Health Econ Exam 1

Arc elasticity

((Q2-Q1)/(Q1+Q2)) / ((P2-P1)/(P2+P1))

price elasticity

((Q2-Q1)/Q1) / ((P2-P1)/P1)

productive time hypothesis

(Socioeconomic status) SES differences are caused by disparities in health. Worsening health diminishes productive time and hence the ability to produce income

Natural Experiment

a study that uses an enviromental shock that creates a treatment group and a control group naturally. This is useful for identifying causal effects because it eliminates selection bias. (ex. an earthquake that only affects one half of a country)

Marginal Efficiency of Capital (MEC) Curve

plots the marginal lifetime utility returns against initial levels of health

Time-discounting theory

predicts that people who do not discount the future very heavily will be well educated and healthy, while people who do discount the future heavily will be poorly educated, unhealthy, and the happier for it

Elastic vs. Inelastic

Elastic: |elasticity| > or = 1 Inelastic: | elasticity | < 1

Uncertainty and the Welfare Economics of Medical Care (by Kenneth Arrow)

**Health is uncertain, demand for healthcare is uncertain -Subject is medical care industry, NOT health the special structural characteristics of the medical-care market are largely attempts to overcome the lack of optimality due to the non-marketability of the bearing of suitable risks and the imperfect marketability of information. -discusses several key differences between the health care sector and perfectly competitive markets: Health is uncertain and contagious (it doesn't matter to you if your neighbor buys a banana or a TV, but it does matter if he skips his flu shot) Because most people are risk averse, health-related uncertainty motivates individuals to demand health insurance. This in turn creates problems that arise in insurance markets: adverse selection and moral hazard (full insurance leads to a desire by healthcare consumers for overconsumption) a) The nature of demand -it is irregular and unpredictable b) Expected behavior of the physician -the customer cannot test the product before consuming it, an element of trust. Physician is suposed to be concerened for the customers welfare, something not usually expected by a salesman 1. no advertising/price competition 2. advice by dr is supposed to be divorced from self interest 3. (claimed) that treatment is dictated by objective needs, not limited by financial considerations 4. Physician is relied upon as an expert in the existense of the illnesses, conveying correct info is supposed to outweigh his desire to please his customers c) Product Uncertainty: recovery from disease is as unpredictable as its incidence. Unequal knowledge/information b/w dr and patient regarding illness/treatment d) Supply Conditions 1. entry to profession is restricted by licensing 2. cost of medical edu is high but borne only to a minor extent by the student -the private benefits to the student greatly exceeds the costs 3. quality and quanitity of supply of med care are strongly influenced by social nonmarket forces e) Pricing Practices: 1. Extensice price discrimination by income (an extreme of 0 prices for sufficently poor patients) 2. Price competition is frowned upon 3. A strong insistance on FFS Problems of Insurance: 1) moral hazard 2) alternative methods of insurance payment 3) third-party control over payments 4) administrative costs 5) predictability and insurance (insurance is more valuable the greater the uncertainty in the risk being insured against) 6) pooling of unequal risks 7) gaps and coverage (certain groups -ex unemployed, institutionalized, aged- are almost completely uncovered)

health care expenditures

-Even in the U.S. with our private healthcare system gov expenditures account for half of all health care spending -Technology advancements: new medical technology appears to be mostly cost increasing - residual studies find about half the total rise in healthcare spending is due to new technology -Cutler and McClellan (1996) - affirmative study (observed specific technology advancement and estimated its cost effects). Found that the expanding use of cardiac surgeries account for almost all growth in treatment costs for heart attacks -Health insurance: increased insurance coverage effectively lowers the price of healthcare services and increases the demand for new medical technology -Peden and Freeland (1998) - found that 70% of growth in healthcare spending is due to medical technology, demand for which is driven by increased insurance coverage

Assumptions of a perfectly competitive market

-Homogenous goods: competition based on price -No barriers to entry: free entry and exit -Many suppliers (sellers): sellers are price-takers -Many consumers (buyers) -Perfect Information: both sellers and buyers -No externalities (broader implications of social welfare maximization) -No economic profits -Outcome is efficient -Perfectly competitive markets maximize social welfare.

