H_10_05W_ cost growth_ social welfare

H_10_05W_ cost growth_ social welfare - HEALTH ECONOMICS...

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HEALTH ECONOMICS Handout 10 Health Care Costs and Societal Welfare Efficiency (social welfare) in the health care sector requires the same conditions as discussed in the context of perfect competition. Prices should equal marginal costs Consumers should be consuming where their indifference curves are tangent to their budget constraint Inputs should be used such that isocosts are tangent to isoquants. Insurance tends to cause these conditions to be violated because prices to the consumer fall below marginal cost and welfare loss is created. Imperfect information may also cause violation of these conditions and I lump physicians acting as imperfect agents for their patients into this category regardless of whether this is intentional or not on the part of physicians. Moreover a lack of competition, or search by consumers, could also lead to a violation of these conditions. These conditions say nothing about equity and issues such as externality, as always can lead to inefficiencies in the market. Question: How do we measure the ‘costs’ of health care (as opposed to some other commodity)? Answer: Conceptually we think of opportunity costs. We could use a tool like the production possibility frontier (which implies a sense of opportunity costs) as opposed to the amount of money spent (per capita or as a % of GDP). The PPF represents all combinations of output that can be produced with available inputs assuming no waste. Graph 1 1
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AOG Health The assumption of no waste indicates that all points on the PPF are "technically efficient". The slope of the PPF measures how much of one commodity must be sacrificed to get more of another. In a competitive equilibrium, the bundle produced would be on the PPF and prices would reflect the slope of the PPF (i.e relative costs). Not all points on the PPF are efficient because they might not reflect preferences accurately The dollars devoted to health care expenditures does not always accurately capture resources used to produce health care because resources are likely "over-priced" (priced well above the value of their best alternative use). There are a few basic points that relate this analysis to common discussions of health care cost that should be worth noting. Q: What does it mean when we say we are devoting to many resources to health care: A1: That we are not on the PPF (see below). In this case we could get the same amount of health with fewer resources (i.e. allowing us to get more other goods without giving up health.) This would be the case if we thought at medical care services were not productive at the margin. (This idea is expressed in many different ways: (i.e. there is a lot of unnecessary care being given. We are on the "flat" of the health care production function.) This would also be the case if the producers of health care were not minimizing costs. A2:
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This note was uploaded on 04/09/2008 for the course HMP 661 taught by Professor Michaelchernew during the Winter '06 term at University of Michigan.

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H_10_05W_ cost growth_ social welfare - HEALTH ECONOMICS...

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