Health Economics

Charles E. Phelps

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138207981
• eBook ISBN: 9781315460475
• Topic: Business
• Subtopic: Economic Theory
• Index: Business

Can we really use economic thinking to understand our health care system? Health Economics, now in its sixth edition, not only shows how this is done, but also provides the tools to analyze the economic behavior of patients and providers in health care markets.

Health Economics combines current economic theory, recent research, and up-to-date empirical studies into a comprehensive overview of the field. Key changes to this edition include:

• additional discussion of the consequences of the Patient Protection and Affordable Care Act (PPACA), in light of current political changes;
• an extensive discussion of quality measures;
• more discussion of preventive services;
• a new section on drug markets and regulation;
• discussion of Accountable Care Organizations (ACOs);
• new references, problem sets, and an updated companion website with lecture slides.

Designed for use in upper-division undergraduate economics studies, the book is suitable for students and lecturers in health economics, microeconomics, public health policy and practice, and health and society. It is also accessible to professional students in programs such as public policy, public health, business, and law.

1
Why Health Economics?

Learning Goals

• ▶ Assess why the special study of health economics makes sense. Understand novel aspects of health care and ways to approach the issues.
• ▶ Identify how health care markets differ from others, particularly understanding the unique role of health insurance.
• ▶ Ascertain how medical spending has evolved over time (and why), dissecting changes over the years in medical spending.

HEALTH CARE REPRESENTS a collection of services, products, institutions, regulations, and people that, in 2015, accounted for about 18 percent of our gross domestic product (GDP), growing at about 2-4 percent of GDP per decade in recent years. In 2016, the most recent year with estimated data at this writing, medical spending reached $3.3 trillion, or about $10,500 per person for the 325 million people living in the United States, representing about 18 percent of the GDP of the country. About half of this comes from private spending, the other half from government spending (financed by taxation). This alone makes the study of health care a topic of potential importance.¹

Almost every person has confronted the health care system at some point, often in situations of considerable importance or concern to the individual. Even the most casual contact with this part of the economy confirms that something is quite different about health care. Indeed, the differences are often so large that one wonders whether anything we have learned about economic systems and markets from other areas of the economy will apply, even partly, in the study of health care. Put most simply, does anybody behave as a “rational economic actor” in the health care market?

1.1 Important (if not Unique) Aspects of Health Care Economics

Although the health care sector shares many individual characteristics with other areas of the economy, the collection of unusual economic features that appears in health care markets seems particularly large. The unusual features include (1) the extent of government involvement; (2) the dominant presence of uncertainty at all levels of health care, ranging from the randomness of individuals’ illnesses to the understanding of how well medical treatments work, and for whom; (3) the large difference in knowledge between doctors (and other providers) and their patients, the consumers of health care; and (4) externalities—behavior by individuals that imposes costs or creates benefits for others. Each of these is present in other areas of the economy as well, but seldom so much as in health care, and never in such broad combination. A brief discussion of each issue follows.

As background to each of these ideas, and indeed for the entire book, the student of health economics will be served by the following notion: Uncertainty looms everywhere. Uncertain events guide individual behavior in health care. This major uncertainty leads to the development of health insurance, which in turn controls and guides the use of resources throughout the economy. The presence of various forms of uncertainty also accounts for much of the role of government in health care. Thus, if all else fails, search for the role of uncertainty in understanding health care. Such a search will often prove fruitful, and will lead to a better understanding of why the health care economy works the way it does and why the institutions in these markets exist.

Government Intervention

The government intrudes into many markets, but seldom as commonly or extensively as in health care. Licensure of health professionals, of course, is common. Many other professionals also require a license before they may practice, including barbers, beauticians, airplane pilots, attorneys, SCUBA instructors, bicycle racers, and (ubiquitously) automobile drivers. But almost every specialist in health care has to pass a formal certification process before practicing, including physicians, nurses, technicians, pharmacists, opticians, dentists, dental hygienists, and a host of others. The certification processes include not only government licensure, but often private certification of competence as well. Why does our society so rigorously examine the competence of health care professionals?

