The Impact of Health Insurance

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Vicki Parker Professor Oz Aydemir ECO 110 8 May 2014 The Impact of Health Insurance Health care is one of the fastest growing sectors of the economy. In the past ten years health insurance premiums have doubled. The health care market cannot be analyzed by using the normal supply-and-demand curve, due to informational problems, market power by suppliers, and government intervention. Balancing the cost of care with the quality of care is a major issue, because the market structure of the health insurance industry impacts rising health care costs and limits access to affordable health insurance and health care. Health care is a unique product compared to other goods and services, as it is not easily defined. The output of medical care and its effect on an individual’s health is difficult to measure, as medical care is not the only determinant of one’s health, such as nutrition, exercise, and other lifestyle factors. Also, the outcome of medical care is uncertain, because large segments of the market are dominated by nonprofit providers and payments are made by third parties. Eighty percent of health care is paid by third parties, including private insurance companies and government programs, such as Medicare and Medicaid. Health insurance is a system of pooling risks so that the financial burden of medical care is dispersed among many buyers: some require more health care, therefore incurring higher medical costs, while most individuals are rather healthy and incur less medical costs. It is difficult to predict who will incur higher costs, so insurance companies shift funds from those who are healthy to those who are unhealthy. Insurance companies spread the risk among similar buyers to effectively prevent losses, due to differential cost of providing coverage and the customers search for the lowest prices insurance companies need to set different premiums
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