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Health Economics Exam 2
Chapters 7-12
118
Economics
Undergraduate 4
11/10/2014

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Term
Total Product
Definition
AKA Total Output!
Typically in the short run total product curve, total product increases at an increasing rate, and then increases at a decreasing rate, and then ends up decreasing! This is because there is originally an increasing, then a diminishing, then an initial increase but then decrease over productivity related to the on the total product.

It can also be formally written as
q = f(n,k)
where "n" is the amount of health input (nurse hours), k is the capital and CONSTANT, and "q" is the health product
Term
Marginal Product
Definition
The change in total output associated with a one unit change in the variable input (not capital!). In the Marginal Product curve, it increases up to a certain point, and then begins to decrease, creating a "hill." This shows that there is a diminishing marginal productivity, that even goes negative after a certain point! (It goes negative when the TP curve goes down).

It can be formally written as MP = Change in Q/ Change in "n"

Remember n is amount of medical input, q is amount of medical output
Term
Average Product
Definition
It is formally written as the total number of output by the total number of variable (medical) input. The AP curve is essentially the derivative of the TP curve, or the "slope of the slopes." The slope of the TP curve increases until a point, and then begins to decrease. It is like the MP curve, except it will never go negative, where the MP curve goes negative when the slopes begin to go negative.

Formally this is written as:
AP = q/n

(Rise over Run), or total medical product over total medical input
Term
Short Run Total Cost
Definition
This is known as the sum of your variable and fixed costs, in the short run. Although redundant it is important to note that it has the distinct two, with the fixed cost being where the curve crosses the vertical axis. The total cost curve is essentially mirror of the total product curve. As the slope increases in the total product curve, it represents higher levels of productivity, and thus lower costs and a lower slope in the total cost curve, and vice versa!

Overall, Short run total cost is written as: STC = w x n +(r x K)
Where K and therefore r are constant (fixed cost), where n (hours of labor) and wage (hourly payment) are variable!
Term
Short Run Marginal Cost
Definition
This is the cost of adding one more unit of output, and like total cost varies depending on how much you have produced. It's curve also mirrors that of the marginal product curve, except the "hill" is upside down. In more economic terms, te marginal cost curve begins at where the fixed cost is, and decreases as you produce more, until a certain point is reached, and then cost begins to increase again. This follows suit with the law of diminishing productivity
Term
Short Run Average Cost
Definition
This is the amount of cost divided by the number of output. Its curve like the others is the reciprocal of the average product curve. It is also the "slope of the slopes" or derivative of the total cost curve!

All in all, the way to write the Short run average cost (or at least the variable cost, since fixed cost is the same regardless of output) is:

SAVC = STVS/q
Term
Total Long Run Cost
Definition
This is the sum of all the costs over a long given period. Because firms can make plans to change in their future, there are NO fixed costs, as even capital (constant K) can be changed! This results in the long run cost curve, becoming essentially a connection of the asymptotes of all the short run cost curves, allowing firms to pick the best one.

Long run cost can be written as:
LTC = SRVC(q,w,k) + r x K
but know that K is NOT constant, subject to change leaving no Fixed cost
Term
Why are Short Run Cost Curves U shaped?
Definition
Short Run cost curves are U shaped because of the law of diminishing productivity setting in eventually making it productive to produce only a certain amount of product.
Term
Why are Long Run Cost Curves U Shaped?
Definition
The Long Run Cost Curve is U shaped due to economics and dis economies of scale. It is the trend of companies specializing, becoming proficient enough to reach the efficient outcome (economies), and when a company becomes too large and the economies of scale become exhausted (diseconomies) when this occurs.
Term
Short Run VS Long Run Costs
Definition
There are two Major differences in the two costs (and their curves)
-Short run includes fixed costs, long run does not
-Short run curves are U shaped due to law of diminishing productivity, long run ones are curved due to economies (and diseconomies) of scale
Term
Law of Diminishing Productivity
Definition
This is the idea that as you increase the level of output you produce, the less and less efficient your firm becomes. Eventually your firm will reach a productivity end point, and from there adding more just increases costs while REDUCING output!
Term
Economies of Scale
Definition
This is a process that occurs in the LONG RUN of costs. It is the process of a firm getting larger and specializing its work force of labor and capital, resulting in a lower cost. It represents the DOWNWARD SLOPING portion of the Long run cost curve, and it is what gives long run cost curves the first part of the U shape.

It is due to INCREASING RETURNS TO SCALE that leads to this curve sending the cost down
Term
Diseconomies of Scale
Definition
This is a process that occurs in LONG term cost. It is when the firm gets too large and starts to effect productivity. This causes the cost to produce more to increase, and represents the curving Upward at the end of the long run cost curve. (This is in part why the LRC curve is U shaped).

