Health Economics, Questionnaire Example

Why are most hospitals in U.S. are organized as non-profit entities?

The reason behind a preponderance of non-profit hospitals in the US is linked to the government as a major payer of services.   In order to be eligible for government reimbursement programs (Medicaid or Medicare), hospitals must provide a certain level of “charity care”- care that is free or at reduced costs for disadvantaged populations (populations who don’t have health insurance or less than optimal levels) (Baumol &Blinder, 2004). The impact of this care on a company’s bottom line is not minimal; thus, hospitals choose non-profit status: because it allows them to access government reimbursements without paying prohibitive taxes on profits.

How are Hollywood and the pharmaceutical industry similar in terms of their marginal cost curves?

Hollywood and the pharmaceutical industry are similar in that firms in those industries pay significant fixed costs to develop products: Movie production firms can pay up to several hundred million dollars to develop, film, and launch a movie; pharmaceutical firms can pay up to several billion dollars to launch a “blockbuster drug.”  However, the marginal cost to produce an additional copy of a movie or drug, once the intellectual property exists, is minimal: Probably free in the case of movies (if placed online); several cents in the case of producing an extra pill (Feldstein, 2011).. Thus, both firms face similar marginal cost curves to produce an additional copy of their developed product.

Give two or three reasons why the U.S. spends more money, per capita, on healthcare than most other countries do.

The price of many health-related services and the utilization of technology in US health care, is  high leading to higher costs than other systems (Henderson, 2012).;

There are substantial administrative costs embedded in many billing procedures due to the existence of numerous, different insurance companies (Henderson, 2012);

A predominant amount of consumer spending is tied to third-party health insurance provided through workers’ firms: since consumers do not typically know what the price is, they tend to over consume health services (Henderson, 2012).

Explain, in a sentence or two, why it is difficult to achieve economies of scale in the U.S. hospital industry?

Economies of scale is defined as declining average cost over.  Since hospitals do not produce the same “product” (i.e., a heart patient is different from one receiving a physical), hospitals do experience economies up to a certain number of beds, but they are unable to grow bigger due to the heterogeneity of service offered (Mankiw, 2001).

Why is the marginal cost structure of U.S. health insurance so problematic?

The marginal cost structure of U.S. health insurance is problematic due to the disconnect in its pricing structure versus the (actual) cost of care (Phelps, 2010). For example, if an individual has an insurance policy that covers all care (no copayment), he/she with theoretically consume as much care as doesn’t cause medical harm.  However, it is possible that the individual wouldn’t purchase at least a portion of that care if he/she paid the actual costs of care.  Overall, an individual is expected to purchase care where marginal benefit exceeds marginal cost; however, since insurance covers the cost of care, the marginal cost structured is obscured from the consumer.

References

Baumol, W. & Blinder, A. (2004).  Microeconomics and Policy. New York: Southwestern Press.

Feldstein, P. (2011).  Health Economics. Boston: Cengage.

Henderson, G (2012). Health Economics and Policy. Boston: Cengage

Mankiw, G.  (2001). Principles of Microeconomics. New York: Southwestern Press.

Phelps, C.  (2010).Health Economics. New York: Addison Wesley.