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Health Care and the Public Sector

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  • David M. Cutler

Abstract

This paper summarizes the many aspects of public policy for health care. I first consider government policy affecting individual behaviors. Government intervention to change individual actions such as smoking and drinking is frequently justified on externality grounds. External costs of smoking in particular are not very high relative to current taxes, however. More important quantitatively are the internal costs of smoking to the smoker. A recent literature has debated whether such internalities justify government action. I then turn to markets for medical care and health insurance. Virtually all governments provide health insurance for some part of the population. Governments face several fundamental choices in this provision. The first choice is between operating the medical system publicly or contracting for care from private providers. The make-or-buy decision is difficult in medical care because medical quality is not fully observable. Thus, private sector efficiency may come at the expense of quality. A second choice is in the degree of cost sharing. More generous insurance reduces the utility cost of illness but also leads to overconsumption of care when sick. Optimal insurance balances the marginal costs of risk bearing and moral hazard. In the US, government policy has historically tilted towards more generous insurance, by excluding employer payments for health insurance from income taxation. The welfare loss from this subsidy has been a theme of much research. Finally, governments face issues of competition and selection. Sick people prefer more generous insurance than do healthy people. If insurers know who is sick and who is healthy, they will charge the sick more than the healthy. This differential pricing is welfare loss, since it denies sick people the benefits of ex ante pooling of risk type. Even if insurers cannot separate sick from healthy, there are still losses: high costs of generous plans discourage people from enrolling in those plans. Generous plans also have incentives to reduce their generosity, to induce sick people to enroll elsewhere. Adverse selection is empirically very important. To date, public policies have not been able to offset it. Finally, I turn to the distributional aspects of medical care. Longstanding norms support at least basic medical care for everyone in society. But the generosity of health programs for the poor runs up against the possibility of crowding out private insurance coverage. Analysis from Medicaid program expansions shows that crowdout does occur. Still, coverage expansions are worth the cost, given the health

Suggested Citation

  • David M. Cutler, 2002. "Health Care and the Public Sector," NBER Working Papers 8802, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8802 Note: HC HE PE
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    Cited by:

    1. Courtemanche, Charles & He, Daifeng, 2009. "Tax incentives and the decision to purchase long-term care insurance," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 296-310, February.
    2. Robin Boadway & Manuel Leite-Monteiro & Maurice Marchand & Pierre Pestieau, 2006. "Social Insurance and Redistribution with Moral Hazard and Adverse Selection," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(2), pages 279-298, July.
    3. Jeffrey R. Brown & Amy Finkelstein, 2008. "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 98(3), pages 1083-1102, June.
    4. Jeffrey R. Brown & Amy Finkelstein, 2007. "Why Is the Market or Long-term Care Insurance So Small?," NBER Chapters,in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 1967-1991 National Bureau of Economic Research, Inc.
    5. Lapo Filistrucchi & Fatih Cemil Ozbugday, 2012. "Mandatory Quality Disclosure and Quality Supply: Evidence from German Hospitals," Working Papers - Economics wp2012_16.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    6. Richard M. Bird & Sally Wallace, 2003. "Taxing Alcohol in Africa: Reflections from International Experience," International Tax Program Papers 0304, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Nov 2003.
    7. W. Viscusi, 2008. "How to value a life," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 32(4), pages 311-323, October.
    8. Christine Jolls, 2007. "Employment Law and the Labor Market," NBER Working Papers 13230, National Bureau of Economic Research, Inc.
    9. Joan Costa‐Font & Christophe Courbage, 2015. "Crowding Out of Long‐Term Care Insurance: Evidence from European Expectations Data," Health Economics, John Wiley & Sons, Ltd., vol. 24, pages 74-88, March.
    10. Sojo, Ana, 2014. "The Chilean system of contributory pensions as locus of rivalry and of a new social compact," Políticas Sociales 211, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    11. Grant Miller & Diana Pinto & Marcos Vera-Hernández, 2013. "Risk Protection, Service Use, and Health Outcomes under Colombia's Health Insurance Program for the Poor," American Economic Journal: Applied Economics, American Economic Association, vol. 5(4), pages 61-91, October.
    12. Srivastava, Divya & McGuire, Alistair, 2015. "Patient access to health care and medicines across low-income countries," Social Science & Medicine, Elsevier, vol. 133(C), pages 21-27.
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    14. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    15. Eggleston, Karen & Wang, Jian & Rao, Keqin, 2008. "From plan to market in the health sector?: China's experience," Journal of Asian Economics, Elsevier, vol. 19(5-6), pages 400-412.
    16. Fischer, Ronald & Gonzalez, Pablo & Serra, Pablo, 2006. "Does competition in privatized social services work? The Chilean Experience," World Development, Elsevier, vol. 34(4), pages 647-664, April.
    17. repec:hrv:faseco:34330197 is not listed on IDEAS
    18. Bhattacharya Jayanta & Vogt William B., 2014. "Employment and Adverse Selection in Health Insurance," Forum for Health Economics & Policy, De Gruyter, vol. 17(1), pages 1-26, January.
    19. Simona GRASSI, 2006. "On the characteristics of a mixed system of provision of a private good. An application to health care," Departmental Working Papers 2006-14, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
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    21. Ines Läufer, 2014. "Another perspective on the high uninsured-rate in the USA: Crowding out of long term health insurance by the institutional setting of the U.S. health insurance system," Otto-Wolff-Institut Discussion Paper Series 02/2014, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
    22. Srivastava, Divya & McGuire, Alistair, 2013. "Analysis of prices paid by low-income countries - how price sensitive is government demand for medicines?," LSE Research Online Documents on Economics 54487, London School of Economics and Political Science, LSE Library.
    23. Jayanta Bhattacharya & William B. Vogt, 2006. "Employment and Adverse Selection in Health Insurance," NBER Working Papers 12430, National Bureau of Economic Research, Inc.
    24. Amy Finkelstein & Kathleen McGarry, 2003. "Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance," NBER Working Papers 9957, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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