CHAPTER 1 WHY HEALTH ECONOMICS?
CHAPTER 1 WHY HEALTH ECONOMICS?
Why is health economics interesting? The U.S. health care economy is massive and expensive. Health is a major source of uncertainty and risk. Governments around the world are deeply involved in financing health systems. Bhattacharya, Hyde and Tu-Health Economics
Bhattacharya, Hyde and Tu – Health Economics Why is health economics interesting? The U.S. health care economy is massive and expensive. Health is a major source of uncertainty and risk. Governments around the world are deeply involved in financing health systems
The U.S.health care economy is massive and expensive The U.S.GDP in 2008 was approximately $14 trillion. One out of every six dollars spent in the U.S.that year was spent on health care. In 1960,barely one dollar out of every twenty spent in the U.S.went toward health care. The trend has been similar in countries around the world,but no country spends quite as much on health care as the U.S. What do we get for all this money? Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics The U.S. health care economy is massive and expensive The U.S. GDP in 2008 was approximately $14 trillion. One out of every six dollars spent in the U.S. that year was spent on health care. In 1960, barely one dollar out of every twenty spent in the U.S. went toward health care. The trend has been similar in countries around the world, but no country spends quite as much on health care as the U.S. What do we get for all this money?
Health care expenditures in the US 16 14.000 15 13.000 12.000 11.000 43210 10.000 9000 8000 7000 uollq) 6000 5000 8 4000 3000 2000 6 1000 5 0 1960196419681972197619801984198819921996200020042008 Year Health expenditure as%GDPGDP (billion $ Figure 1.1.Health care expenditure as a proportion ofUS GDB 1960-present Source:Data from the US Center for Medicare and Medicaid Services,Office of the Actuary. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Health care expenditures in the US
Health is uncertain and contagious The health economy may be huge,but how is it different from other,smaller markets like the market for bananas and the market for televisions? Two interesting economic properties Uncertainty:most people can predict how many bananas or TVs they will buy in the next week,but not how many emergency heart surgeries they will need in the next week. Contagiousness:it doesn't matter to you if your neighbor buys a banana or a TV,but it does matter if he skips his flu shot. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Health is uncertain and contagious The health economy may be huge, but how is it different from other, smaller markets like the market for bananas and the market for televisions? Two interesting economic properties Uncertainty: most people can predict how many bananas or TVs they will buy in the next week, but not how many emergency heart surgeries they will need in the next week. Contagiousness: it doesn’t matter to you if your neighbor buys a banana or a TV, but it does matter if he skips his flu shot
Uncertainty and insurance An unforeseen broken leg or heart attack can suddenly create demand for expensive health care services. Because most people are risk averse,health- related uncertainty motivates individuals to demand health insurance. This in turn creates problems that arise in insurance markets:adverse selection and moral hazard. These two phenomena are what make health policy really difficult(and really interesting). Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Uncertainty and insurance An unforeseen broken leg or heart attack can suddenly create demand for expensive health care services. Because most people are risk averse, healthrelated uncertainty motivates individuals to demand health insurance. This in turn creates problems that arise in insurance markets: adverse selection and moral hazard. These two phenomena are what make health policy really difficult (and really interesting)
Contagiousness and externalities The fact that other people's health decisions affect you creates externalities Examples: Vaccinations and other preventative measures create positive externalities Going out in public with Ebola virus creates negative externalities Externalities undermine the efficient function of markets and often require government intervention. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Contagiousness and externalities The fact that other people’s health decisions affect you creates externalities Examples: ◼ Vaccinations and other preventative measures create positive externalities ◼ Going out in public with Ebola virus creates negative externalities Externalities undermine the efficient function of markets and often require government intervention
Health economics public finance Governments play a huge role in health markets because of the features just discussed. In countries like the United Kingdom,Sweden, and Canada,the government is responsible for the vast majority of health care expenditures. Even in the US,with its private health care system,the government is responsible for half of all health care spending. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Health economics = public finance Governments play a huge role in health markets because of the features just discussed. In countries like the United Kingdom, Sweden, and Canada, the government is responsible for the vast majority of health care expenditures. Even in the US, with its private health care system, the government is responsible for half of all health care spending
Health care is only getting bigger and more expensive for governments and taxpayers Increasing life expectancies and graying populations throughout the developed world will place stress on public health insurance systems. Governments will have to cope with ongoing questions about whether to pay for expensive new medical technologies. Given these trends we can confidently expect health care to be an ever-growing line item on government balance sheets. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Health care is only getting bigger and more expensive for governments and taxpayers • Increasing life expectancies and graying populations throughout the developed world will place stress on public health insurance systems. • Governments will have to cope with ongoing questions about whether to pay for expensive new medical technologies. Given these trends we can confidently expect health care to be an ever-growing line item on government balance sheets
Positive ys normative questions ▣Normative questions Does everyone deserve access to health care,even if they cannot pay? Should people be compelled to purchase insurance? When is it ethical to deny care to a dying patient? Should the government ban certain unhealthy foods? Positive questions How much would it cost to provide free checkups and drugs for everyone in a population? Do strict patent protections for new drugs spur innovation? How much would consumers save if doctors were not required to have medical degrees or medical licenses? Would a tax on saturated fat make a nation healthier? Economic reasoning cannot answer normative questions,but it can answer positive questions,and that can help us form opinions about normative questions. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Positive vs normative questions Normative questions Does everyone deserve access to health care, even if they cannot pay? Should people be compelled to purchase insurance? When is it ethical to deny care to a dying patient? Should the government ban certain unhealthy foods? Positive questions How much would it cost to provide free checkups and drugs for everyone in a population? Do strict patent protections for new drugs spur innovation? How much would consumers save if doctors were not required to have medical degrees or medical licenses? Would a tax on saturated fat make a nation healthier? Economic reasoning cannot answer normative questions, but it can answer positive questions, and that can help us form opinions about normative questions