This week we take on the most pressing Microeconomic issue of our time. According to the text, the income elasticity of health care is as high as 1.5 meaning a 1% increase in income would create a 1.5% increase in spending on health care services. Combine this with the fact that health care as a product or service is very inelastic and you've got an industry that will increase in size (revenue) as the price of health care rises.
There are things that make the health care industry different than many industries. Your book lists four reasons:
Ethical and equity considerations: People tend to believe that health care is more of a right than a privilege and for someone to be denied health care is seen as unfair.
Asymmetric information: Consumers of health care services are not experts on the ailments nor the treatments options that are available, therefore we must rely on our doctors to give us advise on what to do. This is important because you are not able to make the normal trade-offs you would normally make in a purchase decision.
Spillover benefits: Society receives benefits from health care that are not fully represented by the price, in other words, a healthy work force is a more productive workforce and an immunized population is one that is not as likely to get sick.
Third-party payments – insurance: The mere fact that you do not have to pay the full cost of your health care causes you to over-consume health care services. Does this lead to overconsumption?
Given these elements you're asked to develop a plan to improve or fix the health care system. I recommend consulting the OECD Health Project. Sotell us:
1. What in your opinion are the problems in the health care industry that are fixable?
2. What in your opinion are the problems that are NOT fixable?
3. Your suggestions for the fix.