Is Health Spending Excessive? If So, What Can We Do About It? (by Henry J. Aaron and Paul B. Ginsburg)

-The US spends more per person on healthcare than any other country (twice the average of the next ten richest countries) -Excessive spending on healthcare = less money for other private/public services -High per capita income does not explain level or growth of healthcare spending -Little connection between healthcare spending and life expectancy DEMAND: 1) Health Insurance: A) Encourages excessive demand for care B) Encourages people to seek care that is worth less than total societal costs C) Enables people to afford high-value care that they otherwise couldn't afford D) Spreads risk of unpredictable variations in use of healthcare services E) Spreads costs of expected variations in use of healthcare services 2) Tax Provisions: A) exlusion of employer-financed insurance from income/payroll taxes B) People buy more health insurance than is optimal SUPPLY: 1) Fee-For Service -reward providers for supplying services rather than for producing favorable outcomes 2) Inefficient Organization -presence of single-practitioner physician offices -low-occupancy hospitals -ECONOMIES OF SCALE 3) Physician Supply -no conclusion on physician-induced demand -constant demand + increase in supply = decrease in price -non-specialization vs. specialization (result of technology?) Technology and Biomedical Research: -Biggest driver behind problematic growth, also biggest source of increase in benefits -Economic research indicates that some high-tech interventions are overused -Patent system

Grossman Model:

-health is a choice -provides economic explainations for better health among the educated and declining health among the aging -the more-educated person gains more health stock for each unit of health investment (ex. better at understanding dr instructions, more knowledge about buying medicine, etc) -it is too costly to stay forever young. Depreciation of health increases over time, so would have to invest more and more capital to keep same level of H, so will start devoting a greater proportion of his dwindling resources to Z

Why does US spend so much on health care? (Part of "Is health spending excessive" article)

1) health care spending rises with income, and U.S. per capita income is higher than that of most other nations. 2) unit prices of various services are higher in the United States than elsewhere -economic rents (payments larger than necessary to keep health care resources in their current use_ -Superior quality. -Low- or no-benefit services. -Inefficient production methods, including wasteful spending. -Administrative complexity (dk how much administrative spending is wasteful and how much it may contribute to the growth of overall health care)

Causes of market failure in Healthcare

1. Asymmetric Information: Physicians generally are more knowledgeable about a patient's health and different healthcare services than the patient does - can create supplier-induced demand 2. Properties of Health as a good: Health is uncertain and contagious 3. Adverse Selection: Sick individuals are more likely to buy health insurance than healthy individuals - leading to pools of insured individuals that have a disproportionate number of high-risk policies. Insurance companies are forced to raise costs to cover the number of claims they are paying out, leading to healthier individuals dropping out of the pool, further increasing the number of high-risk individuals in the pool and further driving up costs 4. Moral Hazard: increased health insurance coverage leads to increased healthcare utilization and increased demand for healthcare Ex-ante moral hazard: having insurance may lead to less preventive healthcare, as the price of being sick is effectively lowered Ex-post moral hazard: having full insurance may lead to overconsumption of healthcare, as the price of extra healthcare is much less/negligible to consumer 5. Monopolistic Firms: High costs of entry - cost of medical training, cost of sophisticated medical tech, patents on prescription drugs, - lead to monopolization of firms in healthcare industry

3 roles of health in the Grossman model

1. Consumption good: contributes directly to the individual's utlilty function each period. Being healthy is valuable in and of itslelf 2. Input into production: Generates productive time which is useful for producing more H and Z 3. Capital: Unlike home good (Z), it endures from period to period. It can accumulate (or depraciate) over time, so improvements in health today can lead to better health tomorrow

Factors that affect demand for Healthcare

1. Health insurance coverage leads to higher healthcare utilization, and therefore higher demand for healthcare -Reverse causality: Could utilization affect coverage? 2. Those with a higher demand for healthcare are more willing to pay for insurance 3. Health or expectations about future health: poor health may lead to more healthcare utilization and more demand for insurance 4. Income/wealth: healthcare utilization and insurance may both be normal goods; also high paying jobs usually provide insurance coverage 5. Income and family structure can affect qualification and utilization of Medicaid 6. Age: can affect qualification and utilization of Medicaid 7. Risk and time preference: hard to measure factors that may affect both utilization and insurance

Roles of Health in the Grossman Model

A consumption good: Health as a good contributes directly to the individual's utility function each period. Consumer attempts to maximise U (H,Z) where Z = home goods Investment good: health capital determines the amount of productive time (input into production). Generates productive time which is useful for producing more H and Z Capital good: consumer produces health by making gross investments in health. Unlike home good (Z) it endures from period to period. It can accumulate, or depreciate, over time, so improvements in health today can lead to better health tomorrow

allostatic load theory

Allostatic load = the cumulative physiological toll exacted on the body over time by efforts to adapt to life experiences, so the theory predicts that people on the lower end of the socioeconomic status suffer more stress and face worse health outcomes as a result

Fuchs Hypothesis

Both health and SES (socioeconomic status) disparities are simultaneously caused by innate differences in the willingness to delay gratification. Individuals with a lower rate of time discounting (who are therefor more patient) invest more in both health and education

