Health Economics and Policy
Book + Article Summary
2021-2022
, 2
TABLE OF CONTENTS
CHAPTER 15: THE HEALTH POLICY CONUNDRUM ....................................................................... 3
CHAPTER 16: THE BEVERIDGE MODEL: NATIONALIZED HEALTHCARE ........................... 11
CHAPTER 17: THE BISMARCK MODEL: SOCIAL HEALTH INSURANCE ................................ 16
CHAPTER 18: THE AMERICAN MODEL: PRIVATE INSURANCE ............................................... 19
CHAPTER 3: DEMAND FOR HEALTH: THE GROSSMAN MODEL ............................................. 24
CHAPTER 4: SOCIOECONOMIC DISPARITIES IN HEALTH ........................................................ 35
CHAPTER 23: FUNDAMENTALS OF PROSPECT THEORY ........................................................... 41
CHAPTER 24: TIME INCONSISTENCY AND HEALTH ................................................................... 42
ARTICLE 1: KILLING ME SOFTLY: THE FETAL ORIGINS HYPOTHESIS ............................... 50
ARTICLE 2: CHAPTER 3.2. AGING: HEALTH AT ADVANCED AGES ........................................ 53
ARTICLE 3: CRITICAL PERIODS DURING CHILDHOOD AND ADOLESCENCE .................... 57
ARTICLE 4: SMALL STEPS, BIG CHANGE. FORGING A PUBLIC-PRIVATE HEALTH
INSURANCE SYSTEM IN THE NETHERLANDS ............................................................................... 61
ARTICLE 5: NEIGHBORHOOD SOCIOECONOMIC STATUS AND HEALTH CARE COSTS: A
POPULATION-WIDE STUDY IN THE NETHERLANDS. .................................................................. 65
ARTICLE 6: ON THE CONCEPT OF HEALTH CAPITAL AND THE DEMAND FOR HEALTH
....................................................................................................................................................................... 67
ARTICLE 7: WHY IS THE TEEN BIRTH RATE IN THE UNITED STATES SO HIGH AND
WHY DOES IT MATTER? ....................................................................................................................... 68
EXERCISES CHAPTER 15: THE HEALTH POLICY CONUNDRUM ............................................. 69
EXERCISES CHAPTER 16: THE BEVERIDGE MODEL ................................................................... 70
EXERCISES CHAPTER 17: THE BISMARCK MODEL ..................................................................... 71
EXERCISES CHAPTER 18: THE AMERICAN MODEL .................................................................... 72
EXERCISES CHAPTER 4: SOCIOECONOMIC DISPARITIES IN HEALTH ................................ 74
, 3
Chapter 15: The Health Policy Conundrum
Healthcare markets and healthcare insurance markets face several problems:
- Hospital markets can be vulnerable to oligopolies that can raise prices and make care
unaffordable.
o Perverse incentives exist (e.g., fee-for-service) that can motivate physicians to
provide wasteful care or to lobby hospitals to install ineffective medical devices.
- Healthcare insurance markets can malfunction due to asymmetric information or can
collapse when severe adverse selection occurs (leaving many uninsured)
o Moral hazard can make healthcare less efficient and more expensive.
è In this chapter, background is provided on the policies available to countries to organize
healthcare systems. Every policy entails a trade-off and – unfortunately – no perfect solutions
exist to the health policy conundrum.
Arrow’s Impossibility Theorem
According to Kenneth Arrow (1951), designing and organization of health systems is at heart
an optimization problem (e.g., like the task of individuals in the Grossman model).
- Societies must determine how much time/money to spend on improving health; and
how much time/money to spend on other national alternatives (e.g., education,
environment).
- Subsequently, an optimal strategy must be devised to achieve the desired level of health
in the cheapest and efficient manner.
Arrow’s Impossibility Theorem states that it does not make sense to determine an “optimal”
health policy for a country, because societies may not always have preferences that can be
optimized in the traditional sense.
- A society is fundamentally different from a single person, where a person is presumed
to have consistent and transitive preferences.
o Example of Transitive preferences: If an individual prefers eating a cookie (A)
to watching TV (B) and prefers watching TV (B) over exercising (C), then if
the individual has transitive preferences, they prefer a cookie (A) over
exercising (C).
§ In mathematical terms: For a relationship R on the set X è or all a, b,
c ∈ X, if a R b and b R c, then a R c.
As a nonmathematical example, the relation "is an ancestor of" is
transitive. For example, if Amy is an ancestor of Becky, and Becky is an
ancestor of Carrie, then Amy, too, is an ancestor of Carrie.
§ In case the individual prefers exercise (C) over a cookie (A), then they
have circular preferences, and the optimal activities cannot be
determined.
§ Without transitive preferences, welfare economics falls apart.
Arrow’s Impossibility Theorem exemplified (Table 15.1): Voter types are split 1/3. The logic
of transitive preferences
does not hold as though
individuals have transitive
preferences, sociality as a
whole has circular
, 4
preferences, and no optimum can be determined.
