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Chapter 1: Introduction Health Economics

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Chapter 1: Introduction Health Economics Outline The 4 basic questions of health economics. The production possibilities curve Economic models Positive and normative ... – PowerPoint PPT presentation

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Title: Chapter 1: Introduction Health Economics


1
Chapter 1 Introduction Health Economics
2
  • Can we apply the tools of economics to study the
    health care sector?

3
Outline
  • The 4 basic questions of health economics.
  • The production possibilities curve
  • Economic models
  • Positive and normative analysis
  • Net Benefit calculus

The following slides summarize material in
Santerre Neun, Health Economics Theories,
Insights and Industry Studies, Dryden, 2000.
4
Health Economics
  • studies the supply and demand of health care
    resources and the impact of health care resources
    on a population. (Mosby Medical Encyclopedia
    1992, p. 361)

5
The 4 Basic Questions
  • What combination of nonmedical and medical goods
    and services should be produced in the
    macroeconomy?
  • Should the federal government spend more on
    missile defense or to reduce the number of
    uninsured children?
  • Should the federal government spend more on
    education or prescription drugs for the elderly?

6
The 4 Basic Questions (cont.)
  • What particular medical goods and services should
    be produced in the health economy?
  • Should the federal government spend more on
    prescription drugs for the elderly or on home
    health care?
  • Should the federal government spend more on
    research to cure cancer or on cancer screening
    programs?

7
The 4 Basic Questions (cont.)
  • What specific health care resources should be
    used to produce the final medical goods and
    services?
  • Should more ambulatory patients be cared for by
    nurse practitioners instead of physicians?
  • When is medical vs. surgical management of a
    health condition appropriate?
  • Who should receive the medical goods and services?

8
The 4 Basic Questions (cont.)
  • Who should receive the medical goods and
    services?
  • Should all of the elderly receive prescription
    drug coverage from the federal govt, or only the
    low-income elderly?
  • Should illegal immigrants receive free care in
    county clinics and hospitals?

9
The Production Possibilities Curve (PPC)
  • A framework for answering the 4 basic questions.
  • Depicts the availability of resources and
    indicates what can be produced.

10
A PPC for the Federal GovtNational Defense vs.
Health Care
Full-proofness of the U.S. against terrorist
attacks
Points outside the PPC are not achievable with
current technological know-how.
100
Points inside the PPC represent production
inefficiency
100
of Children covered by health insurance
11
A PPC for the Federal Govt (cont.)
  • The federal govt must make tradeoffs.
  • Spending more on health insurance ? spending less
    on defense
  • Tradeoffs ? the PPC slopes downwards.
  • Tradeoffs imply opportunity costs.
  • The value resources would yield if they were put
    to an alternative use.
  • The opportunity cost of raising health insurance
    coverage by 1 could be a 2 reduction in the
    number of armed forces trained to deal w/
    terrorist attacks.

12
A PPC for the Federal Govt (cont.)
  • Resources are allocated optimally if the value
    obtained from a particular expenditure (e.g.
    raising health insurance coverage by 1) is
    greater than its opportunity cost.
  • Whos value? In this case, one must come up with
    a valid measure of societys value

13
A PPC for the Federal Govt (cont.)
  • Resources are imperfectly substitutable
  • Each additional unit of production has a rising
    opportunity cost.
  • e.g. Raising health insurance coverage from 10
    to 20 may reduce the full-proofness of the U.S.
    defense system from 95 to 94. But raising
    insurance coverage from 90 to 100 could reduce
    the readiness of the U.S. defense system from 10
    to 0.
  • The PPC is concave.

14
A PPC for the Federal Govt (cont.)National
Defense vs. Health Care
Full-proofness of the U.S. against terrorist
attacks
100
Identical increases in health insurance coverage
require larger reductions in defense readiness as
more resources are devoted to insurance.
100
of Children covered by health insurance
15
A PPC for the Federal Govt (cont.)
  • All points on the PPC are efficient, and the
    point which is chosen will depend on societys
    preferences.
  • But is the optimal point fair??
  • To the poor?
  • To those who would die in a terrorist attack?

16
A PPC for the Federal Govt (cont.)
  • As we will see in this course, market competition
    often leads to an efficient allocation of
    resources.
  • However, a society which is also concerned with
    equity can redistribute resources, often using
    taxation.
  • However, taxation leads to inefficiencies.
  • A tradeoff often exists between efficiency and
    equity.

