For class meeting September 2, 2015

Economics 7550

Health Economics

A. Goodman

The course• Class Meets: MW 5 – 6:50 – The first class meets

Wednesday, September 2, 2015. It will be a full-length class.

• Office Hours: MW 3:00 – 4:30, or by appointment .• Office location: 2145 FAB• Phone: 577-3235; e-mail: allen.goodman@wayne.edu• Department and Course Web site:

http://www.econ.wayne.edu/agoodman/7550/

Class Meetings – in advance

• SCHEDULED MISSES– Monday, September 14– Wednesday, September 23

• We WILL meet on Monday, November 23.– This is Monday before Thanksgiving

• Wednesday, November 25 is a University holiday – no class.

Text materialsThe text materials (highly recommended) will

be:

The Economics of Health and Health Care, 7th Ed., by Sherman Folland, Allen C. Goodman, and Miron Stano

The Elgar Companion to Health Economics, Edited by Andrew M. Jones, to be purchased at the appropriate outlet.

Selected readings at the library and/or on-line.

There are2 editions.

Either will do.

• Students taking health economics will learn and apply the concepts and methods of economics in depth.

• Students taking health economics will become familiar with the historical context of the discipline, the connections to other fields of study, and the role of ethical values in decisions and policymaking.

• Students taking health economics will carry out independent research and communicate their findings to students, faculty, and others.

• Students will be able to interpret critically and communicate quantitative and verbal information about health economics.

Learning Outcomes (1)

• Students will learn how health economics can be applied to issues of contemporary concern, including but not limited to the environment, globalization, diversity, and sustainability.

• Students will acquire skills and interests which enable them to be lifelong learners and contributing members of their communities, including critical thinking, clear and thoughtful communication, and honest and open inquiry.

Learning Outcomes (2)

Exams and GradingStudents will be responsible for the following

assignments in (roughly) chronological order:

• 1st short in-class presentation 6.25%• Mid-term exam – Monday October 19 20.00%• 1 paper (15 - 20 pages) 25.00%• 2nd  in-class presentation (on paper) 6.25%• Final Exam Wednesday, December 16, 5pm – 6:50 27.50%

Various Homework and other assignments 15.00%

NO ONE ELSE’S FINAL SHOULD CONFLICT WITH THIS.

IF SOMEONE RE-SCHEDULES, LET ME KNOW.

Papers and Presentations

• In-class presentations of current events and good journal material.

• An excellent database on health status and expenditures is available.

• The term paper (and presentation) will be prepared as original work from the database, using appropriate data analysis and econometric techniques.

The Curve

The following percentage curve will guide the grading policy in the course. 90 – 100 A ; 80 – 84.9 B+; 65 – 69.9 C+ ; 85 – 89.9 A-; 75 – 79.9 B ; 60 – 64.9 C ;

70 – 74.9 B- ; Below 60 F

Any grade below B- in a graduate level course is considered to be unsatisfactory, and any grade below C is considered to be a failing grade. Grades of B- or worse, push your GPA below 3.00.

Resources

• Department and Course Web site: http://www.econ.wayne.edu/agoodman/7550/

• Learn to use Library Resources. Invaluable ones include:– Science Direct– OECD

Journals and Web Sites

• There are some terrific places to find information and data.

• Information WSU Library (for Science Direct). Journals such as Journal of Health Economics.

• Another excellent journal is Health Economics.

• More topical stuff is at Health Affairs.

Web Sites

• Medicare and Medicaid – CMS

• Center for Disease Control – CDC

• OECD

• Data for analysis – MEPS

Relevance of Health Economics

The health care sector is bigbig, and is getting biggerbigger. In 1950, less than 5% of GDP went to health care. By 1976, it was about 8%, and now (2014-15) it’s well over 17%. This means that not only has health care grown absolutely, it has grown relative to everything else.

• It’s trivial, but nonetheless useful to consider this algebraically for health share s.

s = pq/y

Percentage = 100s

Health Share

s = pq/y.

ds = (q/y)dp + (p/y)dq – (pq/y2) dy. (Total Differential)

Dividing both sides by s, we get:

ds = (q/y)dp + (p/y)dq – (pq/y2) dy

s (pq/y)

ds/s = dp/p + dq/q - dy/y.