The Health Policy Trilemma
Health Policies can be analysed through measurement of three broad
goals: health, wealth, and equity è Goals allow not for determining a
national’s “optimal” policy, but to study trade-offs inherent in Health
Policy.
Health and Wealth are familiar from the Grossman model as an inherent
trade-off for individuals: health vs. other goods that can be purchased.
ð For societies, this trade-off must be considered between different
groups in society. Differences exist in willingness to sacrifice health or other goods to
achieve better outcomes for themselves or the worst-off.
Achieving Equity or “fairness” is the third goal, which relates to health access and outcomes.
Nations must determine which priorities within this trilemma they want to set, as in practice,
it is unattainable to have everything è Trade-offs are a necessary! For example:
- Any policy Z that combats adverse selection and increases Equity, would increase Costs
(lowering wealth) or lower health for some individuals.
- Countries may differ as to which trilemma goals they value more.
o E.g., valuing social equity through increasing taxes (Beveridge Model) vs.
placing a higher premium on health and approving moral hazard (American
Model)
o Variance in Health policies around the world is thus not necessarily an
indication for getting it right or wrong but reflects instead the nations different
constraints and preferences.
Health Policy optimization is made difficult through four pathologies in health care markets,
being 1) Adverse selection, 2) Monopolistic suppliers, 3) Moral Hazard and 4) Health
disparities.
- Solutions to these pathologies exist but lead to a new set of problems.
How should health insurance markets work?
A principal decision that shapes health care systems is how governments should address
uninsurance è requires a fundamental trade-off. Interventions are divided in 1) Completely
private insurance, 2) Universal public insurance, 3) Compulsory Insurance, 4) Employer-
sponsored Insurance and 5) Means-tested health insurance.
Complete private insurance is the basic version of the Rothschild-Stiglitz (R-S) model.
- Model predicts that only the frailest customers are insured fully and much of the population is
underinsured (separating equilibrium).
- The market can unravel under certain conditions, which can lead to uninsurance for the whole
population.
- Minimizes government involvement, results in maximal adverse selection and lowers equity.
è In practice, no country has completely privatized healthcare markets.
Universal public insurance provides coverage to the whole population and is administered by the
government (E.g., UK, Canada employs this system). System is characterized as single-payer
(Government pays for medical bills and provides population with healthcare insurance)
- Policy option sidesteps adverse selection, ends underinsurance and furthers the goal
of Equity.
o Public insurance can be complemented by private insurance.
Book + Article Summary
2021-2022
, 2
TABLE OF CONTENTS
CHAPTER 15: THE HEALTH POLICY CONUNDRUM ....................................................................... 3
CHAPTER 16: THE BEVERIDGE MODEL: NATIONALIZED HEALTHCARE ........................... 11
CHAPTER 17: THE BISMARCK MODEL: SOCIAL HEALTH INSURANCE ................................ 16
CHAPTER 18: THE AMERICAN MODEL: PRIVATE INSURANCE ............................................... 19
CHAPTER 3: DEMAND FOR HEALTH: THE GROSSMAN MODEL ............................................. 24
CHAPTER 4: SOCIOECONOMIC DISPARITIES IN HEALTH ........................................................ 35
CHAPTER 23: FUNDAMENTALS OF PROSPECT THEORY ........................................................... 41
CHAPTER 24: TIME INCONSISTENCY AND HEALTH ................................................................... 42
ARTICLE 1: KILLING ME SOFTLY: THE FETAL ORIGINS HYPOTHESIS ............................... 50
ARTICLE 2: CHAPTER 3.2. AGING: HEALTH AT ADVANCED AGES ........................................ 53
ARTICLE 3: CRITICAL PERIODS DURING CHILDHOOD AND ADOLESCENCE .................... 57
ARTICLE 4: SMALL STEPS, BIG CHANGE. FORGING A PUBLIC-PRIVATE HEALTH
INSURANCE SYSTEM IN THE NETHERLANDS ............................................................................... 61
ARTICLE 5: NEIGHBORHOOD SOCIOECONOMIC STATUS AND HEALTH CARE COSTS: A
POPULATION-WIDE STUDY IN THE NETHERLANDS. .................................................................. 65
ARTICLE 6: ON THE CONCEPT OF HEALTH CAPITAL AND THE DEMAND FOR HEALTH
....................................................................................................................................................................... 67
ARTICLE 7: WHY IS THE TEEN BIRTH RATE IN THE UNITED STATES SO HIGH AND
WHY DOES IT MATTER? ....................................................................................................................... 68
EXERCISES CHAPTER 15: THE HEALTH POLICY CONUNDRUM ............................................. 69
EXERCISES CHAPTER 16: THE BEVERIDGE MODEL ................................................................... 70
EXERCISES CHAPTER 17: THE BISMARCK MODEL ..................................................................... 71
EXERCISES CHAPTER 18: THE AMERICAN MODEL .................................................................... 72
EXERCISES CHAPTER 4: SOCIOECONOMIC DISPARITIES IN HEALTH ................................ 74
, 3
Chapter 15: The Health Policy Conundrum
Healthcare markets and healthcare insurance markets face several problems:
- Hospital markets can be vulnerable to oligopolies that can raise prices and make care
unaffordable.
o Perverse incentives exist (e.g., fee-for-service) that can motivate physicians to
provide wasteful care or to lobby hospitals to install ineffective medical devices.
