Chapter 10 – Social Insurance II: Health Care Public Economics 1 What’s Special About Health Care? Health care costs are large and growing fast Number of reasons why First Welfare Theorem may be violated Poor information (physician induced demand) Adverse selection and moral hazard Disease externalities 2 What’s Special About Health Care? In the context of health care, moral hazard can be analyzed in a conventional supply-and-demand framework. Health insurance changes the price of health care, and creates deadweight loss. 3 Figure 4 What’s Special About Health Care? Without insurance, consume M0 of health care services. Insurance in this example lowers the price of services to 20% of actual price. With insurance, consume M1 of health care services. Deadweight loss equals abh. 5 What’s Special About Health Care? Assumed that demand for health care downward sloping (., health care use is elastic with respect to the price). Assumed coinsurance rate of 20% -- the amount the insured person pays out of pocket. Social experiments find that the elasticity of demand for health care is -. 6 The . Health Care Market Patchwork of public and private insurance. % of GDP Spending on hospitals is 32% of costs Spending on physician services is 22% 7 The . Health Care Market: Private Insurance Virtually all (93%) of private insurance for the non-elderly is provided through the employer. By-product of wage & price controls during World War II Tax provisions subsidize employer contributions Group market is less expensive than individual market 8 The . Health Care Market: Private Insurance Link to employment potentially leads to “job lock” When you leave your job, you also lose your health insurance May be difficult to get new insurance if you have a “pre-existing” condition Kennedy-Kassenbaum Act mandated that employers must include a new employee who previously had health insurance, even if they have pre-existing condition. 9 The .
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