This concluding chapter summarizes the most pertinent insights from health economics that have been developed in the book. In addition, it includes a section on “debunking” in which economic theory and evidence contradict or heavily qualify views commonly held by experts in health management and policy. The pervasiveness of actionable inefficiency, the emphasis on medical spending rather than health benefits, the value of cost-sharing for nonpoor insureds, and the functioning and tax treatment of employment-based health insurance are all considered.

This chapter addresses the factors outside of medical care that are responsible for health outcomes: social and structural determinants of health (SDOH). It outlines economic stability, education, health access, neighborhood, built environment, and community context (including income inequality and racism) as some of the upstream drivers of the health-income gradient. These SDOH are framed in economic terms as a local public bad. Managers therefore must take SDOH into account if they are aiming to optimize health outcomes and costs for their population, especially if they are in a population-based or capitated payment system. The evidence about what actions to take is still developing, but some interventions are reviewed including Medicare’s direct contracting model, Medicaid’s section 1115 waivers, community health workers, meal delivery programs, and screening and referring to community organizations. Larger actions such as disparate impact monitoring and changing payment incentives and risk adjustment will need to be taken in the future.

Health insurance does not work well when individuals have more information about illness than the insurer. Two problems arise as a consequence of this information gap. Moral hazard, which arises when individuals know more about their current needs than the insurer, generates an overutilization of care services. Adverse selection, caused by insureds having more information about future risk than insurers, leads high-risk individuals to buy high coverage (at a high premium) and low-risk individuals to buy lower coverage than optimal. This chapter covers these market failures and presents some evidence and thoughts about policies that have been used to reduce their negative effect, such as cost-sharing for dealing with moral hazard, and mandates and cross-subsidies for buying high coverage. I end by arguing that dealing with selection should not be a top priority.

This chapter discusses insurance as a central player in the purchasing of health goods and services. It points out the flaws and quirks in the insurance market that lead to an absence of perfect competition and the potential for skewed bargaining power between providers and insurers. Managed care is then outlined as an attempt by insurance companies to curtail health spending through utilization controls and narrow networks. Additional tools such as paying for wellness programs, bundling payments for episodes of care, and cost-effectiveness measures are also discussed as possibilities to improve the efficiency of payouts by insurers. The chapter concludes by reminding us that insurance companies make more money the less they pay out and that making it more difficult for beneficiaries to access care will allow them to accomplish that.

This chapter covers the economic theory and evidence about the impact of provider consolidations (mergers and acquisitions) in healthcare services. As expected, hospital combinations within local markets (horizontal) are associated with higher unit prices but no measurable improvement in metrics of quality or outcomes. Prices increase by about 15%. Currently 30%–40% of the US population lives in big cities with competitive hospital markets. However, an equal fraction lives in smaller cities that could support more competitive hospitals; public policy to encourage competition there would be appropriate. The chapter investigates economic theories of vertical integration across markets; results here are less robust. An example of enhanced market power through bundling is provided, but a health system’s ability to do so is limited by lower administrative cost to employers of dealing with a single insurer that covers sellers in such markets.

This chapter deals with the economics of prescription drugs and of insurance coverage for them. Sellers of drugs have temporary market power because of patents. Drugs are supplied under a cost structure with high fixed costs of research, discovery, and approval followed by low marginal cost of producing additional units; this structure does not permit competitive markets to exist during the period of patient protection. Health systems buy drugs for inpatients in the usual way, but outpatient and pharmacy sold drugs are priced above marginal cost with prices often distorted by insurance coverage. The result can be high prices (though not necessarily increasing ones). A potential solution to the inefficiencies in this market is an agreement between insurers and drug sellers to buy a predetermined volume with the marginal price of additional units low or zero – the so called “Netflix” model. The intent of above-cost pricing for drugs is to encourage the supply of innovative products, but evidence on whether the current patient system in the US achieves an ideal outcome is lacking.

The typical American nonprofit hospital does not fit well with the economic theory of the firm. That theory, as explained by Ronald Coase, imagines that a firm is an organization in which a manager directs the allocation of capital and labor already contracted with the firm. In contrast, US hospital management historically did not employ physicians, supplies of a key input. Physicians were a parallel entity, the medical staff, who billed separately and could issue orders for deployment of other hospital inputs (such as nursing staff). More physicians are not salaried hospital employees, but they still bill separately and have independent control. This chapter outlines a model of the nonprofit hospital in which the objective is maximization of net income of the medical staff and argues that this theory explains much of hospital behavior. Care coordination, tax advantages for nonprofits, and community benefits are also discussed.

This chapter investigates price discrimination among buyers and sellers of healthcare. It is very common for different buyers to pay different prices for the same medical service or drug. Economics does not predict that profit-maximizing sellers will increase the price to other buyers if one buyer reduces price (no cost-shifting), but it does hypothesize that buyers with less price-responsive demands can be charged more than those with more responsive demands by sellers with market power. Likewise, buyers with more buyer market power (e.g., larger insurers) often pay less than smaller insurers or individual uninsured consumers. This chapter explains why price discrimination may improve efficiency compared to simple monopoly by allowing a lower price to be charged to those with lower willingness to pay that is still above marginal cost. The role of pharmacy benefit managers (PBMs) in extracting discounts for drugs is described.

This chapter describes the concept of “value-based” healthcare as an attempt to prioritize value (or quality) over volume (or quantity). However, it points out that the problem with fee-for-service is not that it prioritizes volume per se but that it may prioritize volume of the wrong (low-value) things. This chapter also acknowledges that “value” is difficult to define and quantify – if we are going to pay on it, how do we determine which health services are valuable for which patients? It then outlines an economic model of supplier payment that would lead to maximizing net value and discusses supply curves more in depth. The chapter discusses several forms of value-based payment, including pay-for-performance, bundled episode-based payments, and capitated population-based payments, as well as value-based insurance design. It concludes that the optimal payment mechanism may be a hybrid payment between part capitated (fixed per-patient per-month) and part fee-for-service to carve out high-value services.

This chapter reviews the potential use of cost-effectiveness (CE) analysis in health and health insurance management. The goal is to assure the supply of all medical services with positive benefits greater than cost and none with benefits less than cost. This method is sometimes unpopular in the US because it limits use of care with positive benefits but very high costs; however, the great majority of treatments studied are cost-effective by the usual standards for the dollar value of health improvements. It is shown than cost-sharing can make a service cost-effective. The relevance of the incremental cost-effectiveness ratio (ICER) model for the use of CE analysis by insurers is questioned.

This chapter describes the economic model of ideal decision-making under uncertainty. It also outlines the economic theory of the value of information – when a decision-maker should incur time or money cost to obtain additional evidence. It contracts these two theories with the informal decision-making processes often used by mangers, based on their recent experience or expertise, as well as with an unqualified “evidence-based” model endorsed by government that requires full information before a choice can be made. It offers an extended discussion of Medicare’s choice to put its hospital readmissions reduction program in place based on imperfect and incomplete evidence about how financial penalties would affect hospital behavior and suggests how the decision could have been improved.