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Basics of Health Economics


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A brief introduction to the basic concepts and models of health economics.

Basics of Health Economics

  1. 1. Health Economics <ul><li>Access: who gets healthcare; ability to pay? </li></ul><ul><li>Equity </li></ul><ul><li>Finance: private or public </li></ul><ul><li>Delivery:private or public </li></ul><ul><li>International comparisons </li></ul><ul><li>Outcomes </li></ul>
  2. 2. Health Economics <ul><li>Expenditures on Healthcare as a percentage of GDP </li></ul><ul><li>The problem of the uninsured population </li></ul><ul><li>Characteristics of the insured by type of plan (MCO vs. FFS) </li></ul><ul><li>Is there income inequity? </li></ul><ul><li>National debate on health insurance and healthcare as a right, regardless of ability to pay </li></ul><ul><li>Federal and State programs </li></ul>
  3. 3. National Health Expenditures Copyright ©2008 by Project HOPE, all rights reserved. Sean Keehan, Andrea Sisko, Christopher Truffer, Sheila Smith, Cathy Cowan, John Poisal, M. Kent Clemens the National Health Expenditure Accounts Projections Team, Health Spending Projections Through 2017: The Baby-Boom Generation Is Coming To Medicare, Health Affairs, Vol 27, Issue 2, w145-155w
  4. 4. Example of Type of Research Using 1996 MEPS DATA Resource Use by Income Quintile Actual Use
  5. 5. Example of Type of Research Using 1996 MEPS DATA Resource Use by Income Quintile Standardized Use
  6. 6. 1996 Sample Means by Income Quintile
  7. 7. 1996 Sample Means by Income Quintile Hispanic MCO 0.19 0.13 0.11 0.07 0.04 0.097 FFS 0.19 0.10 0.06 0.06 0.05 0.088 Black MCO 0.26 0.16 0.11 0.10 0.08 0.128 Non-Hispanic FFS 0.23 0.13 0.08 0.06 0.05 0.112 Female MCO 0.55 0.55 0.50 0.51 0.49 0.520 FFS 0.59 0.54 0.50 0.50 0.47 0.520 Health ExcellentMCO 0.30 0.36 0.40 0.40 0.42 0.390 FFS 0.24 0.30 0.37 0.38 0.44 0.340 Health Good MCO 0.27 0.23 0.21 0.19 0.19 0.210 FFS 0.25 0.23 0.20 0.19 0.17 0.210 Health Fair MCO 0.11 0.07 0.05 0.05 0.04 0.060 FFS 0.17 0.09 0.07 0.06 0.05 0.090 Health Poor MCO 0.06 0.03 0.02 0.01 0.01 0.020 FFS 0.07 0.05 0.03 0.02 0.01 0.040
  8. 8. 1996 Sample Means by Income Quintile
  9. 9. Basic Questions of any Economic System <ul><li>What to produce? </li></ul><ul><li>How to produce? </li></ul><ul><li>For whom to produce? </li></ul><ul><li>How to achieve economic growth? </li></ul>With given endowment of scarce resources:
  10. 10. Basic Questions of Health Economics <ul><li>What combination of nonmedical and medical goods & services to produce? </li></ul><ul><li>What particular medical goods and services to produce? </li></ul><ul><li>What specific health resources should be used to produce final goods and services? </li></ul><ul><li>Whom should receive medical goods and services? </li></ul>
  11. 11. The Production Possibilities Frontier <ul><li>Illustrates efficiency and trade-offs </li></ul>
  12. 12. Question of Distribution <ul><li>Pure market system: output distributed based on willingness and ability to pay </li></ul><ul><li>Perfect egalitarian system: government ensures equal distribution to all </li></ul><ul><li>United States: mixed capitalist system; market and government distribution </li></ul>
  13. 13. Distribution <ul><li>Rationing occurs because of scarce resources </li></ul><ul><li>Market driven system: price rations scarce goods and services among consumers </li></ul><ul><li>Non-price system: rationing based on waiting time, age, severity of illness, etc. </li></ul>
  14. 14. The Consumer Determined by regulators Availability of substitutes/complements Yes (for most goods and services) OOP does not reflect full price of service Pays price Yes Weak direct knowledge; based on trust Knows Quality Yes Weak knowledge Knows Price Yes Health Care Generic Industry
  15. 15. The Producer Mixed MD’s : other motivations Non-profits: no Pharmaceutical cos.: yes Profit maximizer yes Yes: licensing, certification, etc. restricts competition Regulation To address externalities; Taken into account in market models Less certainty: efficacy of treatment; scale: very certain to very vague Known Production Function Yes Health Care Generic Industry
