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Key Economic Concepts and Their Implications

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Abstract

This chapter explores some basic concepts from economic theory to provide a background for what value can represent to an economist. We explore terms like “efficiency” and examine how the allocation of resources can become inefficient in the healthcare setting and how this relates to the notion of value. We discuss moral hazard, price sensitivity, asymmetric information, issues of fraud and waste, and the administrative burden associated with complicated payment mechanisms. At the end of this chapter, you will have been exposed to most of the fundamental concepts upon which many types of value assessments are based.

Keywords

  • Economic efficiency
  • Moral hazard
  • Price sensitivity
  • Asymmetric information

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Fig. 5.1
Fig. 5.2

Notes

  1. 1.

    The term “moral hazard” is a bit of a misnomer because it has little to do with morality; in the broadest economic terms, it reflects a situation where one party is incentivized to behave riskily because it knows it is protected against the risk and the other party will incur the cost.

  2. 2.

    I recognize that CMS and other payers have instituted programs that attempt to provide consumers or patients with metrics they can use to compare provider quality; but even if those metrics were excellent surrogates for quality, the reality is that most patients do not bother to consider the metrics and therefore make decisions about which provider to see based on other criteria, like location, availability, and personal recommendations.

References

  1. PwC (2021) Medical cost trend: behind the numbers 2022. https://www.pwc.com/us/en/industries/health-industries/library/behind-the-numbers.html. Accessed 31 Aug 2021

  2. World Health Organization (2021) Social determinants of health. WHO. https://www.who.int/health-topics/social-determinants-of-health#tab=tab_1. Accessed 31 Aug 2021

  3. Manatt P, Philips LLP (2019) Medicaid’s role in addressing social determinants of health. Robert Wood Johnson Foundation. https://www.rwjf.org/en/library/research/2019/02/medicaid-s-role-in-addressing-social-determinants-of-health.html. Accessed 31 Aug 2021

  4. American Hospital Association (2018) Issue brief 3 connecting the dots: value and health equity. AHA.org. https://www.aha.org/system/files/2018-11/value-initiative-issue-brief-3-equity.pdf. Accessed 31 Aug 2021

  5. Sandhu S, Saunders RS, McClellan MB, Wong CA (2020) Health equity should be a key value in value-based payment and delivery reform. Health Affairs Blog. https://www.healthaffairs.org/do/10.1377/hblog20201119.836369/full/. Accessed 31 Aug 2021

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  7. Appleby J (2021) Hospitals have started posting their prices online. Here’s what they reveal. NPR News. https://www.npr.org/sections/health-shots/2021/07/02/1012317032/hospitals-have-started-posting-their-prices-online-heres-what-they-reveal. Accessed 31 Aug 2021

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Solid, C.A. (2022). Key Economic Concepts and Their Implications. In: Practical Strategies to Assess Value in Health Care. Springer, Cham. https://doi.org/10.1007/978-3-030-95149-8_5

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  • DOI: https://doi.org/10.1007/978-3-030-95149-8_5

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  • Publisher Name: Springer, Cham

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