lecture 7

SLIDES 2-8



nJustifications for public policy:

• (1) Health and externalities: Public health,
• contagious and infectious diseases (benefit if other people are healthy).

• (2) Health concerns and prohibition of
• markets: say, euthanasia.

• (3) Social justice and health care as an
• entitlement.

• (4) Health care and natural monopoly: closest
• emergency room.

• (5) Political-support considerations: Government can
• subsidize medical research

• nShould
• publicly financed health care be an entitlement of social insurance?

nPublic finance does imply the need for government supply.

nFree health care involves queuing.

• nEquality in medical treatment: higher-income or wealthier
• people will want market alternatives.

nFree health care as income redistribution.

• à Higher-income people pay the taxes that finance public
• health care but may choose to forgo the availability of tax-financed medical
• care for the private market.

à Again, trade-off between social justice and efficiency.

• nWhen health care is provided through government, the criticisms are about
• inefficiencies, waiting times and quality of treatment, and insufficient
• allowance for individual choices, etc.

• nWhen health care is through private
• markets, the criticisms are about social injustices
• because of exclusion from health insurance and sometimes unnecessary procedures
• (say, background check) that increase costs but do not benefit patients.

• nThe dilemmas of the choice between market and government are
• perhaps nowhere so revealed as in health insurance and health care.

SLIDES 6-8

• nWhen health care is provided through government, the criticisms are about
• inefficiencies, waiting times and quality of treatment, and insufficient
• allowance for individual choices, etc.

• nWhen health care is through private
• markets, the criticisms are about social injustices
• because of exclusion from health insurance and sometimes unnecessary procedures
• (say, background check) that increase costs but do not benefit patients.

• nThe dilemmas of the choice between market and government are
• perhaps no where so revealed as in health insurance and health care.

SLIDES 3,4,5

• n1) Are market decisions appropriate for medical treatment
• when a person is ill or injured?

• à People
• may be prepared to pay their entire wealth for the prospect of preserving their
• lives.

• n(2) Asymmetric information regarding the quality of
• treatment:

• à Difficult for the sick to judge the merits
• of alternative treatments.

n(3) Asymmetric information and regulation:

• à Can
• opportunistic behavior, or even deception or fraud by medical practitioners be
• prevented by regulation through certification?

• à Can a
• society rely on self-regulation by medical practitioners through professional
• associations?

• à How can reasonable error
• be distinguished from incompetence and negligence

SLIDES 5,6,7,8

• nFair odds: Odds that reflect the true probabilities of
• various states of the world.
• nQuestion: Why insurance is not offered at fair odds?

• nTo answer this question, we refer to the problems of
• imperfect information: adverse selection, moral hazard, inability to verify.

• nThe adverse selection problem arises when fair odds are
• different for different people. The insurance company is unable to tall who are
• Healthies and
• who are Sicklies.

• nIf it can’t tell the difference, then it can’t simply offer
• odds that are appropriate for the Healthies, b/c Sicklies will buy the insurance and bankrupt the company.

• nIn practice: Offer two policies, one at “Healthy” odds an one
• at “Sickly” odds. Try best to separate both markets.

• nMaking private health insurance compulsory. Government
• providing health insurance as an entitlement to the entire population. Low-risk
• people then systematically subsidize health costs of high-risk people.

• nInformation about the human genome allows predictions of
• future personal health.

• nAdverse selection can be overcome by personal discrimination
• in health insurance payments.

• à Should
• people with a higher objective likelihood of requiring health care be required
• to pay more for health insurance?

nMaintaining markets through discrimination.

• à Discrimination
• in insurance payments among people with different objective risks prevents the
• collapse of a private insurance market due to adverse selection.

• The biggest spenders in the health-care debate are well-known Washington
• veterans with clear constituencies, including the U.S. Chamber of
• Commerce, which is representing corporate titans who are against reform,
• and a well-organized network of labor organizations pushing for the
• legislation. Health Care for America Now, for example, is a consortium
• of unions and liberal groups that expects to spend $42 million on its
• wide-ranging pro-reform campaign.

More elusive groups

• But outside such established interest groups is a significant but more
• elusive collection of organizations, many of them particularly energized
• in opposition to Democratic health-care reform efforts. Most are
• organized as nonprofits, meaning they do not have to reveal many
• financial details beyond basic revenue and expenses. Some are bankrolled
• by charitable foundations with a political bent or by industries with a
• financial stake in the debate; nearly all use names that seem designed
• to obscure their origins.

• The Partnership to Improve Patient Care, for example, headed by former
• congressman Tony Coelho (D-Calif.), was formed by the drug industry in
• November 2008 to lobby against binding government effectiveness studies,
• which could be used to determine what insurance companies must cover.
• The American Council on Science and Health is an industry-friendly group
• whose board member Betsy McCaughey helped set off the "death panels"
• frenzy last year.