  16. 16. Demand for Medical Care <ul><li>Demand for medical care is derived from demand for health. </li></ul><ul><li>Market good/service (medical care) is transformed into health. </li></ul><ul><li>Harder to imagine health, per se, as a “good” but insofar as it affects consumer satisfaction, can make the assumption. </li></ul>
  17. 17. Demand for Medical Care <ul><li>Medical Care to improve health to improve utility, ceteris paribus. </li></ul><ul><li>At any given time, individuals have some “stock” or endowment of health. </li></ul><ul><li>What affects “stock of health?”and therefore demand for medical care? </li></ul>
  18. 18. Utility <ul><li>Rational people wish to maximize their utility in consumption of goods and services. </li></ul><ul><li>“ goods” increase utility </li></ul><ul><li>“ bads” decrease utility </li></ul><ul><li>Assume Health “happiness” </li></ul><ul><li>Then, one’s health utility </li></ul><ul><li>That is, want to improve one’s “stock” of health (Grossman). </li></ul>
  19. 19. Utility
  20. 20. Utility
  21. 22. Demand for Medical Care - Influences <ul><li>Disease, illness, injury </li></ul><ul><li>Age, gender </li></ul><ul><li>Belief system </li></ul><ul><li>Advice/referrals (induced demand) </li></ul><ul><li>Income </li></ul><ul><li>Price paid (out of pocket expenses) </li></ul><ul><li>Insurance </li></ul><ul><li>Time (opportunity cost) </li></ul>
  22. 23. Demand for Medical Care - Influences <ul><li>Tastes and preferences </li></ul><ul><ul><li>Education: more education is associated with more preventative care </li></ul></ul><ul><li>Marital status </li></ul><ul><li>Substitutes/complements </li></ul><ul><li>Quality of care </li></ul><ul><li>Lifestyle - diet, exercise </li></ul>
  23. 24. Demand for Health Care <ul><li>Demand = f(oop price, real income, time costs, prices of substitutes and complements, tastes and preferences, race/ethnicity, gender, age, state of health, quality of care, etc) </li></ul><ul><li>Assumes that market demand is well defined….. </li></ul><ul><li>Often called “fuzzy demand” </li></ul>
  24. 25. <ul><li>Constrained Optimization </li></ul>Budget constraint & indifference curves to Demand <ul><li>Indifference curves show constant, increasing utility </li></ul><ul><li>Budget constraints show fixed income; changing price of health/medical care </li></ul>
  25. 26. Fuzzy Demand <ul><li>For any given price, will observe a wide range in the quantity and type of medical care </li></ul><ul><li>For given quantity/type of medical care, observe a wide variation in prices </li></ul><ul><li>Derived Demand </li></ul>
  26. 27. Fuzzy Demand for HC <ul><li>Uncertainty </li></ul><ul><ul><li>Not always agreement among healthcare providers about treatment </li></ul></ul><ul><ul><li>Knowledge of outcomes not precisely known </li></ul></ul><ul><li>Consumers/pts lack information (medical knowledge) and rely on professional advice </li></ul><ul><ul><li>MD’s, rather than patients, choose medical services </li></ul></ul><ul><li>Difficulty in accurately measuring medical care </li></ul>
  27. 28. Severity of Disease and Demand
  28. 29. Demand for HC and Insurance
  29. 30. Effect of Insurance on Demand for Medical Care <ul><li>Vertical demand: zero out of pocket costs, no price sensitivity; “free” good </li></ul><ul><li>Absent regulation, supplier can increase prices </li></ul><ul><li>Does patient get “too much” care? </li></ul><ul><li>Insurance premiums are sunk costs and do not affect decisions at the margin to seek care. </li></ul>
  30. 31. Rand Health Insurance Experiment <ul><li>How does insurance status affect healthcare use? </li></ul><ul><li>How does healthcare use affect health? </li></ul><ul><li>1970s </li></ul><ul><li>5800 participants; 4 urban areas, 2 rural areas </li></ul><ul><li>Randomly assigned to 3-5 year enrollment in plans ranging from full coverage to very high deductible </li></ul>
  31. 32. Rand Health Insurance Experiment <ul><li>Range of coverage: Full indemnity to HMO/Managed Care Model; high OOP payments </li></ul><ul><li>Measuring outcomes: sick days, ADL, SRH, use of medical care,etc. </li></ul><ul><li>Low insurance covered group used two-thirds as much healthcare as full coverage group. </li></ul><ul><li>No difference in health outcome except for the following: </li></ul><ul><ul><li>Low income enrollees with better insurance coverage improved blood pressure and heart attack risk. </li></ul></ul>
