ECON2460 Lecture 1 - Notes PDF

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ECON2460: Week 1 Do you have infinite resources to draw on if you get seriously ill? - Price of healthcare is important - Is it affordable? Expensive? How can we make it more affordable? Are you capable of predicting your future health with complete precision? - Future, unforeseen health conditions - Health insurance - Personal demand for healthcare is unpredictable Do you live in a country that has 0 public spending on healthcare? - Government pays for a large amount of healthcare - Are tax payers’ money being spent efficiently? Health Economics studies real-life health decisions - Why people lie to insurance companies about their health?  Don’t cover pre-existing conditions  Charge a high premium  To lower premiums – may cause markets to collapse - Why people smoke while they know that it is bad for their health?  Addictive  Irrational behaviour - Why health insurance might make you fat?  Moral hazard  Insurance company is paying when you are ill  May make decisions that are less healthy  Impacts on health expenditure - How should governments design their national health systems?  UK – government pays for everything  Aus – government subsidises healthcare  US – majority of the health expenses are paid by the patient  Which system is better?? Optimal design/policy?  Why are some American politicians set on repealing the affordable care act?

1. The healthcare economy is Huge 2. Health is uncertain and involves externalities

3. Health economics is public finance US – Fiscal Year 2016 ($ billion) - Health expenditure is 17.8% of GDP ($3.2 TRILLION) - Government spending was 27% ($1.1 TRILLION) Healthcare Spending in Aus - 2013 -14 - Australia spends $155 billion on healthcare - Government healthcare expenditure = $105 billion Healthcare spending has been increasing Facts 1. Most countries spend a lot on healthcare 2. Healthcare costs are increasing faster than inflation  Real cost of healthcare increasing 3. Healthcare expenditure is increasing faster than GDP  Healthcare share of GDP increasing Why are Healthcare costs increasing so quickly? 1. Increase in new medical technology and techniques over the years  Many conditions were untreatable and untreated in the past  There was no cure for diabetes before 1921, before the discovery of insulin – now patients spend billions on treatments like insulin, dialysis etc.  Availability of new healthcare – increases the quantity 2. Features of the healthcare “Market”  Prices of medical procedures not transparent to patients/customers  in absence of price information, patients make decisions on other factors (no price competition between providers)  Supplier-induced demand – patients and hospital administrators often defer to doctors on treatment  Doctors may prescribe more treatments/medication than strictly necessary  Doctors are less concerned about cost control  The rise of for-profit hospitals and competition based on “service quality”

 Medical arms race – as hospitals compete to provide the latest and greatest technology Are higher Healthcare costs worth it? - What do societies get in return for all the money spent on healthcare?  End of life - Are countries spending too much, too little or just right? Cost-Effectiveness Analysis - Higher expenditure does not always result in better health outcomes Value of a Statistical Life - How much should we spend in improving healthcare services?  More specifically, how much is society willing to pay to save one life?  In Australia – 4.2 million for a statistical life and 182000 per statistical year  If a policy can save a statistically ‘average’ life for less than 4.2 million or increase the life expectancy of “someone” by 1 year for less than 182K – the government SHOULD implement it Is the market for healthcare perfectly competitive? - PC markets ‘automatically’ achieve pareto efficient outcome - Government intervention always result in deadweight loss - Not PC - Price taking buyers and sellers  debatable but healthcare providers likely to have market power - perfectly informed buyers and sellers  doctors have more relevant medical training/information than patients  Customers often have more relevant information on own health status than insurance - Free market entry and exit  New medicines are patented  Doctors require costly and stringent certification - Homogeneous products  Does every doctor/hospital provide the same quality of care? No - No externalities  Yes  Vaccination – endangering the community

Uncertainty in Demand for Healthcare - Arrow  Healthcare is different from most other goods – because of uncertainty  Because demand for healthcare is uncertain for most people  The risk is unexpected expensive Information Asymmetry in Health Insurance markets - Just as information asymmetry between doctors and patients can create market imperfections - Information asymmetry between clients and insurers can create problems in health insurance markets  Unhealthy clients or clients with pre-exiting conditions cost health insurers more than regular customers – insurers charge higher premiums to these customers  Clients know more about their health status than insurers  Temptation to lie about own health to lower premiums  But if clients with pre-existing conditions don’t lie, health insurance might be unaffordable – what implications do you think this might have for ‘unhealthy’ clients? - Information asymmetry between clients and insurers can create problems in health insurance markets  Suppose on the other hand the government requires insurers to charge the same premium to all clients, regardless of health condition  Insurers would charge a premium reflecting the average level of claims  Healthy people would choose not to buy insurance Econometric Tools for Healthcare Analysis - Health economics is about optimal levels  Theory predicts the direction of effects of interventions  But the magnitude of effects depends on what happens in the real world  Need “real world” data to determine the optimal level of taxation - Economics is a science  Scientists state hypotheses and conduct experiments to see if their hypotheses hold up in the light of reality

 Laboratory experiments with control and treatment groups – economists do not have the luxury of treating real people like guinea pigs  Use natural experiments – outcomes of policies in different countries...