Business, Community & Government

Health Care: The Problems

Paul Krugman

Lesson time 15:58 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.

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Topics include: Health Is Central to American Lives...and the American Economy • The Private Health Care Market Doesn't Work • Market Killer #1: Information Asymmetry • Market Killer #2: Moral Hazard • Look at the Data


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...

About the Instructor

For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.

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Paul Krugman

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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