1. Basic Concepts of Health Economics
Lecture 1
Assoc. Prof. Sencer Ecer
HEALTH ECONOMICS

2. On the importance of health economics
One in six people is employed in the health sector in the US
Employer-based financing of health care is affecting US global competitiveness (even though tax exempt)
Costs rising outside management control
Unlike competitors of US
Cost-control and utilization control have become urgent, complicated
Consumer resistance
Public – private differences

3. Health Care
Health expenditure per capita (in PPP) is low in Turkey ($505 USD) compared to the EU average ($2,266 USD).
Total health expenditure as a percentage of GDP was 7.5%, which is closer to the EU average. (Kisa et al. (2007))
So, the low per capita figure is due to both low GDP and high population in Turkey
Expenditures mostly personal, some research and admin

6. Health Care Expenditures
HW: Go to World Bank, World Development Indicators, Health
Present three health related statistics
Go to databank
Select OECD countries from Aggregates
Select variables
Format Report

7. New approaches to health economics
Cost-effectiveness
More use of game theory
Deeper understanding of lifestyle choice and impact on health outcomes
Genetics and molecular medicine
Diagnostic and therapeutic alternatives
Better understanding of how our genetic heritage may control our lifestyle choices
Genetic disposition to be addicted to nicotine
How to structure health insurance
How to introduce new technologies to be covered by insurance
Legal and ethical issues

8. Government Intervention
Licensure of health professionals (physicians, nurses etc.), but more rigorous than other professions
Government insurance for at least
Elderly, poor, military veterans…
Free care for those who can’t pay
Extensive price controls in health sector
Since 1971 in the U.S.
Payment to physicians by government insurance

9. Government Intervention
Drug or medical device regulations
Employee health insurance tax exempt
Corporate tax immunity to many hospitals and health insurance companies, sometimes property tax immunity
More government involvement in other countries than in the United States

10. Government Intervention
Entry control
Certificate of need for hospitals
Purchase of expensive equipment
Exit control
Can a hospital shut its doors seamlessly?
Special assistance to health education
Medical students (direct financial aid)
Research in health
NIH

11. Uncertainty
Extraordinary amount of uncertainty exists in the Health Care Market (Arrow, K., 1963, Uncertainty and the Welfare Economics of Medical Care, American Economic Review, 53 (5): pp. 941–973)
Incomplete information in the Market for Health Care
Demand is uncertain (shocks to health). Random events: illness, broken leg, auto accident, Suspicion: Do I have cancer?
Supply is uncertain quality/results, What is the outcome of medical care, for whom
What treatment to offer varies through doctors and in time
Tonsil surgery: widespread in the 1920s, 1930s, 1940s , Caused polio?
Efficacy of new drugs (heavily regulated)/surgical techniques (depends on doctor)
Asymmetric information between
Patient and doctor, Patient and insurance company

12. Uncertainty Uncertainty
In the structure of health insurance
Contractual agreements between doctors and patients
Insurers and doctors/hospitals
Extraordinary regulation related to uncertainty
Direct regulations linked to uncertainty
Licensure
Who can be a doctor?
New drug testing
Indirect regulations linked to uncertainty
Who can build a hospital?
Cost-control through reimbursement
Side effects of health insurance (moral hazard)

13. Uncertainty Externalities
Contagion, productivity
As a result of uncertainty insurance and government intervention emerges
Insurance to control and guide resources
New response to uncertainty: Integrated delivery systems
Doctors, hospitals and sometimes insurance companies
Good example of a business model to emerge in an extraordinary market
Is Rationality/Economics really applicable?