What does this mean?

This is standard tool

in micro work. You

Should get to know it.

Here’s an example

• We have data for about 31 countries for 9 years.

• We have an elasticity of 1.36.

• What happens to shares?

• Look!

Some Numbers

• Nominal health expenditures per capita were:

$147 in 1960. Rose to $9,255 in 2013 - a factor of 57!

• Real health expenditures per capita ($1960) were:

$147 in 1960; $1,176 in 2013. • $1,141/$147 = 8.00• Increase of about 700%. Are we 6-7 times as

healthy as in 1960?

Nat’l Health Expend per Year

Health Expenditures in $Trillions

$0

$250

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

$2,250

$2,500

$2,750

$3,000

$3,250

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Year

Exp

end

itu

res

Health Expenditures

Nat’l Health Exp per capita

HE Per Capita

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Year

$ p

er

ca

pit

a

HE Per Capita

Nat’l Health Expenditures per capita by Year

Health Expenditures Per Capita

0

1000

2000

3000

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

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Real Exp per capita

U.S. Expenditure Shares

Figure 1-1 U.S. Health Expenditure Shares, 1960-2020

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Year

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are

(in

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t)

% Actual

% Projected

Percent of GDP Spent on Health Care, 1960-2010

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

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Canada

France

Germany

Japan

United Kingdom

United States

UK

CA

US

Is it Worth it?In a March 2005 speech to the National Association of Business Economics, Chairman of the Council of Economic Advisers, Harvey Rosen noted that the over the last several decades, the quality of health care has improved—diagnostic techniques, surgical procedures, and therapies for a wide range of medical problems has continually improved. Treatment of a heart attack today is simply not the same “commodity” as treatment of a heart attack in 1970. In fact, although innovations like coronary bypass surgery and cardiac catheterization have raised expenditures per heart patient, they have actually reduced the prices of obtaining various health outcomes, such as surviving hospitalization due to a heart attack.Rosen noted that some improvements in medical technique are quite inexpensive. Prescribing aspirin for heart attack victims leads to a substantial improvement in their survival probabilities. But new medical technologies are often costly. For example, it costs about $2 million to acquire a PET (positron emission tomography)

machine, which can detect changes in cells before they form a tumor large enough to be spotted by x-rays or MRI. Such costly improvements lead medical expenditures to grow. This technology-based theory also helps explain why countries with different health care financing and delivery systems have all experienced increases in health care expenditures. Rosen argued that these societies have at least one thing in common—they have all been exposed to the same expensive innovations in technology. The technology-based explanation puts any debate over cost containment in a new light. Is it a bad thing if costs are rising mostly because of quality improvements? A key question in this context is whether people value these innovations at their incremental social cost. No one knows for sure, but economist Dana Goldman reiterates a provocative insight: “if you had the choice between buying 1960s medicine at 1960s prices or today's medicine at today's prices, which would you prefer?” A vote for today’s medicine is validation of the improvement, and willingness to pay for improved quality!

Still another cause for concern

• Problems that people have had getting insured. • Prior to passage of ACA, the most recent estimate

is 50 million, or almost 1 in 6 Americans We have a feature in the book that talks about how this is measured.

• Only the U.S., among advanced countries, does not currently have some form of universal health coverage.

• ACA will insure about 2/3 of those currently uninsured, but it will take a while.

Origins of Health Economics – 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. z physicians per capita), then calculating the number of physicians necessary, and comparing it to the number available.

• NY Times (7.28.12) had a piece on this. Not “no care” but “delayed care.” Are they the same?

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 ???

• A> 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.

Shortages approaching?

Shortages estimated by fixed coefficient method.

NY Times Article

Price Discrimination

• Reuben Kessel addressed the practice of physicians to charge different patients different fees.

• The physicians often argued that this was charity. That is, they charged some more, to subsidize charging others less.