This curving of the cost upward is due to decreasing returns to scale!
Term
Increasing Returns to Scale
Definition
This is the process of an increase in input leads to a PROPORTIONALLY greater increase in output. (EX Doubling inputs and yielding 3 times the output). This is caused from when firms initially choose to increase size in the long run, and causes economies of scale to occur. The increasing returns to scale shows the cost curve sloping down to horizontal in the long run cost curve
Term
Decreasing Returns to Scale
Definition
This is the process of when increasing input leads to a proportionally smaller increase in output (ex like tripling your inputs, but only seeing an increase in output by double). This is caused from dis economies of scale, or the process of the firm getting too big and losing efficiency. It is represented on the long run cost curve as the cost curve sloping upward and increasing
Term
Constant Returns to Scale
Definition
This occurs when there is a 1 to 1 ratio of input put in and resulting output put out in a long term cost analysis. It represents the horizontal center of the long run cost curve, showing no PROPORTIONAL change in the amount of output with an increase in input.
Term
Economies of Scope
Definition
This is the idea that jointly sharing resources, or producing two things together, is more cost efficient than producing them separately!

EX: Colleges offer undergrad and Grad education at the same location, rather than paying for a separate one of each. Use same teachers, classrooms, etc, leads to higher productivity and is an economies of scope
Term
Learning By Doing
Definition
AKA Practice makes perfect
This is the process of a company becoming more efficient the longer their firm produces a product. It can result in either producing the same output for less cost, or producing more output for the same cost. Either way, it is the concept to a firm of "practice makes perfect"
Term
Integrated Delivery System (IDS)
Definition
THIS IS A TYPE OF ACO, or one way of combining multiple health services together to reduce cost. This is when you combine physicians and hospitals into one single entity, or a physicians practice with a hospital that is run by a single ownership and structure. It can differ from how much revenue, management, risk etc. is shared, but it is a combination of medical outputs to increase efficiency!
Term
Accountable Care Organizations (ACO)
Definition
When the Affordable care act was passed, one of the sections were that it would encourage the creation of ACOs, or accountable care organizations. These are organizations that in one way or another, combine medical services like physicians and hospitals together to provide specialized, cost efficient service. ACOs are expected to receive bonuses for the amount of cost they save while providing a certain standard of care!

