Chapter 2: Health, Medical Care, and Medical Spending

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Chapter 2 Health, Medical Care, andMedical
Spending
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• Can we apply the tools of
• managerial economics to
• health care?

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Outline

• An economic model of utility, health, and medical
  care.
• Measuring health status.
• Empirical evidence on health production.
• Health care expenditures.

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A Basic Economic Model

• Health as a consumer durable good
• Utility U (X, Health)
• X represents other goods and services.
• H is a stock -- every action will affect
  health.
• On its own or combined with other goods and
  services, the stock of H generates a flow of
  services that yield satisfactionutility.

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A Basic Economic Model (cont.)

• Marginal Utility
• The increase in utility resulting from a given
  increase in health.
• MUH ?U/?H
• Law of diminishing marginal utility
• Each incremental improvement in health generates
  smaller and smaller additions to total utility.

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The Total Utility Curve for Health
Utility
Total Utility
U3
U2
U1
U0
Health
H0
H1
H2
H3
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The Marginal Utility Curve for Health
Marginal Utility
MU
Health
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A Basic Economic Model (cont.)

• Production of health
• H g (Medical care, other stuff)
• Marginal productivity
• The increase in health resulting from a given
  increase in medical care (q).
• MPq ?H/?q
• Law of diminishing marginal productivity
• Health increases at a decreasing rate with
  respect to additional amounts of medical care.

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The Total and Marginal Product of Medical Care
Marginal Increase in Health
Health
Total Product
MP
Medical Care
Medical Care
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A Basic Economic Model (cont.)

• Medical care is not homogeneous and differs in
• Structural quality (e.g. facilities and labor)
• Process quality (e.g. waiting time, case mgmt.)
• Outcome quality (e.g. patient satisfaction,
  mortality)
• Therefore medical services are often difficult to
  quantify.

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A Basic Economic Model (cont.)

• HealthH(Profile, Medical Care, Lifestyle,
  Socioeconomic Status, Environment)
• If an individual has a heart attack, then overall
  health decreases, regardless of the amount of
  medical care consumed.
• The total product curve for medical care shifts
  down.
• As a person ages, both health and the marginal
  product of medical care are likely to fall.
• The total product curve shifts down and flattens
  out.

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A Shift in the Total Product Curve for Medical
Care
Health
TP0
TP1
Medical Care
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MEASURING HEALTH

• Important for all health care managers today.
• Insurers and consumers are demanding
• ? costs AND ? quality.

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HEALTH OVER THE LIFE CYCLE
HEALTH
Appendicitis
Auto Crash
Cancer (radiation therapy)
Cancer complications
Hmin
TIME
BIRTH
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HEALTH OVER THE LIFE CYCLE

• Individuals make choices about health (make
  tradeoffs) which maximize U over time.
• Relatively high value for the future
• Low discount rate
• e.g. Low-fat diet and exercise to avoid heart
  disease.
• Relatively low value for the future
• High discount rate
• e.g. Smoking, excess drinking, drug abuse.

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MORTALITY

• Alive vs. Dead
• Do people consider this in decision making?

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MORTALITY MEASURES
1950 1970 1980 1990 1996-98 1. Crude death
rate 963.8 945.3 878.3 863.8 867.3 (per
100,000) 2. Age-adjusted death
rate 840.5 714.3 585.8 520.2 480.7 3.
Age-specific death rate 15-24 128.1 127.7 115.4
99.2 86.0 65-74 4067.7 3582.7 2994.9
2648.6 2514.5 4. Infant mortality 29.2
20.0 12.6 9.2 7.2 Neo-natal 20.5
15.1 8.5 5.8 4.8 Postneonatal
8.7 4.9 4.1 3.4 2.5 5. Life
Expectancy 68.2 70.8 73.7 75.4
76.7 (at birth) (1998)
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MORTALITY MEASURES

• Life expectancy NOT a prediction of how long
  people live.
• 76.7 is a summary of age-specific death rates in
  1998.
• If those born in 1998 experienced age-specific
  death rates prevailing in 1998, on average they
  would live to be 76.7

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MORBIDITY

• The relative incidence of disease
• Advantages
• Captures quality of life.
• Disadvantages
• Difficult to measure
• Difficult to aggregate when patient has gt1
  problem.

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MORBIDITY

• Acute disease
• e.g. appendicitis, pneumonia, gun shot wounds
• Chronic disease
• e.g. arthritis, diabetes, asthma
• Incidence
• occurrence of new cases in any particular year
• Prevalence
• new and ongoing cases in any particular year

• Heart disease is more prevalent, but its
  incidence is declining.