The government also intrudes into health care markets in ways unheard of in other areas. The 2010 Patient Protection and Affordable Care Act (PPACA) vastly altered the health care landscape, including (among other provisions) the requirement that all citizens maintain a minimum level of health insurance coverage, rules prohibiting any health insurer from using preexisting conditions either to determine access to health care or the cost of insurance, and established regional “exchanges” to provide health insurance for people in small-group settings. The PPACA also proposed a phase-in of taxation of high-cost insurance (“Cadillac”) plans, a number of reforms of Medicare (discussed in detail in Chapter 12), and development of a stronger focus on illness prevention in both private insurance and government programs. As this book goes to press, legislation is pending in the U.S. Congress to reshape the PPACA. And wherever that legislation ends, it will represent only the next step in the evolution of government intervention in the U.S. health care sector.

Even before the PPACA, federal and state programs provided insurance or financial aid against health expenses for an extremely diverse set of people, including all elderly persons, the poor, military veterans, children with birth defects, persons with kidney disease, persons who are permanently disabled, people who are blind, migrant workers, families of military personnel, and schoolchildren of all stripes. In addition, a broad majority of people living in the U.S. can walk into a county hospital and claim the right to receive care for free if they have no obvious way of paying for the care. Probably only in public education do various levels of government touch as many individuals at any given time as in health care. Over a life cycle, nothing except for education comes close: Because Medicare has mandatory enrollment at age 65, every person who lives to that age will become affected by an important government health care program. By contrast, many individuals go through private schools and never see a public school. Why does the government involve itself so much in the financing of health care?

The government also controls the direct economic behavior of health care providers such as hospitals, nursing homes, and doctors, far more than in other sectors of the economy. We have seen economywide price controls sporadically in our country’s history, and considerable regulation in various sectors such as petroleum, banking, and (by local governments) housing rental rates. After the Organization of Petroleum Exporting Countries (OPEC) raised the price of oil fourfold in 1973, petroleum regulations became a national phenomenon for several years, with such unintended consequences as gasoline shortages and hours-long queues to buy a tank of gas. However, such intervention pales in comparison to government involvement in prices in the health sector. At least in some form, the government has been controlling prices in the health care industry continually since 1971, and these controls, at least in terms of prices paid to physicians by government insurance programs, have become more rigorous and binding over time. During the same time, the government decontrolled prices in a broad array of industries, including airlines, trucking, telephones, and petroleum. Why do we spend so much effort controlling prices in health care in contrast to those in other industries?

For decades, the United States has also seen direct controls on the simple decision to enter the business of providing health care. Even ignoring licensure of professionals as an entry control, we have seen a broad set of regulations requiring such things as a “certificate of need” before a hospital can add so much as a single bed to its capacity. Similar laws control the purchase of expensive pieces of equipment such as diagnostic scanning devices. The reverse process also attracts considerable attention: If a hospital wants to close its doors, political chaos may ensue. What leads the government to intensively monitor and control the simple process of firms entering and exiting an industry?

Quite separately, both federal and state governments have commonly provided special assistance for providing education to people entering the health care field, through direct financial aid to professional schools and generous scholarships to students in those schools. This financial aid often directly benefits a group of persons (e.g., medical students) who will enter one of the highest paying professions in our society. Why do governments proffer this support for the medical education process?

Government research is also prominent in the health care sector. Although the government accounts for considerable research in other areas, most notably those involving national security (such as aircraft ...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Preface to the Sixth Edition
• Acknowledgments
• CHAPTER 1 Why Health Economics?
• CHAPTER 2 Utility and Health
• CHAPTER 3 The Transformation of Medical Care to Health
• CHAPTER 4 The Demand for Medical Care: Conceptual Framework
• CHAPTER 5 Empirical Studies of Medical Care Demand and Applications
• CHAPTER 6 The Physician and the Physician-Firm
• CHAPTER 7 Physicians in the Marketplace
• CHAPTER 8 The Hospital as a Supplier of Medical Care
• CHAPTER 9 Hospitals in the Marketplace
• CHAPTER 10 The Demand for Health Insurance
• CHAPTER 11 Health Insurance Supply and Managed Care
• CHAPTER 12 Government Provision of Health Insurance
• CHAPTER 13 Medical Malpractice
• CHAPTER 14 Externalities in Health and Medical Care
• CHAPTER 15 Managing the Market: Regulation, Quality Certification, and Technical Change
• CHAPTER 16 Universal Insurance Issues and International Comparisons of Health Care Systems
• Author's Postscript
• Bibliography
• Index