lecture 7

  1. What efficiency justifications can be made for government involvement in the provision of health care? What types of health care policies should be implemented to further the efficient allocation of resources?
    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.
  2. Discuss the difference between public health issues and private health issues. Are there any reasons why the government should be involved in health care provision for problems that primarily relate to private health? Explain your position
    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.
  3. What are the special characteristics of personal demand for health care? How do these characteristics influence markets for health care? How do the special characteristics of health care make cost containment difficult? Evidence shows that increased spending on health care does not necessarily ensure improved health care? Why do you believe that this is so?
    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
  4. Explain the problems of adverse selection and moral hazard (i.e. the incentive problems).Are these problems more severe with health insurance than with other kinds of insurance?What might be done to reduce the impact of these problems on health care costs?
    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.
  5. Ultimately, any government reform of the health care system will be produced through the political process. Describe the role of interest groups in the process of reform. How do you think that political influences will affect the ultimate product of health care reform?
    • 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.
  6. Public finance theory suggests a number of reasons government involvement in the allocation of resources might be equitable and efficient. What justifications can be made for government involvement in the provision of education? What types of educationpolicies should be implemented to further the efficient allocation of resources?
    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.
  7. What are the arguments for and against equalizing the level of school expenditures across school districts? Considering both sides of the issue, how much equalization do you think should be implemented?

    • 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.
  8. Explain how the voucher system for financing education would work. Should vouchers allow students to attend any school, or should they be available only for public schools?What are the arguments for and against vouchers?
    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.
  9. Does education produce a positive externality? If so, does this justify the public financingof education? Explain the arguments on both sides of the issue and which side you findmore persuasive.
  10. Explain why a pay-as-you-go system such as Social Security give the initial beneficiaries a good return on their contributions but cannon sustain this return. Considering SocialSecurity as a government program whose characteristics are politically determined,explain why the political system has produced a pay-as-you-go system rather than afunded system.
    SLIDES 18-20
  11. Explain several rationales for the reason that the Social Security system is compulsory rather than voluntary. Do you think these rationales are adequate justifications for acompulsory system?
    SLIDE 20
  12. The Social Security program is partly an insurance plan and partly a form of welfare.What is the distinction between these two aspects of the program? How could this distinction come into play in any potential reform of the system?
Card Set
lecture 7
lecture 7