Economics 7550 Health Economics A. Goodman For class meeting August 28, 2013 The course • Class Meets: MW 3 – 4:50 – The first class meets Wednesday, August 28, 2013. It will be a full-length class. • Office Hours: MW 1:30 – 2:45, after class, or by appointment . • Office location: 2145 FAB • Phone: 577-3235; e-mail: allen.goodman@wayne.edu • Department and Course Web site: http://www.econ.wayne.edu/agoodman/7550/ Class Meetings – in advance • We WILL meet on Monday, November 25. – This is Monday before Thanksgiving • Wednesday, November 27 is a University holiday – no class. Text materials The text materials (highly recommended) will be: The Economics of Health and Health Care, 7th Ed., by Sherman Folland, Allen C. Goodman, and Miron Stano The Elgar Companion to Health Economics, Edited by Andrew M. Jones, to be purchased at the appropriate bookstore. Selected readings at the library and/or on-line. There are 2 editions. Either will do. Learning Outcomes • Students taking health economics will learn and apply the concepts and methods of economics in depth. • Students taking health economics will become familiar with the historical context of the discipline, the connections to other fields of study, and the role of ethical values in decisions and policymaking. • Students taking health economics will carry out independent research and communicate their findings to students, faculty, and others. • Students will be able to critically interpret and communicate quantitative and verbal information about health economics. • Students will learn how health economics can be applied to issues of contemporary concern, including but not limited to the environment, globalization, diversity, and sustainability. • Students will acquire skills and interests which enable them to be lifelong learners and contributing members of their communities, including critical thinking, clear and thoughtful communication, and honest and open inquiry. Exams and Grading Students will be responsible for the following assignments in (roughly) chronological order: • • • • • 1st short in-class presentation Mid-term exam – Monday, October 14 1 paper (15 - 20 pages) 2nd in-class presentation (on paper) Final Exam Wednesday, December 13, 1:20 – 3:50 Various Homework and other assignments 12.50% 6.25% 22.50% 25.00% 6.25% 27.50% Papers and Presentations • In class presentations of current events and good journal material. • An excellent database on health status and expenditures is available. • The term paper (and presentation) will be prepared as original work from the database, using appropriate data analysis and econometric techniques. The Curve The following percentage curve will guide the grading policy in the course. 90 – 100 A ; 85 – 89.9 A-; 80 – 84.9 B+; 75 – 79.9 B ; 70 – 74.9 B- ; 65 – 69.9 C+ ; 60 – 64.9 C ; Below 60 F Any grade below B- in a graduate level course is considered to be unsatisfactory, and any grade below C is considered to be a failing grade. Resources • Department and Course Web site: http://www.econ.wayne.edu/agoodman/7550/ • Learn to use Library Resources. Invaluable ones include: – Science Direct – OECD Journals and Web Sites • There are some terrific places to find information and data. • Information WSU Library (for Science Direct). Journals such as Journal of Health Economics. • Another excellent journal is Health Economics. • More topical stuff is at Health Affairs. Web Sites • • • • Medicare and Medicaid – CMS Center for Disease Control – CDC OECD Data for analysis – MEPS Relevance of Health Economics bigger The health care sector is big, and is getting . In 1950, less than 5% of GDP went to health care. By 1976, it was about 8%, and now (2012-13) it’s well over 17%. This means that not only has health care grown absolutely, it has grown relative to everything else. • It’s trivial, but nonetheless useful to consider this algebraically. s = pq/y Percentage = 100s Health Share s = pq/y. ds = (q/y)dp + (p/y)dq – (pq/y2) dy. (Total Differential) Dividing both sides by s, we get: ds/s = dp/p + dq/q - dy/y. What does this mean? Some Numbers • Nominal health expenditures per capita were: $147 in 1960. Rose to $8,402 in 2010 - a factor of 57! • Real health expenditures per capita ($1960) were: $147 in 1960; $1,141 in 2010. • $1,141/$147 = 7.76 • Increase of about 676%. Are we 6-7 times as healthy as in 1960? Nat’l Health Expenditures per capita by Year Health Expenditures Per Capita 9000 8000 7000 Exp per capita Expenditures Real Exp per capita 6000 5000 4000 3000 2000 1000 0 1960 1965 1970 1975 1980 1985 Year 1990 1995 2000 2005 2010 U.S. Expenditure Shares Figure 1-1 U.S. Health Expenditure Shares, 1960-2020 20.0 18.0 16.0 Share (in Percent) 14.0 12.0 10.0 8.0 6.0 % Actual 4.0 % Projected 2.0 0.0 1960 1965 1970 1975 1980 1985 1990 Year 1995 2000 2005 2010 2015 2020 Percent of GDP Spent on Health Care, 1960-2010 18.0 US Canada Percent 16.0 France 14.0 Germ any 12.0 Japan 10.0 United Kingdom CA United States 8.0 6.0 UK 4.0 2.0 0.0 1960 1965 1970 1975 1980 1985 Year 1990 1995 2000 2005 2010 Is it Worth it? In a March 2005 speech to the National Association of Business Economics, Chairman of the Council of Economic Advisers, Harvey Rosen noted that the over the last several decades, the quality of health care has improved—diagnostic techniques, surgical procedures, and therapies for a wide range of medical problems has continually improved. Treatment of a heart attack today is simply not the same “commodity” as treatment of a heart attack in 1970. In fact, although innovations like coronary bypass surgery and cardiac catheterization have raised expenditures per heart patient, they have actually reduced the prices of obtaining various health outcomes, such as surviving hospitalization due to a heart attack. Rosen noted that some improvements in medical technique are quite inexpensive. Prescribing aspirin for heart attack victims leads to a substantial improvement in their survival