Transcript
Chapter 5: Production of Health
Note: this chapter relies on two key concepts from principles of economics, production functions and elasticity. These concepts are reviewed briefly in Chapter 2. At the end of this chapter 5 outline, you will find an additional outline for the relevant sections of chapter 2 that you might want to review if you are not following the material presented in chapter 5.
I. The Production Function of Health
A. What does Figure 5-1 A show the relationship between? Health status and health care inputs
1. What does ?HS measure? The first unit's marginal product; represents the change in health status
2. How is it calculated? Health Status Index 2-Health Status Index 1; it is calculated when a health status increases or decreases. Example: the first unit of health care has increased the health status index from 32 to 43. The change in health status is 11 units.
B. How are Figures 5-1 A and B related? Figure B shows the relationship between marginal product of health care and health care inputs; The healthcare inputs are measured in the same way while the health status and the marginal product of health care are not the same.
C. Fill in the following table based on Figure 5-1.
Health Care Inputs
Health Status
Marginal Product
(MP)
Average Product
(AP)
0
32
0
16
1
43
11
27
2
50
7
28.5
3
54
4
29
D. Does MP increase or decrease as the quantity of health care inputs increases? it decreases
E. Is total health status increasing or decreasing as the quantity of health care inputs increases? total health status is increasing as the quantity of health care inputs increases.
F. What does the law of diminishing returns refer to and how is it illustrated in Figure 5-1? This is the principal that a continual increase in effort or investment does not lead to a continual increase in output or results. The marginal products are diminishing in size, which illustrates this law.; Marginal products are demising in size, illustrating the law of diminishing marginal returns. If society employs a total of "n" units of healthcare, then the total contribution of health care is the sum of the marginal products of each of the "n" units.
G. How is average health output (average product) affected by the declining marginal output achieved from more health care inputs? The marginal product of the "nth" unit of medical care is change in health status and it is small. It is almost on the "flat of the curve". The health production function is a rising curve that flattens out at a higher level of health care never bends downward. Due to the decrease on the marginal product of health care this lowers the average and makes the increases in the average smaller.
H. When is health status maximized in the graph (at its highest value)? health status is maximized at the "nth" unit of medical care.
I. What is MP at that point? Positive, negative, or zero? marginal product at this point is zero
J. If each use of health care inputs costs $10, what is happening to the cost of gaining each additional unit of health output if MP is decreasing? If each unit costs $10 then you are increasing the expense while decreasing the marginal product of health care. The increase in expense would be more money for a lesser quality product.
K. Why do we often focus on “marginal” instead of “total”? Marginal is more relevant to policy propositions; Marginals rather than the totals are relevant to the policy propositions. We also look at this to determine if the money allocated for this program is being put to good use or would be better used elsewhere.
II. The Historical Role of Medicine and Health Care
A. The Rising Population and the Role of Medicine - in the first century the population was roughly 300,000,000. For 1000 years thereafter until the era of Vikings Little change. By the age of Enlightenment just before the 1700s the population had risen to 600 million. What happened, the population health improved. Population increases from: increased birthrates, reduced mortality, or increased in migration. The main reason of population increase was due to decreased mortality.
1. Review Figure 5-2.
2. Review Table 5-1.
B. What Caused the Mortality Rate Declines? Was it Medicine? Mortality rates for three upper respiratory diseases have fallen due to the availability of effective medical interventions.
1. Read Box 5-1: “Tuberculosis and The Magic Mountain”; Thomas Mann wrote tuberculosis and the Magic Mountain. It is about a young German engineer (Han Castorp) who is smitten with a girl named Clavida Chauchat who is in a sanatoria. His cousin Joachim (a military man) succumbs to TB and his body is sledded down the mountain. There were no chemical treatments for TB prior to the 1940s but doctors did treat TB using sanatorias. Declines in mortality TB rates during this period represented perhaps the most important example in declines in the mortality rate.
2. Review Figure 5-3
3. Nutrition Reduced Mortality - Medical historian Thomas Mckeown (1976) and economic historian Robert Fogel (2004) argued strongly that the primary reason mortality had been reduced was nutrition, not public health or medical intervention. Robert Fogel established that after mis-18th century calorie level intake increased tremendously. At about the same time the average height also increased tremendously. Today, the relationship between height and weight is now known as the Waaer Curve.
