206 final notes

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206 notes 206 final notes Unit 1, 2: Cost benefit principle: take an action only if the extra benefits exceed the extra cost Types of efficiency: 1. technical: producing the maximum possible amount of output from the inputs used. 2. cost effectiveness: lowest cost for production. 3. allocative: produce and distribute according to the values of individuals. Utility – subjective satisfaction = welfare. *An allocation is AE id there it is impossible to reallocate resources in a way that makes at least one person better off without making someone else worse off. Pareto Criterion: if the gains from reallocation are sufficiently large that the winners could in theory compensate the losers and still be better off, the policy is deemed allocatively efficient thus, only a single point is allocatively efficient. Marginal benefit: the increase in gain as the result of increase in production or consumption of one additional unit. . Marginal cost: increase in cost … Produce/consume until marginal benefit = marginal cost. Externalities: Physical (selfish) externality: even a purely selfish person cares about others’ consumption of health care (e.g., flu shot). Caring externality: concern for others’ welfare. Unit 3: #7, #8, #9 Demand for health care can depend on: -out of pocket price -income -time costs -price of substitutes and complements -tastes and preferences -state of health -provider

206 notes PED range: 0 to minus infinity (-∞) Five cases: perfect inelasticity: PED = 0 inelastic demand: PED between 0 and -1 unitary elasticity: PED = -1 elastic demand: PED is less than -1 perfect elasticity: PED is minus infinity (- ∞) Primary care tends to be inelastic -0.1 -0.7 Dental and nursing home service are more elastic Complements : if price of one good goes up, you consume less of both. Substitutes : if price of one good goes up, you consume more of the other one. Determining factors of risk: -probability an event will occur -size of gain or loss Risk pooling: individuals contribute a small amount to the pool, this will compensate for loss. *Only risks that can be traded can be pooled. Works if uncertainty is: -unpredictable at the individual level -quite predictable in a large group Effective risk pooling depends on: -size of pool -presence of sufficiently independent risks -independence between the expected loss and the presence of insurance. Moral hazard: expected loss changes with the presence of insurance. Ex ante: insured takes less care to avoid loss. Ex post: those affected seek more expensive care than if the loss was not insured. *Death from boxing example. Expected value(x)= p1x1+p2x2+...pnxn Risk averse: doesn’t wants risks. Risk seeking want risks. Risk neutral: doesn’t care. *understand welfare gain of risk pooling Standard insurance model has limitations, but no single model has replaced it Uncertainty and risk aversion -> insurance can lead to significant welfare gains (Arrow, 1963)

206 notes Moral hazard -> significant welfare losses [argument for cost sharing] (Pauly, 1968) Limitations of the standard model: -magnitudes of gains and losses -loss aversion -risk reduction is the only source of welfare gain -little influence on the size of the expected losses -overconsumption -> welfare loss Supply side solutions: Motivations: Better judges necessary and effective care Limit ability to engage in SID Approaches: ‘gatekeeper’ model Managed care (HMO is one type) Capacity control (publicly funded systems Financial incentives Types of insurance and their effects on demand: If patient pays 0 for care demand will become perfectly inelastic. If patient coinsures demand will become more inelastic but not fully. If patient has a coverage limit demand will be perfectly inelastic till coverage threshold, then it will be back to its normal elasticity. If patient pays a fixed rate, insurer pays the rest demand will be normal till rate and perfectly inelastic after. Adverse selection = information asymmetry Cream skimming: choosing patients for some characteristics benefitable to supply rather than their need for care. Unit 4: #9,#10 Financing: the activity of raising funds from individuals to pay for the operation of the health care system. Example: direct out of pocket payments, private insurance, premiums, social insurance contributions and taxes. Funding and remuneration: the activity of allocating those funds to alternative activities within the health care sector. Example: fee for service, capitation, budgetary allocations.

206 notes Efficiency in raising revenue (technical): -minimize cost per dollar raised -public funding tends to be more efficient for both providers and beneficiaries Efficiency when it comes to risk (allocative) -Where preferences vary private insurance is more efficient. -consumption should conform to preferences. -considerable scope for inefficiency this is because of: risk pooling (adverse selection, cream- skimming, etc..) in both private and public. Method of financing affects allocative efficiency in the market for services through the influence on consumption. Efficiency of utilization Welfarist: private market with cost sharing. Non welfarist: public financing. Wait times used as common critique of a single payer. Efficiency of investment One payer in multiplayer system has a disincentive to innovate because others will “free ride” No comparable problem with single payer public system Progressive: poor pay their portion, rich pay more

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