NOTE: integrated delivery systems (IDS)s are a type of ACO, where the whole operation is run by 1 source of management. An ACO can include all sorts of ways of incorporating medical services together
Term
Market Structure
Definition
The overall environment or "playing field" within each firm operates. Examples of market structure characteristics are number of buyers and sellers, type of product sold, barriers to entry of the market, etc.
Term
Perfect Competition
Definition
This is a type of Market Structure. In this type, there are many buyers and sellers in the industry, and they each sell the same (or a homogenous) product. There are no barriers of entry, and we assume buyer information is "perfect" or that consumers are aware of price fluctuations. The result in these characteristics is that competition between firms is high because there are so many and they sell similar things. This is the LOWEST market structure where firms have market power, as the price is set by supply and demand!
Term
Monopolistic Competition
Definition
This is a type of market structure. It has many number of sellers, however instead of perfect competition, what each seller sells is differentiated (not homogeneous/ the same). The buyer information is slightly imperfect, and there is no barrier on market entry. There is slightly less competition because goods are differentiated, but the free entry and knowledgeable consumers gives this LITTLE market power, it is the 2nd lowest
Term
Oligopoly
Definition
This is a type of market structure. It is defined by few, very large firms holding most of the industry. Due to this, there are large barriers to entry in the market. The products can be differentiated or homogeneous (same or different) depending on the firms. Competition occurs between the few large firms, but much less than perfect competition. The consumers can be perfect or imperfectly knowledgeable as this matters little on the price. This is the 2nd highest market structure in Market Power, each firm holding a lot of power on the price *but not absolute
Term
Pure Monopoly
Definition
This is a type of Market structure. It is defined by having 1 having dominance over the market. Market entry is impossible, and the products are considered either homogeneous or differentiated, dictated by the firm. The consumers are therefore either perfect or imperfectly knowledgeable on the price, and they are indifferent knowing they don't set it. This causes pure monopolies to have 100% of market power! The most out of any market structure
Term
Price Takers
Definition
In perfect Competition, the vast number of buyers and sellers allows for supply and demand to dictate the price, or the "equilibrium market price." Because neither the buyers or sellers actually dictates what they pay, in perfect competition they are considered "price takers"
Term
Consumer Surplus
Definition
This reflects the Net benefit to consumers from engaging in free exchange (competitive market). It shows the difference between what the consumer actually has to pay over the relevant range of output. In graphical terms, in a supply + demand graph, CS is considered the "Top Half" of the triangle made from the equilibrium, the demand, and supply curves.
Term
Producer Surplus
Definition
This is the net benefit to producers from participating in free trade. It is the difference between the actual price received and the required price they would be required to sell something for the relevant range of outputs (outputs before equilibrium. In graphical terms, Producer Surplus is the Bottom half of the triangle made from the equilibrium, the demand, and the supply curves.
Term
Total Welfare (W)
Definition
This is the sum of consumer and Producer surplus. It is maximized when markets behave at optimum efficiency. In perfect competition, Total Welfare is maximized when the market is operating at equilibrium
Term
PS, CS, and W During Perfect Competition
Definition
During Perfect Competition Total Welfare W is maximized, and Consumer Surplus and Producer Surplus equal eachother!
PS = CS
Term
Imperfect Competition
Definition
This is a type of market structure in which one of the rules to be perfectly competitive is not met. IE, this is ANY of the market structures that aren't perfect competition
Term
CS, PS, and W during Imperfect Competition
Definition
Imperfect Competiton, or a market structure that is NOT perfect competition is not as efficient as PC. Because of this, Total Welfare W is not maximized, as one or multiple factors are not allowing the economy to operate at equilibrium. This causes CS and PS to not be maximized, and more than likely, not equal eachother. The main thing to take away is that imperfect competition (monopolies, oligopolies) are NOT as efficient and do not maximize Welfare like PC does
Term
Comparative Static Analysis
Definition
This examines how changes in market conditions influence the positions of the demand and supply curve and causes the equilibrium price and output to adjust. It is doing supply and demand curve shift analyses!
Term
Two Supply and Demand Explanations for the Increase in Medical Care Price, Utilization, and Expenditure
Definition
1. One belief is that the manufacturing sector wages and the wages of those who are in service (like medical care), are related. When the manufacturing business wages rose, this causes medical care providers to increase wages, without being able to keep up with the productivity of the increased wages. This essentially caused the supply curve to shift to the left (decrease in supply), and thus shifted the price up (assuming demand was constant)
2. Advances in medical technology caused both a shift in supply and demand. It shifted supply by getting more cost efficient, causing the curve to go left (lessening supply). Meanwhile, the advances in technology also increased the demand, as more people were able to be treated. The low supply but the greater demand caused expenditures on healthcare to increase!
OVERALL: demand and supply of healthcare are both shifted (mainly from technology and changes in wages), which cause an overall price and expenditure increase
Term
Product Differentiation
Definition
In monopolistic Competition, this is the idea that your product that you offer differs from other Monopolies products. It is a way for firms to increase the demand of their own products. They can do so through advertising, branding, etc.
Term
Market Concentration
Definition
This is a measure of the number of firms and level of competition within those firms in a given industry. It allows us to determine what kind of market we are dealing with!
Term
Herfindahl-Hirschman Index (HHI)
Definition
This is an equation for measuring the market concentration for a given market. It represents how competitive a market is. It is derived by summing the squares of the market shares of all the firms in a given market!
HHI = Σsi2 = s12+s22+s32+…sn2

Add up the squares of the market shares to find the market concentration!
Term
Lerner Index
Definition
The Lerner Index is a way of measuring market power. Lerner proposed that market power can be defined as the ability to elevate price above marginal cost. (NOTE, in perfect competition, the Lerner index is 0 because it faces a perfectly elastic demand).

It is formally written as:

L = (P-MC)/P OR 1/(Em)

Em = price elasticity of market demand (how much price is effected by market demand).
Term
Public Interest Group Theory
Definition
This theory states that Government promotes the general interests of society as a whole, and it is THEM who pick which policies enhance efficiency and equity.
Term
Special Interest Group Theory
Definition
This theory states that Government intervention is treated like any private market of goods and services. In other words, the amounts and types of legislation are determined by supply and demand, not by the government themselves
Term
Two Properties of Being a Public Good
Definition
To be a public good you must exhibit Non-rival consumption (one person consumes without diminishing it), and excludability (make it hard to exclude people/ make it costly to make people pay for it)
Term
Non-Rival Consumption
Definition
This is one of 2 properties of a Public Good. It is the idea that if someone uses or consumes this good, it will not deteriorate its value for the next person!
An example of this would
Term
Excludability
Definition
This is one of the two properties needed to be a public good. It is the idea that a public good must have low excludability, or that it must be costly to exclude non-paying individuals. An example is a public park. Everyone benefits from it who goes, but it is very hard to determine who is actually paying for it, making it a PUBLIC good
Term
Externality
Definition
An unpriced, byproduct of production or consumption that adversely or beneficially affects another party not directly involved. It is the unintentional effects of consuming/ producing something
Term
Taxes as means of Correcting Externalities
Definition
Taxes are means of threat or fines to discourage socially harmful behavior. This can be either taxing people when the smoke (decrease side, demand of cigarettes) or taxing companies when they produce pollution (cause them to reduce supply of something).
Term
Subsidy as means of Correcting Externalities
Definition
Subsidies are used to encourage socially beneficial activity that otherwise is undervalued in the marketplace. It can support positive behavior or give incentive to stop negative behavior
Term
Price Ceiling on Perfect Competition Markets
Definition
Price Ceilings create a shortage between quantity demanded and supplied. At a price too low for market price, suppliers will only supply a certain amount, where as consumers will demand much more at below equilibrium price.
Term
Price Ceiling in Monopoly
Definition
Price Ceiling in Monopolies can cause a shortage just like in perfect competition. Monopolies already sell at a shortage, because they sell wherever their MR = MC, or where MR crosses the supply curve. This is typically at a higher price and lower quantity than equilibrium, so a price ceiling can be set to lower the price! However, unless this price is set to where the competitive equilibrium would be, a shortage will remain (just not as large of one)
Term
Quality Regulation on Market
Definition
This analysis can be done by a Comparative Static Analysis, or a supply and demand shift analysis. Typically, when better quality workers are demanded, it means a higher cost of production, or a loss in supply. Shifting the supply curve left due to this increases employee wages! This difference in wages is known as the compensating wage differential, or the amount needed to pay the new doctor/ medical care provider for this increase in quality!
-The improved quality can shift demand too! This is what brings in the demand-supply shift analysis

