Economics 387 Lecture 1 Introduction to Health Economics Tianxu Chen

Economics 387

Lecture 1

Introduction to Health Economics

Tianxu Chen

The course• Class Meets: Tue,Wed,Thu 9:30-12:00• Class location: B41 Psychology • Office Hours: Wed 1:00-2:30, or by

appointment• Office location: 429 Economics • E-mail: [email protected]

Text materials

The text materials will be:

The Economics of Health and Health Care, by Sherman Folland, Allen C. Goodman, and Miron Stano (Seventh Edition)

Exams and Grading

• There will be one in-class mid-term exams and a final exam. The mid-term exams will be:

Thursday, July 19th – 30% of course grade• The final exam will be hold on the last day of this

class: Thursday, August 9th. It will be worth 50% of the course grade.

Other assignments

20% of your grade•These will include one presentation in class and two short writing assignments.•You are encouraged to choose any paper already on the reading list. •Each presentation is supposed to total 15 minutes. Often this means that less than the full paper will be presented. You can choose to be selective in what you present, focusing on only the theory, or the specification, or the econometrics.

Presentation Papers

1. Ellis and McGuire, 1986, Provider Payment under Prospective Payment Journal of Health Economics.

2. Shen and Melnick, 2005, Is Managed Care Still An Effective Cost Containment Device?

3. Ruhm, Chris, 2005, Healthy Living in Hard Times, Journal of Health Economics, 24(2005) 341-363

4. Ellis, Randall P. and Michelle M. Miller, 2008,“Provider Payment Methods and Incentives” in Heggenhougen, Kris (ed.) “Encyclopedia of Public Health”

5. Case, Anne, Angela Fertig, and Christine Paxson. The Lasting Impact of Childhood Health and Circumstance, Journal of Health Economics, 2005, v. 24, pp. 365-389.

6. Merideth Rosenthal et al. 2006 Pay for Performance in Commercial HMOs. New England Journal of Medicine

7. Ellis, Randall P. and McGuire, Thomas G. (2007) “Predictability and predictiveness in health care spending” Journal of Health Economics. 26:25–48.

Presentation Papers

8. Miller, Amalia R., and Catherine E. Tucker. 2011. “Can Health Care Information Technology Save Babies?” Journal of Political Economy, 119(2): 289-324.

9. Abaluck, Jason, and Jonathan Gruber. 2011. “Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program.” American Economic Review, 101(4): 1180–1210.

10. French, E. and Jones, J. B. 2011. “The Effects of Health Insurance and Self-Insurance on Retirement Behavior.” Econometrica, 79: 693–732.

Presentation Papers

Outline

• What is Health Economics?

• The Relevance of Health Economics

• Economic Methods

• Does Economics Apply to Health and Health Care?

• Is Health Care Different?

• Conclusions

WHAT IS HEALTH ECONOMICS?

• Health economics is defined by who health economisits are, and what they do!

Who are the Health Economists?

• 96% hold academic doctorate degrees, nearly ¾ in economics

• 64% work in a university setting, 15% for nonprofit organizations and 12% for government, mainly federal

• Only 24% of health economists hold appointments in economics departments, 26% in schools of public health, 18% in schools of medicine

Relevance of Health Economics

• The health care sector is bigbig, and is getting

biggerbigger.

• not only has health care grown absolutely, it has grown relative to everything else.

Figure 1-1 U.S. Health Expenditure Shares, 1960 – 2020

Source: Centers for Medicare and Medicaid Services: http://www.cms.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp, accessed August 8, 2011.

http://www.cms.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp

Table 1-1 Health Expenditures as

Percent of GDP in Selected OECD

Countries

Table 1-2 Total Consumption Expenditures in $ Billions, by Type, 2009

Table 1-3 A Persons Employed at Health Services Sites: 2009

Table 1-3B Active Health Personnel and Number per 100,000 Population (in Parentheses)

Table 1-4 National Health Expenditures and Other Data for Selected Years

Features of Economic Analysis

• Scarcity of societal resources

• Assumption of rational decision making

• Concept of marginal analysis

• Use of economic models

Still another cause for concern

• Problems that people have getting insured?

• Only the U.S. and South Africa, among advanced countries, do not have some form of universal health coverage.

