Health Econ

2000s

-government takes activist approach (HIPPA, CHIP, Medicare expansion of provisions)

1980s

-greater reliance on market -intro to alternative payent schemes (prospective payment, capitation, diagnosis related groups, managed care more common)

oligopoly

(in between perfect competition and monopoly) ○ Market dominated by small number of sellers (oligopolists) ○ Usually driven by nature of technology, can be sustained by collusion (acting together) ○ Usually refers to markets of homogeneous goods ○ Ex: telecommunications, oil

Comparing elasticities

-If |e| >1, the relationship is elastic (responsive) - If |e| <1, the relationship is inelastic (not very responsive) -When comparing two elasticities, we can say that relation 1 is relatively more elastic than relationship 2 if |e1|>|e2|

1960s

-US government involvement in medical spending (Medicare, Medicaid) -cost-shifting to subsidize care for uninsured

US health system vs. British health system

-US- health care financing is almost completely separated from delivery (commercial insurers); lack of clear gatekeeper hierarchy in US blamed for fragmentation of care, inefficiency, higher costs; health care reforms focused on improving delivery of care (reducing fragmentation) and reducing cost inefficiencies by integrating delivery and financing -british- primary care provider acts as gatekeeper;

discounting

-a dollar today is worth more than a dollar tomorrow (interest, inflation, etc.) -costs usually incurred today, but benefits accrue later -downweight costs and benefits incurred later (to control for discounting)

1970s

-advancement in technology -cost containment strategies (National Health Planning Act of 1974- CON, ERISA of 1974-incentive for employers to switch to self-insurance)

Future

-aging population with be important

cost-benefit analysis and cost-effectiveness analysis

-cost-benefit analysis- marginal benefit is in dollars (cost per marginal dollar benefit of program) -cost-effectiveness analysis- marginal effect is in terms of some health measure (usually QALYs) (cost per marginal QALY gained from program) -big CER bad, small CER good -costs include direct and indirect costs -CBA/CEA done relative to comparator (status quo or standard of care is usual comparator) -QALY = weight x time

health care delivery vs financing

-delivery refers to flow of services, i.e. who provides what services (hospitals, physicians, community health centers) -financing refers to flow of dollars, i.e. who pays whom for services (insurers, medicare, medicaid)

elasticity of good y

-how responsive the quantity of Y is to change in some determinant of Y -elasticity of good y (with respect to some determinant of y); how responsive the quantity of Y is to a change in some determinant of Y -size of elasticity tells us how much impact changing x policy might have on y -larger elasticities- larger effect of policy (holding other things fixed)

flat of the curve medicine

-in low-income countries, additional medical care may generate large returns -for high0income countries, not so much ("flat of the curve medicine"

marginal analysis

-in making decisions, people consider what they already have and decide whether to add to it

marginal effect vs. average effect

-marginal effect- effect of one additional unit of output

1990s

-moderation in spending -> movements of patients to managed care

primary, secondary, and tertiary care

-primary care- care of common illnesses and disabilities (preventive care, family medicine, etc); accounts for 80-90% of doctor visits, mostly outpatient -secondary care- problems requiring specialized clinical expertise (referral, hospital care) -tertiary care- problems requiring highly specialized care and expertise (highly specialized equipment)

1960-1990

-rapid increase in expenditures -expansion of entitlement program -intro to new technologies

1985-2005

-slower growth rate -expansion of managed care -cost sharing is greater -changes in medicare reimbursement policies (prospective) -shift from inpatient to outpatient care

2010

-slowest growth rate (recession?)

Big 3 reasons for growth in expenditure

-technology -reimbursement for doctors -degree of cost-sharing between patient and insurance company

opportunity cost

-the cost of something is what you give up to get it

production function

-y=f(a,b,c) where y indicates (amount of) output and a,b,c indicate inputs used in production -concave shape -large increases in production (and productivity) at lower input levels -decreases in returns to production at higher input levels (law of diminishing returns or decreasing marginal productivity) -purpose- additional effect of an input depends on where we are on the function; for effective policies we want to know where we are on function

principal-agent problem

hysician compensation recap ○ FFS/retrospective reimbursements lead doctors to recommend more services because doctors financially benefit from additional services ○ Prospective compensation schemes lead doctors to undertreat patients because doctors financially benefit from fewer services • General problem is that objective of physician should be to always treat patient optimally (according to patient's health needs and preferences) but physician has own objective function/interests that can diverge from that of patients ○ Although "professionalism" or norms may limit physician self-interested behavior, conflict between physician acting in interest of patient and in own personal (financial or non-financial) interests • Principal-Agent Problem- In P-A problems, principal is an individual/entity that delegates authority to another individual (agent) to make decisions for the principal • Features ○ Agent knows more about the situation/conditions than principal (agent has more information, informally, agent=expert) ○ Ideally, agent always acts in the interest of the principal for whom the agent makes decisions ○ Problems arise when goals of principal conflict with goals of agent and principal cannot perfectly monitor agent (too costly to perfectly monitor)