NOTE in this graph, it has employment on the x axis, and "wages" on the y axis. So the shift left in supply shifted total employment down, but wages up!
Term
Compensating Wage Differential
Definition
When government regulation regulates the quality of a medical service, typically what occurs is that it causes cost of production to go up, resulting in lower total employment, but higher wages for the better quality of employees. This difference, between what was before and the new wages, is known as the compensating wage differential, or how much you need to pay employees to reach that level of quality medical care
Term
Price Discrimination
Definition
When a seller will sell the same good to different consumers at different prices. The SAME good for different prices.
EX senior discounts
*this only works when firm holds some sort of market power
Term
Vertical Equity
Definition
This is the notion that "unequals should be treated unequally." In other words, those who have higher incomes and have a higher ability to pay should pay higher taxes. It is the foundation of the government ruling to redistribute income equally
Term
Horizontal Equity
Definition
This is the idea that "equals should be treated equally." Or that those who make the same amount of income and have the same availability to pay should pay equal amounts of taxes.
Term
Progressive
Definition
This is one of the types of taxation. The way progressive taxing works is that of income tax. The more more net income makes, the higher that the fraction of their income is paid in taxes.
Term
Proportional
Definition
This is one of the 3 types of Taxation. Proportional tax is like Medicare tax, or the idea that we all pay a percentage that is fixed
Term
Regressive
Definition
This is one of the types of Taxation. It is the idea that the more you pay, the less you end up paying in taxes. This applies to sales tax, where even though everyone pays the same rate, the more you consume, the less percentage total you are paying in taxes!
Term
Supply Side Subsidies
Definition
A grant of money from the government to aid reducing internal costs of producing something typically consumer orientated. Government money to help pay for production cost.
*Economist see these as the worse of the 2 subsidies, as it can lead to a misallocation of resources!
Term
In Kind Demand Side Subsidies
Definition
These subsidies are when people qualify for them (by being poor, passing a test, etc) and receiving aid on certain things. These can include food stamps, medical services, etc
*economists consider this the better of the two kinds of subsidies (compared to supply)
Term
Cash Demand Subsidies
Definition
These subsidies are when people qualify for them (by being poor, passing a test, etc) and receiving aid by receiving cash to help them pay for things.
*economists consider this the better of the two kinds of subsidies (compared to supply)
Term
Medicaid Target Groups
Definition
The target groups for Medicaid, or the majority of the vendor's payments went to the elderly, followed by children with disabilities and their families.
Medicaid targeted the states with the lowest incomes, giving those states the highest subsidies for Medical Care
Term
Funding of the Medicaid Program
Definition
Medicaid is funded in part by Federal and In part by State Governments, and this caries among State to State!!
Federal Government "covers" the most for states with the lowest incomes
Term
Target Groups for Medicare
Definition
Medicare's primary goal is to improve medical access for Old People! Anyone 65 and older is eligible for the program.
Term
Funding the Medicare Program
Definition
Medicare is mainly funded through payroll tax (84%). The other is made up of taxation of benefits (6%) and interest (8%) and other (2%). It is essentially funded by payroll tax on citizens!
Term
State Children's Health Insurance Program (SCHIP)
Definition
In 1996, over 42 million people were uninsured, and over 25% of them were children! So the government instituted SCHIP, in order to expand insurance coverage towards uninsured, low income family children. It is funded both of the Federal and State levels a lot like Medicaid
Term
Policy Changes to Medicare Over the years
Definition
-Diagnosis-Related Groups (DRG) system
-Resource Based Relative Value Scale (RBRVS) System
-Medicare Volume Performance Standard (VPS)
-Medicare Part D
Term
Diagnosis Related Groups (DRG) System
Definition
This is one of the reforms made to Medicare over the years. In this case, hospitals were reimbursed for providing care to specific groups, based on their symptoms. Essentially, each case they treated in a specific group they were reimbursed, with the amount of each reimbursement depending on the group. This was done to increase medical care efficiency
Term
Resource-Based Relative Value Scale (RBRVS) System
Definition
This one one of the reforms to Medicare. In 1992 they started reimbursing physicians based the time, effort, or resources necessary for them to put in a certain amount of care. They were then reimbursed a fee based on how much of their time/ effort/ resources was consumed
Term
Medicare Volume Performance Standards (VPS)
Definition
This was a reform made to the Medicare system in 1990. The government wanted to seize more control over the growth of their Medicare Expenditures. So they established the VPS, or a limit on the amount of expenditures that can be spent on Medicare each year. Based on whether or not the limit is met, or exceeded, helps the government decide on the physician fees (and growth) for the next year!
Term
Medicare Part D
Definition
Medicare part D is the most recent expansion/ reform of Medicare, implemented in 2006. This was a way to ensure that more Americans were covered in prescription drug coverage! This was done so by allowing people to do what they did before, which was have Medicare cover medical and have a private insurance cover prescription drugs, or you could have Medicare and a private insurance cover both. This allowed for people to buy private insurance to cover the "doughnut hole," which is a gap in insurance coverage between 2930 and 4700 where to coinsurance rate is 100 in Medicare (people pay that out of pocket!) By getting Medicare AND private insurance people can cover expenses under this amount
Term
The Doughnut Hole
Definition
The Doughnut Hole is formally expressed as when Prescription drug coverage costs between 2930 and 4700 dollars, Medicare will not cover any of that and the coinsurance rate was 100! This problem was solved by implementing Medicare Part D, which allowed both private and Medicare coverage to cover this gap!
Term
When does catastrophic prescription drug coverage start?
Definition
This will start when the beneficiary has paid up to 4,700 dollars for their coverage! After that the coinsurance rate drops from 100 to 5% (out of the doughnut hole). **This 4700 threshold is reached when TOTAL prescription drug expenses exceeds $6,657.50!
Term
How Medical Employer Based Health Insurance Came to be thanks to WWII
Definition
During WWII, the hospital insurance market and the level of competition among hospitals intensified. Meah while, the Federal Government had implemented wage and price controls on healthcare services! This increase in competition, but inability to offer higher wages due to the wage ceiling, lead Medical businesses to offer something else: private insurance coverage to those who work for them! Thus employers began insuring their employees as a means of compensating for the fact they could not raise their wage.

