Lecture 3 - 9/7/99

Pauly’s Typology: 3 Types of Medical Services

• Frequently consumed and frequently produced (OB care, physical exam)
• Frequently produced and infrequently consumed (most surgery)
• Infrequently produced and infrequently consumed (new cancer therapies)

Externalities in Consumption: 2 Types

• Communicable diseases-->public support for public health programs
• Consumption of services per se-->public insurance; tax subsidy of private insurance; and community rating of insurance premiums

Uncertainty

• Individuals’ consumption of services is stochastic
• To deal with stochastic consumption, there is health insurance (to lesser extent self-insurance---precautionary saving)
• 2 problems arise in insurance markets: moral hazard and adverse selection

Moral Hazard Graph

How to Cope with Moral Hazard

• Financial incentives for patients
• External utilizaton controls
• Financial incentives for physicians
• Experience-rated insurance premiums

Public Goods

• What a public good is: nonrivalness in consumption
• Examples: biomedical research, others?

Warning!!  Demand Concept Here May be Inapplicable/Inappropriate

• Provider-induced demand due to asymmetric information between providers and patients
• Use of demand leads to inefficient and inequitable policies  (Some economist proponents of this view:  Tom Rice, Uwe  Reinhardt, Robert Evans)

Why Conduct Demand Analysis

• Study underuse
• Study effects of imposing cost sharing, moral hazard and associated welfare loss
• Forecast future utilization of services
• Plan capacity

Demand Theory Concepts

• State-dependent indifference curves
• Engel curves: sanitation, health spa, fast lane effects
• Complements versus substitutes: concepts and examples
• Consumer surplus
• Effects of health insurance on demand for medical care: coinsurance; indemnity insurance; deductibles; maximum payment limitations