This chapter introduces the student to the economic way of thinking as it relates to the study of

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 1: U.S. Medical Care: An Uncertain Future This chapter introduces the student to the economic way of thinking as it relates to the study of the U.S. medical care system. After a brief summary of the historical development of medical care delivery and finance, the basics of economic modeling and analysis are addressed. The similarities and differences between medical care and other economic goods and services are also discussed. As a set of unifying themes providing focus and continuity throughout the book, ten guiding principles are introduced and defined.

Chapter Outline

• Historical developments in the delivery of medical care
• Post-war experience
• Concern over high and rising spending
• Changes in medical care delivery
• Health economics defined
• Ten key economic concepts
• Summary and conclusions

Issues in Medical Care Delivery • The Patient Protection and Affordable Care Act of 2010 • Spending Somebody Else’s Money

Chapter Objectives

• Understand the nature of the health care crisis in America.
• Identify the important historical developments affecting health care delivery and

finance in the U.S. system.

• Identify and explain the major reasons for the high and rising cost of medical care.
• Understand how the third-party payment mechanism and managed care affect

health care delivery.

• Understand the impact of the current healthcare reforms
• Recognize the relevance of economics in studying health care issues.

(Health Economics and Policy, 7e James Henderson) (Solution Manual all Chapters) 1 / 4

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Understand the aspects of medical care that contribute to its uniqueness as a

commodity.

Teaching Suggestions • Get a copy of the survey from Victor R. Fuchs, “Economics, Values, and Health Care Reform,” American Economic Review 86(1), March 1996, 1-24. Ask your students to answer the survey and tabulate the answers. Compare their answers with those of the economists who answered the survey originally. This is a good way to check the pulse of your class. The ensuing discussion can be a good way to introduce many of the topics covered in the course.• National media attention has focused on the problems of the medical care sector periodically in recent years. The “crisis” in medical care is well documented. Discuss the various meanings of the term “crisis.” Students will have some interesting perspectives on this issue.• It is a good idea to discuss the use of the Internet as a research tool. It is important that students be able to discern good sources from bad. The Internet is full of both. That is the purpose of the Internet exercise in my class. Students join a ListServ or eavesdrop on a newsgroup to get some idea how to judge the quality of the information available in cyberspace. There are literally thousands of forums to join. Many of my students begin their electronic discussions with DejaNews, a leading site for Internet discussion groups. You can

find it at http://w2.dejanews.com/.

• If you like to emphasize the incentives created by our third-party payment mechanism, make sure you at least mention “Spending Somebody Else’s Money.” When people spend their own money they spend it differently than when they spend someone else’s money.Students will remember this example the entire semester and beyond.• Discuss the future of the ACA and current debate on new reform and its impact on access, quality, and cost. 2 / 4

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.• Take the time to go over the 10 key economic concepts. A brief introduction helps develop continuity.

Suggested Approaches to End-of-Chapter Questions

• A crisis is defined in the dictionary as a critical time or occasion, or even an emergency.

Students will approach this question differently. At this early juncture many will be influenced by their own experience with the health care system. Those arguing that the U.S.has a health care crisis will likely cite the following: 1) rising costs and spending, 2) the changing demographics of the population, 3) the number of uninsured, and 4) health status comparisons with other developed countries. Those arguing against a health care crisis will likely argue that 1) even the uninsured have access to care through public hospitals and emergency rooms, 2) medical technology is more widely available in the U.S. than anywhere else in the world, and 3) confounding factors make international comparisons suspect.

• Medical care spending is absorbing an increasing share of national output, at least up until

the last two or three years. Whether this recent slowing in the percentage share of GDP will continue is debatable (and a good structured discussion topic). The reasons for high and rising spending include 1) the increased use of medical technology, 2) rising medical input prices, 3) an aging population, 4) the cost of medical malpractice litigation, and most importantly, 5) the third-party payment mechanism.

• Cost containment is an important policy goal since the health of the population is not the

only important national goal. But cost containment may not be the most important national health care goal. The pursuit of cost-effective delivery makes more sense from an economic perspective. Other health care goals are improving access for the uninsured and quality for everyone. Note, however, these latter goals tend to drive up costs.

• Scarcity in economics is the recognition that all resources are limited relative to wants that

are unlimited in the aggregate. Scarcity forces us to make choices. 3 / 4

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Unpredictability will be present in any complex system, and the health care market is

certainly a complex system. Additionally, it contains contradictions, and there are some questions for which we simply don’t have the answers. Entry barriers include providers’ market power, inefficient provider systems, and in some areas, insufficient competition.Because a patient does not have medical knowledge, the patient must trust in the physician to act for the patient’s interest above his or her own interest. But many physicians today have diagnostic “side” businesses by which they earn money when they refer patients.Patients do not have the complex medical knowledge to make decisions, and so suffer from asymmetric information. Each insurer has its own system of payment, co-payment, life-time caps, and so on. All of these distortions appear in other markets, as well.

Additional Questions for Discussion and Evaluation

• Outside of government itself, the largest industry in the United States is the health care

industry. Over the past several decades, costs in the health care industry have been increasing at a much faster rate than the rate of inflation in general. Why? Cite relevant empirical evidence to support your answer.

• How much do Americans spend on medical care? Why do they spend so much? How does

US spending compare with that of other developed countries? Are we getting our money’s worth? Be somewhat specific.

• How big is the role of the federal government in health care delivery and financing in the

United States? How big should it be?

• Give consumers more information, let them choose the best provider and the resulting

competition will help to squeeze out costly waste and ineffective care. After all, markets work pretty well for other goods and services. The notion has some appeal, and a dose of market medicine would help some of what ails the nation's health-care system. But as a cure, the approach rests on the belief that health care is – in most respects – like any other product.

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