The Production of Good Health
• Production function
– How the level of output depends on quantities
of various inputs
• Health production function
– Maximum amount of health that an individual
can generate:
• From a specific set of health-related inputs
• In a given period of time
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The Production of Good Health
• Short-run health production function
Health = H (Profile, TECH, environment,
SES, lifestyle, medical care)
– Profile
• Individual’s mental, social & physical profile
• Includes uncontrollable factors—age, race and
gender
– TECH
• State of medical technology
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The Production of Good Health
• Short-run health production function
– Environment
• Air and water quality and public health measures
– SES
• Effect of social and economic factors
– Education, income and poverty
– Lifestyle
• Set of health-related choices (diet, exercise)
– Medical care
• Quantity and quality of medical care consumed
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Figure 2.3 - The Total Product
Curve for Medical Care
Health
(H)
Total
product
The total product curve is upward
sloping and indicates that as an
individual consumes more medical
care, overall health improves. The
positive intercept term represents
the individual’s level of health
when no medical care is consumed
and is a function of other factors
such as lifestyle and the
environment.
Medical care (q)
The law of diminishing marginal productivity accounts for the bowed shape of the curve. This law
is a fundamental principle of production theory and it implies that health increases at a
decreasing rate when additional units of health care are consumed, holding all other inputs in
the health production process constant.
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The Production of Good Health
• Marginal product of medical care
– Incremental improvement in health brought
about by each successive unit of medical care
consumed
MPq = ΔH/Δq
• MPq - marginal product of the last unit of medical
care services consumed
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The Production of Good Health
– Law of diminishing marginal productivity
• Marginal product of medical care diminishes as the
individual acquires more medical care
• Marginal product curve - Negatively sloped
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Figure 2.4 - The Marginal Product
Curve for Medical Care
Marginal
product
(MPq)
MP
Medical care (q)
The MPq curve establishes the relation between the marginal product of medical care and
the amount of medical care consumed. The curve is downward sloping because the
marginal product of the last unit of medical care consumed decreases as the individual
consumes more medical care, reflecting the law of diminishing marginal productivity.
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The Production of Good Health
• Change in any one of the health-related
inputs in the production function
– Alters the position of the total product curve
• Shift
• Rotate
– Because the marginal productivity of medical care has
changed in response to the change in the other factors
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Better Medical Technology
• New medical technology
– Development of sophisticated medical
devices
– Introduction of new drugs
– Application of innovative medical and surgical
procedures
– Use of computer-supported information
systems
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Better Medical Technology
• Newer medical technologies result in:
– Treatment expansion
– Treatment substitution
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Figure 2.5 - The Effect of Technological Change
on the Total Product Curve for Medical Care
Health
(H)
B
H1
TP1
TP0
H0
C
q2
The total product curve shifts
upward with the development and
application of new medical
technology because of an increase
in the marginal product of medical
care.
A
q0
q1
Medical care
(q)
A movement from point A to point B
illustrates the case in which a new
technology results in a simultaneous
increase in the amount of medical
care consumed and improvement in
health.
A movement from point A to point C depicts the case in which the new medical
technology has no impact on health but results in less consumption of medical care.
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Better Medical Technology
• Movement from point A to point B
• Represents treatment expansion
• Movement from point A to point C
• Represents cost saving technology
• Increase in marginal product
• Marginal product curve shifts to the right
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Change in Profile Variable
– Depends on a person’s genetic makeup,
mental state, age, gender, and race/ethnicity
as of a given point in time
– Affects the intercept term and slope of the
health production function
– Causes a downward shift or rotation of the
total product curve
– Causes the marginal product curve for
medical services to shift to the left
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Figure 2.6 - A Shift in the Total Product
Curve for Medical Care
Health
(H)
TP0
TP1
Medical care
(q)
The graph illustrates what happens
to the total product curve when an
individual gets an illness such as
cancer for a reason other than
improper medical care.
The curve shifts downward because
at each level of medical care
consumed the individual is less
healthy than previously was the
case. The curve also rotates
downward and becomes flatter,
reflecting the likelihood that the
now ill individual is going to respond
less favorably to a given amount of
medical care consumed, such as an
office visit, than previously was the
case when she was healthy.
