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CH 1 Factors accounting for the growth of importance in the health sector Global health and longevity gains Expansion of health sector throughout the world Global Distribution of Longevity Gains Global Distribution of LE LE (China v.s. US) Health Care Expenditures in the United States, 1960-2007 1960 1970 1980 1990 2000 2005 2007 Nominal health expenditures $27.5 (billions of dollars) 74.9 253.9 714.0 1,353.3 1,987.7 2,241.2 Annual rate of growth -(average annual % change from previous period shown) 10.5% 13.0 10.9 5.9 8.9 6.2 Nominal per capita health expenditures $148 356 1,102 2,813 4,790 6,697 7,421 Health expenditures as percentage of GDP 5.2% 7.2 9.1 12.3 13.8 16.0 16.2 Source: CMS Homepage: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf The Health Care Industry is Rapidly Evolving Advances in medical technology and drugs are dramatically improving patient care But, these improvements are costly Aging U.S. population % 65 years+ 1950 8.1 1970 9.8 2008 12.8 Which category has the largest share of health care expenditures? Hospital Care Physician Care Prescription Drugs Uses of Health Care Funds in the United States 2006 Nursing homes 6% Home health care 3% Investments 7% Hospital services 31% Prescription drugs 10% Program administration 7% Public health 3% Physician services 21% Other 8% Dental services 4% (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or du PHARMACEUTICAL INDUSTRY U.S. prescription drug expenditures reached $228b in 2007 Industry highly dependent on research and development (R&D) $897m to bring a new drug to market Aggressive marketing to physicians, hospitals, pharmacists, and even the patient PHARMACEUTICAL INDUSTRY Pfizer $48.3b 40.8% in sales in 2008 of sales come from 4 drugs: Lipitor, Lyrica, Celebrex, Norvasc. Important Institutional Features of Health Care Asymmetric Information Health insurance Externality Government intervention Economic Model P (price) A’ A E B B’ X (quantity) Market Equilibrium Supply curve(suppliers) Demand curve (consumers) Equilibrium price and quantity Suppliers and Consumers Suppliers Hospitals (clinics) Doctors Nurses Consumers Patients Equilibrium quantity and prices Quantity Visits Admissions (hospital days) Price Payment per visit Payment per hospital day Assumptions for efficient market Numerous consumers Numerous suppliers Consumers search for the quality of care Consumers search for the low price Suppliers compete with each other In the end, efficient market ensures that consumers can purchase quality care at the low cost Information Do consumers (patients) know the quality of care? Do consumers (patients) search for the low cost? Do suppliers (doctors) compete with each other? Asymmetric information Asymmetric information refers to the case that one party to a transaction has information pertinent to the transaction that the other party does not possess Examples The doctor knows more than the patient The insurance purchaser knows more than the insurer Competition is a big issue in light of asymmetric information Health insurance Because the health expenditure is random, risk adverse people would seek to reduce expenditure risk by obtaining health insurance (e.g. dialysis patients) Nonetheless, consumption decisions would be distorted due to health insurance. Consumers would like to use more than they want when facing the lower prices (moral hazard) Also, asymmetric information would patients to conceal personal information---high risk consumers purchase good insurances, and good insurances need to charge a even higher price to cover its costs. In the end, no insurers are willing to offer insurance contract (adverse selection) Externality Consumption externality (e.g. vaccinations) Financial externality Moral externality (access of care) Government intervention Health sector is highly regulated industry Entry barriers Doctors Hospitals Drugs Price Regulated prices Insurer sets up the payment price to doctors Government intervention Providing health insurance Provision of health care US: Medicare (the elderly), Medicaid (the poor) Taiwan: National Health Insurance Public clinics or hospitals Financing the health care Taxation Subsidy Share of health related research