demand for medical care- physician factors

§ Because physician can be imperfect agent for patient, then (under FFS) physician can induce demand for some medical care § Theory of physician-induced demand or supplier-induced demand predicts that increases in supply of physicians will also induce increases in demand for care § Modifications to reimbursement mechanisms (e.g. capitation) can be used to reduce physician-induced demand

accountable care organizations

§ Capitation or global payments: bundling of all provider services § ACOs have been multispecialty physician groups associations of independent practice associations (IPAs), large regional collaborations § Accountable for identifiable patient population with ability to measure outcomes and quality, and to distribute incentive payments § Most evidence form ACOs has been from demonstration projects (not controlled or quasi-experimental studies) § Some cost reductions but mostly in outpatient care and in ACOs that had smaller inpatient care base

elements of insurability

§ Measurable (in health care is measurable but subject to a lot of other factors) § Large number of similarly situated insureds (spread over risk pool) □ Insurance works for large employers (more people to spread risk over; less likely for premiums to skyrocket) § Low risk of a catastrophe (catastrophes that could bankrupt insurance system) □ Depends on your pool □ High risk of catastrophe for small company § Fortuitous (by chance and not because of what you intentionally did) □ Dependent on life-style choices and other factors Can control healthcare such as MRI or x-ray

premium, deductible, copayment, coinsurance

○ Premium- fixed amount paid for insurance plan § Paid by patient and often the employer ○ Deductible- expenditure level incurred before any benefits are paid out ○ Copayment- fixed amount paid by patient for health care service Coinsurance- fixed percentage "C" paid by patient for health insurance service (ex. C=30% so insurer pays 70% of charges

demand for medical care: noneconomic patient factors

§ Noneconomic factors □ Actual or perceived illness □ May be random at individual level but not at population level (stable at population level) □ Morbidity increases at older ages □ Gender: greater demand for women up to age 45, lower after § Demographic factors □ Marital status and size of household (substitute for doctor care) □ Education (preventive vs. curative)- demand for curative is lower for higher education; demand for preventive is higher for higher education

usual, customary, and reasonable (UCR) limits

§ Payer attempts to limit fees □ Usual, customary, and reasonable (UCR) limits to fees ® Minimum usual charge: median fee charged last year for service ® Customary charge: percentile of distribution of fees charged by other doctors in geographic area ® Reasonable annual increases (ex. inflation) ® System inherently inflationary (leading to increasing prices) b/c no one has incentive to charge minimum

payment per episode

§ Payment per episode: payment for each episode of illness □ Ex: single payment for appendicitis has to cover surgery and any post-surgical visits or complications □ Accounts for fact that some illnesses are more complicated resolve than others □ Gives doctors incentive to resolve illness early to avoid subsequent visits □ Hospital Medicare DRG system (payment per diagnosis) analogous- similar logic applies

surplus and shortage

§ Two ways a market can be out of equilibrium □ Excess supply (surplus) □ Excess demand (shortage) § Excess supply (surplus) □ When market price is above equilibrium price □ At this price, quantity that sellers want to supply is greater than quantity that buyers want to buy □ Price is too high ® tends to happen in labor market; minimum wage set too high; more unemployed people § If market is not in equilibrium, there is generally market pressure to move it towards equilibrium □ Ex. Buyers lower price to address surplus and raise price to address shortage

market equilibrium

§ What buyers want to buy at each price is expressed in demand curve § What sellers want to sell at each price is expressed in supply curve § Quantity demanded = quantity supplied □ Point at which d curve and s curve intersect Equilibrium price (or market clearing price) is the price under equilibrium conditions and equilibrium quantity is the quantity under equilibrium conditions

resource-based relative-value scale (RBRVS)

® Medicare determines reimbursements based broader definition of cost (physician skill, time, effort, malpractice-related costs, and material cost) ® Because of large patient pool, Medicare has bargaining power to set reimbursement schedule Very complicated, over 7000 individual ® Central planning aspect of RBRVS lead to dynamic inefficiencies (no intrinsic mechanism for identifying relative mispricing) ◊ Ex: bias towards overcompensation for procedures done by specialists, flawed geographic adjustments ® Neglects economies of scale (bigger company more efficient at certain procedures; doesn't account for this because each procedure is given the same relative value) ◊ Bigger practices or physicians who do a lot of certain procedure may be more efficient in certain ways ◊ Fees incorporate mispricing due to market power in certain specialties