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Effect of Age
• Age affects health through the profile
variable
– Health and marginal product of medical care
are likely to fall
– Rate at which health depreciates over the
period is also likely to increase
– Total product curve shifts downward and
flattens out
– Marginal product curve shifts left
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Lifestyle Variables
• Personal habits impact the production of
health
– Adoption of healthier lifestyle causes the total
product curve to shift and rotate upward
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Socioeconomic Conditions
• Improved socioeconomic conditions
– Increase intercept term and marginal product
– An educated individual is a more efficient
producer of health
• Total product curve shifts upward
– Higher the level of education more efficient
the utility of each unit of medical care
• Total product curve steepens and marginal product
of medical care increases
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Socioeconomic Conditions
• Reverse effect: health influences
education
– Poor health conditions during childhood may
result in a less healthy adult with moderate
levels of education
• Fuchs (1979), argues that the acquisition
of education and health depends on the:
– Value people place on future events
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Socioeconomic Conditions
• Income gradient
– “…health improves with income throughout
the income distribution” (Deaton, 2002)
• Increase in income
– Indirect impact on health
• Consume more medical care
• More educated, healthier lifestyle, and live in a
safer environment
• Improved health
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Socioeconomic Conditions
• Increase in income
– Direct impact on health
• Employed in a safer work environment
– Slim risk of a work-related accident
• Employed in a more stressful occupation
– Adversely impact health
• Absolute income hypothesis
– An individual’s absolute income is positively
related to health
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Socioeconomic Conditions
• Relative income or deprivation hypothesis
– An individual’s income relative to some social
group average impacts overall health
• Relative position hypothesis
– One’s social position in the income distribution
impacts health
• Income inequality hypothesis
– The distribution of income itself directly
impacts health
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Environment
• Adjustment in physical environment affects
the total product curve
– Cleaner physical environment means less
exposure to allergies and ailments
– Total product curve - shift and rotate upward
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The Determinants of Health among
Nonelderly Adults
• Medical care and health
– Households in low coinsurance plans
• Received more medical care; same level of health
as those households in high coinsurance plans,
ceteris paribus.
– “flat-of-the-curve” medicine
• Small marginal impact of medical care services on
the health status of adults
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The Determinants of Health among
Nonelderly Adults
– Studies reviewed, consistently show that
health insurance:
• Increases physician and preventive services
• Improves self-reported health status
• Lowers mortality conditioned on injury and disease
– Surveyed studies offer no direct estimates of
the magnitudes of the marginal productivity of
medical care among nonelderly adults
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The Determinants of Health among
Nonelderly Adults
• Education and health
– Positive relation exists between education
and health
– One more year of schooling
• Decreases the probability of dying within 10 years
by 3.6 %
– An additional year of education
• Increases life expectancy between 0.18 and 0.6
years
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The Determinants of Health among
Nonelderly Adults
• Income and health - positive connection
– Increases in income
• Enhance both mental and physical health
– People with less than a high school education
and incomes below $10,000
• 2-3 times more likely to have functional limitations
and poorer self-rated health
– In the short run, an inverse relationship exists
between the strength of the economy and
health
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The Determinants of Health among
Nonelderly Adults
• 1% drop in unemployment rate – 0.5-0.6%
increase in total mortality rate
• Income inequality and health
– Studies indicate significant support for the
absolute income hypothesis
– Some studies support the hypothesis that
greater income inequality worsens health
outcomes at the state level
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The Determinants of Health among
Nonelderly Adults
• Lifestyle and health
– Risky lifestyle behaviors – negative impact
• Smoking, excessive alcohol consumption, lack of
physical activity, and poor diet
– Heavy smokers between the ages of 50 and 54
» Males - expected to live 2 years less compared to
nonsmokers
» Females - expected to live 1.44 years less
compared to nonsmokers
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The Determinants of Health among
Nonelderly Adults
• Obesity - same impact on health as 20 years of
aging
• Adverse lifestyles cause the total product curve for
medical care to shift downward and possibly flatten
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The Determinants of Health among
Nonelderly Adults
• Environment and health
– Relation between environmental factors and
health is very complex in terms of:
• Types of pollution and their impacts on health
– A study reveals that "reductions in air pollution
