Health Economics and its Applications to Health Policy

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Health Economics and its Applications to Health Policy Question 1 Allocative efficiency refers to a characteristic of an efficient market whereby the capital is allocated in a way that is most beneficial to the parties that are involved. It represents an optimal distribution of goods and services to the consumers in an economy. It also represents an optimal distribution of the financial capital to the firms or projects among the investors. On the other hand, equity corresponds to the issue of whether the distribution of goods and services to individuals and profits to the firms are fair.

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It is possible to use the market mechanism to implement Pareto efficient and equitable allocations in healthcare markets. Allocation or outcome is Pareto efficient if no one party can be made better off without another being made worse off. This is ideal in a perfectly competitive market. In any other situation other than the Pareto efficiency, there can be some changes to the allocation of resources in an economy. Only the changes that meet the above conditions are said to be aligned with the Pareto efficiency.

Question 2 Supplier induced demand may occur in a situation where there is the asymmetry of information between supplier and consumers. The supplier can use superior information in order to encourage an individual to demand a greater quantity of service or good that they supply than the Pareto efficient level. In health economics, the supply-induced demand has to do with the amount of demand that would have occurred in a market in which the patients are fully informed.

The supplier-induced demand is likely to increase the financial pressures on the pubic insurance programs, ad increase the share of national resources that are spent on healthcare. All these happen with very few benefits for the health of the population. Although mostly creates inefficiencies, it is sometimes efficient when it comes to immunization, CDC, among other issues. Measures tailored towards controlling the same entails include fee controls, utilization reviews, technology controls, capping of services, limiting the supply of doctors and clinical practice guidelines.

Question 3 The theory of rational addiction model has been criticized on the front that it is not able to explain the social problems, compulsive behavior, or the reasons as to why people tend to pay money in order to get rid of their addictions because the rational people have the tendency of

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deciding from the start that addiction, which includes all the consequences will give them the greatest satisfaction out of life. It has also been criticized on the front that people are not fooled into an addiction; therefore, there is no need for the education programs that provide information regarding the potential danger of the addictive goods. The implementation of exponential discounting has also been criticized given that empirical evidence suggests that the hyperbolic discounting is likely to explain the addictive behavior more realistically. Other theories attempt to model addictive behavior. For instance, there is the psych dynamic model that suggests that we can link problems to our childhood and how we can cope as adults. This means that addiction can be an unconscious response to the difficulties that individuals may have experienced in childhood. There are also other models, such as the social learning model and the sociocultural model. Commitment device enforces voluntarily imposed restrictions on the people until they have accomplished their goals or enforce voluntarily imposed penalties if they do not accomplish their goals. This is important in this context because some people are aware of the fact that because of limited will power, they sometimes fail to follow through on their best intentions, and therefore could fail to accomplish their current health goals. As such, commitment devices are attractive to such people as they permit them to pursue healthy future endeavors.

Question 4 Just like in a general economy, the high marginal tax rates can discourage work, innovation and savings through the supply side. The specific tax preferences can also affect the allocation of economic resources. The long-run effects of the tax policies depend not only on their incentive effects but also their deficit effects. As a result of tax increases, the policies demanded are likely to be less comprehensive, hence causing the net price of care to the consumer to rise and the demand for medical care to decrease. With a decrease in the demand for

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medical care services would create a situation whereby the medical prices are going to fall. Some of the tradeoffs that the policymakers should consider include the cost containment measures.

With high taxes, the costs incurred by health facilities may go up, and this has implications on the quality of healthcare provided. There may also be reduced payment by healthcare insurance providers, implying that the patients will incur a significant portion of healthcare costs. However, the taxation may be aligned with the need to realize equitable healthcare; hence in line with the Pareto efficiency. A Pareto improvement may occur when a change in allocation helps some people and does not lead to damages. Pareto improvements will keep enhancing value to healthcare.

Question 5 Insurance companies are always susceptible to imperfect information, which cause a moral hazard problem. The moral hazard refers to a situation where people engage in riskier behavior with insurance than they would if they did not have insurance. This is supposed to be prevented by insurance companies by carrying out investigations that are meant to prevent insurance fraud as one of the ways of reducing extreme cases of moral hazard. If an insurance company happens to have perfect information on risk, it may raise its premiums every time that an insured party engages in risky behaviors. However, an insurance company cannot be in a position to monitor all the risks that the people take all the time, implying that the moral hazards will remain a problem even when various cost-sharing and checks are in place. Other ways of controlling this include focusing on the incentives of the providers of healthcare, cost-sharing of the insurance companies through co-insurance, in-depth investigations tailored towards fraud prevention, and imposing some deductible on the policyholders so that they can be paying some amount for every doctor visit that they make.

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Question 6 The introduction of generic ibuprofen likely caused the demand for Advil to shift inward and become more elastic. The two products are substitutes; therefore, the introduction of ibuprofen will definitely curtail the demand for Advil, which is an already existing product.

However, this will also depend on the price of generic ibuprofen. The demand for Advil varies directly with the price of the generic ibuprofen. If the price of newly introduced substitute increases, the demand for Advil will remain the same or rise in the long run. This is because Advil becomes relatively cheaper. When changes in the prices here play a very important role in shifting the demand of Advil, this makes the demand for Advil more elastic than static.