demand curves

• Demand curve specifies, at each price, quantity demanded of product ○ Individual demand curve specifies what quantity an individual would want to buy at each price ○ Market demand curve aggregates individual curves for all consumers in market § Demand schedule is demand curve in tabular form • Demand curve in general slopes downward (always negative) "law of demand": when price of a good increases, quantity demanded of that good falls; when price of a good decreases, quantity demanded of that good increases

responses to adverse selection and moral hazard

• Insurance company response to adverse selection ○ Charge premiums according to risk ○ Require waiting period after enrollment ○ Do not cover pre-existing conditions ○ Impose high deductibles • Insurance company response to moral hazard ○ Cost sharing to decrease over-utilization (copayment, coinsurance) ○ Most efficient forms of cost-sharing have different copayment or coinsurance rates for different types of services § Lower copay/coinsurance for inpatient care relative to outpatient care § Higher copay/coinsurance for preventive care Principle: higher copay/coinsurance for high elasticity, discretionary care Both responses lead to some people having no coverage, incomplete coverage, or unaffordable coverage; society views this as undesirable

functional shapes

• Linear vs. convex. Vs concave • Total Y (e.g. benefit, health, effect) increasing in all three • Marginal or incremental Y (e.g. marginal benefit) is constant for linear functions, increasing for convex functions, and decreasing for concave functions • Example- for production/benefits functions, relevant range for analysis is concave, which shows diminishing marginal benefits (diminishing returns) • Benefits/effects curves are typically concave (show diminishing returns), while cost functions can vary. cost function- how much with this cost me with additional input? most common shape of cost function is convex the more things you do the more expensive each additional unit typical cost function (concave side first and then convex side)

perfect competition

○ Sellers are price-takers ○ So many sellers that each individual seller cannot influence market price ○ Sellers have incentive to set at market price § Incentive to set at market price-- If individual seller raises price, all consumers will go to other sellers ○ Applies when good is perfectly homogeneous across sellers (perfectly substitutable) § More broadly, applied when there exist good/perfect substitutes for good/service ○ Applies when thinking about broadly defined market (not a lot of good substitutes for medical care)

Rand Health Experiment

• Most credible estimates of how responsive quantity demanded of medical care is to income is the Rand Health Insurance Experiment ○ 5,800 subjects (4 cities, 2 rural areas) randomly assigned to insurance plans with different levels of coinsurance and deductibles • (New experiment begun in 2008 with Oregon Health Insurance Experiment to study effect of Medicaid coverage on utilization and health) ○ Because of financial constraints, only 1/3 of those on waitlist given opportunity to enroll in expanded Medicaid; enrollment done by lottery ○ Outpatient visits more responsive (more elastic) than hospital admissions ○ Well care visits (preventive visits) more elastic than other kinds of outpatient visits ○ All were inelastic (w/ negative elasticities) ○ Credible elasticity estimates show price elasticities of demand for medical care around -0.1 to -0.2 (inelastic) ○ Demand for dental and nursing home care more elastic than for medical care

Principles of health insurance

• Principle 1- People are risk-averse, i.e. people prefer certainty to uncertainty ○ Life is unpredictable and risk is undesirable § Want to minimize financial risk • Principle 2- Insurance allows people to get financial certainty to deal with uncertainties ○ Company bares the financial risk if something bad happens to you ○ Insurance company profits from people that never get sick or need the insurance ○ Insurance companies serve coordination function, transferring money between different people/places ○ Risk pooling § Insurance pools risks from different kinds of people who get sick at different times § Risk pooling is generally a good thing § The more diverse the pool, the better

theoretical predictions of demand for medical care

• Quantity demanded of medical care should increase as out-of-pocket price of care decreases (price elasticity of demand) • Quantity demanded of medical care should increase as cost of time decreases Quantity demanded of medical care should increase as time used to obtain care decreases

bundling

□ Bundling typically used to refer to lump sum payment for services provided by different providers for single episode, or combined inpatient and outpatient services ® Ex bundled payment for obstetric care for pregnancy □ Any additional care leads to less net benefit to doctor □ Leads to underutilization or underuse (less care than is beneficial) □ Potentially leads to doctors refusing care to chronically ill, sickest patients, complex cases □ Leads to poor care for outlier cases (not going to test for rare cases if not necessary)

demand for medical care- economic patient factors

□ Income ® Different mechanisms with different effects on demand (total effect on demand is ambiguous) ◊ Pure income effect- people buy more medical care if they are richer } Depends on permanent income rather than transitory ◊ Lifestyle/"fast lane" effect: increased consumption of goods that are worse for health (increase in demand) ◊ Health spa effect- increased consumption of goods that are better for health (decrease in demand) □ Value of patient's time ® Time cost of care large part of cost of ambulatory medical care (time to travel to provider, wait time) ® Insurance only covers monetary costs and not time-cost □ Out-of-pocket price of medical care ® Depends on price faced by consumer, not full price of treatment ® Insurance/Medicare/Medicaid coverage decreases price for individual and expands demand for market □ Prices of complements and substitutes ® Home health care and outpatient services substitute for hospital stays (reduce length of stay) ® Changes in other health markets affect demand and supply in medical care markets

