Economics 415 Health Care Economics

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Economics 415Health Care Economics

• A Review of Basic Economics

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Health Economics Data and Journals

• http//www.nicholls.edu/mcoats/Health20Care20Eco
  nomics20Syllabus.htm

• http//www.nicholls.edu/mcoats/Health20Care20Eco
  nomics20Syllabus.htm

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Economics Review

• The Economic Approach
• Model it! Break down what we are discussing into
  understandable pieces and put the pieces back
  together
• Make assumptions
• Observe
• Develop theory
• Derive hypotheses from theory
• Observe phenomena to see if hypotheses improve
  predictions

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Economics Review

• Models are embodiments of assumptions
• Models simplify so we can understand
• Model is the theory!
• Assumptions clear away unimportant or
  non-critical bits of information
• Ceteris paribus thinking

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Economics Review

• Key Assumptions in Economics
• Scarcity and competition (setting)
• Rational or self-interested behavior (motivation)
• Self-interested behavior is optimizing behavior
  (predictable behavior)

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Economics Review

• Optimizing behavior
• Constrained optimums
• Marginal benefits and marginal costs

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Markets Demand and Supply

• Demand and Law of Demand
• QD vs. D
• Determinants of QD
• Measuring Demand Elasticity
• Supply and Law of Supply
• QS vs. S
• Determinants of QS
• Measuring Supply Elasticy

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Economics Review

• Equilibrium
• Prices higher than equilibrium
• Prices lower than equilibrium
• Speed of adjustment to equilibrium

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Economics Review

• Taxes and Subsidies
• Taxes and Supply and Demand
• Note on Taxes and Incidence
• Subsidy?
• Health Insurance

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Economics Review

• Markets Demand and Supply
• Demand and Law of Demand
• Supply and Law of Supply
• Measuring Supply and Demand Elasticity
• Equilibrium and Market Adjustment
• Taxes, Subsidies and Health Insurance

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Determinants of Quantity Demanded (QD)

• Own Price (-)
• Prices of Substitutes ()
• Prices of Complements (-)
• Income ( for normal gds., - for inferior gds.)
• Expectations (prices, incomes)
• Information
• Number of Buyers

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Quantity Supplied vs. Supply (QS vs. S)

• Same story as with Demand
• Quantity Supplied is a variable
• Supply is a function or relationship between
  Price and Quantity Supplied

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Determinants of Quantity Supplied (QS)

• Own Price ()
• Prices of Inputs (-)
• Prices of Complements in Production or
  By-Products ()
• Expectations
• Technology (Information of Sellers)
• Number of Sellers (special restrictions on
  entry?)

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Measuring Supply and Demand Elasticity

• Elasticity and Slope
• Ratio of percentage changes instead of ratio of
  changes
• ? ?QD/ ?P
• ?QD/?P x P/Q
• Unitless measurement
• Price Elasticity of Demand
• Average sensitivity of buyers to price changes
• Elasticity and Substitutes and Complements

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Measuring Supply and Demand Elasticity

• Price Elasticity of Demand and Revenues
• RP x QD
• Law of Demand P QD move in opposite
  directions, if one goes up, the other goes down,
  CP
• Marginal Revenue and Elasticity

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Equilibrium

• Prices higher than equilibrium
• Prices lower than equilibrium
• Speed of adjustment to equilibrium

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Taxes, Subsidies and Health Insurance

• Taxes and Supply and Demand
• Note on Taxes and Incidence
• Subsidies?
• Health Insurance

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ReviewEquilibrium

• Prices higher than equilibrium
• Prices lower than equilibrium
• Speed of adjustment to equilibrium

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Consumer Surplus
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A Subsidy for Buyers
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Competitive Markets

• Homogeneous Product
• Easy or Free Entry and Exit
• Low-Cost or Costless Information
• Atomistic CompetitionBuyers and Sellers so
  small, no single market participant has an effect
  on price

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Competitive or Price-Taker Markets
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Profit Maximization Marginal Costs and Marginal
Revenues

• Profit Function
• Profits Revenue Costs
• Slope of Profit Function
• Profit Slope Marginal Revenue Marginal Costs
• Profits Max. where Marginal Revenues and Marginal
  Costs are Equal (slope of profits zero)

