Econ 4999Health Economics

Lecture 1:

Introduction

Class information

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Syllabus: Updated version on class website

Outline

■ What is health and health care?■ What is health economics? Why is it important? What makes the health care market different

from the market or other goods? What type of questions do health economists

ask?

What is health

Health is a multifaceted concept and not easily measurable.

WHO definition: Health is a state of complete physical and mental

well-being and not merely the absence of disease or infirmity (WHO, 1948)

Refer to peoples’ health status (how healthy they are).

What is health

Important part of human capital Human capital: value of learning, experience and

ability embodied in workers which increases productivity and income.

Asset: accumulates and depreciates Individual or households can improve their health

through use of health care, diet .. Production of health

Health Production Functions Determinants of health

What is health care?

Definition: The prevention, treatment, and management of illness and the preservation of mental and physical well-being through the services offered by the medical and allied health professions.

What is health care? Important difference between health and

health care Health care can be traded on the market but

health cannot. Demand health care to improve our health

Demand for Health Care Health care markets differ from markets for

other commodities Role for Government

Roots of health economicsEmerged as a sub discipline of economics in

the1960s with the publication of two important paper:

1. Kenneth Arrow (1963) “Uncertainty and Welfare Economics of Medical Care” The American Economic Review.

2. Mark Pauly (1968) “The Economics of Moral Hazard: Comment” The American Economic Review.

Concerned with the health market not with health or health status.

What is health economics?

1. Health economics is the study of how (scarce) resources are allocated to and within the health economy.

Production of health care (doctors, specialists, or nurses).

How do we distribute health care across the population? Based on who can pay or who needs it or

some combination. How much money should the government spend

on health care?

What is health economics?

2. Demonstrates the magnitude and importance of the health sector

e.g. How fast it might be growing and why

3. What makes it different from other markets and how our analysis may need to adjust

4. Models the determinants of health status and looks and how government policy might improve health status in short and long run

Why is it important?

1. The size of the health economy is large and growing

2. Role of government in the health care markets

3. Health care market is difference from other markets

4. Externalities

Why is it important?1. Health economy is large and growing

Figure 1-1 US Health Expenditures Shares, 1960-2003

0

2

4

6

8

10

12

14

16

1960 1965 1970 1975 1980 1985 1990 1995 2000Year

Expe

nditu

res

as a

% o

f GD

P

Source: Organization for Economic Cooperation and Development, Health Data 2005.

The size of US health economy GDP: The market value of final goods and

services produced within the borders of a country in a year.

1980s: Rise in shares Increase in insurance coverage and FFS

system Introduction of more market based policies

1990s: Expenditures flattens out Managed care introduced

Could just be an decrease in the denominator.

National US Spending on Health Care

Year NHE Growth % GDP

1960 36.7 5.11970 73.1 10.6 7.01980 245.8 12.9 8.81990 696.0 11.0 12.01995 990.3 7.3 13.42000 1310.0 7.0 13.42006* 2077.5 7.3 16.0

Per CapitaNominal Real

143 483

348 8971067 1295

2,738 2095

3,698 24274,672 2713

6,830 N.A.(In billions of dollars); * = projectionNumerator is increasing

NHE = National Health Expenditures

Out-of-Pocket and Federal Expenditures -Table 1-5 FSG

Total Out-of- Third FederalPocket % Party % %

1960 25.0 12.9 52 12.1 48 2.2 9

1970 67.3 25.1 37 42.2 62 15.6 23

1980 233.5 58.2 25 175.2 75 66.1 28

1990 669.6 137.1 20 532.3 80 181.9 27

2003 1614.2 230.5 14 1384 86 507.5 31

(In billions of dollars)

Medical care prices (CPI), 1960-2004

1960 1980 2004

ALL

Hospital services

Presc. drugs

Personal Consumption, 2001Food and Tobacco 15.3

Housing 14.3

Medical Care 18.2

Hospital and nursing 7.3

Transportation 11.4

Household Operation 10.7

Recreation 8.5

Clothing 5.9

Other 15.6Source: FSG Table 1.2

Personal Expenditures

Medical care is the largest category. Most of this is for hospitals/nursing homes Need to think how policy affects this category

Uninsured go to emergency rooms

In 1960 food was 25%, housing 15%, and medical care 5%.