4. Public Health Reduced Mortality - by 1870s cities had grown rapidly without the planning and development we now see essential to a healthy environment. During this era, urban centers slowly overcame their status of having worse mortality rates and general health that the countryside knows as the "urban deficit". Streets contained animal feces, sewer systems were mainly designed for stormwater, and water supplies were often delivered in lead pipes.
5. Explain the roles of nutrition and public health.
6. Read Box 5-2: “The Importance of Clean Water” - In 1900 waterborne infectious disease accounted for ¼ of the deaths from infectious diseases. Public health campaigns cleaned up the water. They introduced the filtering of city water through sand. They fought to have the sewage discharged at a safe distance from water intakes. In 1870, they introduced water closets which discharged wastes into city sewer systems and they introduced chlorination of the water supplies
C. What Lessons are Learned from the Medical Historian? Medical research has contributed to improvements to medical practice and health-enhancing practices; (1) investments in medical research play a major role in our health and well-being. Murphy and Topel (2005) used people's willingness to pay for advances in medical knowledge as a measure. (2) skepticism toward effectiveness of any given medical practice and more importantly the benefit to a population. Outcomes studies seek to address the effectiveness and appropriateness of a specific medical practice on patient outcomes, Evidence-based medicine. (3) historical puzzles have relevance to the progress in public investment practices of lesser developed countries who have scarce resources with which to invest in either industrial growth or to invest directly into health measures or public health improvements.
III. The Production Function of Health in the Modern Day
A. Preliminary Issues
1. How to measure health: what are possible measures of health status in research? What are the pros and cons? morality and morbidity studies
2. What is morbidity?
3. What is mortality?
4. Eliminating Biases—Reduced Form Versus Structural Equations
B. The Contribution of Health Care to Population Health: The Modern Era
1. What does the elasticity of health with respect to expenditures on health care measure?
2. Consider the following example using life span as the measure of “health”:
Suppose in a given country that the expected life span is 70 years. Health policy-makers increase health care spending by 10% and the life span rises to 71 years. The elasticity of life span with respect to health care spending is:
a) % change in health is the numerator, which must be calculated, using the elasticity formulas from before, we need to measure the change in quantity of life span, as a percentage of the initial life span: the change is (71-70) relative to the initial life span of 70 years, so (71-70)/70 = (1/70) = 0.014 (or 1.4%)
b) % change in health spending is the denominator, in this example, the percentage change in health care spending is already calculated as 10%
c) Elasticity = 1.4%/10% = 0.14 (or approximately 14%)
d) Mathematically, since 10% = 1/10, the complete elasticity equation could be written as
3. Review Table 5-2.
C. Is Health Care Worth It?
1. What does elasticity tell us about whether additional health expenditures improve health status and what does it indicate about whether MP is increasing, decreasing, or totally flat? Health expenditures do improve health status and MP is increasing
2. Box 5-3: “Sulfa: A Drug That Really Changed Things”
D. On the Effect of Social Health Insurance
1. Review Table 5-3. How does work-loss days per employed person differ by the type of plan?
2. What did the RAND study reveal? The greater portion of the health care bill that individuals are required to pay, the less health care they choose to purchase
E. Prenatal Care
1. Review Table 5-4.
2. What are the main factors for reducing neonate mortality rates? abortions, prenatal care, WIC
3. What does research indicate about the effect of prenatal care? prenatal care is effective, especially for African Americans
F. The World’s Pharmacies: how does access to pharmaceuticals affect health relative to other potential factors? Countries in the organization for economic cooperation and development with higher drug consumption have great life expectancies
IIII. How Does Health Care Affect Other Measures of Health?
A. On the Importance of Lifestyle and Environment: are they important? Yes
1. How was this evaluated? Victor Fuchs compared average death rates in Nevada and Utah for 1959 to 1961 and 1966 to 1968. These two states are contiguous and have about the same levels of income and medical care and are alike in other respects. Fuchs argued that the explanation for these substantial differences surely lies in lifestyle. Utah primarily inhabited by Mormons, whose influence is strong throughout the state, who don't use tobacco or alcohol and in general lead stable, quiet lives. Nevada on the other hand is a state with high rates of cigarette and alcohol consumption and very high indexes of martial and geographical instability.