17
Economic Models
  • Models are abstractions of reality and are used
    in economics to simplify a very complex world.
  • Usually describes a hypothesized relation between
    two or more variables.
  • Can be expressed in verbal, graphical, or
    mathematical form.

18
Economic Models (cont.)
  • Example We hypothesize that health care
    expenditures are dependent upon an individuals
    income.
  • E f(Y)
  • In stating this hypothesis, we assume that all
    other likely determinants of E (e.g. prices,
    tastes, preferences) stay constant.

19
Economic Models (cont.)
  • We can hypothesize that health care expenditures
    are linearly related to income.
  • E a bY
  • a expenditures if income is zero.
  • b slope of the expenditure function.
  • b ?E/?Y

20
Economic Models (cont.)
  • We can quantify the linear relation between
    income and health expenditures.
  • E 1000 .1Y
  • 1000 expenditures if income is zero.
  • Each 1,000 increase in consumer income raises
    health care expenditures by .1(1000) 100.

21
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22
Economic Models (cont.)
  • The economic models states that ceteris paribus,
    E1000 .1Y.
  • We can incorporate changes in other factors into
    the model as well.
  • Suppose that the population has aged, so that
    yearly medical costs rise by 500 for the typical
    household.

23
Economic Models (cont.)
  • We respecify the model as
  • E 1500 .1 Y
  • In our graphical representation of the model,
    this represents a shift up in the entire health
    care expenditure function.

24
E1 1500 .1Y
E0 1000 .1Y
  • We will rely on the results of multiple
    regression analysis to quantify models like this
    in this course.

25
Positive and Normative Analysis
  • Positive analysis makes statements or predictions
    regarding economic behavior.
  • What is?
  • What happened?
  • Normative analysis deals with the appropriateness
    or desirability of an economic outcome or policy.
  • What ought to be?
  • Which is better?

26
Positive and Normative Analysis (cont.)
  • According to Becker and Murphy (1988), a 10
    increase in the price of cigarettes leads to a 6
    reduction in the number of cigarettes consumed.
  • The government should increase the tax on
    cigarettes to prevent people from smoking.

27
Positive and Normative Analysis (cont.)
  • It is in our countrys best interests that the
    federal government take a more active role in the
    prevention of AIDS.
  • A study by Hellinger (1991) estimates that the
    average yearly cost of treating someone with AIDS
    is 38,300, while the lifetime costs equal
    102,000.

28
Positive and Normative Analysis (cont.)
  • To control health care expenditures, the United
    States should adopt a national health insurance
    program similar to Canadas.
  • National health care expenditures per capita in
    the U.S. equaled 4,094 in 1998.

29
The Net Benefit Calculus
  • Economic models assume that individuals are
    rational.
  • People can rank their preferences from high to
    low, or best to worst.
  • People never purposely choose to make themselves
    worse off.
  • If expected benefitsgtexpected costs for a given
    choice, it is in the agents best interest to
    make that choice.

30
The Net Benefit Calculus (cont.)
  • NB(X) B(X) C(X)
  • X choice or activity under consideration
  • NB expected net benefits
  • B expected benefits
  • C expected costs
  • B(X) Pr(X)B(X) 1?Pr(X)?0

31
The Net Benefit Calculus (cont.)
  • Health care providers, government agencies, and
    individual consumers use such cost-benefit
    analysis to make decisions.
  • Explicitly or implicitly.

32
Conclusion
  • Because resources are limited, health economists
    are concerned with determining what medical
    services to produce, how they should be produced,
    and who should receive them.
  • As we will see in this course, the tools of
    economics can be applied to the health care
    sector to derive valuable insights about our
    health care system.

