Americans are living longer, healthier lives. Since 1960, average life expectancy has increased by more than 5 years. American physicians have access to the best technology in the world, and more than one-half of the world's medical research is funded by private and public sources in the United States. At the same time, the share of national income devoted to health care has been growing rapidly. Concern about rising expenditures and reduced access to insurance has led to the development of a variety of proposals for health-care reform, from market-based managed care to calls for a government-run national health insurance program. Economic analysis is very helpful in understanding the potential of these alternative approaches.
Two features of health-care services have significant economic implications. First, it is difficult for consumers to independently evaluate the quality of health-care services. Consumers typically rely on the advice of service providers in deciding what to buy. Although the lack of independent information is not unique to the health-care market (car owners often rely on mechanics), it can lead to the purchase of poor quality, unnecessary, or high-cost services. Second, to protect consumers from unscrupulous or incompetent providers, licensing boards in every state regulate those who work in the health-care field. Such licensing procedures can increase the cost of health-care services by limiting price and product quality competition.
Physicians have much more information about treating particular illnesses than do patients. Patients often find it difficult to evaluate the efficacy of their treatment. Even if they get better, they may not be able to tell whether they have enjoyed a natural recovery or have benefited from especially effective treatment. Lack of service quality information also makes it difficult for people to make rational decisions about purchasing health-care services. Without an accurate way to measure quality, health-care plans, hospitals, and providers have a difficult time competing on the basis of the price of services they offer. To address this problem, insurers and employers have recently been working together to develop systems for measuring the quality of health-care provided.
In some instances, health-care costs have risen because of restrictive government regulations. Industry costs typically rise when skilled personnel and materials are in short supply. In most cases, short-term shortages cause wages to rise, attracting new supplies of skilled workers. As a result, extreme personnel shortages and the high wages that they produce are not likely to persist. Historically, high physician incomes did not lead to an increased supply of doctors because the medical profession limited the number of new physicians receiving licenses. For many years, professional associations also controlled advertising and the types of fee arrangements that doctors could accept. These problems are less serious today. With new and more enlightened government regulation, the number of practicing doctors and price competition have increased greatly.
A further problem stems from the fact that all medical insurance, whether privately or publicly provided, affects the incentives of the insured. Because they are protected against the full cost of a serious illness or injury, insureds have less incentive to take steps to limit the losses associated with such events. The change in incentives that results from the purchase of insurance is known as the moral hazard problem, or the difficulty encountered when the full costs of economic activity are not directly borne by the consumer. This term carries no connotation of dishonesty; it simply refers to the typical reduction in the economic incentive to avoid undesirable events. For example, people insured against car theft may leave their doors unlocked, increasing the chance that their cars may be stolen. Although people with health insurance may be careful about avoiding health risks, they are prone to go to the doctor often and choose complex medical procedures. Among health economists, the term moral hazard has come to explain why insurance provides incentives for the overconsumption of health-care services.
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