*Unfortunately, employees never reported this insurance coverage on their taxes, and by the time the government mandated that they reported it, employees revolted when they attempted to tax them as well. The initial delay of reporting is what lead to the tax exemption of this coverage!
Term
How did Tax Exemption of employer-provided Health Insurance come to be?
Definition
During WWII, when wage ceilings were imposed in medical businesses, the only way to compensate for not being able to raise wages was to offer their employees medical insurance. This was fine for sometime, however, the employees never reported that as part of their income. By the time the government mandated that they reported it, employees revolted when they attempted to tax them as well. The initial delay of reporting is what lead to the tax exemption of this coverage! employees never reported this insurance coverage on their taxes, and by the time the government mandated that they reported it, employees revolted when they attempted to tax them as well. The initial delay of reporting is what lead to the tax exemption of this coverage!
Term
Self Insured Insurance Plans
Definition
When companies, typically larger ones, choose to insure their employees themselves instead of having a private insurance business do so. The employer itself collects premiums from enrollees and takes on the responsibility of paying employees’ and dependents’ medical claims. These employers can contract for insurance services such as enrollment, claims processing, and provider networks with a third party administrator, or they can be self-administered.
Term
Trends of Self Insured Insurance Plans
Definition
Self funded insurance pans in businesses have increased from 44% to 60% since 1999 to 2011. This rise is because self insurance plans are exempt from paying premium taxes, so more and more companies are using them!
Term
Dominant Insurer Pricing Model
Definition
This occurs in Medical Insurance providers becuase typically there are a few Dominant Monoploies that run the market, and some very small insurance companies that operate on the "fringe." The way that this model works is that the Dominant insurance company selects a price based on where it maximizes their profit, based on their "residual demand." (the demand that is left for the monopoly due to the presence of fridge firms). Once the monoply have dictated what their profit maximizing price is, the fringe firms will see what they can leftover at that price to get the quantity and price to intersect somewhere at the demand curve!

