Health care

Health care is different from other goods and services: the health care product is ill-defined, the outcome of care is uncertain, large segments of the industry are dominated by nonprofit providers, and payments are made by third parties such as the government and private insurers.

Various players in the industry—consumers and providers, to name two—respond to incentives just as in other industries.

Federal and state governments are a major health care spender. Together they account for 46 percent of national health care expenditures, private health insurance pays for more than 35 percent of spending, and out-of-pocket consumer expenditures account for another 14 percent.

Conventional economics argues that the probability of purchasing health insurance will be greater when the consumer is particularly risk averse, when the potential loss is large, when the probability of loss is neither too large nor too small, and when incomes are lower.

Most Americans under age sixty-five receive their health insurance through their employers. This form of employee compensation is not subject to income or payroll taxes, and as a result, the tax code subsidizes employer purchase of employee health insurance.

The previously mentioned tax incentive for the purchase of health insurance increases the chances that health insurance will be purchased. Indeed, the presence of a progressive income tax system implies that higher income consumers will buy even more insurance.

The key effect of health insurance is to lower the out-of-pocket price of health services.Thus, health insurance gives consumers an incentive to use health services that have only a very small benefit even if the full cost of the service (the sum of what the consumer and the insurer must pay) is much greater. This overuse of medical care in response to an artificially low price is an example of “moral hazard".Much spending is on things that have no effect on mortality and little effect on quality of life, and these are encouraged when the patient pays only a fraction of the bill.

There are three reasons why most people under age sixty five get their health insurance through an employer.

(1)employed people, on average, are healthier than those who are unemployed; therefore, they have fewer insurance claims.

(2)the sales and administrative costs of group policies are lower.

(3) health insurance premiums paid by an employer are not taxed.

If insurance premiums increased, on average, by $200, the typical worker spent $104 more on coverage and paid for this by reducing take-home pay by $74 and giving up $30 in other benefits.

These so-called compensating wage differentials, reductions in wages due to higher nonwage benefits, have important policy implications. They imply, for example, that a governmental requirement that all employers provide health insurance will result in lower wages for the affected workers.

Managed care changed the nature of competition among providers. It is true that managed care plans disproportionately attract healthier subscribers.

The health care industry is one of the most heavily regulated industries in the United States. These regulations stem from efforts to ensure quality, to facilitate the government’s role as purchaser of care, and to respond to provider efforts to increase the demand for their services.

All of the above regulations restrict supply and raise the price of health care; interestingly, those who lobby for such regulations are medical providers, not consumers, presumably because they want to limit competition.

Although other countries with more centralized government control over health budgets appear to have controlled costs more successfully, that does not mean that they have produced a more efficient result.Marginal benefits are very hard to measure, but certainly they include more subjective values than the crude measures of morbidity and mortality that are widely used in international comparisons.

The use of tight physician fee schedules gives doctors incentives to reduce their own time and other resources per patient visit; patients must therefore make multiple visits to receive the same total care. But these hidden patient time costs do not appear in standard measures of health care spending.