Definitions and Basics

Health Care, by Michael A. Morrisey. Concise Encyclopedia of Economics

Health care is different from other goods and services: the health care product is ill-defined, the outcome of care is uncertain, large segments of the industry are dominated by nonprofit providers, and payments are made by third parties such as the government and private insurers. Many of these factors are present in other industries as well, but in no other industry are they all present. It is the interaction of these factors that tends to make health care unique.

Health Insurance, by John C. Goodman. Concise Encyclopedia of Economics

In the 1930s and 1940s, a competitive market for health insurance developed in many places in the United States. Typically, premiums tended to reflect risks, and insurers aggressively monitored claims to keep costs down and prevent abuses. Following World War II, however, the market changed radically. Hospitals had created Blue Cross in 1939, and doctors started Blue Shield at about the same time. Under pressure from hospital and physician organizations, the “Blues” won competitive advantages from state governments and special discounts from medical providers. Once the Blues had used these advantages to gain a monopoly, the medical community was in a position to refuse to deal with commercial insurers unless they adopted many of the same practices followed by the Blues. The federal government also later adopted some of these practices through its Medicare (for the elderly) and Medicaid (for the poor) programs.

Pharmaceuticals: Economics and Regulation, by Charles L. Hooper. Concise Encyclopedia of Economics

Pharmaceuticals are unique in their combination of extensive government control and extreme economics, that is, high fixed costs of development and relatively low incremental costs of production.

In the News and Examples

Brady on Health Care Reform, Public Opinion, and Party Politics, podcast on EconTalk.

David Brady of Stanford University talks with EconTalk host Russ Roberts about American public opinion on changing the health care system. Brady discusses the impact of taxation on public opinion toward health care reform–if the poll includes a measure of the likely increase in taxes necessary to pay for expanding coverage, support for expanding coverage drops dramatically compared to generic polls that ignore costs. He also discusses the role of the party system and partisanship for the health care issue and more generally, how partisanship has changed over time. The conversation concludes with Brady’s views on how much science there is in political science.

Autor on Disability, podcast on EconTalk. April 16, 2012

David Autor of MIT talks with EconTalk host Russ Roberts about the Health Care Disability Insurance (SSDI) program. SSDI has grown dramatically in recent years and now costs about $200 billion a year. Autor explains how the program works, why the growth has been so dramatic, and the consequences for the stability of the program in the future. This is an illuminated look at the interaction between politics and economics and reveals an activity of government that is relatively ignored today but will not be able to be ignored in the future.

Taubes on Fat, Sugar and Scientific Discovery, podcast on EconTalk.

Gary Taubes, author of Good Calories, Bad Calories, talks to EconTalk host Russ Roberts about what we know about the relationship between diet and disease. Taubes argues that for decades, doctors, the medical establishment, and government agencies encouraged Americans to reduce fat in their diet and increase carbohydrates in order to reduce heart disease. Taubes argues that the evidence for the connection between fat in the diet and heart disease was weak yet the consensus in favor of low-fat diets remained strong. Casual evidence (such as low heart disease rates among populations with little fat in their diet) ignores the possibilities that other factors such as low sugar consumption may explain the relationship. Underlying the conversation is a theme that causation can be difficult to establish in complex systems such as the human body and the economy.

What does the rising cost of healthcare buy us? YouTube video,

Economics professor Antony Davies demonstrates that over the last 40 years, the cost of healthcare in the U.S. has been rising much faster than the cost of other goods. However, he suggests that it is also important to consider what that higher cost has bought us. What have been the changes in the quality of healthcare over that same period? Using data on mortality rates, Prof. Davies demonstrates that the increased cost of healthcare has been accompanied by important improvements, which save hundreds of thousands of lives each year. While the improvements in medical care are not the only factors leading to increased costs, these better outcomes are significant, and should not be forgotten in today’s healthcare debates.

Hanson on Health, podcast on EconTalk.

Robin Hanson, of George Mason University, argues that health care is different, but not in the usual ways people claim. He describes a set of paradoxical empirical findings in the study of health care and tries to explain these paradoxes in a unified way. One of his arguments is that the human brain evolved in ways that make it hard for us to be rational about health care. He also discusses using prediction markets as a way of designing health care policy.

Lipstein on Hospitals, podcast on EconTalk.

Steven Lipstein, President and CEO of BJC HealthCare–a $3 billion hospital system in St. Louis, Missouri–talks with EconTalk host Russ Roberts about the economics of hospitals. They discuss pricing, the advantages and disadvantages of specialization in modern medical care, and culture and governance of non-profit hospitals vs. for-profit hospitals. At the end they talk about the positives and negatives of a national health board patterned after the Federal Reserve.

Who Attends You When You Are Ill? Attendant Services Under Consumer-directed Health Care, by Linda Gorman.

The “Iron Triangle” theory of health care policy, which claims that one can achieve, at most, two of the three goals of high quality, universal access, and cost containment, has a number of influential adherents. Bloomberg Government hosted an April 2011 event entitled “The Iron Triangle of Healthcare,” which reportedly featured an examination of the “interrelationship between cost, access and quality in the U.S. health care system” and such speakers as the Secretary of Health and Human Services and a number of widely known people from government and business trade associations….

Henry Aaron on Health Care Costs, podcast on EconTalk.

In this bonus middle-of-the-week podcast, Henry Aaron of the Brookings Institution talks with EconTalk host Russ Roberts about health care costs. Researchers in a New England Journal of Medicine article have estimated that the US could save $209 billion if the US went to a single-payer system like Canada. Is this number reliable? Aaron takes a deeper look at the estimate and discusses the relevance of such estimates for health care policy.

Arnold Kling on the Economics of Health Care and the Crisis of Abundance, podcast on EconTalk.

Arnold Kling of EconLog talks with EconTalk host Russ Roberts about the economics of health care and his book, A Crisis of Abundance: Rethinking How We Pay for Health Care. Kling discusses whether we get what we pay for when we spend money on health care, why health care isn’t like cars, and why health care insurance isn’t really insurance. The conversation closes with a discussion of innovation in America’s health care system and why America is so unlike everywhere else.

A Little History: Primary Sources and References

Great Depression, by Gene Smiley. Concise Encyclopedia of Economics

…The Great Depression is often called a “defining moment” in the twentieth-century history of the United States. Its most lasting effect was a transformation of the role of the federal government in the economy. The long contraction and painfully slow recovery led many in the American population to accept and even call for a vastly expanded role for government, though most businesses resented the growing federal control of their activities. The federal government took over responsibility for the elderly population with the creation of Health Care and gave the involuntarily unemployed unemployment compensation. The Wagner Act dramatically changed labor negotiations between employers and employees by promoting unions and acting as an arbiter to ensure “fair” labor contract negotiations. All of this required an increase in the size of the federal government….

Advanced Resources

Richard Epstein on Happiness, Inequality, and Envy, podcast on EconTalk. November 3, 2008.

Richard Epstein of the University of Chicago talks with EconTalk host Russ Roberts about the relationship between happiness and wealth, the effects of inequality on happiness, and the economics of envy and altruism. He also applies the theory of evolution to explain some of the findings of the happiness literature.

Related Topics

Roles of Government
Fiscal Policy
Social Security
Aggregate Demand
Government Budget Deficits and Government Debt
Government Failures, Rent Seeking, and Public Choice
Income Distribution