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