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Prod. Surplus R - VC
Total Var. Costs (VC)
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Supply MC

• P MR (flat Demand of Price Takers)
• MR MC (Profit Maximization)
• QS of individual firm determined by Profit
  Maximization behavior of firm, so QS where PMC
• Sum QS of all firms at each price (P MC)
• Same as summing MC of firms
• Supply is relationship between P and QS

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Competitive Markets Profits and Entry

• Fixed Costs include Opportunity Cost of Capital
• If Producer Surplus gt Fixed Costs, then Profits gt
  0
• PSR-VC
• If R-VCgtFC, then R-VC-FCgt0
• If Profits gt 0, then entry occurs, increasing
  Supply, pushing price down until Profits 0

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Competitive Markets Profits and Exit

• If Profits lt 0 (losses), then firms leave market
• Supply falls
• Price rises
• Losses drop (profits rise) until Profits 0

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Competitive Markets and Welfare
CS
PS
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Competitive Markets and Efficiency

• Entry occurs until Prices driven down to minimum
  average cost (short run and long run costs)
• Producer and Consumer Surplus maximized

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Market Imperfections

• Supply Side Imperfections
• Monopoly or High Entry Barriers
• Monopolistic Competition and Oligopoly
• Demand Side Imperfections
• Monopsony (lack of competition for inputs)

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Price Taker Markets
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Monopsonistic Markets
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Other Market Imperfections

• Public Goods
• Externalities (e.g. vaccinations)
• Information Problems (e.g. supplier-induced
  demand)
• Incentive Problems

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Can We Rely on the Market in Health Care? Do We
Need Government Intervention?

• Critics of market argue
• Market is insufficient to handle complex health
  care, patients have insufficient information
• Social Good, too important to be left to market
• Infectious diseases involve externalities,
  affecting (and infecting) others by their actions
• Basing who gets medical care on ability to pay is
  wrong

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Can We Rely on the Market in Health Care? Do We
Need Government Intervention?

• Critics of Government intervention argue
• Government run programs always cost more than
  ever imaginedMedicaid 9 billion in 1990
  forecast 65 billion actual
• Medicare originally prohibited federal
  supervision or control over the practice of
  medicine of the manner in which medical services
  are provided.

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Call for Health Care Reform

• Spending, very high and climbing
• 1553 billion 2002, 14.9 of GDP
• Hospitals, 36.3 personal HC spending, but 3
  paid out-of-pocket
• Physicians, 25.3 personal HC spending, 18 paid
  out-of-pocket
• Drugs, about 15.9 personal HC spending, 40 paid
  out-of-pocket

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Reasons for High HC Spending in US

• High Income
• Service Sector Cost Disease

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Medical Care and Baumols Disease

• Personal Service productivity growth
• Medical care hard to standardize
• Quality judged by time spent
• Manufacturing productivity growth
• Productivity, Wages and Opportunity Cost

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Access

• 42 million Americans with no HC insurance in 2002
• But most in age categories that use very little
  medical services, 18-34
• No insurance not same as no access, uninsured
  receive 60 of HC per capita of that received by
  insured
• Universal Coverage vs. Universal Access to
  insurance (mandatory vs. voluntary)

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Outcomes

• Life Expectancy
• Infant Mortality
• Death Rates in Leading Causes of Death
• Life Expectancy at 65
• Hospital Stays
• Hospital Beds
• Physicians

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Commonly Cited Health Indicators, 2000
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Mortality Ratios, 1997Death Rate/Disease
Incidence
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Other Important Health Indicators, 2000
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Efficiency

• TechnicalProduce at Lowest Cost
• AllocativeMaximize Producer and Consumer
  Surplus, Leave no mutually profitable trade
  unmade

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Equity

• Fairness
• Equal results substantive fairness
• Equal opportunity procedural fairness
• How can results be different but still have equal
  opportunity?
• Taking a test, playing a football game, earning
  income
• Unequal bargaining power
• Special market protection

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Market Imperfections

• Market Power
• Monopoly (Supply Side)
• Monopsony (Demand Side)
• Public Goods
• Externalities (e.g. vaccinations and infectious
  diseases)
• Information Problems (e.g. supplier-induced
  demand)
• Incentive Problems

