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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Dr. Krugman is on of the most accessible and incisive thinkers in economics and practical public policy. I just wish there was more.

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A fellow student

That was very interesting. I think the american diet in general might have a big impact on the lower than expected life expectancy in the US.

Tapan P.

This is a bit off if you ask me. 1- you'll notice in the first chart, not every country is listed, and, generally, it grows by the general wealth of the country- though there are outliers like India or Uk. I'd be more interested- think that should be addressed. Secondly, life expectancy goes by several different situations- from mental health, to diet, to exercise, to jobs, to genetics, etc. It's not as cookie cutter as laid out.

A fellow student

Take a look at the system in Switzerland which has the best of both. US is messed up because of the lobbying which destroys the possibility of something which can be better.

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).