Healthcare Economics Explain the Term

Healthcare Economics

Explain the term Moral Hazard. Explain how the level of morale hazard affects an individual's use of health services.

A moral hazard exists when the possession of an insurance policy increases the likelihood of incurring a loss. Moral hazard comes about because a person does not take the full responsibility for their actions, and thus has a tendency to act less cautiously than they otherwise would, leaving another party to hold some accountability for the consequences of those actions. In the healthcare area, the existence of a moral hazard implies that people use more services when they are insured or when they are more fully insured.

For a fully insured person, the cost of using an additional service is shared by everyone who pays premiums. Therefore, that person is more likely to use more services than they would if they had to pay the full cost of the additional services. It is believed that people will use too many services because they are not bearing the full cost of that usage. Costs are therefore being passed on regularly to others, which does not seem very fair. Those who are receiving the services should be the ones to bear the cost of such services, not everyone who pays for insurance.

An example of this is a person with health insurance who may be less cautious about taking care of themselves, because the negative consequences of having bad health are partially the responsibility of the insurance company. People who have health insurance tend to use health services more often than those who don't so the insurance policy increases the risk of loss for the insurance company. Insurers often view moral hazard unfavorably because it often means that they end up paying out more in benefits than expected when setting premiums which is why this term has a negative view.

2. Explain the term elasticity of demand. What are the major determinants of elasticity of demand?

Elasticity of demand is the amount to which demand for a good or service varies with its price. The elasticity of demand is the percentage of change in quantity demanded divided by the percentage of change in price. There are three major determinants of the elasticity of a good or service:

the extent to which substitutes are available -- if a consumer can easily switch to another good when the price of the original god rises, then the latter will tend to be more elastic.

the proportion of the consumer's income spent on the good -- goods that compose a greater share of a person's budget tend to have higher elasticities.

the time frame in question -- over time it is easier for consumers to find substitutes, so long-term elasticities are higher.

The relationship between demand and income and demand and the price of other goods is complicated. In general it is expected that the demand curve would shift outward and to the right if income were to rise. This is generally true for normal goods, but is not necessarily true for inferior goods. In this case when income rises, demand falls and when income falls, demand rises. An example of this is the health care area is visits to the emergency room. People with higher incomes are likely to have a regular doctor and therefore only seek care from an ER when it is truly an emergency. Conversely, people with lower incomes, that do not have a regular physician, typically use the ER for all of their health care services. Thus, the higher ones income the lower the demand is for ER services.

3. What cost containment provisions are part of the Patient Protection and Affordable Care Act of 2010?

There are three strategies that exist for containing costs in healthcare. These are: government regulation like limiting reimbursements or resources, private regulation like managed care restrictions and the price mechanism. The Affordable Care Act seeks to lower costs by making cuts in Medicare reimbursement, adjustments in Medicare reimbursement based on quality of care and greater cost sharing for Medicare beneficiaries.

Under the Act, hospitals, nursing homes and other health care facilities will receive fewer dollars over the next ten years in the form of Medicare payments. In addition the Affordable Care Act will save money for the government by increasing the cost-sharing obligations of Medicare beneficiaries. Premiums for Part B of Medicare are set to go up for higher income people. Reimbursement based on quality of care rather than quantity of care has the potential for saving costs by reducing the amount of unnecessary care provided to patients.

Basically this Act is working to balance demand side and supply side cost containments. On the supply side it is going to contain costs by redoing reimbursement rates and relying more on managed care structures. It is also going to try and standardized price mechanism so that everyone is on the same playing field. On the demand side the Act will contain costs by making Medicare recipients responsible for more of their health care costs. The idea that is consumers are responsible for more of the cost of their health care they will shop more wisely when it comes to having procedures done. The rising rates of health care costs in this country are unsustainable as they are. This Act is just the first step in many more that will have to come in order to make it so that everyone as access to and can afford health care.

4. Discuss Mark Pauley's arguments related to the question: Do people have the information they need to make the right healthcare choices?

Information plays an important role in economic theory. Consumers need good information in order to make good decisions. The question of whether patients have enough information to make the right choices depends entirely on the health service being considered. It is thought that there are three kinds of services:

1. those purchased relatively infrequently by the typical household

2. those provided frequently by a physician but used infrequently by a patient

3. those that even a physician provides infrequently.

Research has been conducted that has shown that information on the alternatives that people face in the health market have very little to do with consumerism. In the past research has shown that people did not try to find out information when it came to making healthcare decisions.

This appears to be changing as the market it leaning more and more towards consumer driven health care. This brings about the question though of even if more information is provided for consumers will they understand the information that they are being provided and know what to do with it. Overall consumers do not understand the difference in the many types of health care coverage that they are offered. People normally have no idea what the difference is between fee for services medicine and managed care plans.

There is no doubt that information needs to be given to people so that they can make informed decisions, but that information needs to be presented in a way that is easily understood by everyone. If this is not done the providing of the information is basically useless. If a person does not know what it means they still can't make a good decision.

5. There is constant debate in the U.S. related to controlling healthcare costs. Part of chapter 4 discusses control from the supply side and control on the demand side. Give an example of each. In your opinion which is a more effective. Why?