Hello, and welcome.
Now that we covered the
relationship between supply
and demand, you should
have a better understanding
of how markets function
with and without government
intervention.
To analyze economic
market, we must
be able to define
who is selling,
who is buying, what is being
sold, and what is its price.
In many industries, the
answers to these questions
are fairly obvious.
Let's think about the
shirt I'm wearing.
In the clothing
industry, we can easily
identify the seller, the
buyer, and most importantly
the product that
is being delivered.
We would argue that the clothing
manufacturers are producing
and selling clothes while the
public is buying, oftentimes
to retailers.
Now, let's map this
logic to health care,
which exists because we all
want to be healthy, right?
But what is health from
an economic perspective?
Is health an output,
like my shirt?
Or an input, like the fabrics
that make up this shirt?
Who produces health?
Is it sold on the market?
And if so, what is
the price of health?
Let's start with the issue
of output versus the input.
If you answer that health is
an output, you are correct.
If you answer that health is
an input, you are also correct.
Health happens to be one
of those conditions that
serves both as a goal and
as a means to other goals.
Health or being
healthy is an output
from several perspectives.
From an individual,
perspective it's
an output in that it's a goal
we all put resources behind.
We exercise, we eat
healthy, and use
medical care to
elevate our health.
Being in good health care
is a desirable output.
But individuals are not
the only ones thinking
of health as an output.
If we look at it from the
perspective of providers,
their core business is to
deliver care that improves
the health of their patients.
This is one of the reasons
many economists believe
doctors should be paid based
on their success in making
their patient healthier and not
based on the number of services
they provide to patients.
The current payment
system suggests
that health is an
output, because it's
reflective of the care
provided to patients.
At the same time, health
can be viewed as an input.
But what would
health be producing?
Well, from an
individual perspective,
the healthier we are,
the more productive
we are in the workplace
and outside of it.
Healthier workers lose
fewer days to illness
and earn more money.
At the same time,
being healthier
helps make the most out
of our leisure activities.
But individuals are not
the only ones thinking
of health as an input.
If we look at it from the
perspective of payers,
their core business is to spread
financial risk from health care
utilization.
Naturally, what makes an insured
member more or less risky
is their underlying
health condition.
Therefore, faced
with other selection,
insurance companies will
have to properly assess
the underlying health of
their member population.
Failure to do so may lead payers
to experience financial losses,
as we've seen with the
number of plans offered
on state insurance exchanges.
Health is therefore an input
because insurance companies
base their decisions on the
health status of their members.
So health is both an
input and an output,
and that clearly makes economic
analysis of health care markets
more challenging.
But it is even more
complicated than that.
Let's revert back to the
questions of sellers and buyers
in health care markets.
You might say, the
answer is simple.
The physician is the seller.
The patient is the buyer.
One is selling a service.
The other one is purchasing it.
But the patient-physician
relationship
is far more complicated than
it would seem at first glance.
The reason for that
is, again, the role
of health in economics.
Recall our discussion
of supply and demand.
Suppliers in economics are
represented by a supply curve.
They make decisions about
the quantity supplied
at any given price point.
And, moreover, they have
control over the quality
of their services.
Consumers, on the other hand,
make decisions on the quantity
demanded.
Since price is
observable to consumers,
their desires and
valuation of the service
allows them to determine
how much they would spend.
These desires and valuation
constitute what economists
call willingness to pay.
Here is a simple example
relying once again
on the straightforward
interpretations of the clothing
industry.
A consumer is interested in
purchasing a brand new shirt.
While our consumer is
no expert on shirts,
they do control one important
aspect of the transaction,
their willingness to pay.
At the same time,
the producer can
alter the quality of the
shirt to affect the consumer's
valuation of the product.
An Oxford blue shirt
at Walmart costs $15
while a shirt just like
that at Ralph Laurent
would cost $73 on sale.
It sounds trivial, but
for economics to work,
the sellers must control aspects
of the product or the service
while the buyer decides how
much they are willing to pay
for this product or service.
Now let's go back to health.
First of all, patients,
or buyers in our example,
rather than physicians
or suppliers
have major influence
over their health.
Sure, physicians have
control over quality aspects
of medical care, but they
have little influence
over their patients adherence to
a healthy and active lifestyle,
a key determinant of health.
In that sense, consumers
in health care markets
exert influence over
the supply curve,
and that is not how economics
is supposed to work.
Now, let's look at the
other side of the equation.
Who decides how much to spend?
In our shirt example,
it was the consumer,
but here physicians
rather than patients
have a major influence
over purchasing decisions.
Patients, both insulated
from the actual cost of care
through insurance or
lacking medical expertise
to determine the level of
care appropriate for them,
will be heavily influenced
by advice from their doctors.
In that sense,
suppliers in health
care market exert influence
over the demand curve.
And again, that is not how
economics is supposed to work.
Therefore, we find
ourselves in a world
where the sellers can
manipulate aspects of demand
and buyers can manipulate
aspects of supply.
That, in turn, changes
the fundamental notion
of equilibrium we discussed
in the previous segment.
And this is before we even
enter this health insurance
into the mix.
But not to worry, now
that we understand
the nature of the complexity,
we can start taking steps
to have it all make sense.
In the next segment, we will
discuss a key contribution
to understanding
the role of health
in economics, Grossman's 1972
human capital model, where
health, in addition to
being viewed as an output
and as an input, is also viewed
as a durable capital stock.
