Macroeconomics of Healthcare
Douglas A. Propp, MD, MS, FACEP, CPE
Chair, Department of Emergency Medicine
Advocate-Lutheran General Hospital
Clinical Associate Professor of Emergency Medicine
University of Chicago
As Emergency Physicians, we are frequently peripherally exposed to healthcare economic statistics, policies, and debates with little concern for mastering these concepts, feeling that they have little to do with our practice of Emergency Medicine. Although a working knowledge of microeconomics will not aid in arriving at the diagnosis for the elderly patient with mental status changes who we are evaluation at 3 A.M., an understanding of these principles will enhance our roles in positively contributing to the healthcare debate, given our overall limited societal resources. Although not intended to be comprehensive, I will introduce several relevant concepts to hopefully whet your appetite in case you want to pursue them further.
Economics is the study of how resources are allocated with the marketplace.1 I make the analogy between the disciplines of Physics and Economics. Whereas Physics are the laws which explain the observed behavior of matter, Economics are the rules which explain the behavior of people who pursue (and compete with others for) the limited resources (goods, currency, health, etc.) within a society. The interest in healthcare economics has blossomed over the past several decades as spending on healthcare has continued to escalate, now representing well over $1 trillion (with approximately 40% going to hospitals and 20% going to doctors), and occupying over 16% of the nation's Gross Domestic Product (cumulative value of domestic goods and services produced). Many of the healthcare economic principles focus on how people make decisions related to expenditures for the health given competing alternative (e.g., food, clothing, housing, hobbies, travel, education, etc.)
Insurance allows typically risk-averse individuals to face uncertainty and spread their potential financial risk across a large number of people, thus limiting the maximal exposure for any one individual. By capitalizing on the "law of large numbers", an individual, for example, would not have to pay the total cost of replacing an automobile destroyed in a collision or an expensive hospitalization due to unanticipated but inevitable illness or injury. Unlike other countries, and certainly since the introduction of the Medicare and Medicaid programs in the 1960s, American have relied on health insurance to fun their consumption of healthcare resources.
Insurance companies, who indemnify the cumulative financial risk of the covered group, utilize various methodologies to determine a fair price for their product. Their risk is related to arriving at a fair "up front" premium prior to them realizing the subsequent costs during the coverage period. Experience rating (based on knowledge of prior claims of the covered group) differs from community rating where the insurance company prices their product to cover all subscribers in a given location, irrespective of age or health experience. For a comparably priced product, one could expect insurance companies to pursue healthier individuals for their coverage (favorable selection) rather than the sick and elderly who are likely to have increased consumption of healthcare resources (adverse selection).
It has been well studied that individuals who benefit from insurance coverage (not limited to healthcare) tend to over-utilize resources, compared to their use if they had to pay for all of the consumed resources themselves. Who hasn't had patients request unnecessary x-rays, assuring us that their insurance will pay for it? This concept of insurance induced demand is referred to as the Moral Hazard.2 As we look for explanations for why the cost of healthcare continues to escalate; many have identified this moral hazard related to health insurance as...
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