[Mankiw principles of economics 12] 12.The_Economics_of_Healthcare

#economics #microeconomics #macroeconomics #upsc #upscexam

Here's a summary of the key points:

Unique Nature of Healthcare Markets [00:42]:

Third-Party Involvement: Insurers and the government are heavily involved, changing how transactions occur [00:48].

Information Asymmetry: Patients often rely on doctors to determine their needs, and doctors are paid by insurance companies, not directly by patients [00:54, 01:00]. This limits the "invisible hand" of the market [01:11].

Economic Concepts at Play:

Externalities: Healthcare has significant positive externalities. For example, a flu shot protects not only the individual but also the wider community, a benefit not reflected in its price [01:17, 01:51]. Medical research breakthroughs also have massive positive ripple effects [02:07].

Moral Hazard: Insurance, while a safety net, can lead to moral hazard. When insured, individuals don't feel the full cost of their healthcare decisions, potentially leading to overuse of services (e.g., visiting a doctor for a minor sniffle) and driving up overall costs [02:15, 02:27].

Adverse Selection: This occurs when those most likely to need insurance (i.e., higher-risk individuals) are the most eager to buy it [02:53]. This can lead to a "death spiral" where premiums increase, low-risk individuals drop out, and costs become unaffordable for the remaining high-risk individuals, causing the market to collapse (illustrated by a university swim team example) [03:14, 03:28].

US Healthcare System Context:

Successes: Modern medicine and public health have dramatically increased life expectancy (from 47 years in 1900 to nearly 77 today), a significant achievement [05:21, 05:32].

High Costs: This progress comes at a high price, with the US spending about 17% of its GDP on healthcare, significantly more than other developed countries [05:46, 05:53].

Reasons for High Costs:

Baumol's Cost Disease: Healthcare is like services that don't benefit from productivity gains (e.g., a string quartet), meaning costs must rise to match wages in more productive sectors [06:06, 06:31].

Insurance Coverage: A high percentage of healthcare costs are covered by insurance or the government (around 90% today compared to 50% in the 1960s), insulating consumers from the true cost and exacerbating moral hazard [06:49].

The Debate: The complexity leads to two main opposing views on how to fix healthcare:

More Government Involvement: Advocates argue that market failures necessitate more government intervention, perhaps through a public option or single-payer system, to ensure universal coverage [07:28].

More Market Principles: Proponents believe that excessive government involvement is the problem, and more competition and less regulation are needed to drive down prices and increase efficiency [07:44].

The video concludes by emphasizing that understanding adverse selection and the implications of voluntary health insurance is central to the entire healthcare debate [07:57].