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16.4 End-of-Chapter Material

In Conclusion

The debates that we have introduced in this chapter are far from settled. The issue of health-care policy is one that is not likely to be quickly resolved in the United States or elsewhere in the world. At the moment, we see many different ways in which health care is provided in different countries.

There is enormous pressure within the United States to deal with the perceived problem of uninsured households. As we have seen, this is a key element of the health-care bill that was signed into law in 2010. In addition, there are unsolved problems associated with Medicare and Medicaid. These government programs are in need of reform to deal with the escalating costs of medical care. According to the General Accounting Office, the current level of Medicare and Medicaid spending is about 4 percent of the gross domestic product (GDP). If there are no changes in current programs, this fraction is expected to increase to about 11 percent by 2050.This draws the discussion of the US budget through 2075: “A 125-Year Picture of the Federal Government’s Share of the Economy, 1950 to 2075,” Congressional Budget Office, July 3, 2002, accessed February 1, 2011, Also see David M. Walker, “U.S. Financial Condition and Fiscal Future Briefing,” US Government Accountability Office, January 2, 2008, accessed February 1, 2011, To put this in perspective, government outlays as a fraction of GDP have typically been about 20 percent of GDP over the past 40 or so years. This number is forecast to increase to nearly 27 percent by 2050, with a significant fraction of this driven by Medicare and Medicaid programs.

There are two overarching lessons to be drawn from this chapter.

  1. Incentives matter. Whatever programs are deemed to be desirable for dealing with health-care problems, we need to be sure to take into account the incentives that these policies will create.
  2. People are different. Health-care providers, insurance companies, and the government cannot observe many of these differences. Policies must take into account all these differences and recognize the importance of adverse selection. To the extent that markets fail because of adverse selection, government policy must address this source of the underlying problem of health care.

The nature of adverse selection is heavily influenced by technology. Recently, the US Congress has been considering legislation, HR 493,, “Text of H.R. 493 [110th]: Genetic Information Nondiscrimination Act of 2008,” accessed March 14, 2011, which limits the ability of insurance companies to use genetic information. If insurance companies have more information about individual health risks, then they can design more targeted insurance contracts. From the perspective of efficiency, this might seem to be a good thing because it eliminates some adverse selection problems. Imagine that technology were to reach a point where all your major health risks could be identified from your genetic code at birth. Almost all the uncertainty over your health would disappear, and there would be almost no role for health insurance. (There could, of course, still be insurance for accident risk.) Although this world might be more efficient, it would also be much more unequal. People with genetic predispositions to certain illnesses would face steep medical bills, while healthy people would not.

In this world people would want insurance before they were born, while there was still uncertainty about their genetic makeup, which takes us back to the Rawlsian thought experiment that we discussed earlier. It might be that, paradoxically, one of the most compelling arguments for government-provided universal health care will turn out to be the gradual elimination of market failures from adverse selection.

Key Links


  1. Is health insurance a complement or a substitute for the demand for health-care services?
  2. If doctors no longer needed a license to practice so that there was free entry into the provision of that service, what would happen to the price and quantity of health-care services? What would happen to the quality?
  3. Give an example of technological innovation in the health-care industry.
  4. If adverse selection is a problem, does allowing an insurance company to know your entire health history improve market efficiency?
  5. What type of inefficiencies does the commitment problem of a hospital create? Why don’t restaurants have this same problem?
  6. One government intervention in health care is compulsory vaccinations for children against various infectious diseases. Can you explain why governments might enact such policies? (Hint: are there any externalities involved?)
  7. In some countries and some regions, there are shortages of doctors. Why is this problem not quickly resolved by the normal workings of supply and demand in the labor market?
  8. As the United States has become richer, an increasing proportion of GDP is spent on health care. Does this fact, in and of itself, indicate inefficiencies in health care? (Hint: to what extent are aspects of health care luxury goods?)
  9. One complicated part of the demand for health care is that consumers are not quite sure of the quality of the product they are buying. Can you think of other goods or services that have this same property? Are there measures to protect consumers? Why don’t sellers sell only low-quality goods to consumers who are not able to judge quality?
  10. In the health-care market, private and public hospitals coexist. Can you think of another market in which both public and private providers exist? What are the differences in that market among the public and private firms?
  11. What are the incentives for parents to provide health care for their children?
  12. The next time you visit a doctor, ask for a price list. Discuss what happens.
  13. The government provides deposit insurance so that funds deposited at a bank are insured even if the bank goes out of business. What are the moral hazard implications of providing deposit insurance?
  14. What does the link of health-care coverage to employment do to the incentives of someone to quit one job and look for another?

Economics Detective

  1. Table 16.4 "The Uninsured (in Millions)" came from a 2006 and 2010 census. What is the current number of uninsured? What fraction is under 18 and in the 18–24 age group?
  2. Find out about the health-care system in France, Sweden, or Canada. How does it compare with the US system? How do health outcomes in the country you have chosen compare with those in the United States?
  3. The election results in November 2010 reflected, in part, concerns over the health-care bill signed into law in March 2010. What were the main concerns discussed in the election campaign with regard to the bill?