There has been a big shift in spending patterns. May represent a richer society.

Personal Expenditures

What have we not accounted for in personal expenditures?

Opportunity cost of your own time Time spent caring for sick or disabled Decreased with more spent on nursing home? Very important in developing countries

US compared to OECD countriesTable 1-1: health expenditures % GDP, OECD Health expenditures grew rapidly between

1960-1980 for most countries.

Rates continued to rise in1990s in US.

US is the biggest spender. Twice as much as the UK (national health

insurance).

Questions for you to think about1. Why do you think health care spending is

higher in the US than in other countries?

2. Is the fact that the US population spends more per capita on health care than people in any other developed country evidence of a failure of the US system?

Why is it important?

1. The size of the health economy is large and growing

2. Role of government in the health care markets

Role of Government Participate because of market failures Demand side

Provision of insurance Effort to affect health behavior

Supply side Price controls Restriction of entry/exit Subsidize research Tax policy

and much more …

US health care spending, 2003Government is 45 % of total health spending

Source: DHHS, http://www.cms.hhs.gov/statistics/nhe/historical/chart.asp

Percent of health care expenditure

60%

40%

20%

80%

Private Federal State and local

Why is it important?

1. The size of the health economy is large and growing

2. Role of government in the health care markets

3. Medical Market is difference from other markets

How is the medical care market different from other markets?1. Presence of Uncertainty Demand is irregular and uncertain

Accidents, can you deny someone lifesaving care if they don’t have the money?

How is the medical care market different from other markets? Supply–hard to understand the product

Asymmetric information When we are sick we don’t understand the

treatment we need and must trust our doctor in their diagnosis.

Different doctors may suggest different treatments due to uncertainty of outcome.

Hard to judge quality Governments establish licensing requirements to

ensure minimum level of quality

How is the medical care market different from other markets?2. Prominence of Insurance

People buy insurance to cover themselves against the risk of illness.

With third party financing most of the cost of medical care, individuals are insulated from the full cost of the care they receive.

Demand for medical care may rise if you don’t pay the full cost.

Treatment recommendations are adjusted to insurance status.

How is the medical care market different from other markets?3. Large role of not-for-profit providers

Economists usually assume firms maximize profits.

There are many not-for-profit hospitals (85%). How should economists model their behavior?

4. Role of equity and need Belief that people ought to get health care

whether or not they can afford it. Economists need to take this feature of the

good into consideration.

Why is it important?

1. The size of the health economy is large and growing

2. Role of government in the health care markets

3. Medical Market is difference from other markets

4. Externalities

Externalities Communicable disease

A disease that is transmitted through direct contact with an infected individual or indirectly through a vector (e.g. mosquito).

Significant reduction in their spread account for much of the improvement in health in developed countries Malaria, TB, vaccine preventable diseases

Still a significant problem in less developed countries

Externalities

Individual behaviors (smoking, over eating) Direct impact on health of person and others Impacts the cost of health

premiums –i.e. lung cancer Impact on demand for health care

Cause of death

14

4843

77

99

0

10

20

30

40

50

60

70

80

90

Developed Regions Developing Regions

Percent

Communicable Non-communicable Injuries

Source: http://ucatlas.ucsc.edu/health.php

Causes of Death in US, 2000

Source: Mokdad et al, 2004

What questions do health economics ask?

What role should the government play in health?

What health care investments should a developing country make?

What advertising should be banned? What is the optimal design for health

insurance? Why has health care become so expensive?

What questions do health economics ask? Does health care early in childhood lead to

improved cognition and higher incomes in the future?

Have Medicare and Medicaid increased utilization and improved health outcomes?

Do different methods of doctor payment change quality of care, outcomes or costs?