accounted for as much as 15 percent of the
overall increase in life expectancy"
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The Determinants of Health among
Nonelderly Adults
• Other determinants and health
– Age
– Marital status
• Married adults experience better health
– Spouse augments the production of health within the
home
– Altering preferences for risky behavior
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The Determinants of Health among
Children
• Childhood health
– Long-term impact on adult health, education, and
social status
– Parental education positively impacts the
production of a child’s health at all age levels
– Family income before a child is born is positively
related to the child’s health for all ages
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The Determinants of Health among
Children
– Healthier parents tend to have healthier children
– Environmental factors also impact children’s
health
– Expansion of Medicaid eligibility impacts infant
mortality
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The Determinants of Health among the
Elderly
• Medicare
– Utilization of ambulatory and inpatient care
increases sharply at age 65
– Less time in bed; reduced probability of dying
– Relatively large marginal productivity when
applied to elderly population
– Associated with more medical spending and
procedures
– Reduction in the mortality rate of the elderly
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The Role of Public Health: An Historical
Approach
• Public health interventions
– Development of clean water in the U.S. during
the first half of the twentieth century
• Improvements in nutrition and public health
• Significant decrease in infectious-disease mortality
rates
• Public investments in clean water technology
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The Role of Public Health: An Historical
Approach
– Development of a polio vaccine
• Number of reported polio cases fell by
approximately 90 percent within a span of 2 years
of the inception of the vaccination program
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The 10 Major Causes of Death in the
United States in 2010
• Over the course of a year, more than 2.4
million individuals died in the U.S.
– 75% succumbed to the ten most common
causes of death
• Heart diseases account for 24% of all deaths
• More than 80 percent of all lung cancer deaths can
be attributed to smoking
• Lifestyle choices, socioeconomic status, and
environmental factors play critical roles in disease
incidence and deaths
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Table 2.1 - The 10 Leading Causes of Death
in the U.S. in 2010
Cause
1. Diseases of the heart
2. Malignant neoplasms
3. Chronic lower respiratory diseases
4. Cerebrovascular diseases (stroke)
5. Unintentional injuries
6. Alzheimer’s disease
7. Diabetes mellitus
8. Nephritis, nephritic syndrome, and
nephrosis (kidney disease)
9. Influenza and pneumonia
10. Intentional self-harm (suicide)
TOTAL
Number of Deaths
595,444
573,855
137,789
129,180
118,043
83,308
68,905
50,472
50,003
37,793
2,465,932
SOURCE: National Center for Health Statistics. www.cdc.gov/nchs/fastats/deaths.htm
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Empirical Evidence on the Production of
Health: A Summary
• Practical economic perspective
– Important to know which factors contribute
more to improved health at the margin
• So cost-effective policies can be designed
• Adult health
– Medical care matters but nonmedical factors
also play an important role in maintaining
wellness
• Better lifestyle and improved socioeconomic and
environmental conditions
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Empirical Evidence on the Production of
Health: A Summary
• Infants
– Low birth weight and greater infant mortality
have been linked to adverse maternal lifestyle
behaviors
– Medical care also appears to be important at
the margin for the health of infants
• Especially for low-income infants
40
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Empirical Evidence on the Production of
Health: A Summary
• The elderly
– Medical care – important at the margin
– Nonmedical factors also play an important
role
41
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Empirical Evidence on the Production of
Health: A Summary
• Policy implications
– Any public policy initiative aimed at improving
health should also consider:
• Raising education levels
• Reducing the amount of poverty
• Encouraging improved lifestyles
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Implications of the Patient Protection and
Affordable Care Act (PPACA) of 2010
• Health of the U.S. population is expected
to improve with the PPACA
– As long as capacity constraints are absent in
the medical care production process
• PPACA may impact the production of
health through its emphasis on wellness
and prevention
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Implications of the Patient Protection and
Affordable Care Act (PPACA) of 2010
• Grants and technical assistance to
employers will be provided to establish
wellness programs for workers
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Implications of the Patient Protection and
Affordable Care Act (PPACA) of 2010
• Chain restaurants and food sold in
vending machines will be required to
provide information regarding the
nutritional content of each item sold
• Establishment of accountable care
organizations may help to replace the
fragmented health care system with a
more integrated one
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Once marginal effects estimated, resources can be
allocated to maximize the improvement in health status
by compare MB/MC of differing strategies
Co
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