ch09 - Chapter 9 Government and Health Care 1 Government...

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1 Chapter 9 Government and Health Care
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2 Government Health Care Spending Government spending represents 45% of the $1.3 trillion spent on Health Care. 20% of the Federal Budget is devoted to health care issues.
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3 Figure 9.1 U.S. Health Expenditures as a Percentage of GDP 1960-2001
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4 Why Health Care is Different Uncertainty: People do not typically know what their health care expenses will be. Insurance: Because of uncertainty (risk), people typically buy health insurance. This means that people do not typically pay the full marginal cost of their health expenses.
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5 Health Insurance Coverage 82% of Americans are covered. 44 million are uncovered.
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6 Figure 9.2 Financing Health Care Expenditures in the United States, 2001
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7 Problems with Health Insurance—(cont.) Adverse Selection People at greater risk for high health expenses will purchase health insurance, even at very high premiums. At those higher premiums, people who are healthy may opt to go without insurance. This lack of healthy insureds in the pool forces insurance companies to raise rates, because companies must assume that only those with higher risk will apply for insurance. This problem can create a vicious cycle that drives insurance companies out of business and leaves people without health insurance.
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8 Problems with Health Insurance Asymmetric Information : Sellers (health insurance companies) know more about the health industry needs than buyers of policies know. This can lead to over-consumption, because doctors may prescribe unnecessary procedures.
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9 Figure 9.3 Health Insurance and the Market for Health Care Price (Dollars per Unit Service) P 2 P 1 Q 1 B A P 2 Q * C Loss in Net Benefits Supply = Marginal Social Cost Demand = Marginal Social Benefit
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10 Problems with Health Insurance (cont.) Third-Party Payments Neither the insured nor the physician has incentives to keep costs down. This leads to over-consumption. Patients evaluate the benefits of a procedure against only a fraction of the procedure’s cost (i.e, (their coinsurance rate).
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11 Figure 9.4 Government Health Spending, 1965-1998 in billions (Selected Years)
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12 Problems with Health Insurance (cont.) Moral Hazard
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