• Kessel argued, instead that it increased profits by getting money from those who were most able to pay.

Q

PD

MC

MR

Q*

P*

For a physician what does a downward sloping D curve mean? Is this perfect competition?

For a physician what does a downward sloping D curve mean? Is this perfect competition?

Price DiscriminationNow suppose the physician wants to

treat 1 more customer, who he knows, can only pay less than P*. MR is still greater than MC. Further, most health care can not be re-sold; if you break your leg, I can't go and get cheaper treatment and re-sell it to you.

Hence, additional profits can be made, even if physicians charges subsequent buyers less money.

Q

PD

MC

MR

Q*

P*

Incremental Profit

Does Economics Apply to Health and Health Care?

1. Uncertainty

• Most analysis that we do in economics ignores 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 InsuranceNo other sector features insurance so

prominently. In 1960 about 55 percent of all personal health care expenditures were paid out-of-pocket; 45 percent by third party payers and/or government. By 2000, 82.6 percent was paid by third party payers.

In 2009, the percentage was 88.0.

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?

• Do insurance and medical care prices combine to raise health care costs?

Does Economics Apply to Health and Health Care?

• 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.

• 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? A> Probably pretty well informed for a substantial proportion of their care.

• Think about yourself. How well-informed are you? How about your parents? How well-informed are they?

Does Economics Apply to Health and Health Care?

Does Economics Apply?

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?

• How does a hotel differ from a nursing home?• If we want to send aid to Haiti, who do we go

to? Why?

Does Economics Apply?

5. Restrictions on Competition• There are many. These include:

– Licensure requirements for providers

– Traditional restrictions on advertising (although these seem to be waning – there doesn’t seem to be much that we can’t advertise).

– Only US and New Zealand allow advertising of prescription drugs.

– Standards which frown on price competition

NZ Drug Ads

US Drug Ads

Does Economics Apply?

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 illustrates this.

Does Economics Apply?

• This is a particularly interesting issue teaching things as an economist. As an economist, we look at markets FIRST. The rest of the world, including those who make policy, are more likely to look at government FIRST, markets LAST.

• For next Lecture look at Fuchs (AER, 1996), and Zweifel and Breyer (Ch. 1).

Compared with Others

Country 1960 1970 1980 1990 2000 2008a

Australia 6.3 6.9 8.3 8.5

Austria 4.3 5.2 7.5 8.4 9.9 10.5

Belgium 3.9 6.3 7.2 8.6 10.4 11.1

Canada 5.4 6.9 7.0 8.9 8.8 10.4

Czech Republic 4.7 6.5 7.1

Denmark 8.9 8.3 8.3 9.7

Finland 3.8 5.5 6.3 7.7 7.0 8.4

France 3.8 5.4 7.0 8.4 9.6 11.2

Germany 6.0 8.4 8.3 10.3 10.5

Greece 5.4 5.9 6.6 7.8 9.7

Hungary 6.9 7.3

Iceland 3.0 4.7 6.3 7.8 9.5 9.6

Ireland 3.7 5.1 8.3 6.1 6.3 8.7

Italy 7.7 8.1 9.5

Japan 3.0 4.6 6.5 6.0 7.7 8.1

Korea 3.4 4.0 4.6 6.5

Luxembourg 3.1 5.2 5.4 5.8 7.8

Mexico 4.8 5.6 5.9

Netherlands 7.4 8.0 8.0 9.9

New Zealand 5.2 5.9 6.9 7.7 9.9

Norway 2.9 4.4 7.0 7.6 8.4 8.5

Poland 4.8 5.5 7.0

Portugal 2.5 5.3 5.9 8.8 10.2

Slovak Republic 5.5 8.0

Spain 1.5 3.5 5.3 6.5 7.2 9.0

Sweden 6.8 8.9 8.2 8.2 9.4

Switzerland 4.9 5.4 7.3 8.2 10.3 10.7

Turkey 3.3 3.6 4.9 6.2

United Kingdom 3.9 4.5 5.6 6.0 7.2 8.7

United States 5.1 7.0 8.7 11.9 13.2 16.0