Ch 1 Outline

Chapter 1: Introduction What is Health Economics? Review Box 1-1. How does technological change affect health care costs? Technological change is rising health care costs, most economists agree increased spending patterns reflect the rapid rate of adoption of new technology in the U.S What do the United States, United Kingdom, and Japan have in common that helps explain why such different countries have experienced increased in health expenditures? They all have access to the same expensive innovations in technology. Do health care consumers value technological change? No one knows for sure, but a vote today's medicine is the validation of the improvement and willingness to pay for improved quality. The Relevance of Health Economics The Size and Scope of the Health Economy - The health economy merits attention for its sheer size, constituting a large share of Gross Domestic Product in the United States, as well as in other countries. It also represents a substantial capital investment. THE HEALTH CARE SECTOR IS LARGE AND GROWING PART OF OUR ECONOMY. Health Care’s Share of GDP in the United States What is “GDP”? Gross Domestic Product What does GDP measure? The market value of final goods and services produced within the borders of a country over a period of one year. What share of the US economy is accounted for by health care? 17.2% Go to the following link to find the data for 2016: http://stats.oecd.org/Index.aspx?DataSetCode=SHA “Health Expenditures as Share of GDP” is a MS Excel file showing data for 2000-2016. Find the updated value for the United States in 2016. Using the values provided in Table 1.1 for historical values, and the table referenced in the link provided above for 2016, how has that share changed over time? It grew from 12.5% in 2000 to 14.5% in 2003 and remained constant until 2005. Since 2005, it has constantly grown from 14.5% to 17.2% in 2016. (our book says 17.4) What are the possible reasons/explanations for the increasing share accounted for by health care spending? People may be buying more health services People may be buying higher-quality health services and services which were previously unavailable such as treatments for burn victims, laser surgery, vaccinations, and organ transplants. Health care inflation may be higher than the general inflation rate. Higher incomes and the increase prevalence of insurance, and government programs such Medicare and Medicaid, may have led to increased health care prices over time. Health Care spending in Other Countries Review Table 1-1 and the “Health Expenditures as Share of GDP” spreadsheet. How does spending in the US compare to other countries? Do we spend more or less on health care? Looking at the Excel, the USA has spent more than any country between 2000 and 2016 As a percentage of GDP, which countries spent the most in 2000? In 2016? In 2000, The US, Germany, France. In 2016, The US, Switzerland, Germany. As a percentage of GDP, which countries spent the least in 2000? In 2016? In 2000, Korea, Mexico, and Turkey. In 2016, Turkey, Latvia, Mexico. Importance of the Health Economy in Personal Spending Review Table 1-2. Outside of health care spending, what other kinds of spending on goods and services account for relatively large shares of personal consumption expenditures? Outside of health care spending (18.3%), other notable goods and services such as nondurable (total: 21.6%), immediately consumable goods (< 3 years): food and beverage (7.3%), clothing and footwear (3.1%), gasoline and energy (2.5%). Services make up 67.3% of expenditures with the largest portion (18.3%) going to health care, followed by housing (15.6%), food and accommodation (6.6%), and recreation (3.8%). Importance of Labor and Capital in the Health Economy Review Table 1-3. Describe the growth in health care employment over time. How is “growth” calculated? Measure the percentage change. FORMULA (Total physicians year2 - Total physicians year1)/(Total physicians year1)=growth rate Example: 1970 total physicians=334,028; 1980 total physicians=467,679 The growth rate (or percentage change) measures the change in number of physicians relative to the starting value. To measure the growth from 1970 to 1980: (1980 total physicians-1970 total physician)/(1970 total physicians) (467,679-334,028)/(334,028) = (133,651)/(334,028) = 0.4001 The number of physicians increased by 40.01% from 1970 to 1980 (convert the proportion 0.4001 to a percentage by multiplying it by 100, which moves the decimal to places to the right, and use the % sign to indicate it is a percentage) One way to remember this formula is (new-old)/(old), what is the new measurement and the old measurement, which gives the size of the change, and then measure the change relative to the “old” or initial value to measure the change as a percentage. Has employment growth matched or exceeded the growth of the US population? Calculate the growth in the following for two time periods, 1970-1980 and 1980-most recent: physicians 40.01%, 123.64% (exceeded) registered nurses 69.7%, 109.1% (exceeded) pharmacists 26.6%, 101.3% (exceeded) U.S. population 11.4%, 39.8% (exceeded) How has capital in health care changed? Specifically, the number of nursing home beds and short-term hospital beds? Nursing home beds (1.7 million from 1.3 million, increase of 30.77%, and short-term hospital beds is currently around 915,000 from a peak in 70’s of 1.5 million, a decrease of 39 percent. Time—The Ultimate Resource Understand that those that donate their own time to help care for loved ones (or other similar situations which require time but are unpaid) are not counted in GDP The Importance Attached to Economic Problems of Health Care Delivery How have health