A Lecture on Healthcare Economics from MIT

Below is a lecture on Healthcare Economics by Professor Jonathan Gruber from MIT. In this lecture, he talked about health care market from an economic perspective why it fails to behave like free markets, why individuals who need health insurance might not be insured by private insurance, why those who are under health care coverage tend to over-consume health care services, and the over-prescription of unnecessary medical tests had made the problem worse.

Market failure in health care is rooted in what is known as “information asymmetry” between individuals and health insurance companies, and between patients and doctors. “information asymmetry” leads to “moral hazard”, a behaviour of the individual who holds private information that was unknown to the other party or have more knowledge in a subject matter and therefore more likely to convince the other party into make decisions that are suboptimal to themselves. So in the market of health insurance, individual applicants are more likely to be “self-selected” because they need health care services more than others. Private health insurance companies respond to the self-selection moral hazard by rejecting those who have pre-existing conditions, or by terminating the contracts after patients get sick. As a result, patients who need health insurance the most but ineligible for public insurance cannot buy private insurance either.

To solve this market failure, pushing mandatory “universal health coverage” policy and “force” everyone to pay their health insurance is one way, increasing the public health care spending and cover all the ‘uninsured’ is another. The US government did both through the Affordable Care Act to mandate the uninsured to buy health insurance with subsidises provided to those who can’t afford to pay.

Moving towards universal health coverage is just a small step towards a more ‘effective’ and ‘affordable’ health care system. The second issue to be dealt with is also related to “information asymmetry” between patients and providers, as well as between payers and providers. On the one hand, health care coverage lowers the marginal cost per visit for patients and makes it easier for them to over-consume health care. On the other hand, if doctors are incentivised financially to maximise the fee-for-service reimbursement per patient, then implementing UHC by putting more people into the same system without solving the information asymmetry problem, it may not lower the total health care cost at all. By increasing the deductibles, we may marginally reduce the unnecessary utilisation of care but at the same time hurt the genuine needs for care although these demand should be theoretically price ‘inelastic’.

Much more on ‘value-based’ health care system to be discussed here. Let’s welcome Professor Gruber.

Ph.D. in Economics with interests in Life Science, Behavioral Science, Health Economics Evaluation and Health Technology Assessment. Executive MBA student at The University of Chicago Booth School of Business in Hong Kong, graduating in 2020.

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