarket
MedicalMarket
Planned Yes No
Know Price Yes No
Guarantee Yes No
Equal Information Yes No
Medical events are random and unpredictable
However, with a large number of people, the average can be
predicted fairly accurately
Insurance
Sharing risk
Does not eliminate riskSpread around risk
Risk Aversion
A dislike of uncertainty
Estimating Expected Cost
1. Estimate the cost of an event 2. Estimate the probability of an event3. Expected Cost = Cost x Probability
1. 1002. 1 in 20 or 1÷ 20 or 5% or .053. 100 x .05 = 5
Estimating Expected Cost
1. 50002. 1 in 303. Expected Cost ?
= 5000 x .03333= 166.67
5000 or 30 x 166.67?
Progress is Risky
Insurance allows us to share the risk
Therefore, insurance allows us to be more risky
Therefore, insurance allows us to make progress
Insurance Problems
Asymmetric InformationAdverse Selection
Moral Hazard
Asymmetric Information
Parties to a trade do not have the same
information
Not Equal
Adverse Selection
Making a bad choice due to asymmetric
information
Moral Hazard
Changing behavior after an agreement
Temptation to abuse the other party
Diversification
Replace one large risk with lots of smaller
unrelated risks
Deductible Pay first fixed amount
CopaymentPay fixed amount for
each incident
CoinsurancePay fixed percentage for
each incident
Three Types of Coverage
Incentives to Keep Costs LowType of
Reimbursementfrom Insurer
Fixed Variable
Low
HighOut-of-Pocket
costs to Patient Provider
worriesNobodyworries
PatientworriesBoth worry
Health
Medical Costs
LargeGain
Diminishing Marginal UtilityHealth and Medical Costs
SmallGain
For-Profitvs.
Not-for-Profit
For-Profit Not-For-Profit
InformationPerfectlyInformed
ImperfectInformation
Equity Ability to Pay Need
Externalities None Several
For-Profit Not-For-Profit
Initial Capital Shareholders Donations
Profits Distribute Retain
Sale Easy Difficult
Taxes Liable Exempt
Type of Goods No restrictions Restricted
Summary
Decision Individuals or government
Financing Out-of-pocket, Premiums, or Taxes
Reimbursement Fixed or Variable
Produced For-profit, Not-for-profit, or Public