  32. 33. Rand Health Insurance Experiment <ul><li>Difficult to tell how much medical care is the “right” amount </li></ul><ul><li>What is the marginal effect? </li></ul><ul><ul><li>More spending on healthcare does not seem to lead to more “health.” </li></ul></ul><ul><li>Using healthcare to the point where marginal product is close to zero? </li></ul><ul><li>Not measuring “right” outcome? </li></ul>
  33. 34. Demand, Insurance and Moral Hazard <ul><li>In the market for medical services, moral hazard results from: </li></ul><ul><ul><li>Increase in quantity demanded if not paying full price </li></ul></ul><ul><ul><li>Pts have less incentive to guard against covered losses; compensate for poor health status with more medical care </li></ul></ul><ul><ul><li>Third party payments could lead to low-benefit high cost technology </li></ul></ul><ul><ul><li>Less incentive to monitor behavior of providers </li></ul></ul><ul><ul><li>No incentive to shop for lower price </li></ul></ul>
  34. 35. Welfare loss and Insurance
  35. 36. Producing Health <ul><li>Heterogeneous in nature </li></ul><ul><li>Hard to quantify -- much is a service/intangible </li></ul><ul><li>Inseparable: production & consumption take place simultaneously (a la education, “consumer” takes part) </li></ul><ul><li>Inventory: can’t keep an “inventory” of check-ups to meet peak demand </li></ul><ul><li>Inconsistency: composition and quality vary widely across medical events </li></ul>
  36. 37. Producing Health <ul><li>Because of difficulty in quantifying medical care services, researchers often measure: </li></ul><ul><ul><li>Availability (MDs or hospital beds/1000) </li></ul></ul><ul><ul><li>Use (office visits or surgeries per capita, # of inpatient days) </li></ul></ul>
  37. 38. Producing Health <ul><li>Production Function </li></ul><ul><li>Output: health </li></ul><ul><li>Input: medical care </li></ul><ul><li>Health = H(age, gender, medical care consumed, lifestyle, socioeconomic status, environment) at any given time </li></ul>
  38. 39. Production Function
  39. 40. Production Function <ul><li>Problem of uncertainty in production function </li></ul><ul><ul><li>Outcomes vary over people </li></ul></ul><ul><ul><ul><li>Good outcome, no change, bad outcome </li></ul></ul></ul><ul><ul><ul><li>Correct treatment, problem with patient compliance </li></ul></ul></ul>
  40. 41. Disease Specific Production Functions
  41. 42. Medical Care at the Margin Breast Cancer Screening <ul><li>Extensive Margin </li></ul><ul><ul><li>Screen all adult women </li></ul></ul><ul><ul><li>Number of positives detected per 1000 women would decrease as sample size increases and age decreases </li></ul></ul><ul><ul><li>1000 women 50+: 5 cases </li></ul></ul><ul><ul><li>1000 women 40 - 49: 3 cases </li></ul></ul><ul><li>50+ rate of detection = 5/1000 </li></ul><ul><li>40+ rate of detection = 8/2000 (<5/1000) </li></ul><ul><li>30+ (2 cases), so rate of detection is now 10/3000 </li></ul><ul><li>Marginal productivity is decreasing as extensive margin increases </li></ul>
  42. 43. Medical Care at the Margin Breast Cancer Screening <ul><li>Intensive Margin </li></ul><ul><ul><li>Screen those most at risk </li></ul></ul><ul><ul><ul><li>50 + or 40 + with family history </li></ul></ul></ul><ul><li>Frequency of screening </li></ul><ul><ul><li>Every 10 years -- not enough </li></ul></ul><ul><ul><li>Every day? Marginal product would be negative </li></ul></ul>
  43. 44. Externalities and the Need for Policy <ul><li>More pollution is created by the factory at the higher output. </li></ul><ul><li>Government regulation will increase costs to the producer such that the new Supply function includes the social cost of the negative externality, so less is produced. </li></ul>
  44. 45. Public Health, Externalities and Policy <ul><li>Childhood Vaccinations </li></ul><ul><ul><li>Without government intervention (law, subsidies, etc), the number of vaccines demanded would be reflected by the private demand (private benefit) </li></ul></ul><ul><ul><li>Demand increases(to social demand/social benefit) as elementary schools through graduate schools require vaccinations for contagious disease, thus being a socially optimal point </li></ul></ul>
  45. 46. Conclusion of Brief Overview of Health Economics Theory <ul><li>Questions </li></ul><ul><li>Comments </li></ul><ul><li>Thank you </li></ul>