care prices changed over time? Both the NHE (National Health Expenditures) per capita and the CPI reflected increases in health care costs over time; They have increased from $27 billion in 1960 to $3,031 billion in 2014. Prices rose by 700 percent as measured by the CPI Why must the CPI be used to adequately assess the change in prices over time? Because the CPI (consumer price index) is a tool used to measure the changes in the relative buying power of the dollar over time, it is a useful tool to understand the relative prices of goods/services over time Inflation (NOTE: the CPI and measuring inflation are concepts from principles of economics, a few basics are included below but you might need to review these concepts more thoroughly) What is inflation? Inflation refers to the buying power of money. Inflation typically refers to decreases of the dollar value (a rise of the general price level), while deflation refers to increases of the dollars buying power How is inflation measured? Inflation is measured by changes in the CPI from year-to-year. The CPI is measured by dividing the prices of the “market basket” of a particular year (in 1982-1984) by the price of another market basket. The rate of inflation is calculated by measuring the change in CPI and dividing it by the CPI of the base year, multiplying it by 100, and reporting it as a percentage Note: the CPI information in Table 1.4 can be sourced from here: https://www.minneapolisfed.org/community/teaching-aids/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913 Note: the health price index information in Table 1.4 is originally sourced from this document produced by the Census: https://www.census.gov/prod/2011pubs/12statab/health.pdf The numbers in Table 1.4 relate the cost in terms of what it would have cost in 1982-1984. The values can be used to measure year to year growth in prices or relative to 1982-1984. The base year for comparison using the CPI is an average of 1982-1984. So, if a basket of goods cost $100 in 1982-1984 (base CPI=100), and the CPI of 2000 is 172.2, then it costs $172.20 in the year 2000 to buy what it cost $100 in 1982-1984. To compare 1960 and 2014, the change is (236.7-29.6)=207.1, to measure as a percentage increase over the staring year of 1960 the equation is, 207.1/29.6 = 6.9966 (or approximately 700%) Base CPI 147 If the price index for hospital and related services in 2014 is 743.2 and the base year 1982-1984 is 100, then the increase is (743.2-100)=643.2. Hospital and related services have increased 643% from 1982-1984 to 2014. Comparing expenditures across time requires adjusting the values for changes in prices over time in order to measure the REAL increase (total expenditures can increase because more services are used or just because prices change, to measure the change in usage, the price effect must be accounted for). In 1960, National Health Expenditure (NHE) per Capita was 146. In 2000, NHE per capita was 4,857. How can these two numbers be compared? Either the 1960 value can be converted to a 2000 equivalent, or the 2000 value can be converted to a 1960 equivalent. The CPI for 1960 = 29.6. The CPI for 2000 = 172.2. Converting the 1960 value to 2000 is done in the following manner using the ratio of the CPI index for 1960 and 2000: (1960 value) * (CPI 2000) = (146)*(172.2) = 849 (CPI 1960) (29.6) You can now compare 1960 to 2000 NHE per capita by measuring the growth from 849 to 4,857. (NOTE: the change is still a very big number but will be smaller than if the 146 number were used. Inflating 146 to 849 allows us to account for the price increases that occurred from 1960 to 2000 so we can see how much real increase occurred due to utilization.) Access: how do rising costs affect access? For many, the rising costs reduce accessibility to healthcare. Financial affordability influences demand for most goods and services.; reduces accessibility due to financial affordability Quality How is increasing quality related to rising costs? Increased in quality contributes to spending increases as the focus is on ensuring quality through professional licensure/certification & QA programs. What does it mean to say some consider the quality of care to be excessive? High tech treatments-resource costs may exceed benefits to patients. The Economic Side to Other Health Issues – Many other health issues have economic components even though they may seem to be purely medical concerns such as choice of a health care treatment and personal health choices. Quality How is increasing quality related to rising costs? Higher quality care (in terms of quality-assurance programs, and licensure and certification) costs more What does it mean to say some consider the quality of care to be excessive? The costs of resources exceed the benefit to patients The Economic Side to Other Health Issues – The opportunity costs of making certain health choices as opposed to others (caffeine consumption may have a perceived low opportunity cost, whereas meth may have a higher one, but consumers make the choices that give them greatest utility/satisfaction) Economic Methods and Examples of Analysis Features of Economic Analysis – Health economics is what economists actually do and they use certain characteristic approaches to their analyses of the world. Scarcity of Resources: what do economists mean when they refer to “opportunity cost”? Individuals must give up some of one resource to get some of another. Rational Decision Making: what do economists mean when they assume individuals are rational decision makers? Rationality-making choices that best further one’s own ends given one’s resource constraints. Irrational behavior often makes sense when incentives facing the decision maker