33
Industry Overview Health Economics
34
Health Care Expenditures in the United States,
1960-2001
1960 1970 1980 1990 1995 1999 2001
Nominal health expenditures 26.9 73.2 247.3 699
.4 987.0 1210.7 1424.2 (billions of
dollars) Annual rate of growth --
10.6 12.9 10.9 6.7 5.2 8.4 (average annual
change from previous period shown) Nominal per
capita health 143 341 1,052 2,690 3,686 4,358 5,0
43 expenditures Health expenditures
as 5.1 7.1 8.9 12.2 13.3 13.0 13.4 percentage of
GDP
Projected Source Health Care Financing
Administration Homepage http//www.hcfa.gov/stats
/stats.htm
35
The Health Care Industry is Rapidly Evolving.
  • Advances in medical technology and drugs are
    dramatically improving patient care.
  • But, these improvements are costly.
  • Aging U.S. population.
  • 65 years
  • 1950 8.1
  • 1970 9.8
  • 2000 12.7

36
The Health Care Industry is Rapidly Evolving.
  • Increased cost containment efforts.
  • Changes in government reimbursement of health
    care providers.
  • Private insurers are exercising more control over
    patient care.
  • Increased competitive pressures.
  • Mergers of existing providers.
  • Entry of new competitors.
  • Where are the most promising business
    opportunities?

37
HOSPITAL CARE
  • 32 of all health care expenditures in 1999.
  • But insurers moved from cost-based reimbursement
    to fixed price reimbursement in the 1980s.
  • Slower revenue growth
  • In order to attract patients, many hospitals
    overspent on high-tech equipment.

38
HOSPITAL CARE
  • Improved surgical techniques led to shorter stays
    in hospital after surgery, more outpatient
    surgery.
  • Lower demand for hospital beds and operating room
    time.
  • 1998 community hospital occupancy rate 62.5
  • A glut of hospital beds and high-tech services
    has led to too many hospitals competing for too
    few patients.

39
NYT 10/25/96
40
Modern Healthcare 2/8/99
41
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42
If hospital revenues are shrinking, which sectors
of the industry are growing?
43
Americas Top 100 Fastest-Growing
CompaniesFORTUNE, September 4, 2000
EPS GROWTH RATE
REVENUES (millions)
100 RANK
COMPANY
WHAT THEY DO
16 VISX 100 266.8 Holds 150
patents for laser technology, charges a
per- procedure licensing fee. 23
Advance 78 1968.4 Prescription-drug
benefit Paradigm
manager 23 Forest 105
959.9 Licenses drugs developed by
Laboratories other companies markets
them. 28 Minimed 71
252.1 Infusion pump worn like a pager for
diabetes patients to avoid injections. 30
Polymedica 48 156.9 Sells
diabetes-testing equipment to seniors
covered by Medicare. 30 Sunrise
124 280.6 Assisted Living
Homes Assisted Living 69 Biogen
60 881.1 Biotech drug
company, leader in MS drugs. 92
Impath 38 99.0 Collects and
interprets Cancer data
44
PHARMACEUTICAL INDUSTRY
  • U.S. prescription drug expenditures reached
    99.6b in 1999.
  • Industry highly dependent on research and
    development (RD).
  • 300m to bring a new drug to market.
  • Aggressive marketing to physicians, hospitals,
    pharmacists, and even the patient.

45
PHARMACEUTICAL INDUSTRY
  • Merck
  • 40.4b in sales in 2000
  • 50 of sales come from Merck-Medco
    (pharmaceutical benefits management)
  • 50 of human health sales come from 5 drugs
    Vioxx, Zocor, Fosamax, Cozaar/Hyzaar, and
    Singulair

46
WSJ 2/10/99
47
MANAGED CARE
  • Systems which manage the quality and cost of
    patient care.
  • Most common
  • Health Maintenance Organization (HMO)
  • Consumer pays a fixed annual capitation fee, for
    which HMO agrees to provide comprehensive medical
    services.
  • 60 of U.S. population (66.8m) enrolled in 2000.

48
MANAGED CARE
  • ADVANTAGE If capitation fee gt costs, HMO keeps
    the profit.
  • DISADVANTAGE HMO responsible for cost overruns.
  • Subject to lawsuits if provides sub-optimal care.

49
WSJ 2/17/98
50
Integration and Disintegration
51
On One Hand...
Between 1995 and 1998, over 2,800 hospitals were
involved in mergers, acquisitions, joint
ventures, long-term leases, and other
partnerships.
Source Modern Healthcare. January 11, 1999.
Deals include mergers, acquisitions, joint
operating companies, joint ventures, long term
leases, and system affiliations.
52
On the Other...
53
LONG-RUN KEY TO SURVIVAL
  • Be an efficient provider of high-quality patient
    care.
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