- Healthcare insurance markets can malfunction due to asymmetric information or can
collapse when severe adverse selection occurs (leaving many uninsured)
o Moral hazard can make healthcare less efficient and more expensive.
è In this chapter, background is provided on the policies available to countries to organize
healthcare systems. Every policy entails a trade-off and – unfortunately – no perfect solutions
exist to the health policy conundrum.
Arrow’s Impossibility Theorem
According to Kenneth Arrow (1951), designing and organization of health systems is at heart
an optimization problem (e.g., like the task of individuals in the Grossman model).
- Societies must determine how much time/money to spend on improving health; and
how much time/money to spend on other national alternatives (e.g., education,
environment).
- Subsequently, an optimal strategy must be devised to achieve the desired level of health
in the cheapest and efficient manner.
Arrow’s Impossibility Theorem states that it does not make sense to determine an “optimal”
health policy for a country, because societies may not always have preferences that can be
optimized in the traditional sense.
- A society is fundamentally different from a single person, where a person is presumed
to have consistent and transitive preferences.
o Example of Transitive preferences: If an individual prefers eating a cookie (A)
to watching TV (B) and prefers watching TV (B) over exercising (C), then if
the individual has transitive preferences, they prefer a cookie (A) over
exercising (C).
§ In mathematical terms: For a relationship R on the set X è or all a, b,
c ∈ X, if a R b and b R c, then a R c.
As a nonmathematical example, the relation "is an ancestor of" is
transitive. For example, if Amy is an ancestor of Becky, and Becky is an
ancestor of Carrie, then Amy, too, is an ancestor of Carrie.
§ In case the individual prefers exercise (C) over a cookie (A), then they
have circular preferences, and the optimal activities cannot be
determined.
§ Without transitive preferences, welfare economics falls apart.
Arrow’s Impossibility Theorem exemplified (Table 15.1): Voter types are split 1/3. The logic
of transitive preferences
does not hold as though
individuals have transitive
preferences, sociality as a
whole has circular
, 4
preferences, and no optimum can be determined.
The Health Policy Trilemma
Health Policies can be analysed through measurement of three broad
goals: health, wealth, and equity è Goals allow not for determining a
national’s “optimal” policy, but to study trade-offs inherent in Health
Policy.
Health and Wealth are familiar from the Grossman model as an inherent
trade-off for individuals: health vs. other goods that can be purchased.
ð For societies, this trade-off must be considered between different
groups in society. Differences exist in willingness to sacrifice health or other goods to
achieve better outcomes for themselves or the worst-off.
Achieving Equity or “fairness” is the third goal, which relates to health access and outcomes.
Nations must determine which priorities within this trilemma they want to set, as in practice,
it is unattainable to have everything è Trade-offs are a necessary! For example:
- Any policy Z that combats adverse selection and increases Equity, would increase Costs
(lowering wealth) or lower health for some individuals.
- Countries may differ as to which trilemma goals they value more.
o E.g., valuing social equity through increasing taxes (Beveridge Model) vs.
placing a higher premium on health and approving moral hazard (American
Model)
o Variance in Health policies around the world is thus not necessarily an
indication for getting it right or wrong but reflects instead the nations different
constraints and preferences.
Health Policy optimization is made difficult through four pathologies in health care markets,
being 1) Adverse selection, 2) Monopolistic suppliers, 3) Moral Hazard and 4) Health
disparities.
- Solutions to these pathologies exist but lead to a new set of problems.
How should health insurance markets work?
A principal decision that shapes health care systems is how governments should address
uninsurance è requires a fundamental trade-off. Interventions are divided in 1) Completely
private insurance, 2) Universal public insurance, 3) Compulsory Insurance, 4) Employer-
sponsored Insurance and 5) Means-tested health insurance.
Complete private insurance is the basic version of the Rothschild-Stiglitz (R-S) model.
- Model predicts that only the frailest customers are insured fully and much of the population is
underinsured (separating equilibrium).
- The market can unravel under certain conditions, which can lead to uninsurance for the whole
population.
- Minimizes government involvement, results in maximal adverse selection and lowers equity.
è In practice, no country has completely privatized healthcare markets.
Universal public insurance provides coverage to the whole population and is administered by the
government (E.g., UK, Canada employs this system). System is characterized as single-payer
(Government pays for medical bills and provides population with healthcare insurance)
- Policy option sidesteps adverse selection, ends underinsurance and furthers the goal
of Equity.
o Public insurance can be complemented by private insurance.