*All in all, because there are mainly a few very large dominant insurance providers and a few small ones, the main big ones dictate the price, and the fringe firms make due to get that price as close to the actual quantity of insurance demanded. NOTE becuase of residual demand, the fringe firms have SOME effect on the price, but the decision is based off what the monopoly decides
Term
Insurance Premium
Definition
This is what you spend monthly, weekly, yearly, etc in order to get insurance coverage!

Determining how much you pay for a Premium can be determined by an equation:

Prem = E(ben) + ADMIN + TAX + PROFIT

Where you add the net benefits of having the insurance, the administration cost of the insurance, what the insurance pays in taxes, and the profit the company is making! They make up what you pay to have coverage
Term
Price of Health Insurance
Definition
The price of health insurance determines how much must be spent in premiums in order to receive 1$ in benefits! The price covers how much you spend in premiums divided by how much benefit you are actually receiving.

We can use the price to determine how much cover our premium is paying for!
EX: if we pay 1.25 in insurance price, then we know 1$ of that premium is on coverage (benefits to us), and the remaining 25 is the "loading fee", or everything else the insurance needs to give you that dollar benefit!
Term
Loading Fee
Definition
This is a tricky concept but think of it as the part of the fee that the health insurance provider needs for a certain amount of benefit!

Think of this equation

Price = 1 + LOADING Fee
Price = 1 + [(ADMIN + TAX + PROFITS + e) / BEN]

Loading Fee = (ADMIN + TAX + PROFITS + e) / BEN

Loading fee with a bunch of other equations will tell you that it is formally written as the amount you spend on a premium divided by the benefits. In other words, the loading fee is what is spent on health insurance premium that does not go toward your benefit, but instead goes to Administration (admin), taxes, the insurance companies profits, and calculation error (e).

*remember, you can use the price someone pays for insurance to find the loading fee!
Term
Monopsony Power
Definition
This is when there is only 1 buyer of a good/ service exists in a market, and they are able to dictate their price AND quantity.
Term
Do Healthcare Insurers have Monopsony Power on Hospitals
Definition
They do not, but they do have what is called "Monopoly Busting Power." They presence of only having 1 "buyer" (the healthcare provider) allows them to negotiate with hospitals for a better price. This better price actually causes price to be reduced and closer to what a competitive market price would be. However, because the hospital market is not that large, they are less susceptible to having few buyers, and they do not budge on quantity provided. Because the healthcare insurers only change the price and not the quantity, they DO NOT have monopsony power, but they do have "monopoly busting" power or the power to reduce price closer to competitive market price.

*competitive market price does not occur in hospital industry because field is concentrated on few big industries!
Term
Do Healthcare Insurers have Monopsony Power over Physicians?
Definition
YES They do! Unlike hospitals where they can only effect the prices of what is bought, Health insurers have monopsony power because being that they are the only buyers in the industry, they can dictate the price AND quantity. The reason they can do that over physicians markets and not hospitals is due to the large size of physicians markets compared to the hospital market. If the insurance provider is the only one buying, but in the hospital market there aren't that many sellers, they won't be as affected. In the large physcians market, the more firms means the more competitive they are to what the health insurer wants, thus giving it total monopsony power!
Term
What are the two ways that insurance companies figure out the Expected benefit of a particular person, in order to figure out the right premium price?
Definition
The two ways to figure out a persons expected benefit value and therefore their insurance premium value are
- the community rating (based a range of people in a market and not individual risks to a person)
- the experience rating (based on an individuals statistics such as age, gender, occupation, etc)
Term
Community Rating
Definition
This is one way of determining someones expected benefit to an insurance plan, in order to determine what their premium value should be. It is done so by calculating the expected benefit of all of those in a given market, and not by risk factors of an individual person. It is not allowed to discriminate based on individual risk factors of people!
Term
Experience Rating
Definition
This is one way of determining someones expected benefit to an insurance plan, in order to determine what their premium value should be. It is done so by calculating the expected benefit, and therefore the premium, of each individual or family looking to buy the plan, based on factors such as age, gender, etc
Term
Adverse Selection
Definition
This occurs when a high-risk consumer subscribes to an insurance group composed of lower risk individuals. It is essentially when an insurer picks the wrong type of plan for a specific person, allowing them to underpay for their coverage
Term
Cherry Picking (Cream Skinning)
Definition
Besides apparently being racist, this is an issue that arises when insurance companies choose to decide who to cover and for how much. Because companies are able to select individuals, they "cherry pick" which ones they like based off low risk and this typically with leave high risk people completely uninsured.

