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Economics 387
Lecture 1
Introduction to Health Economics
Tianxu Chen
The course
• Class Meets: Tue,Wed,Thu
9:30-12:00
• Class location: B41 Psychology
• Office Hours: Wed 1:00-2:30, or by
appointment
• Office location: 429 Economics
• E-mail: [email protected]
Text materials
The text materials will be:
The Economics of Health and Health Care,
by Sherman Folland, Allen C. Goodman,
and Miron Stano (Seventh Edition)
Exams and Grading
• There will be one in-class mid-term exams and a
final exam. The mid-term exams will be:
Thursday, July 19th – 30% of course grade
• The final exam will be hold on the last day of this
class: Thursday, August 9th. It will be worth
50% of the course grade.
Other assignments
20% of your grade
• These will include one presentation in class and
two short writing assignments.
• You are encouraged to choose any paper already
on the reading list.
• Each presentation is supposed to total 15 minutes.
Often this means that less than the full paper will
be presented. You can choose to be selective in
what you present, focusing on only the theory, or
the specification, or the econometrics.
Presentation Papers
1. Ellis and McGuire, 1986, Provider Payment under
Prospective Payment Journal of Health Economics.
2. Shen and Melnick, 2005, Is Managed Care Still An
Effective Cost Containment Device?
3. Ruhm, Chris, 2005, Healthy Living in Hard Times,
Journal of Health Economics, 24(2005) 341-363
4. Ellis, Randall P. and Michelle M. Miller, 2008,“Provider
Payment Methods and Incentives” in Heggenhougen,
Kris (ed.) “Encyclopedia of Public Health”
Presentation Papers
5. Case, Anne, Angela Fertig, and Christine Paxson. The
Lasting Impact of Childhood Health and Circumstance,
Journal of Health Economics, 2005, v. 24, pp. 365-389.
6. Merideth Rosenthal et al. 2006 Pay for Performance in
Commercial HMOs. New England Journal of Medicine
7. Ellis, Randall P. and McGuire, Thomas G. (2007)
“Predictability and predictiveness in health care
spending” Journal of Health Economics. 26:25–48.
Presentation Papers
8. Miller, Amalia R., and Catherine E. Tucker. 2011. “Can
Health Care Information Technology Save Babies?”
Journal of Political Economy, 119(2): 289-324.
9. Abaluck, Jason, and Jonathan Gruber. 2011. “Choice
Inconsistencies among the Elderly: Evidence from Plan
Choice in the Medicare Part D Program.” American
Economic Review, 101(4): 1180–1210.
10. French, E. and Jones, J. B. 2011. “The Effects of Health
Insurance and Self-Insurance on Retirement Behavior.”
Econometrica, 79: 693–732.
Outline
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What is Health Economics?
The Relevance of Health Economics
Economic Methods
Does Economics Apply to Health and
Health Care?
• Is Health Care Different?
• Conclusions
WHAT IS HEALTH
ECONOMICS?
• Health economics is defined by who health
economisits are, and what they do!
Who are the Health Economists?
• 96% hold academic doctorate degrees,
nearly ¾ in economics
• 64% work in a university setting, 15% for
nonprofit organizations and 12% for
government, mainly federal
• Only 24% of health economists hold
appointments in economics departments,
26% in schools of public health, 18% in
schools of medicine
Relevance of Health Economics
• The health care sector is big, and is getting
bigger.
• not only has health care grown absolutely, it
has grown relative to everything else.
Figure 1-1 U.S. Health Expenditure Shares, 1960 – 2020
Source: Centers for Medicare and Medicaid Services: http://www.cms.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp,
accessed August 8, 2011.
Table 1-1 Health
Expenditures as
Percent of GDP in
Selected OECD
Countries
Table 1-2 Total Consumption Expenditures in $ Billions, by
Type, 2009
Table 1-3 A Persons Employed at Health Services
Sites: 2009
Table 1-3B Active Health Personnel and Number per
100,000 Population (in Parentheses)
Table 1-4 National Health Expenditures and Other Data
for Selected Years
Features of Economic Analysis
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Scarcity of societal resources
Assumption of rational decision making
Concept of marginal analysis
Use of economic models
Still another cause for concern
• Problems that people have getting insured?
• Only the U.S. and South Africa, among
advanced countries, do not have some form
of universal health coverage.
Origins -- 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. x physicians per capita), then calculating the
number of physicians necessary, and comparing it
to the number available.
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 ???
• Answer: 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.
DOES ECONOMICS APPLY TO HEALTH
CARE?
Does Price Matter?
• The curve shown is similar to an
economist's demand curve in
that it shows people consuming
more care as the care becomes
less costly in terms of dollars
paid out-of-pocket. More
importantly, the curve
demonstrates that economic
incentives do matter. Those
facing higher prices demand less
care.
Source: Keeler, Manning, and Wells (1980) for
mental health care; Keeler and Rolph (1988)
for medical care.
• Figure 1-2 Demand Response of
Ambulatory Mental Health and
Medical Care in the RAND Health
Insurance Experiment
Is Health Care Different?
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Presence and Extent of Uncertainty
Prominence of Insurance
Problems of Information
Large Role of Nonprofit Firms
Restrictions on Competition
Role of Equity and Need
Government Subsidies and Public Provision
Does Economics Apply to Health and Health Care?
1. Uncertainty
• Most analysis that we do in economics
ignores the possibility of 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
Perhaps no other sector features insurance so
prominently. In 1960 about 56 percent of all
personal health care expenditures were paid outof-pocket; 44 percent by third party payers and/or
government. By 1990, over 76 percent paid by
third party payers.
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?
Does Economics Apply to Health and Health Care?
• 3. 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? Sometimes, patient
knows he is not healthy, but can hide it from
insurer. This can lead to breakdowns in the
insurance markets.
Does Economics Apply to Health and Health Care?
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?
Does Economics Apply to Health and Health Care?
5. Restrictions on Competition
• There are many. These include:
– Licensure requirements for providers
– Restrictions on advertising
– Standards which frown on price competition
Does Economics Apply to Health and Health Care?
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 is a manifestation of this
concern.
Does Economics Apply to Health and Health Care?
7. Government Subsidies and Public Provision
Table 1-5 Personal Health Care Spending, Selected Years
(in $ Billions)
CONCLUSIONS
• The greatest strengths of economics and
economists are a framework of systematic theory,
an array of concepts and questions that are
particularly relevant to the choices facing policy
makers, and skill in drawing inferences from
imperfect data. . . . Economists’ framework of
systematic theory facilitates the transfer of
knowledge drawn from other fields of study to the
health field.
• Health economists have also inherited from economics
a set of concepts and questions that have proven to be
particularly relevant to the policy problems that have
emerged in health during the past three decades.
Scarcity, substitution, incentives, marginal analysis,
and the like were ‘‘just what the doctor ordered,”
although in many cases the ‘‘patient’’ found the
medicine bitter and failed to follow the prescribed
advice. (Fuchs, 2000, p. 148)
What Next??
• Some tools !!!
– For Economics analysis -- Chapter 2