MI H2 ECONS (9757 01) Answers

2018 PU3 H2 Economics EYE Answers CSQ1: Healthcare and Health Insurance (a) Using the information from Extract 1, compare the change in share of health expenditure as a percentage of GDP between Singapore and Ireland from 2011 to 2015. [2] While Singapore’s healthcare expenditure as a percentage of GDP increased, that of Ireland decreased. [1m] In terms of magnitude, the extent of the decrease for Ireland was larger than the increase for Singapore. [1m] (b) Explain how each of the following led to the trend in healthcare expenditure in Singapore. (i) ‘the development and adoption of new and expensive health technologies’ and ‘rising wages’ [4] Both increase COP  fall in supply [1] Fall in supply  increase P and decrease Q [1] Since healthcare is a necessity, demand is price inelastic [1] So, fall in Q is less than prop to increase in P, causing TE to increase [1] (ii) ‘population ageing’ and ‘lifestyle risk factors’ [2] Both lead to an increase in D for healthcare [1] Increase in D  increase in P, Q, and hence TE [1] (c) Explain how the statement “retrenched PMETs from other fields cannot easily enter the healthcare sector due to a mismatch of skills” illustrates a form of inefficiency in the healthcare market. [2] The statement shows inefficiency due to factor immobility [1] This is because the occupational immob ility caused by the lack of skills means that these retrenched PMETs remain unemployed, which causes productive inefficiency (not producing on the PPC) as labour resources are not utilised. [1] Also accept structural unemployment but must be linked to some form of inefficiency for full credit. (d) (i) Explain the source of market failure caused by ‘(h)aving an insurer pay 100 per cent of a patient's bill’ (Extract 2). [2] The action of undergoing medical procedure undertaken by consumer but cost of going for healthcare procedures borne by insurer [1] This creates moral hazard where the c onsumers will overconsume even if the procedures are not necessary / consumers will not be careful about health [1] (ii) With reference to the case material, assess the use of deductibles and co-insurance (Extract 3) to address the market failure in (d)(i). [8] Question analysis: Command word = “assess”  Need 2 sides and an evaluative conclusion Content = “the use of deductibles and co-insurance to address the market failure”  Need to explain how deductibles and co-insurance correct the market failure due to moral hazard and the limitations Context = insurance industry Introduction

2018 PU3 H2 Economics EYE Answers Deductibles and co-insurance are supposed to correct the market failure due to moral hazard in the insurance market. Thesis: Use of the 2 measures solves moral hazard Both the deductible and co-insurance require consumers to co-pay for the healthcare they consume, even though they have insurance. This solves the overconsumption due to moral hazard as consumers will consider whether they really need the treatment when they have to co-pay for it. Without such co-payment (i.e., if the insurance company pays for everything), consumers will consume healthcare services even if they don’t need it. Anti-thesis: Limitations of the 2 measures However, there may be implementation problems. First, because of imperfect information, the deductible and co-insurance amount may be set too high or too low. This is seen in Extract 4 where there is a great variance in deductible and co-insurance across different countries, which shows that there may be a lack of research on what the optimal levels of deductible and co-insurance are. Additionally, the 2 measures may worsen inequity. Extract 2 points out that the reduction in price of healthcare paid by consumers due to insurance is a good thing as it improves access by low income. Conversely, making consumers co-pay for healthcare would worsen inequity as it increases the price of healthcare to consumers. Since healthcare is a necessity and a higher price might make it unaffordable to low income consumers, deductibles and co-insurance may worsen inequity. Additionally, such payments are regressive in nature as they take up a larger portion of the poor’s income than the rich’s. Conclusion In conclusion, deductibles and co-insurance are necessary to correct moral hazard. However, how well they are used depends on specific context of the country. For richer and more developed countries, the optimal deductible and co-insurance should probably be set higher since consumers have greater purchasing power. Additi onally, we also need to consider whether there are other policies to mitigate the effects on equity. For example, higher deductibles and co-insurance payments may be optimal if there are complementary policies like means-tested subsidies for low income consumers to offset the negative effect on equity. Level Descriptor Marks L2 Balanced answer that explains how deductibles and co-insurance corrects moral hazard and their limitations. Answer makes sufficient reference to the case material. Explanations are well-developed. 4-6 L1 Answer lacks balance (missing thesis or anti-thesis) or depth (explanations are underdeveloped) or reference to the case material. 1-3 E A judgement of the use of deductibles and co- insurance based on the context. 1-2

2018 PU3 H2 Economics EYE Answers (e) With the use of the case material and your own knowledge, discuss whether the setting up of the Agency for Care Effectiveness (ACE) will help Singapore achieve its microeconomic aims. [10] Question analysis: Command word = “discuss whether”  Need 2 sides and an evaluative conclusion Content = “setting up of ACE will help Sg achieve micro aims”  Need to explain how ACE will result in efficiency and equity and how it may not (i.e., limitations of policy) Context = healthcare industry Introduction: Explain the market failure in the healthcare industry due to imperfect info The microeconomic aims are efficiency and equity. ACE is meant to combat the problem of “physician-induced demand”. Physician-induced demand causes both inefficiency and inequity. When patients have imperfect information, they may be persuaded by doctors to consume more care than necessary. This causes the demand for healthcare to be higher than it should be. Referring to the figure above, the demand for healthcare due to physician- induced demand is at D(imperfect info), which is higher than it would be if consumers had perfect info. As such, the market equilibrium would be at Qe while the socially optimal quantity would be at Qs. Since Qe exceeds Qs, there would be overconsumption of healthcare and hence a deadweight loss of the shaded area. Social welfare is not maximised and there is allocative inefficiency. Additionally, since the higher demand also causes the price of healthcare to be higher at Pe instead of Ps (Extract 5: physicians may charge a higher fee), it may also cause inequity as poor consumers who actually require the healthcare may be unable to afford it. Thesis: ACE will help achieve micro aims (efficiency and equity) ACE publishes drug guidances on how well the drugs work and their cost- effectiveness. As this information is made public, it helps to correct the imperfect information of consumers. As consumers would now have perfect information of whether the drugs work, the demand for healthcare should fall from D(imperfect info) to D(perfect info). This would cause the market

2018 PU3 H2 Economics EYE Answers equilibrium to fall from Qe to Qs. Hence, overconsumption is corrected and the DWL is avoided. Thus, ACE helps to achieve efficiency. Additionally, since the fall in demand would also cause a fall in the price of healthcare from Pe to Ps, the healthcare would then become more affordable to the low income consumers who really