This chapter discusses the pharmaceutical industry, with specific attention given to the role of intellectual property and R&D. The chapter also explains (broadly) the process by which a new drug is approved by the Food and Drug Administration. The key concept in the chapter is the tradeoff inherent in intellectual property protections: stronger protections spur more innovation but at the cost of higher prices for a longer period of time. On the other hand, weaker protections allow for more affordable products more quickly, but at the cost of reduced innovation. The end of chapter supplement explores the role of international trade agreements in solving research and development coordination problems.

This chapter covers managed care organizations (MCOs). The chapter begins by laying out the general game plan of a MCO: reduce ineffective medical spending so that you can offer the same health outcomes at a lower price. Then the broad organizational structure of common MCO types is discussed: HMOs, PPOs and POS type plans. Next, the chapter goes through various tools that MCOs use to try to achieve their goals: denial of payment, prior authorization, behavioral interventions, gatekeeper and second opinion programs, strategic manipulation of cost sharing, provider payment schemes, and choice of who to contract with for services. Finally, the patient tradeoff between cost of coverage and amount of red tape present is explored.

Chapter 16 establishes the concept of an externality, a situation where a decision carries additional costs or benefits to a party not involved in the decision-making process. The chapter classifies several types of externalities and explores how and why they lead to undesirable outcomes. Then potential solutions to externalities as well as their strengths and weaknesses are discussed: subsidies, taxes, regulation, and the assignment of property rights. The chapter ends with a discussion of cost–benefit analysis and its role in evaluating interventions aimed at combatting externality problems.

This chapter begins by applying the theory of the firm to the context of a medical practice. The concepts of profit maximization, inputs to production, and outputs from production are all applied to this example. Then the chapter moves on to discuss sources of efficiency in production and specific applications to medical care production. The chapter then develops the basics of supply curves, and how they are interpreted and used, and then brings supply together with demand to describe the basics of equilibrium in an efficient market. The last part of the chapter discusses threats to efficiency in markets, giving a brief overview of the largest sources of difficulty in applying efficient markets to the healthcare context. This sets up the rest of the book: the healthcare sector is filled with problems that make efficient markets unlikely, meaning that understanding the underlying economics is vital.

Chapter 9 explores the hospital as an economic entity. The chapter discusses the differences between for-profit and not-for-profit hospitals, the organization of hospital workforces, and how the for-profit/not-for-profit distinction interacts with the organization. Then the chapter explores how different parties involved with the hospital seek to exert influence over how hospital resources are used: what they want and how they get it. Finally, the chapter covers topics in how hospitals operate within the sector: hospital growth, hospital competition, and operation of hospital systems.

Chapter 11 focuses on the adverse selection problem in the health insurance market, which is sometimes referred to as the “death spiral.” First, the concept of “uninsurable” individuals is developed and the rationale for eliminating differential pricing based on pre-existing conditions (experience rating) is explored. Then the chapter discusses the consequences of this choice: the adverse selection problem. Finally, alternative solutions to adverse selection are explored – both single-payer systems and market-based solutions such as the Affordable Care Act. The end of chapter supplement explores the historical reasons for differences between the health insurance system in the United States and the system of a close ally, the United Kingdom.

Chapter 12 deals with how prices are set within the healthcare sector. Prices do not come from direct interaction between buyers and sellers but are instead arrived at via a complex negotiation process between multiple parties. This chapter covers the lifecycle of a medical bill, the role of chargemasters (master price lists) in billing, how providers negotiate with insurers, and how the uninsured are treated in billing. The chapter then discusses price competition and quality competition between providers, as well as the role of price transparency.

Chapter 19 explores differences in spending on healthcare and health outcomes across countries. The main result of interest from these comparisons is that the United States spends vastly more than other OECD countries but gets only middle of the road health outcomes. The second part of the chapter explores leading theories as to why this is the case. The final part of the chapter compares different strategies for setting up a healthcare and health insurance sector: the Bismarck model, the Beveridge model, national health insurance, and hybrid models.

Chapter 8 explores how incentives influence the behavior of providers. The first part of the chapter is an application of personnel economics, discussing how different pay schemes create incentives for different types of effort. The chapter goes on to discuss the latent variable problem when looking at pay schemes and behavior and covers literature that helps to unpack the causal story. The second half of the chapter discusses demand inducement and its variants (fee splitting and self-referral) from both a theoretical and empirical perspective. The end of chapter supplement gives a brief introduction to behavioral economics and how cognitive biases can also be used to influence provider behavior.

This chapter deals with the topic of inequality in the healthcare sector. The chapter begins by looking at some summary data and the inequality in various measures of health that are obvious from simple differences. Then the chapter discusses some basic social philosophy on the topic of how to judge fairness in an abstract society. More detailed data on health outcomes is then explored, highlighted inequality along different demographic lines. Then there is a discussion of theories that fit the facts presented: why do these inequalities exist, and what do we learn by unpacking them: both social implications as well as clinical. Finally, inequalities in the labor market for healthcare workers are discussed.

This chapter covers the medical malpractice system: how it works, what its goals are, and how it influences provider behavior. The chapter begins by defining key terminology in tort law and explaining the process by which a medical malpractice case is brought and resolved, as well as the goals that this system is trying to achieve. Then discussion turns to how this system creates incentive for actions that run counter to its goals and the problems that are likely to arise, along with some empirical evidence of the existence of said problems.

This chapter introduces the basics of the economic approach to understanding decision-making. This is done using examples drawn from consumer decision-making in the context of healthcare. Topics include how to think about preferences, different types of costs, optimization, and the importance of perceptions. The end of chapter supplement discusses how to use price indexes.

Chapter 14 provides a brief overview of major health insurance provided by the government in the United States. The majority of the chapter goes through the major programmatic details of the Medicare and Medicaid Programs: who is covered, what services are covered and how generously, and how providers are paid by the programs. The discussion of Medicaid also explains the nature of the federal-state partnership and explores ways in which states have and use their freedom to expand upon the program. The remainder of the chapter briefly describes other public insurance (or insurance-related) programs: the VA and CHAMPVA, TRICARE, CHIP, COBRA, and the IHS.