14. Asymmetric Knowledge Doctor and patient Patients and insurers
Doctors know more
Patients generally want to reveal all the information they have to doctors (sometimes fear leads to concealment)
Doctors may not want to do all that
Ethics v profits (this is one reason why we have professions!)
e.g. auto repair (but much smaller asymmetry, much less dire consequences of mistake)
A solution is continuous relationship
Less chance of being caught
Read: Company of Strangers by Paul Seabright
Another solution: friends recommend doctors
Patients and insurers

15. Externalities
Actions that create benefits or costs for others but not accounted for by the individual
Communicable illnesses
Spreading them hurts all or avoiding them helps all
Getting a shot is socially more beneficial than individually, hence individual decisions may end up in not taking the shot
Sewage control, mosquito abatement
Using antibiotics increases odds of drug-resistant bacteria (problem in small communities such as a nursing home)
Health Systems deals with some after the fact
Drink and Drive
One thirds of vehicle fatalities in US involve one drunk driver (more important than most diseases) –about 14 thousand deaths

16. Follow Journals Reports
Journal of Health Economics
Health Economics
Health Affairs
Reports
Health Statistics Yearbook (look for latest), Turkey
Health, United States, latest
Handbook of Health Economics (read chapters 1, 2, 7)

17. Medical expenditures 16% of GDP in the US
1% more every decade
In 2009: $2.9 trillion total of which $2.2 trillion personal
Half government (taxes), half private
Health expenditure increase due to:
Inflation
Population growth and aging
Technological change (new treatments)

18. Fixed Technology
For now we are in a static world, how health care and insurance relates, supply and demand factors, and equilibrium
In typical study of competitive markets, consumers don’t care about costs (only price) and producers don’t care about incomes of consumers, they can price just using input costs and technology
In health care price consumers pay is different from price sellers receive because of insurance
Net price of care to consumers is lower than without insurance
Figure 1.1

19. 19

20. Health care and insurance
We cannot talk about health care or health insurance markets in isolation
Unlike other insurances, health insurance directly affects the demand for medical care, directly affects price in another market
Similar to options, but alters the price drastically
House burned down, appraiser pays cash valuing the asset with definable market value but health is hard to appraise objectively
Health insurance insures the purchase of medical care
Distorts the prices we pay for illness
Caribbean pirates partly compensated directly for health
Health insurance companies intervenes in choice of medical care
Managed care

21. Dynamic Issues Changes in overall economy Demographic changes
Income growth
Demographic changes
Aging
Changes in medical knowledge

22. Economy, Demographics, R&D
Health is normal good
See Table I.1
Income increase with constant numbers
See Table I.2
Aging means more medical care (health stock deteriorates faster)
See Table I.3
Artificial hearts, organ transplants
Complex cancer therapies, genetic manipulation
CT and MRI
Lighter casts and better band aids

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25. 25

26. More on R&D
Biomedical research, supported by health insurance coverage
Private and public
Private: mostly pharmaceutical, not necessarily all US
Some research like laser or computers come from other sectors (chemistry, biology) – hard to trace as health R&D
Public: mostly US (DHHS, NIH)

27. Price and Spending Patterns
Increase in real medical spending led to massive government regulation
Medical care prices are difficult to measure because nature of service differs
Medical CPI component (BLS) to compute inflation
Medical care services
Doctors, nursing homes, health insurance premiums etc.
Hospital bills
Medical care commodities
Drugs, medical equipment
Pharmacies are asked to provide last 20 drugs dispensed

28. CPI medical component Price may increase due to quality
As such price increase with quality increase may not lead to consumer surplus loss
Hospital room and board charge (most important in CPI)
Services that come with basic room have changed
Better beds, better nurses
Figure 1.2
Medical care CPI 6.0% compound rate
Overall CPI 4.2%
Relative price has more than doubled since 1960

30. Medical prices
Critique: We are interested in cost of treatment of an illness, not procedures
Quality adjusted cost of treating heart attacks, depression decreased. Medical CPI may overstate the increase

32. More on Medical CPI Mix of hospital patients changed
Inpatients are on average far sicker than before (say 1960 v 2010), because outpatient surgery became common
Prescription drugs changed
Aspirin to Ibuprofen, acetometaphin (Tylenol) etc.
New drugs for new things such as peptic ulcers are not even counted
Tables
1.8 is shaky: nature of medical service changed, relative prices can’t be constant

39. Medical spending
With age adjustment only 14% would be GDP share not 16%
Baby boomers
85+ age group will be 5% by 2050
Increase is mostly due to new technologies
Heart disease, schizophrenia, trauma care, orthopedic repair, angio, new drugs
CT, MRI, PET
Genome
Stem cells –regenerative medicine