• "It's sort of like money-laundering their PR," said Lisa Graves,
• executive director of the Center for Media and Democracy, a
• liberal-leaning group that runs a Web site called PRWatch.org. "A lot of
• these groups are heavily funded by corporations and then don't reveal
• it. They try to imply that they are funded primarily by individuals, but
• that's clearly not the case."

• The Center for Medicine in the Public Interest (CMPI) is a New
• York-based think tank headed by Peter Pitts, a former Food and Drug
• Administration official who appears frequently on newscasts condemning
• Democratic health-care proposals. CMPI is an offshoot of the San
• Francisco-based Pacific Research Institute, which has received
• foundation grants over the years from Philip Morris, Pfizer and the
• Pharmaceutical Research and Manufacturers of America, according to
• public records.

• While serving as president of CMPI, Pitts also works as the global
• health-care chief at Porter Novelli, a New York public relations firm
• whose clients include Johnson & Johnson, GlaxoSmithKline, Wyeth and
• Pfizer. He acknowledges that CMPI also receives money from the
• pharmaceutical industry, which is supporting reform legislation in
• exchange for a White House promise to limit cuts.

slides 9-11

• nCollective benefits:
• User prices and private supply? There could be inefficient exclusion from
• collective benefits

(i.e. more students in the classroom until it is congested).

• nNatural
• and enforced monopoly:

• à Education is a local
• natural monopoly when the objective is that children attend the school closet
• to their house.

• à A school system’s bureaucracy may favor the idea that schools ought to
• be natural monopolies, b/c the competition by allowing students access to
• schools may be out of control (WHY?).

nExternalities and education:

• à Benefits of interaction
• with people who are more knowledgeable and educated.

• à Knowledge and education as
• foundations for economic growth.

• nGovernment
• paternalism:

• à The paternalistic case for compulsory
• education.

• à Every child has an entitlement to an
• education, because of the personal and
• private benefits to the children.

• nMoral
• hazard and social insurance:

• à By
• providing education as an entitlement, society hopes to make people
• self-reliant, and not dependent on future government income transfers.

à Moral hazard now: some children chose not to study.

à Social insurance tomorrow: protection for low incomes.

• Evidence: private schools
• in general provide better quality education that government schools. Think
• about why?

nResources and class size.

nInteraction with fellow students.

• nNorms of behavior, including attitudes to study and to the
• merits of academic success.

nThe home environment and attitudes of parents.

• nSocial norms about how conflicts or disagreements are
• resolved.

• n“Good” schools: better administrators, better-qualified and motivated
• teachers, more concerned parents. Could be government schools.

nPrivate schools:

• à Children
• can be with other children whose parents are also willing to pay money for a
• better education.

• à Private
• schools provide education under competitive market conditions.

slides11-12

• nLocational choice is not an
• automatic escape from bad quality schools!!!

• nLocational choice is limited by
• income.

• nGovernment schools and the price of housing: Good government
• schools are capitalized
• into the price of housing in a school district, as are bad government schools.

• nUnequal education: When locational choice is the means the means of access to schools,
• education can be expected to be unequal.

nChanges in locational rules?

• It will
• redistribute income or wealth among homeowners.

• nChanges in the quality of the schools after re-sorting:
• Social norms of behavior of students and “good” or “bad” schools.

• nFamilies switching to private schools lose twice: the values
• or their houses decline, and they now pay for private education.

• nSuccessive exit to private schools is an adverse-selection
• response.

• nIt reduces the average quality of input of parents and
• adversely affects social norms of children who remain in government schools.

• nIn the end, only children whose parents cannot afford to pay
• for private schools, or children whose parents are satisfied with
• inferior-quality education, remain in government schools.

• nThe objective of equalizing educational opportunities is not
• achieved because of adverse selection.

nSocial integration has not been achieved.

• nThrough exit from government schools, fewer voters benefit
• from government schools.

• nVoting and political decisions on public spending result in
• reduced public spending on government schools.

nVoting is another path of adverse selection.

SLIDE 14

• nEducational vouchers de-link quality of education from
• parents’
• ability or willingness to pay for private schools, or from the location of
• housing.

• nSorting children among schools is then determined by a school’s willingness to accept a
• child, and not by ability of parents to pay.

• nWith the introduction of vouchers, the location of housing no
• longer determines the quality of schooling.

• nOpposition will come from administrators of government
• schools who oppose the competitions introduced by school vouchers.

• nPeople who own houses that are valuable b/c of capitalized
• values of good schools have reason to oppose the introduction of school
• vouchers.

SLIDES 18-20

SLIDE 20