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Econ 4999 Health Economics Lecture 1: Introduction.

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Presentation on theme: "Econ 4999 Health Economics Lecture 1: Introduction."— Presentation transcript:

1 Econ 4999 Health Economics Lecture 1: Introduction

2 Class information Class website es/econ4646/ es/econ4646/ Readings section requires a password: Username: econ4646 Password: arrow1963 Syllabus: Updated version on class website Syllabus

3 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?

4 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).

5 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

6 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.

7 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

8 Roots of health economics Emerged 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.

9 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?

10 What is health economics? 2.Demonstrates the magnitude and importance of the health sector e.g. How fast it might be growing and why 3.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

11 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

12 Why is it important? 1.Health economy is large and growing Source: Organization for Economic Cooperation and Development, Health Data 2005.

13 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.

14 National US Spending on Health Care YearNHEGrowth% GDP * Per Capita NominalReal , , , ,830N.A. (In billions of dollars); * = projection Numerator is increasing NHE = National Health Expenditures

15 Out-of-Pocket and Federal Expenditures -Table 1-5 FSG TotalOut-of-ThirdFederal Pocket%Party% (In billions of dollars)

16 Medical care prices (CPI), ALL Hospital services Presc. drugs

17 Personal Consumption, 2001 Food and Tobacco15.3 Housing14.3 Medical Care18.2 Hospital and nursing7.3 Transportation11.4 Household Operation10.7 Recreation8.5 Clothing5.9 Other15.6 Source: FSG Table 1.2

18 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.

19 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

20 US compared to OECD countries Table 1-1: health expenditures % GDP, OECD Health expenditures grew rapidly between for most countries. Rates continued to rise in1990s in US. US is the biggest spender.  Twice as much as the UK (national health insurance).

21 Questions for you to think about 1.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?

22 Why is it important? 1.The size of the health economy is large and growing 2.Role of government in the health care markets

23 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 policy and much more …

24 US health care spending, 2003 Government is 45 % of total health spending Source: DHHS,

25 Percent of health care expenditure 60% 40% 20% 80% Private FederalState and local

26 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

27 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?

28 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

29 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.

30 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.

31 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

32 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

33 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

34 Cause of death Source:

35 Causes of Death in US, 2000 Source: Mokdad et al, 2004

36 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?

37 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?

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