income elasticity of demand for medical care

○ As income increases, demand for medical care increases (inelastic) ○ Demand for chronic and acute care visits more responsive to income ○ Demand for well care less responsive to income ○ Demand for hospital visits not responsive to income ○ Time series studies show much larger income elasticity of demand so as households (countries) become richer, they demand more care (technology/interventions) § Rand Hie cross-sectional, holds technology fixed

rating and risk pool

○ Community rating (everyone in the community in one risk pool) § Individual coverage is community rating § Everyone pays the same regardless of who you work for § Healthy people pay more than what they need to and sick people pay less than what they need to § ACA tries to move things to community rating ○ Experience rating (individual) § Risk profile depends on how hazardous the job is and how sick the employee is Most employee based coverage is experience rating

monopolistic competition

○ Firms sell similar goods but products are successfully differentiated so not perfect substitutes ○ Firms have some market power to set price of good/service based on differentiation (through branding) Ex: automobiles (Subaru vs. Lexus), health care providers (follow-up, quality of staff, wait times)

fee for service vs capitation

○ In FFS system, doctors' profit (net benefit) per patient = (10% test cost + test cost) - (test cost)= 10% test cost ○ In capitation system, doctors' profit per patient = (fixed reimbursement per patient) - (test cost) § Cost of test adds to FFS doctor's per-patient profit but subtracts from capitation doctors' per-patient profit § Expensive test adds more to FFS doctor's net benefit than less expensive test § Less expensive test reduces less of capitation doc's net benefit than more expensive test § FFS doctors do more of expensive test, capitation doctors do more of cheaper test

three-legged plan for coverage

○ Individual insurance market reform ○ Large employer mandate Medicaid expansion

adverse selection

○ Individuals with higher risks are more likely to want and purchase insurance ○ Insurance contracts are structured in a way that selectively attracts higher risk people relative to lower risk people ○ This is adverse from viewpoint of insurer, who faces a pool of higher risk people than anticipated ○ When insurers offer insurance, they price insurance based on average risk of pool

pay for performance

○ Pay for performance refers to physician compensation schemes that are based on quality of care measures § Ex: additional payments if doctor assesses x% of pneumonia patients for oxygen status or schedules y% children age 0-1 for well-baby visits ○ Quality of care measures defined broadly- could be outcome measures, process measures, or cost measures § Outcome measures risky and some outcomes not in doctor's control (leads to selection for healthier patients) § Process measures may not be well-correlated with quality or appropriateness of care § Cost measures may lead to lower quality of care ○ Many payers now implement pay for performance schemes using many different outcome, process, and cost measures

monopoly

○ Single seller in the market § Huge investment before you can start producing something; economically more efficient to have one producer (already made fixed costs so more efficient) ○ Monopolies arise from nature of technology, regulatory or professional barriers, perceived valuation § Physician licensing- Creates market power for doctors § How much power does the seller have on the price? ○ Unlike sellers in perfectly competitive markets, monopolists can exercise power on selling price § Monopolists set prices based on demand (not costs because they do not have competition) § If demand is inelastic, can sell at very high price § If demand is elastic, monopolist has less market power ○ In practice, rare to find pure monopoly § Usually driven by nature of technology § Regulatory restraints on pricing usually imposed § Rare to find good with no substitutes

supply curves

○ Supply curve specifies, at each price, quantity supplied of product § Individual supply curve specifies what quantity each firm would want to sell at each price § Market supply curve aggregates (sums up) individual supply curves for all firms in market ○ Supply curves in general slope upward Law of supply- when price of a good increases, quantity supplied of that good increases; when price of good decreases, quantity supplied of that good decreases

fee-for-service

○ Traditionally, doctors compensated by fee-for-service mechanism § Doctors are paid fee for each distinct service (also paid fee on top to cover fixed costs of practice) § Historically, doctors established fees ○ Reimbursements based on cost-based (cost-plus) system where doctor paid additional amount (or %) on top of cost of service (to account for fixed costs like office space, admin staff) ○ Known as retrospective payment method ○ Physicians established fees and payers generally paid them ○ Doctors are paid more for each additional service -> leads to doctors providing more services § FFS leads to over-utilization or overuse (care beyond what is required or beneficial) ○ Potential for bonus creates incentive for doctors to charge high fees (P)

moral hazard

○ When individuals use more services because of insurance coverage ○ As insurance coverage increases, individuals use even more services (downward sloping demand) ○ More insurance lowers financial risk for consumer, but encourages wasteful (and perhaps unhealthy) utilization.