*This occurs with both experience and community rating insurance coverage plans, as both don't want to insure high risk individuals and end up having to raise premium prices
Term
Pre Existing Conditions and their effects on a persons chance of Denial for Insurance Coverage
Definition
This is a self explanatory concept, but it is the idea that the more severe/ higher number of pre existing conditions one has the harder it is for them to get insured, especially at low premium rates. They face "significant barriers" due to the fact insurance companies target only really low risk individuals
Term
Guaranteed Renewability
Definition
This is a contractual feature that may be in an insurance policy, typically in individual insurance policies. It is a policy that requires an insurance provider to sell another policy when the existing coverage meets its anniversary. The premium is subject to change, but only due to factors that changed during that given period!

*Note, this reduces cherry picking as high risk individuals end up having to pay the high premium when the renewability period starts
Term
Trend of Real (Inflation Adjusted) Premium Payments over time
Definition
Since 1960, the amount of real wage (adjsuted for inflation) has skyrocketed! It has risen up from less than 2% in 1960 to over 20% of an average persons income (in 2010).

*Note, this vast increase implies the success of the medical insurance field, due to increasingly higher demand for insurance coverage. It DOES NOT signify failure due to higher premiums, as that is inconclusive from the rise in price
Term
Frictional Uninsured
Definition
The Frictionally uninsured is when they had a job that had insurance coverage, and they are in the process of getting a new job with new insurance, or have that new job and are in the process of having the new insurance come. It is the "in between" period of medical insurance for people switching jobs
Term
Structural Uninsured
Definition
The people who are structurally uninsured are people who are without insurance for the long run. This can be as a result of having a chronic illness, having too many preexisting conditions to get insurance, having a job that doesn't offer one, or just not having the sufficient funds. The key here is that they are long run without insurance
Term
Cyclically Uninsured
Definition
Those who are cyclically uninsured are those who lose their insurance due to losing a job from macroeconomic fluctuations in the short run. They are typically low skilled workers who lose insurance as economic casualties (compared to frictional uninsured, who lose insurance more so based on their own job decision/ performance, not economic cycle/ flux)
Term
The Job Lock
Definition
This occurs when one is employed in a company that uses an employer sponsored insurance plan. When this occurs, employees cannot take their boss-sponsored insurance policy to other jobs! They must search for new insurance if they want to switch jobs. Because of this, employees experience the "job lock" or being stuck in their current job in order to ensure they keep the same insurance coverage
Term
Health Insurance Portability and Accountability Act of 199 (HHIPAA)
Definition
This act was passed to reduce uninsured people who were in between jobs and make it harder for insurance companies to deny people based on risk pools/ pre-existing conditions. It is considered a very important movement in healthcare reform legislation, the first document really targeting private insurance providers
Term
Trends in Mode of Physician Practice
Definition
Over time, physicians have moved from working in small practices to larger multidoctor modes of production. The number of physicians who own their own practice has decreased, the number of 1 and 2 doctor practices has decreased, while the number of physcians who get paid a salary has increased, and the total number of physicians in mid size practice has increased from 13.1-19.4%. Overall, we can deduce these trends as physcians are moving away from private small practices and into much larger ones
Term
Barriers of Entry for Physicians
Definition
Barriers of entry are quite large for Physicians, as they have to go through medical school, licensing, time it takes, residency program, etc. to become one!

*People argue over time this barrier of entry has weakened as doctors get away from their own practice, but the barriers are still quite high
Term
Production/Cost/Efficniency and Physician Service
Definition
Doctor Services have certain efficency trends to maximize production and reduce costs. They are:
-Marginal Productivity for doctors is much greater than that of other medical inputs like nurses, aka doctors are the most efficient
-Efficiency increases greatly with the input of more "physician extenders" like PAs and nurses
-Group Practices are much more efficient than solo practices

Overall:
1. doctors have highest marginal productivity
2. PAs and Nurses greatly increase efficiency
3. Better in groups than in solo practice