are properly understood. Marginal Analysis: what does marginal analysis refer to? Mental experiment of trading off incremental costs against incremental benefits at the margin. Use of Models (the focus of chapter 2 is to introduce the mathematical and graphical models used to analyze health care markets and policy) Economics develop models to depict subject matter (word, graphs, mathematics) and are often abstract. Two Notable Contributors to Health Economics Kenneth Arrow: Nobel Prize winner in 1972 for mathematical economics. His clear thinking about health care markets provided a starting point for health economics. Arrow noted that health outcomes are difficult to predict and may even be difficult to attribute to past behaviors and care. This uncertainty makes it complicated to develop markets for risk sharing, and needed insurance markets may fail to develop. To overcome this, health care markets typically rely upon institutional norms and other institutions such as licensing. Trust is placed in the superior knowledge of the physician. And, the physician is relied upon to make base his or her decisions upon proper medical procedure and not upon profits. Amy Finkelstein: Professor of Economics at MIT. Preeminent student of health insurance markets, especially Medicare and Medicaid. Finkelstein’s work created novel theories of choice under risk. She also conducted large-scale empirical work regarding her theories. Recently joined with others to investigate an experiment in which the State of Oregon gave Medicaid to new recipients on a randomized basis. Discovered that Medicaid helped recipients to avoid financial disaster, decreased depression scoring, and increased detection of diabetes. Does Economics Apply to Health and Health Care? What is coinsurance? (Rate) The share of costs (fraction or percentage) paid by the beneficiary of a health policy (often after some deductibles) How does coinsurance affect the price paid by the patient (i.e., does a coinsurance rate of 0 mean the patient pays for nothing or the patient pays for everything)? It means that for services subject to coinsurance, your insurance company will pay 100%, fully covered. An Example: Does Price Matter? Explain what the RAND Health Insurance Experiment revealed about whether prices matter. One of the largest randomly controlled economic experiments ever conducted. It was designed to test the health status of a large and closely observed group of people from all walks of life. RAND REVEALED that the greater the portion of the healthcare bill that individuals are required to pay the LESS healthcare they chose to purchase. It found that an increased use of healthcare has little effect on illness rates of the study population. However studies of the totally uninsured now reveal gains in health due to publicly provided health insurance. Is Health Care Different? Presence and Extent of Uncertainty: what role does uncertainty play in health care? How does it affect the demand side of the market? Consumers are uncertain of their health status and need for health care in any coming period. This means that the demand for healthcare is irregular in nature from the individuals perspective; likewise, the demand facing a health care firm is irregular How does it affect the supply side of the market? Standard economic analysis often assumes that products, and the pleasures they bring, are well understood by the purchasers. Several cases of product uncertainty exist in the health field – consumers often don’t know the expected outcomes of various treatments without physician advice, and in many cases the physicians themselves cannot predict the outcome of a treatment with certainty Prominence of Insurance How does insurance affect health care? Consumers purchase insurance to guard against uncertainty and risk. Because we have health insurance, most American citizens (and citizens of other countries) do not pay directly for the full cost of their health care. The costs are paid indirectly through coinsurance and premiums. Out of pocket costs dropped dramatically following the introduction of Medicare and Medicaid, the continued growth of private insurance, and the introduction of new programs such as CHIP. Insurance changes the demand for care, and it potentially also changes incentives facing providers. For example, how does the DRG reimbursement system affect incentives? In the 1980s Medicare, faced with rapidly increasing expenditures, changed its hospital payment system from one based largely on costs (retrospective reimbursement) to one with fixed payments per admission determined by the resources typically used to treat a medical condition (as classified by DRG). With the prospective DRG reimbursement system, an extra day of care added to hospitals costs rather than its revenues, so this system led to shorter stays, reduced demand for hospital beds, and ultimately the reduction in size and/or closing of many hospitals. Problems of Information What kinds of information problems exist in health care and why is that problematic? Uncertainty can be attributed to lack of information. Actual and potential information problems in health care markets raise many economic questions. Consumers of health goods and services may not know which physicians or hospitals are good, capable, or even competent. Consumers may not know whether they are ill or what should be done if they are. This lack of information makes the individual consumer (principal) dependent on the provider (agent) What does it mean to say information is “asymmetric” in health care? When information in question is unavailable to all parties concerned (for example, neither gynecologists nor patients recognize early stages of cervical