Econ 4999Health Economics

Lecture 1: Introduction

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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 why3. 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

0246810121416

1960 1965 1970 1975 1980 1985 1990 1995 2000Year

Expe

nditu

res as a % of G

DP

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.

07.0 13.4

2006* 2077.5

7.3 16.0

Per CapitaNominal

Real

143 483348 8971067 12952,738 20953,698 24274,672 27136,830 N.A.(In billions of dollars); * = projectionNumerator is increasing

NHE = National Health Expenditures

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

of-Third Federa

lPocket % 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 servicesPresc.

drugs

Personal Consumption, 2001Food and Tobacco 15.3Housing 14.3Medical Care 18.2 Hospital and nursing

7.3

Transportation 11.4Household Operation 10.7Recreation 8.5Clothing 5.9Other 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 policyand 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

C om m unicable Non-com m unicable 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?