probabilities. But new medical technologies are often costly. For example, it costs about $2 million to acquire a PET (positron emission tomography) machine, which can detect changes in cells before they form a tumor large enough to be spotted by xrays or MRI. Such costly improvements lead medical expenditures to grow. This technology-based theory also helps explain why countries with different health care financing and delivery systems have all experienced increases in health care expenditures. Rosen argued that these societies have at least one thing in common—they have all been exposed to the same expensive innovations in technology. The technology-based explanation puts any debate over cost containment in a new light. Is it a bad thing if costs are rising mostly because of quality improvements? A key question in this context is whether people value these innovations at their incremental social cost. No one knows for sure, but economist Dana Goldman reiterates a provocative insight: “if you had the choice between buying 1960s medicine at 1960s prices or today's medicine at today's prices, which would you prefer?” A vote for today’s medicine is validation of the improvement, and willingness to pay for improved quality! Still another cause for concern • Problems that people have getting insured. • Almost 1 in 6 Americans do not have health insurance. Prior to passage of PPACA, the most recent estimate is 50 million. We have a feature in the book that talks about how this is measured. • Only the U.S., among advanced countries, does not currently have some form of universal health coverage. • PPACA will insure about 2/3 of those currently uninsured, but it will take a while. https://www.google.com/#fp=76d84e2dc9178884&q=New+York+Times +%22delayed+care%22 Origins of Health Economics – 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. z physicians per capita), then calculating the number of physicians necessary, and comparing it to the number available. • NY Times (7.28.12) had a recent piece on this. Not “no care” but “delayed care.” Are they the same? 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 ??? • A> 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. Shortages approaching? Shortages estimated by fixed coefficient method. Price Discrimination • Reuben Kessel addressed the practice of physicians to charge different patients different fees. • The physicians often argued that this was charity. That is, they charged some more, to subsidize charging others less. • Kessel argued, instead that it increased profits by getting money from those who were most able to pay. Why does individual physician face down- ward sloping D curve? D P P* MC MR Q* Q Price Discrimination Now suppose the physician wants to treat 1 more customer, who he knows, can only pay less than P P*. MR is still greater than MC. P* Further, most health care can not be re-sold; if you break your leg, I can't go and get cheaper treatment and re-sell it to you. Hence, additional profits can be made, even if physicians charges subsequent buyers less money. Incremental Profit D MC MR Q* Q Does Economics Apply to Health and Health Care? 1. Uncertainty • Most analysis that we do in economics ignores 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? Does Economics Apply to Health and Health Care? • 2. Prominence of Insurance No other sector features insurance so prominently. In 1960 about 55 percent of all personal health care expenditures were paid out-of-pocket; 45 percent by third party payers and/or government. By 2000, 82.6 percent was paid by third party payers. In 2009, the percentage was 88.0. Does Economics Apply to Health and Health Care? • 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? • Do insurance and medical care prices combine to raise health care costs? Does Economics Apply to Health and Health Care? • 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. Does Economics Apply to Health and Health Care? • 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? A> Probably pretty well informed for a substantial proportion of their care. Pauly did kind of a back of the envelope calculation for 1971 and found that a large portion of care WAS well-informed. • Think about yourself. How well informed are you? Does Economics Apply? 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? • How does a hotel differ from a nursing home? • If we want to send aid to Haiti, who do we go to? Why? Does Economics Apply? 5. Restrictions on Competition • There are many. These include: – Licensure requirements for providers – Traditional restrictions on advertising (although these seem to be waning – there doesn’t seem to be much that we can’t advertise). – Only US and New Zealand allow advertising of prescription drugs. – Standards which frown on price competition NZ Drug Ads Does Economics Apply? 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 illustrates this. Does Economics Apply? • This is a particularly interesting issue teaching things as an economist. As an economist, we look at markets FIRST. The rest of the world, including those who make policy, are more likely to look at government FIRST, markets LAST. • For next Lecture look at Fuchs (AER, 1996), and Zweifel and Breyer (Ch. 1). Compared with Others Country Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom United States 1960 5.2 6.3 6.9 1980 6.3 7.5 7.2 7.0 3.8 3.8 5.5 5.4 6.0 5.4 8.9 6.3 7.0 8.4 5.9 3.0 3.7 4.7 5.1 6.3 8.3 3.0 4.6 3.1 6.5 3.4 5.2 5.2 4.4 7.4 5.9 7.0 2.5 5.3 7.8 6.1 7.7 6.0 4.0 5.4 4.8 8.0 6.9 7.6 4.8 5.9 4.9 3.5 6.8 5.4 3.9 5.1 4.5 7.0 5.3 8.9 7.3 3.3 5.6 8.7 6.5 8.2 8.2 3.6 6.0 11.9 4.3 3.9 5.4 2.9 1.5 1970 1990 6.9 8.4 8.6 8.9 4.7 8.3 7.7 8.4 8.3 6.6 2000 8.3 9.9 10.4 8.8 6.5 8.3 7.0 9.6 10.3 7.8 6.9 9.5 6.3 8.1 7.7 4.6 5.8 5.6 8.0 7.7 8.4 5.5 8.8 5.5 7.2 8.2 10.3 4.9 7.2 13.2 2008a 8.5 10.5 11.1 10.4 7.1 9.7 8.4 11.2 10.5 9.7 7.3 9.6 8.7 9.5 8.1 6.5 7.8 5.9 9.9 9.9 8.5 7.0 10.2 8.0 9.0 9.4 10.7 6.2 8.7 16.0