Health economics studies how people and societies produce health and pay for healthcare. Health markets are special because of uncertainty about when you fall sick, information gaps between doctor and patient, and trust. Health is like a ‘stock’ of capital. People invest in health through diet, care and habits; it depreciates with age. Insurance is also an interesting concept. Medical care is not an ordinary market. The core problem is uncertainty: you don’t know when you’ll get sick, and you can’t be sure treatment will work. As a result, we can’t say that competitive markets will be efficient. Also, patients know far less than doctors, and both sides are aware of this. Illness threatens your life and your earning power at the same time. Doctors are expected to act in the patient’s interest, not their own. Advertising and price competition are frowned upon, advice is supposed to be disinterested, and treatment should follow need rather than ability to pay. These are all things that are not expected from a normal seller.
There is uncertainty in the product itself. Patients can’t judge quality before or even after treatment, because recovery is as unpredictable as illness.
Some complexities brought on by insurance includes - a) Doctors prescribe costlier treatment to the insured, insured people will use more healthcare. Pricing also matters, since pricing at an average of low and high risk patients will likely drive away the low risk patients.
Some features:
- Licensing guarantees minimum quality when patients can’t judge it.
- Nonprofit hospitals reassure patients that profit won’t override their welfare when they can’t check.
- Price discrimination works partly as informal insurance or charity for the poor.