Part Two

1
Part Two

• Economics of Health Care Is Health Care similar
  to other commodities?
• Craig A. Pedersen, R.Ph., Ph.D.

2
Competitive Market Model Assumptions

• Homogenous Products
• Full and Free Information
• Freedom of entry and exit
• Many buyers and sellers
• No collusion

3
Market Forces Supply

• Suppliers
• Entry restrictions
• Individual Supply Factors
• Quality
• Technology
• Input Prices
• Supplier Behavior

4
Market Forces Demand

• Demanders
• Individual Demand Factors
• Income
• Prices
• Behavior
• Quality
• Tastes and Preferences
• Health Status
• Health Perception

5
Medical Market Models

• Demand Generation Model
• A built bed is a filled bed
• Complex Market Model

Consumer
Insurance Co.
Producers (Hosp, MD, etc)
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Types of Cost Sharing

• Deductible - Fixed paid by insured prior to
  benefits being received
• Copayment - Fixed amount per service
• Coinsurance - Fixed per service
• Maximum limits (Caps or Stop Loss)
• On benefits
• On out-of-pocket

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Insurance

• Premium Calculations
• Actuarial analysis
• Buying insurance is rational
• Expected value from loss is greater than premium
• Induced demand
• Think supply and demand curve, as price decreases
  (copay) quantity demanded increases
• Target income hypothesis
• Just tell me the rules

8
RAND Health Insurance Experiment

• Largest and most comprehensive study of price
  responsiveness of consumers
• 1974-1977
• Coinsurance of 0, 25, 50, 95 percent
• Stoploss of 5, 10, 15 percent of income up to
  1,000
• Results

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Imperfections in theMedical Market

• Consumers do not have perfect information
• Patients and providers do not have incentives to
  minimize their costs of buying and selling
  medical care
• Substantial barrier to entry into the market
• Market for medical care is not well defined
• it is a mix of institutional markets, manpower
  and factor markets, and educational markets which
  are not well defined

10
Demand vs. Need vs. Want

• Demand function A multivariate relationship
  between quantity demanded and the determinants of
  demand.......Qf(P,P0,Y,Popn,TP)
• Need Normative judgment of medical services
  that should be consumed

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Demand vs. Need vs. Want

• Need estimate assumes Knowledge of
• How to measure health
• How healthy population is
• What the impact of medical science will be on
  health
• Wants Quantity of medical services that a group
  feels they should consume
• Influenced by customs, religion, education,
  social status, perceived wealth

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Relationship Between Demand Need

• Do not assume that if you give health care away
  that consumers will take it
• Given population has perfect knowledge of health,
  the quantity demanded is not likely to equal the
  quantity needed. Why?
• Financial barriers to access
• Non-financial barriers to access
• Wants are less than needs
• If consumers have imperfect knowledge may have to
  pay them to get medical treatment, i.e. Prenatal
  care

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This Concludes Part Two.

• Economics of Health Care Is Health Care similar
  to other commodities?
• Craig A. Pedersen, R.Ph., Ph.D.