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Causes of Market Power

• Entry Barriers
• Natural Economies of Scale and Scope
• Not Natural, But Defensible Patents to induce
  technology growth
• Not Natural and Less Defensible Special
  protection for certain types of firms or
  occupations, licensing

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Monopoly Markets
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Monopsonistic Markets
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Other Market Imperfections

• Externalities (e.g. pollution, vaccinations)
• Public Goods
• Information Problems (e.g. supplier-induced
  demand)
• Incentive Problems

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Externalities harm or help through others (3rd
parties) actions

• Pecuniary (competition) not a market failure
• If all costs and benefits accrue to buyers and
  sellers in a market, but seller 1 undercuts
  seller 2s price, seller 2 harmed but
• Positive (help or external benefits) or Negative
  (harm or external costs)
• Production or Consumption

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Externality

• Negative Externality--Producer or consumer not
  fully responsible for costs they impose on
  others, e.g. Pollution, Smokingless would be
  better
• Positive ExternalityProducer or consumer not
  fully compensated for benefits they producemore
  would be better
• Property Rights
• Externalities are reciprocal whose rights?
• Transactions Costs

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Negative Externality
QS
Qp
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Positive Externality
Qp
Qs
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Public Goods

• Public Provision of Health Care, But Is It a
  Public Good?
• Public Goods (incentives arent there for market
  to provide even though there are gains from
  trade)
• vs. Private Goods (incentives are there for
  market to provide if there are gains from trade)

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Public Goods

• Characteristics of Public Goods
• Non-rival goods (shared consumption)
• Non-excludable goods (too costly to prohibit
  access to non-payers)
• Public Good special case of Positive
  Externality
• What type of health care meets public good
  definition?
• Research, Charity

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Government Correcting the Market for
Externalities and Public Goods

• Positive Externalitiessubsidy or government
  provision? (Waldo)

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Correcting for Negative Externality
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Correcting for Public Goods

• Just like positive externality, but extreme,
  shared by so many
• Government provision, and taxation to pay

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Information Problems

• Costly Information and Advertising
• Gasoline and eyeglasses
• Information Asymmetries
• Supplier Induced Demand (Agency)
• Adverse Selection and Medicare
• Third-party payers--moral hazard

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Merit Goods

• Assumption People dont know whats good for
  them or whats bad for them
• Merit Goods are things that are good for
  people, even if they dont recognize itbenefits
  no fully appreciated by general public
• Merit goods Medical Care, checkups, but also
  Opera, Avant-garde art
• Demerit goods alcohol, tobacco, sex, drugs and
  rock n roll
• Who is to say what is or is not good for us?
  Anything can be a merit good, no real standards

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Merit Good

• Peoples Demand Lower than an Expert Buyer

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Physician-induced Demand

• Payment schemes influence this
• Fee-for-service vs. HMO type capitation payments

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Supplier-induced or Physician-induced Demand
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Entry Barriers and Licensing

• Rationale for Licensing Physicians
• Alternatives?
• Rationale for Certificates of Needsame as with
  public utilities, to prevent costly duplication
• Consequences?

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Prices

• Medicare/Medicaid Early on Usual, Customary
  and Reasonable Charges Charge Minimum of
• UsualDrs usual fee, median last year
• CustomaryFees of other Drs in the area
• No incentive to charge less than competitors, fee
  creep
• Now, Relative Value ScaleBases fees on resource
  use, allowing more for evaluation and patient
  management, less for invasive procedures
• Prospective Payments for Hospitalspayment based
  on Principal Diagnosis, provide service for less
  than payment, hospital profits, more, hospital
  loses

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Other Government Regulation--FDA

• Rationale?
• Entry Barrier
• Speed of Approval
• Benefits and Costs of Regulation
• Apparent Benefits vs. Hidden Costs
• Fen-Phen???
• Prevention of helpful drugs
• Effects of technology emphasis

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Tax Policy Influences

• Some non-wage benefits not taxable
• Incentives to firms
• What kind of employees do firms want to provide
  HC insurance for?

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Government Failure

• Regulatory capture
• Self-serving and self-perpetuating bureaucracies
• Voters are ignorant, just as HC buyers are

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Can Medical Markets Work?

• Buyers must be well informed and able to
  understand their options
• Competition among sellers is important
• Buyers must have money to spend
• Cost-conscious behavior on the part of both
  buyers and sellers is essential