hen 368 lecture 6 health care systems and institutions
TRANSCRIPT
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Health Economics
Lecture 6Health Care Systems
and Institutions
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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
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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
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Who gets the Benefits?Me Not Me
Me
NotMe
Who pays the Costs?
Balanced Too Cautious
Too Risky Don’t Care
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Milton Friedman(1912 - 2006)
Nobel Prize1976
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Friedman MatrixWho’s Money?
My Not Mine
Me
NotMe
Spent on Who?
Price: YesQuality: Yes
Price: NoQuality: Yes
Price: YesQuality: No
Price: NoQuality: No
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Heath Care SystemThe organizational
arrangements and processes through which a society makes choices about the production, consumption, and distribution
of health care services
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Four Questions
Who decides? Who finances?
How reimbursed?How produced?
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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
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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
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Private Government
Choice Voluntary Mandatory
Financing Premiums Taxes
Payment Based on risk Same for all
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NormalMarket
MedicalMarket
Planned Yes No
Know Price Yes No
Guarantee Yes No
Equal Information Yes No
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Medical events are random and unpredictable
However, with a large number of people, the average can be
predicted fairly accurately
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Insurance
Sharing risk
Does not eliminate riskSpread around risk
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Risk Aversion
A dislike of uncertainty
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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
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Estimating Expected Cost
1. 50002. 1 in 303. Expected Cost ?
= 5000 x .03333= 166.67
5000 or 30 x 166.67?
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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
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Insurance Problems
Asymmetric InformationAdverse Selection
Moral Hazard
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Asymmetric Information
Parties to a trade do not have the same
information
Not Equal
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Adverse Selection
Making a bad choice due to asymmetric
information
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Moral Hazard
Changing behavior after an agreement
Temptation to abuse the other party
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Diversification
Replace one large risk with lots of smaller
unrelated risks
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Deductible Pay first fixed amount
CopaymentPay fixed amount for
each incident
CoinsurancePay fixed percentage for
each incident
Three Types of Coverage
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Incentives to Keep Costs LowType of
Reimbursementfrom Insurer
Fixed Variable
Low
HighOut-of-Pocket
costs to Patient Provider
worriesNobodyworries
PatientworriesBoth worry
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Health
Medical Costs
LargeGain
Diminishing Marginal UtilityHealth and Medical Costs
SmallGain
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For-Profitvs.
Not-for-Profit
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For-Profit Not-For-Profit
InformationPerfectlyInformed
ImperfectInformation
Equity Ability to Pay Need
Externalities None Several
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For-Profit Not-For-Profit
Initial Capital Shareholders Donations
Profits Distribute Retain
Sale Easy Difficult
Taxes Liable Exempt
Type of Goods No restrictions Restricted
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Summary
Decision Individuals or government
Financing Out-of-pocket, Premiums, or Taxes
Reimbursement Fixed or Variable
Produced For-profit, Not-for-profit, or Public