317_L27, Mar J. Schaafsma 1 Review of the Last Lecture Are looking at program evaluation in healthcare: CBA, CEA, CUA Finished our discussion of CBA and CEA Started our discussion of CUA (Cost Utility Analysis) In CUA the output measure is a QALY to compute a QALY need Health Related Quality of Life weights Three techniques for computing HRQoL weights: rating scale, Time- Trade-off, Standard Gamble. Have discussed the first two. Today: begin by looking at the Standard Gamble method Then discuss whether QALY’s should be discounted. Then begin section VII(1): Supply of Physician services

317_L27, Mar J. Schaafsma 2 Computing Utility Values: Standard Gamble: SG classical method of measuring cardinal utility based on work by von Neuman and Morgenstern (1953) SG  considers a choice between staying in the current state of chronic ill health for n years followed by death, or accepting what could be considered a lottery ticket. the lottery ticket consists of accepting treatment  one of two outcomes will occur: i) full health for n years then painless death, with a probability of p ii) instant painless death, with a probability of (1 – p) (diagram)

317_L27, Mar J. Schaafsma 3 SG Method Continued subject is confronted with the choice of staying in the chronic state of ill health or accepting the lottery ticket (treatment) obviously if ill health very bad and p of success very high  accept treatment at some value p e for the prob of successful treatment the person is indifferent between treatment (lottery ticket) and no treatment: i.e., U(HS ill ) = p e U(full health) + (1 – p e ) U(death) set U(death) = 0, then U(full health) = 1  U(HS ill ) = p e U(HS ill ) is the fraction, p e, of the utility of full health U(full health) NB. These fractions are additive  QALYs =  p e i i = 1,…,n ///

317_L27, Mar J. Schaafsma 4 Problems with the SG Method applying this technique to subjects experiencing the state of ill- health can be problematic (stressful for patients) applying this technique to subjects who are not ill requires them to understand the true extent of the state of ill health (also problematic) subjects may not be able to judge the true significance of different probability values.

317_L27, Mar J. Schaafsma 5 Discounting QALYs basic issue  is saving 10 lives at a given HRQoL for 1 year equivalent to saving 1 life for 10 years at the same HRQoL? really two issues here: 1.An equity issue: if we can save 10 QALY’s are we indifferent between saving 1Qaly for each of 10 people, or 10 QALY’s for 1 person (we will ignore this distributional issue) 2. whether QALYs that accrue in the future as a result of HC today should be discounted or not. ///

317_L27, Mar J. Schaafsma 6 Arguments Against Discounting QALYs discounting implies inter-temporal choice  ability to trade off future benefits for present ones and vice versa  at the individual level inter-temporal choice is feasible for quality of life but not for life years  can’t give up a life year now for more tomorrow  thus argued  don’t discount while an individual has a finite time horizon and thus discounts the future (may not be alive next year, or two years from now so present is more valuable than the uncertain future); society could be considered infinitely lived  thus no time preference  thus future as important as the present  no discounting. ///

317_L27, Mar J. Schaafsma 7 Arguments for Discounting QALYs the flow of HC costs over time is always discounted  symmetry requires that QALYs also be discounted  society unlikely to be indifferent between two projects with the same PV of HC costs and the same undiscounted QALYs gained but where the gain is far into the future for one project and the gain is immediate for the other.=> discounting QALYs takes care of this problem statistically can trade-off lives inter-temporally! HOW?  - borrow for expanded HC services today  save lives. - later when the debt must be serviced  curtail HC services to balance the budget  lives could be lost. ///

317_L27, Mar J. Schaafsma 8 VII. The Provision of Healthcare 1. Modeling the Supply of Physician Services the cost of physician services is the third largest component of the HC budget (about 13% compared to 40% for institutional care and 17% for drugs). Also: physicians are the gate keepers (determine the care patients receive, thus influence hospital expenditures). in Canada, physician services generally provided by the practitioner- firm on a fee-for-service basis (self-employed providers) practitioner firm is a physician’s practice  owned/operated by the HC practitioner  e.g., medical practice, dental practice, optometric practice, pharmacy (is there an ordering here from an economic perspective?)  strength of profit motive  going  the list? ///

317_L27, Mar J. Schaafsma 9 Attributes of the Practitioner Firm Similarities with the concept of the firm in standard micro theory: the practitioner firm (PF) combines inputs to produce an output output generally sold on a fee-for-service basis (price per unit) Differences from the firm in standard micro theory: owner is patient’s agent  thus not-only-for-profit firm owner supplies a large part of the labour input Question: how should the practitioner firm be modeled if we are to understand its factor input combination in production, output and pricing decisions in response to changes in the environment in which it operates? And allocative and technical efficiency ? ///

Allocative and Technical Efficiency 317_L27, Mar J. Schaafsma 10 Our discussion of the various models of the practitioner firm will focus on their implications for allocative and technical efficiency Allocative Efficiency exists if MB = MC (a higher output of a good results in a deadweight loss (MB MC) Technical Efficiency exists if the given quantity of output is being produced at the lowest possible cost

317_L27, Mar J. Schaafsma 11 Modeling the Practitioner Firm: the Case of Physicians. models of the physician firm have gone through three successive stages that emphasized different characteristics of these firms: 1. Monopoly models that stressed monopoly power conferred by self-regulation and licensure 2. Self-employed “labour managed” nature of the firm. 3.Information Asymmetry and SID Each model builds on the preceding one ///

317_L27, Mar J. Schaafsma 12 The Physician Firm as a Monopoly: Supply Restrictions in these models licensure restricts entry  confers monopoly power. however, NOTE that the power to license does not necessarily confer monopoly power. competing organizations could develop e.g. physicians vs. chiropractors lawyers vs. notaries in accounting  CA, CGA, CMA, CPA ///

317_L27, Mar J. Schaafsma 13 Licensure and Monopoly Power for licensure to restrict supply (create monopoly power) need: 1. Control over entry. 2. Effective boundaries on the set of activities only members of the licensed profession are allowed to supply (need not perform them  could hire non-licensed help and supervise them) 3.Control over the output by its members (If licensed professionals can easily expand supply by hiring non-licensed help  require that only a licensed professional may supply the service or restrict the number of employees a professional may supervise). ///

317_L27, Mar J. Schaafsma 14 Four Models Based on Restricted Supply and Monopoly Power will look at four models that stress restricted entry and monopoly power: 1. Competition behind the barrier to entry 2. Monopolistic competition 3. 1 st degree price discriminating monopolist 4. Cartel and joint profit maximization these 4 models assume: demand exogenous and profit maximization. ///

317_L27, Mar J. Schaafsma 15 Monopoly Model 1: Competition Behind the Barrier to Entry profession restricts entry practitioner firms compete behind barrier to entry (diagram) supply curve sits more to the left than if free entry consequences  welfare loss (consumer surplus and producer surplus components) & higher producer surplus to physicians who do get past the barrier at the expense of consumer surplus (diagram) allocative inefficiency Technical efficiency (guaranteed by competition and profit maximization)

317_L27, Mar J. Schaafsma 16 Possible Barriers to Entry excessively high grade requirement excessive educational requirements marginally relevant but very challenging courses (e.g. dissecting an entire human cadaver in an optometry program) high fees for board exams exceptionally difficult board exams ///