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MEASURING MORBIDITY

• Distinguish between symptom and disease.
• e.g. high blood pressure vs. stroke
• Disabilities are also a sign of morbidity.
• Subjective measures - i.e. self-rated health.
• Is your health excellent/good/fair/poor?
• Problem 1970-80, of people with high blood
  pressure declined. But of people reporting
  restricted activity due to HTN doubled!
• Depends on what you want to do - e.g. astronaut,
  airline pilot, or professor?

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MEASURING MORBIDITY

• How far do we go in classifying medical
  problems?
• e.g. cosmetic surgery
• Beware of phrases in contracts or policy
  statements such as providing all medical care
  or basic needs.

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LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED
15-24 (1998)
CAUSE OF DEATH DEATHS
Unintential injuries 13,349 Homicide
and legal intervention
5,506 Suicide 4,135 TOTAL
Violent Deaths 22,990
75 Cancer 1,699 Heart
Disease 1,057 HIV 194 All
other nonviolent causes 4,687 TOTAL
Nonviolent Deaths 7,637 25
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LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED
65 (1998)
CAUSE OF DEATH DEATHS Heart
disease 605,373 Cancer 384,186 Cerebrovas
cular Disease 139,144 (Stroke) Chronic
Obstructive Lung Disease 97,896 Pneumonia and
Influenza 82,989 Diabetes mellitus
48,974 Unintentional injuries
32,975 2 Nephritis 22,640
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Empirical Evidence on Health Prodn

• Bunker et. al. (1995) estimated the increases in
  LE due to 26 preventive curative medical
  services.
• 13 preventive services raised LE by 1.5 years.
• 13 curative treatments raised LE by 3.5-4 yrs. on
  average for the entire U.S.
• Given that LE rose from 62.9 to 75.4 yrs. (12
  yrs.) b/w 1940 1990, medical care had a
  significant impact on health.

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LIFESTYLE

• ? cigarette smoking 10 ? ? mortality
• blacks whites
• men 45-64 2.3 1.4
• women 45-64 1.1 1.1
• (Hadley, 1982)
• A one-pack-a-day smoker incurs 10.9 more sick
  days every six months than a comparable
  non-smoker.
• (Leigh and Fries, 1992)
• Not smoking, regular exercise, moderate/no use of
  alcohol, 7-8 hours of sleep per day, proper
  weight, eating breakfast, and no snacking leads
  to 28 lower mortality for men, 43 lower for
  women.
• (Breslow and Enstrom, 1980)

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OTHER FACTORS AFFECTING HEALTH

• Environmental factors
• e.g. air pollution, water quality, climate,
  occupational hazards
• Empirical studies inconclusive, but may be due to
  lack of good data.

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OTHER FACTORS AFFECTING HEALTH

• Socioeconomic status
• Education strongly correlated with health.
• May help in direct production of health.
• Or, may reflect high preference for future
• (low discount rate)
• Income
• Strong correlation with health in U.S. from mid
  1700s to mid 1900s
• Less relation between income and health since,
  maybe because most important public health
  problems are already solved
• e.g. Adequate nutrition, sanitation
• Higher income may increase bad habits
• e.g. Smoking, excess drinking, reckless driving

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Determinants of Infant Health
Corman and Grossman, 1985
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Determinants of Infant Health
Corman and Grossman, 1985
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Determinants of Infant Health

• Does more schooling and the availability of more
  providers improve infant health?
• Is the marginal productivity of more providers
  greater for blacks or whites?

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Determinants of Infant Health

• Why might the marginal productivities for blacks
  and whites differ?
• The regressions have poor controls for
  income,health status, preferences, etc. which may
  be correlated with schooling and the
  availability of providers.
• If the marginal productivity for most factors is
  greater for blacks then whites, why isnt the
  overall neonatal mortality rate lower for blacks
  than whites?

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Marginal Productivity of Provider Services for
Infant Health
(1-mortality rate)
Blacks
Whites
Medical Care
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Marginal Productivity of Provider Services for
Infant Health (cont.)

• For any given level of provider services,
  marginal productivity may be higher for blacks
  than whites.
• However, the level of services may be higher for
  whites than blacks.
• Knowing the shape of the total product curve is
  not enough. You must also know where you are on
  it.

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Conclusions

• In an economic model, medical care and other
  goods and services are combined to produce
  health, which yields utility to the consumer.
• The production of health can be measured in a
  variety of ways.
• Both higher health care expenditures and other
  factors are improving health status over time.