2. Review Table 5-5 and explain what was measured in the study. The study measured was excess of death rates in Nevada compared to Utah. in both males and females. It also broke down the 2 categories by age stating at less than 1, 1-19, 20-39, 40-49, 50-59, 60-69, and 70-79.
B. Cigarettes, Exercise, and a Good Night’s Sleep: what role does cigarette smoking play in health? It causes ill health but it is pleasurable.; Americans know that heart disease and cancer are the two leading killers but most do not realize how substantial a part smoking plays. Using the category "malignant neoplasms of the respiratory system" (category for lung cancer) we find that the 2002 death rate (51.5) is twice as high as breast cancer (13.4), prostate cancer (9.2), pneumonia and influenza (17.5), diabetes mellitus (22.3), HIV (3.1) or motor-vehicle related injuries (11.8). We have already seen the negative health production of elasticity of cigarettes, which makes it clear that cigarettes smoking affects the average health of the community and is statistically significant at that level. The authors showed that a good nights sleep, avoiding smoking, and regular exercise each contribute importantly to self-reported health. Rolland (2006) shows that greater life satisfaction means being less willing to risk death by smoking.
C. The Family as a Producer of Health: how do parents affect their children? Maternal behavior greatly affects a child's health. The parent's incentive to invest in their children's health is clearly a critical factor in a child's health.; looking at this study at a more abstract level, a study from Sweden develops the theory of how parents make health investments in themselves and their children. The parents incentive to invest in their children's health is clearly a critical factor in Child health. If parents individually make these health investment decisions strategically that is in response to the expected decisions of the others - the decisions, together, will not be optimal for the family.
D. Social Capital and Health: what is social capital? Form of economic and cultural capital in which social networks are central; Recent research has made it clear that family, friends, and community are associated with the health of the individual and the community. Networks of social contacts of an individual or the complex overlapping networks have come to be called social capital. The effects, first described by political scientists, medical researchers and epidemiologists - suggest that social capital beneficially affects measures of health. Social capital may improve an individuals health in several ways: (1) May relieve stress to have the support of more social contacts (2) More contacts can provide additional information on healthful behaviors and health purchases. (3) Satisfying social relationships may provide reasons to re-evaluate risky health behaviors.
E. Environmental Pollution: Pollution causes ill health and death in individuals with elderly and people with respiratory diseases are more susceptible. Pollution effects on health are sizable and statically significant in both industrialized and lesser-developed countries. Based on levels of total suspended particulates (TSP) in New Delhi between 1991 and 1994, the average pollution level was five times the limit recommended by the World Health Organization (WHO). A similar study by Schwatz & Dockery (1992) in Philadelphia suggests that reducing the pollution level there by the same 100 micrograms per cubic meter would reduce deaths by more than 6 percent in the general population and nearly 10 percent for the elderly.
F. Income and Health: what is the role of income? Income is related to one's health; We know that good health during the years when an individual is forming a career can be a big boost to that persons income later in life. We also know that being rich does not necessarily cause one to choose to live and eat wisely. They find the relation of income and health to be complex and contradictory. There was a substantial decline in mortality after 1950, but rather than growing incomes as the cause, they conclude a more plausible account of the data is that, over time, declines in mortality are driven by technological advances, or the emergence of new infectious diseases, such as AIDS. Part of our problem thus far in researching the contribution of income to health in the industrialized world is that incomes do not vary greatly enough to detect the larger patterns.
V. The Role of Schooling
A. Why do economists focus on schooling rather than education as a measure? Education includes both formal and informal training such as experience or on the job training some portions of education is possible to measure accurately. Often healthcare economics focus on schooling as measured by years of schooling.
B. What is a discount rate? The interest rate used when converting sums to be received at further date to a present value.
1. What does it mean to say a person has a “high” discount rate? Immediate payoff vs. long-term projects
2. What does it mean to say a person has a “low” discount rate? value long-term gains
C. Two Theories about the Role of Schooling - Michael Grossman theory of demand entails a central role for education contends that a better educated person tends to be economically more efficient of producers of health. Victor Fuchs suggested that people who seek out additional education tend to be those with lower discount rates.
