Reference no: EM132560493

Describe the results of the experiment and analyze how it affects healthcare today.

Asynchronous Information in Healthcare

In the free-market system, it is assumed that people maximize their benefits when they are allowed the freedom of making choices on their own. This assumption includes that the government, if allowed to choose for the person, would not make the best choices. For a person to maximize his or her benefits by making intelligent choices, it is clear that good information is necessary. These choices face some restrictions provided by the government, as it is assumed by the government that not all people will make the best choices. Examples are the personal use of drugs or excessive gambling. The government justifies this by showing that it is expensive for the government to take care of the people if they make these choices. In some cases, the government takes a paternalistic view rather than a criminalistic view, like in France. In the case of pharmaceutical drugs, their use is legal, but they are not the best thing to take without a prescription.

In regard to the availability of information, it is important to consider where the information originates from. For example, there are many advertisements on TV and the Internet that describe pharmaceuticals that a person should ask his or her physician to provide. The source of information, of course, being the manufacturers of the pharmaceuticals, leaves us with the question of whether this is unbiased information.

In this unit, you will continue to look at various problems with people making decisions, for example, the status quo bias, present bias, loss aversion, and decision fatigue that make it difficult for people to make completely logical decisions about their health and its maintenance.

Demand for Healthcare

Few people in this country have unlimited funds to spend on healthcare; so spending money on healthcare is somewhat of a zero-sum game, that is, money spent on healthcare cannot be spent on food or clothing or other activities. To maximize a person's utility, it is necessary to decide how much healthcare is enough to create good health in that person. This desire to create health is what creates demand in healthcare.

Insurance is one way that people attempt to level out healthcare expenses, which may be large in one month and zero in the next. One of the serious problems with health insurance comes from moral hazard. A hazard is the overuse of, in this case, healthcare, although it could be any other service when that service is free. When something is free, people tend to want as much as they can get. The problem with this, among other things, is that society at large is degraded when one person uses too much and leaves little, if any, for another person. Insurance has this tendency as a problem to solve.

It is important to study the price elasticity of demand for healthcare and know that demand will decrease as price increases, which by itself seems obvious. But it is impossible to calculate how much of a decrease there will be and, therefore, estimate how much service should be provided so that there will be no wastage. The reason this calculation is important is that the public exchanges created by the Affordable Care Act of 2010 would be less than effective if it were not for the subsidies provided to the lower-income population to overcome this price elasticity of demand.

In the next section of this unit, you will spend time discussing the RAND Corporation's HIE, which was the largest experimental study ever conducted on healthcare in this country. It provides the foundation of cost sharing in healthcare, which is intended to control the overuse of services and moral hazard.

Externalities of Consumption

Externalities are created when the actions of one person affect the well-being of another person.

There are two types of externalities, production and consumption. When one organization or person manufactures a product and, as a product of that manufacturing, harms another organization or person, this is called a production externality. Earlier, we discussed the example of generating electricity as a production activity and a product of that being air pollution, which harms others. There are also both positive and negative externalities. For example, the production of apples in a tree farm as a product of reducing carbon dioxide is a positive product. It is common for economists to tax negative externalities and provide incentives for positive ones.

Consumption externalities occur on a more personal level-for example, a positive consumption externality is immunization. When one person consumes an immunization, the product of that is a lowered risk of other people contracting the disease. Society is enhanced through a positive consumption externality quite often. A classic case of a negative consumption externality is smoking. A mention of secondhand smoke provides an image that is not easy to forget.

It can easily be shown that a completely free market would be disrupted by these externalities in many cases. It is, however, difficult for the government to establish taxes, tariffs, and incentives that both maintain a free market and avoid many negative externalities.

Many economists believe that the consumer is the best judge of what will maximize his or her utility, and this is the foundation of a free market. One of the problems with this assumption is that it assumes people will demand things that will make them the best off. However, there are many instances, such as addiction, whether to drugs or cigarettes or obesity, that counter this argument.

So we are left with the question of how many choices are enough, although economic theory suggests that the more the number of choices, the better. One finds that too many choices make them more difficult, or nearly impossible, to manage. It becomes incumbent upon the government then to, at least in some ways, limit the number of choices in order to promote a fair market.