Business, Politics & Society

Health Care: The Problems

Paul Krugman

Lesson time 15:59 min

Health care is central to American lives and the American economy. Paul breaks down the economics of the private health care market and explains two “market killers” in our current system.

Paul Krugman
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Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive history, policy, and help explain the world around you.
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Health is a very big deal in modern society and in the economy. I mean, your health always mattered, but there's a lot more than we can do about it now, but we also spend an awful lot of money on it. So in the US now, we spend something like 17% of our national income on health. You know, in any given year, about half the population essentially spends nothing on health care. But when it hits, it can be enormously expensive. And so having a system that-- having something, having insurance that will pay for health care and having a system that makes sure that the insurance actually does lead to adequate health care is a hugely important part of making people's lives decent. Americans often have a picture in their minds of what their economy is about, particularly about what their local economy is about that's out of touch with reality. So take a place like West Virginia. Obviously, a very pro-Trump state in the last election. And in the minds of West Virginians, they still think of coal. And the thing is, there haven't been a whole lot of coal miners in West Virginia for a long time. And so only about 3% of the workforce is in mining. 15% of the workforce is in health and social assistance. What people really do for a living in West Virginia is they work in hospitals, they work in clinics. The point is, actually, if you ask, what does America do for a living right now, you probably want to think about health care. If you look at, what are the 10 fastest growing occupations in America, I think eight of them are basically something that you might have basically described as being a nurse. So this is what we do. And so the economics of health care is absolutely central to everything that we talk about in terms of economic policy. Health care pretty much follows the 80/20 rule. 20% of the population accounts for 80% of the health care costs. 5% of the population accounts for typically something like half. Suppose I'm running a health insurance company. I have a bunch of people paying in premiums, and then I am prepared to pay their health costs if they need treatment. How high a premium do I need to charge? Well, I need to be charged enough to cover the expected, the average costs of a member of the people who have signed up with my health insurance company. If it's a pretty sick group of people, if they're all, you know, they're all 62 years old and have lots of medical problems, then I'm going to have to charge very high premiums. If it's all healthy 23-year-olds who run four miles a day, then I won't have to charge very much. The underlying health and therefore the underlying risk of expensive treatment depends very much on the composition on what kind of people have signed up. So if you're going to have any kind of system where private providers are providing health insurance, it's critically important to them that the risk pool, the mix of people that they're covering contain a sufficient fraction of healthy peo...

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A fellow student

I would be interested to know what part of our Health Care costs are for Mental Health.

A fellow student

Excellent! Insightful, informative, entertaining. Everyone who has an opinion on health care should have to see this.

A fellow student

Where are the assignments for this class? Or any Master Class? I have never been able to find any.

Craig K.

The Seventeen percent (17%) figure that Dr. Krugman spoke of e.g. percentage of GDP spent on health care costs in the United States actually dates back to a 2014 study produced by the World Bank. You can expect that that figure is considerably higher today. And given that even though Americans spend vastly larger sums of their GDP compared to any other advanced nation on health care and its related industries, we really receive just about the poorest actual care of any industrialized nation. This is manifestly unacceptable and which Smith's 'invisible hand' has failed to correct. And while the ADA was helpful in some regards, it is clearly not the solution. Without question, Americans ( as with any aging democracy ) need to move toward some sort of NHS ( National Health Service ) and they need to do so PDQ to avoid bankrupting the country. One proposal was for the VA to be 'nationalized' and converted into a dual hospital system ( NHS/VA ) where the tremendous costs associated with the current aging population(s) {Boomers, etc..} could be absorbed. ( And it should also be presumed as fact that President Trump has neither the brains nor the spine to advance this badly needed solution. )So, up to now, health care costs are simply skyrocketing with no relief or even a plan for relief - from either political party- in sight. it is the most vexing problem America faces today.

Graeme R.

What a corrupt and horrible mess! The lobbying power of health insurers, hospitals, medical associations, pharmaceutical companies and others, along with their preposterous ability to hide information that consumers need, means that we have little democratic power. Without Nancy Pelosi, Barack Obama, and their Affordable Care Act our situation would be even worse. At least the dysfunctional system provides vast numbers of jobs.