D. Empirical Studies on the Role of Schooling in Health - Education has clear, casual and positive effect on health. An additional year of schooling caused an improvement in the affected students health. Education makes people more efficient producers of their own health. Education is associated statistically with better reasoned choices of health-related behaviors. One finds as well that education plays a stronger role in health for cases where new medical knowledge is more important.
VI. Conclusions
VII. Suggested End-of-Chapter Questions
A. Discussion Questions: 2, 5, and 8
2. What evidence is there to suggest that the United States is on the “flat of the curve” in health production? Is a typical developing country likely to be on the flat of its health production function? Discuss the differences.
5. What role did public health play in the historical decline in mortality rates?
8. Summarize the two theories on how schooling is correlated with health status. Which of the two theories does the evidence support?
B. Exercises: 3
3. What are the differences between mortality and morbidity? Would you expect the two variables to be related to each other? If so, how?
Chapter 2: Microeconomic Tools for Health Economics
Note: this chapter is a brief summary/review of many of the topics covered in a principles of microeconomics course. You should refer to an introductory level textbook (or in some cases an intermediate level) if you need more information about these topics.
VIII. Elasticities (p. 43-45)
A. Chapter 2 specifically focuses on price elasticity of demand and income elasticity but several types of elasticity are used throughout the text. This section on price elasticity will help prepare you for the concepts presented later.
B. What does price elasticity of demand measure?
C. How is price elasticity of demand calculated?NOTE: this formula is referred to as the “point elasticity” formula, because it measures the percentage changes in price and quantity relative to an initial/starting price and quantity combination. A different version sometimes used in principles classes is the “arc elasticity” formula, which measures the percentage change between two points based on the average price and the average quantity of the starting and ending point. This text uses the POINT elasticity formula to calculate the change.
D. Price Elasticity example
1. Consider the following demand schedule
P
Q
5
0
4
1
3
2
2
3
1
4
2. Measure the price elasticity of demand for a change from p=4 to p=3.
a) Ep=Percentage change in quantity demanded/percentage change in price
b) At p=4, q=1; at p=3, q=2
c) Ep=(?Q/Q)/( ?P/P)=((1-2)/(1))/((4-3)/(4))=((-1)/1)/((1/4))= -4
d) Recall from principles that price elasticity of demand is NEGATIVE because as price decreases, the quantity increases (they move in opposite directions)
e) Ep=-4, indicates the percentage change in quantity was 4 times as large as the percentage change in price
3. At the other end of the demand curve, what is the price elasticity of demand for the price change from p=2 to p=1?
E. What does income elasticity measure?
F. Review Figure 2-12.
1. How does the relative slope of demand curves indicate price elasticity?
2. How does elasticity affect how much of this cigarette tax is paid by consumers relative to producers?
3. Which demand curve (D1, D2, or D3) results in consumers paying the largest share of the tax?
4. Which demand curve is most inelastic?
G. Review Table 2-3. How does elasticity for healthcare compare to the elasticity of demand for other goods and services?
IX. Production and Market Supply
A. The Production Function (p. 46-49)
1. What is a production function?
2. Review Figure 2-13.
a) What does the first figure illustrate?
b) What does the second figure illustrate?
c) How are the two figures related?
3. What is marginal product (MP)?
4. How is MP represented graphically?
5. Is MP constant, increasing, or decreasing in the figure? How can you tell?
B. Production Functions
1. Review Table 2-4.
a) Table 2-4 represents short-run production, when one of the inputs (factors of production) is held constant (does not change).
b) In Table 2-4, which input is held constant?
c) How is MP calculated?
d) What is average product (AP)?
e) How is AP calculated?
f) Using equation 2.12 (in the middle of the page), can you confirm the calculation of Q using the K and L values in the table?
2. Review Table 2-4 and Figure 2-14.
a) What is an isoquant?
b) Table 2.5 indicates how labor (L) and capital (K) can be used in different combinations to produce 10 units of output (Q). Isoquants indicate long-run production possibilities, which is when both inputs can be varied.
c) What does MRTS measure?
3. Is substitution possible in practice?