*NOTE physicians practice also deals with moderate economies of scale
Term
Economies of Scale and Physician Service
Definition
It is noted that there is a moderate economies of scale when dealing with doctor practices, or that as you increase the number of input (doctor hours) you get an increasing proportion output (happy patients) for a little while until the curve flattens out
Term
Manage Care Organizations (MCOs) on the Physician Market
Definition
MCOs have a large role in the doctor market, as almost 90%! of physicians have a contract with at least 1 MCO.
-This also explains the trend to larger practices, are large, cost efficient, multidoctor places are much more likely to be able to accept discounts from MCOs
Term
Manage Care Organizations (MCOs)
Definition
These are organizations that are used to improve healthcare quality and maximize healthcare benefits! The are federally funded
Term
Supplier Induced Demand (SID) Hypothesis
Definition
This is the idea that doctors abuse their role as medical advisers (take advantage of their asymmetric medical information) to improve their own economic self interest.
This can include prescribing unnecessary medical care, like follow up visits, excessive number of tests, etc.
Term
Asymmetric Information
Definition
This is the idea that doctors and patients do not know the same amount of information on medical care. It is believed that this had lead doctors to take advantage of medical care consumers by prescribing them unnecessary medical care, increasing the doctors economic gain
Term
Small Area Variations
Definition
The variation in the delivery and consumption of physician service over geographical regions.
EX the number of C-sections varies between countries.
-Where you are effects the doctor care given
Term
Physician Practice Hypothesis
Definition
This is a hypothesis made to try and explain the small area variations, or geographical differences, between how each region utilizes their medical care. It is the idea that the per capita variations, particularly surgeries, explain the different clinical options regarding the type of care.
AKA the more an area makes gives the physician more options on how to proceed, especially when it comes to surgery
Term
Enthusiasm Hypothesis
Definition
This is one of the hypotheses to describe the small area variations, or the geographical differences in doctor care/ how people utilize it. It is the theory that in a particular area, a physician will become adept or "enthusiastic" to treating people a certain way, and each doctor at each region has their own type of preference. This results in the different types of medical care given for different areas
Term
Utilization Reveiw
Definition
This is one of the ways Managed Care Organizations (MCOs) try to contain medical costs. The do so by implementing programs that do utilization reviews, either current, retrospective, or prospective (past, present, future) to see how well physicians are making medical decisions and eliminate unnecessary medical care

-Overall it is a way to contain medical costs set by doctors
Term
Defensive Medicine
Definition
This is the process a doctor goes through of recommending a diagnostic test or treatment that is not necessarily the best option for the patient, but an option that mainly serves the function to protect the physician against being sued. Doctors are encourages to over utilize medical services to stave off malpractice suits!
Term
Expenditures on Physicians over time
Definition
Expenditures on Doctors has increased a lot in the past 2 decades! Since 1990, people have gone from spending 158.9 billion to 515.5 billion on doctor expenses!!
Term
Prices of Physician Care Over Time
Definition
The price of doctor care has increased every year since 1990. However, the inlfation rate for doctor services has not increased as much as the total inflation rate for medical services over time. It has increased as well with the price, just not as much
Term
Utilization of Physician Services over time
Definition
Utilization of doctor services has increased quite a lot since 1990. By combining the expenditure, price, and CPI (consumer price index), economists were able to deduce that price had over half the reason why expenditures on doctor care increased, but everything else was inflation. Although it did not have as big a fact on expenditures spent on doctors as price, utilization has increased since 1990
Term
3 Key Provisions to the Affordable Care Act (ACA)
Definition
THIS WAS ONE OF THE READINGS.
The 3 key provisions were:
1. New Consumer Protections
2. Improving quality and lowering costs
3. Increasing Acess

CP, Q+C, Acessibilty
CPQCA

see-pee-Q-see-ayy
Term
New Consumer Protections
Definition
This was one of the ways the Affordable Care Act (ACA) was revised in 2010 to help consumers. This one was to provide more healthcare protections to consumers, and it did so by
-putting info for consumers online
-prohibiting dney coverage of children based on pre exisiting conditions
-prohibit insurance companies from rescinding coverage
-Eliminating Lifetime limits on insurance
-Regulating Annual Limits
-Appealing Insurance Company Decisions
-Establishing Consumer Assistance Programs in the States
Term
Improving Quality and Lowering Costs
Definition
This was one the ways the Affordable Care Act (ACA) was reformed in 2010 to help people attain better healthcare. This way did so by:
- Providing small business health insurance tax credits
-offering relief for 4 millions seniors who hit the Medicare "donut hole"
-Providing Free Preventative Care
-Preventing Disease and Illness
-Cracking Down on Heathcare Fraud
Term
Increasing Access to Affordable Care
Definition
This was one of the ways the Affordable Care Act was reformed in 2010 in order to ensure more healthcare to more individuals. This way did so by:
-Providing access to insurance for uninsured Americans with pre-existing conditions
Term
Gruber's 3 Legged Stool
Definition
This was Gruber's Economic Analysis of the Affordable Care Act. It was the idea that the Affordable Care act needed all 3 of these things to be successful and provide affordable care. The three "stools" are
-Insurance companies should offer insurance to any applicant based on age and tobacco use, not underlying heatlh status
-There should be a requirement that makes all residents purchase insurance
-Subsidies make insurance affordable for those below the poverty line

*This essentially guatentees affordable healthcare insruance for all, but they theory is that they need all 3 (no discrimination, everyone has to buy, and the govt subsidize those that cant afford) in order to work!
Term
Isoquant
Definition
It is a line written on a production function to represent the efficient allocation of resources. Each perspecitve "line" represents an amount of quantity created with 2 inputs, one on the x and one on the y axis. The place where the isocost curve and isoquant curve are tangent is the optimal output!

*Think the outward going lines!
Term
Isocost
Definition
This is the tangent line of the isoquant line, that finds the optimal level of input for both inputs on both axis's!
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