Same as with taxes: Lobbys keep Health poorly regulated so assymetry of info n moral hazard r normal n tax payers don't get 2 say anything, they buy or they'll literally die. Government must promote, within the education system, healthy eating habits (we do r what we eat, n the USA eats mostly junk food). Also gun control n racism must b regulated because it sends that 5% that accounts to the 50% of the total expenditure 2 the hospital. That being said, it's clear that Trump is a huge part of the problem (to vary a lil). With my hypothesis about what's the root of the economic system malfunctioning we won't have 2 worry about moral hazard n assymetry of info (I'll post it as a question in the "office hours" section)

A fellow student

Rather than a health care system based on health needs, "Obama care" is based on how much money you make. Thus the cost of health care is much higher for middle income and younger people. Rather than health care managed by health care professionals "Obama care" is managed by government agencies paid by citizens in taxes. Government run programs always are less efficient and more inflexible than private systems. Try negotiating the VA system sometime. In countries like Canada if they don't have your needs on their list you don't get it (unless you go to the US).

Norm C.

As a Canadian I want to say Thank You to Paul for explaining the US Health Care system. I keep hearing it is messed up, now I have some idea of why. Huge amounts of money being siphoned off by self interest groups [administrators of the system] rather than to actual health care. There is so much money siphoned the administrators have political clout. Having been a life long user of the Canadian system and aware it has it's critics I can tell you it really does work. You always hear about wait times but I can assure you if your doctor[s] feel there is a life threatening situation, you go to the front of the line. I have to say the OECD data chart on health spending is misleading, based in US dollars doesn't represent what percentage of income or government spending or GDP a country like China really spends on health care. Most things in China are cheaper, to us. For example a gallon of 40%+ drinking alcohol available in any corner store is about $20cdn, here it would be $200. Using this example, multiply China's healthcare spending by ten to be relative. I have been a small time user of the Chinese medical system, and by our standards it's amazing. Every small town has a hospital. Cities have huge hospitals. In my experience you walk in and get to see any specialty you want, right now. Doctor, Dentist, whatever. I walked into a Hospital in Beijing with a serious cough, interviewed by a nurse, sent for a blood test involving a pin prick, got a complete readout of everything in my blood twenty minutes later. Saw a doctor, got a prescription for drugs made by Bayer and another European company which you can't buy in North America. Two hours and 200 bucks. Beat that America. As for life expectancy, in my opinion, South Africa'short life span is probably due more to violence and accidents than lack of health care. I saw this in Northern B.C. The life expectancy chart scares me, hopefully I won't live as long as the chart suggests.

Dawn B.

I have worked in the health system in Ausrtralia for over 12 years, first in primary care, and then in alcholol and other drug services. It became very clear to me early on that compared to the US, Australia has a vastly better health system, notwithstanding the perennial issue of private versus public medicine. This is a purely political and philosophical argument, which actually makes good delivery at a reasonable price extremely difficult. I think Paul's take on private health insurance is spot on; as one colleague stated: making lots of money out of peoples' misery is shameful. I agree.

Richard B.

It is too simplistic to consider health care market failures as being correctable by overcoming asymmetric information and allowing patients to comparatively shop. The asymmetric problem (very, very real) is made more complex because of the action of agents who act in our stead. In some cases, the doctor acts as our agent when referrals are made to specialists. In other cases the the insurance company acts as an agent when the company creates a network or panel of doctors and hospitals who we must select among for our care. The second big market failure is a cultural one. We really do not want the market to work and we have been working diligently since WWII to intercede and keep the market from working. For a market to work it has to be able to exclude those who cannot purchase the product. America does not want to tell us that Aunt Sally cannot have that heart-lung transplant. It is almost unconscionable that we would even consider it. So we paper over the exclusion problem with dollar bills. The third big problem is that we are using a property & casualty insurance model for what is really an expenditure issue. In the 1950's, P&C might have worked tolerably well. We knew how many heart attacks were likely to occur in a population of 100,000 - so we used the law of big numbers and tried to create a really big pool to spread the risk over. Now, we can target the population to identify those who have a higher risk of heart attack, but we still apply the P&C model. But, complicating that is we want insurance to pay for routine care. We need to rethink what we want insurance to pay for and what we want to finance through a combination of direct pay and public support.