cancer without Pap smears) or is known to some parties, but not to all Large Role of Nonprofit Firms: how do the incentives of non-profit firms differ from the incentives of for-profit firms? For-profit firms allocate resources in such a way that maximized profits, whereas non-profits do not. Many healthcare providers are nonprofit. Restrictions on Competition – Competition generally viewed as good b/c it forces providers to offer services at competitive/lower costs, benefitting consumers. What kinds of restrictions and government interventions affect health care markets? Licensure of providers restricts competition by limiting the number of people capable of offering the service. Restrictions on provider advertising restrict competition. Ethical standards that encourage noncompetition between other providers. Are these restrictions and interventions to promote competition or hinder it? Antitrust laws can be enacted by the government to prevent monopolistic practices, encourage competition, and benefit consumers Role of Equity and Need – Concerns exist that people ought to get the care they need regardless of cost, but ambiguity of one’s “needs” present economic concerns Government Subsidies and Public Provision What is a subsidy? A form of financial aid with the intent to encourage a policy How does the government subsidize health care? By subsidizing health insurance, which encourages people to get insurance by helping cover some of the costs. Conclusions End of Chapter Suggested Discussion Questions: 3, 4, 5, and 7 3. If greater health care spending leads to more jobs, why is there such concern about the rapid growth rates of spending? Higher spending on health care creates more jobs in the health economy. However, this is not always necessarily efficient. For each economy, there is an efficient quantity and price and hence spending for health care. Health care spending beyond that point is not socially optimum. This is because the cost to society would be greater than the benefits. If spending on health care is too high then it would result in lower allocation of resources to other sectors such as education where the benefits may be higher than the cost. Hence, this tradeoff has to be considered instead of just observing the increase in jobs. 4. Do consumers take the net price (including insurance and time) they face into consideration when choosing health care? What evidence suggests that price matters? Suggest real-life scenarios in which price may affect choices regarding health care. Health economics is of much use to the society as individuals, except under emergency situation, do a cost benefit analysis while making their health care choices. Much of health care is elective so individuals do perceive some choice over whether and when to have the diagnostics or treatment involved. So consumers take the net price they face into consideration when choosing health care. Data from RAND Health Insurance Experiment gives us a clear indication that prices do matter when individuals make their health care decisions. It was seen that as the economic incentives mattered and those facing higher prices demand less care. Real life scenarios are problems such as upper respiratory infections, back pain and diagnostic checkups. It is expected that as the price of these faced by the consumer decreases, they would demand more. 5. Suppose that a woman works 40 hours per week with no opportunity for overtime. She also takes care of a sick parent. Can we say that her time has no value in providing this health care because she could not earn more at work? If a woman works 40 hours per week with no opportunity for overtime and also takes care of a sick patient, it cannot be said that her time has no value in providing this health care. This is because the time she spends in taking care of the patient reduces her leisure time. Moreover, lack of leisure time may affect her productivity at work. A better measure of the value of the time that the woman provides to the patient would be how much it would cost her to hire someone to take care of the patient. 7. Give three examples of quality of care in the provision of health services. Why might consumers be willing to pay more money to have each of them? In the provision of health services, besides the price, the quality of health services is also a concern. For example, how often the doctor comes and visits his patient, how caring a nurse is, or the type of food available in the hospital. Consumers might be wiling to pay more money to have each of them if the marginal benefit would be more than the marginal cost. Suggested Exercises: 2, 3, and 6 2. Identify five distinctive features of the health economy. Examine each one separately, and describe other commodities or sectors that share those features. Do any other commodities or sectors have all the features you listed? 3. In Table 1.1, calculate which countries had the largest and smallest percentage increases in GDP share from 1960 to 1980. Compare these to similar calculations for the period 1980 to 2015. Discuss your results. 6. In Table 1.5, examine the private health insurance, Medicare, and Medicaid components. Which category grew the most between 1970 and 2014? Between 2000 and 2014? What factors might have led to the differences in the growth rates? Exercise 2: refers to the “Is health care different?” section Exercise 3: One suggestion is to use a spreadsheet. Enter the values for 1960, 1980, and 2015. Then, use a formula for measure the percentage increase (or growth rate). Remember the formula provided earlier? You need to determine how to use Excel to perform the calculation. Exercise 8 (a and b) will give you additional practice if you want to try them.