Origins -- Physician Shortage

Health economics has evolved from applied work in more general economics. An example

• In early 1940s Milton Friedman and Simon Kuznets, looked at the so-called physician shortage of the 1930s.

• These shortages are often defined through the health care sector, by positing a technological ratio (e.g. x physicians per capita), then calculating the number of physicians necessary, and comparing it to the number available.

Physician shortage

• FK discovered that physicians, at the time, were earning about 32% more than dentists, while their training costs were about 17% higher. What would we expect to see over some adjustment period ???

• Answer: Entry into the physician market. Friedman and Kuznets attributed long-term high returns to barriers to entry into the medical profession through licensure, and education.

DOES ECONOMICS APPLY TO HEALTH CARE?

Does Price Matter?• The curve shown is similar to an

economist's demand curve in that it shows people consuming more care as the care becomes less costly in terms of dollars paid out-of-pocket. More importantly, the curve demonstrates that economic incentives do matter. Those facing higher prices demand less care.

• Figure 1-2 Demand Response of Ambulatory Mental Health and Medical Care in the RAND Health Insurance Experiment

Source: Keeler, Manning, and Wells (1980) for mental health care; Keeler and Rolph (1988)for medical care.

Is Health Care Different?

• Presence and Extent of Uncertainty

• Prominence of Insurance

• Problems of Information

• Large Role of Nonprofit Firms

• Restrictions on Competition

• Role of Equity and Need

• Government Subsidies and Public Provision

Does Economics Apply to Health and Health Care?

1. Uncertainty

• Most analysis that we do in economics ignores the possibility of uncertainty. Where does this occur?– Patient status - How healthy are we? Will we

need treatment?– Efficacy of treatment - Do we need it? Will it

work?


• 2. Prominence of InsurancePerhaps no other sector features insurance so

prominently. In 1960 about 56 percent of all personal health care expenditures were paid out-of-pocket; 44 percent by third party payers and/or government. By 1990, over 76 percent paid by third party payers.


• 2. Prominence of Insurance• Availability of insurance. Who has it? Who

doesn't?• Effect of insurance on technology. Does

insurance impact which kinds of treatments are given, and which aren't?


• 3. Information• Lots of economic analysis assumes perfect

information on the parts of buyers and sellers. This is "symmetric" information. Both parties have it.

• Sometimes neither party has the information. e.g. Neither the gynecologist nor her patient may recognize early stages of cervical cancer without a Pap smear.

• Sometimes, physician knows more about disease, and must act as an agent for the patient. Some feel that this can lead to the recommendation of too much, or even unnecessary care.

• How informed are patients? Sometimes, patient knows he is not healthy, but can hide it from insurer. This can lead to breakdowns in the insurance markets.



4. Role of Non-Profit Firms

• Unlike most other economic analysis, there is an important role for non-profit firms in the industry. How does this work out in economic models in which profits are maximized?

5. Restrictions on Competition

• There are many. These include:– Licensure requirements for providers– Restrictions on advertising– Standards which frown on price competition


6. Need and Equity

• Finally, the health care sector engenders considerable discussion of the role of need, as well as many equity concerns.

• The whole debate about National Health Care policy is a manifestation of this concern.


7. Government Subsidies and Public Provision


Table 1-5 Personal Health Care Spending, Selected Years (in $ Billions)

CONCLUSIONS

• The greatest strengths of economics and economists are a framework of systematic theory, an array of concepts and questions that are particularly relevant to the choices facing policy makers, and skill in drawing inferences from imperfect data. . . . Economists’ framework of systematic theory facilitates the transfer of knowledge drawn from other fields of study to the health field.

• Health economists have also inherited from economics a set of concepts and questions that have proven to be particularly relevant to the policy problems that have emerged in health during the past three decades. Scarcity, substitution, incentives, marginal analysis, and the like were ‘‘just what the doctor ordered,” although in many cases the ‘‘patient’’ found the medicine bitter and failed to follow the prescribed advice. (Fuchs, 2000, p. 148)

What Next??

• Some tools !!!– For Economics analysis -- Chapter 2

Documents

Economics 387 Lecture 1 Introduction to Health Economics Tianxu Chen