Oregon Medicaid Experiment

Demand curves for healthcare are downward sloping But generally price of healthcare does not seem to affect health - except within most vulnerable segment of the population (low income, diabetes, high-blood pressure, etc)

The RAND Health Insurance Experiment, Three Decades Later (by Aviva Aron-Dine, Liran Einav, Amy Finkelstein)

MY PRESENTATION: Consumer's level of spending on health care clearly does respond to changes in out-of-pocket price - but the exact price sensitivity varies extensively -Dangers of using single price elasticity for nonlinear health insurance contracts -Summarizing healthcare utilization by overall dollar cost doesn't take into account heterogeneity in healthcare Threats to Validity of RAND expirement: 1. Whether the stratified random assignment to plans was successfully implemented 2. Concerns that differential participation across plans might affect the findings 3.Differential incentives to report medical spending Supports RAND rejection of the Null Hypothesis that health spending does not respond to out-of-pocket price Basically, RAND experient checks out but be careful, and it is likely the -0.2 is an overestimate

The United States leads the world in health care spending but has only the 31st longest life expectancy. Does this necessarily point to problems with the health care system?

No, not necessarily. US may just be different in unobservable ways that cause them to consume more medical care while reducing life expectancy simultaneously; say they are more prone to risky health attitudes.

Positive vs normative

Positive: How it is. Normative: How it should be

Patient Cost-Sharing and Healthcare Spending Growth (By Katharine Baicker and Dana Goldman)

Purpose: To evaluate the effect of demand-side cost-sharing on healthcare spending ARGUMENT: while cost-sharing can be a powerful tool to move utilization under comprehensive insurance closer to optimal allocations, it is a blunt tool as currently deployed in most health insurance plans Increasing patient cost-sharing does reduce healthcare expenditures, but it can do so in a way that does not discriminate particularly well between high- and low-value use, and that does not take into account important interactions optimal cost-sharing is not just about the trade-off between the incentives that insured patients face for potential overconsumption of healthcare and the exposure to uninsured financial risk EFFECTS OF COST-SHARING: compelling evidence that patients do indeed respond to prices—although not necessarily in a way that is consistent with careful and farsighted analysis of the costs versus benefits of care. Own-Price Effects: RAND experiment, how increased co-payments decrease utlilzation of healthcare Cross-Price Effects: Increasing copayments for outpatient care might decrease the number of office visits but increase hospitalizations or emergency department visits COST-SHARING AND HEALTH: evidence suggests that demand-side cost sharing affects utilization of healthcare services in quantitatively important ways -The optimal level and design of cost-sharing depends not just on how cost-sharing affects the quantity of health care consumed, but also on the health that consumption generates. HETEROGENEITY IN EFFECTS OF COST-SHARING: evidence that the frequent users of health care (the sickest) are more likely to adjust utilization in response to changes in cost-sharing THE SPECIAL CASE OF PHARMACEUTICALS: studies suggest a price elasticity for drug expenditures of 0.2 to 0.6. Reflects differences in responsiveness by drug class and its importance; for example, increased cost-sharing may decrease "nonessential" drug use, like antihistamines, more than "essential" drug use -substantial cross-price effects from changing copayments for pharmaceuticals POSSIBLE SOLUTIONS: 1)Value-based insurance design: Built on the premise that more sophisticated cost-sharing structures can produce more efficient utilization outcomes (EX. charge lower or no copayment for cholesterol-lowering drugs to those at high risk for an adverse cardiac event and higher copayments for those at low risk) 2) Two-Part Pricing and Copayments -pharmaceutical firms would charge health insurers a license fee for each patient receiving unfettered access to their product(s) up to some therapeutically optimal level (for example, twelve monthly prescriptions per year). -In return, Pharmaeutical firms sell their drugs to the plan at very low cost, not typical mark-ups -Patients also pay an annual "licensing fee" for each drug they take, at the time they start taking it; after paying that fee, patients would then obtain medication with nominal or nonexistent copayments. -In effect, insurers would purchase drug licenses from manufacturers and patients would purchase drug licenses from insurers.

thrifty phenotype hypothesis

Resource deprivation in utero and during early childhood can lead to activation of "thrifty" genes optimized for sparse conditions. Individuals with such genes activated are poorly adapted for abundant conditions and may develop diabetes, obseity, and other disorders. Health disparities arise because poorer individuals are more likely to face this sort of depreivation early in life.

Affordable care can improve health for at-risk groups, but does not measurably improve health for most of the population

T

Grossman Model utility

Ut = U(Ht, Zt)

Income inequality hypothesis

health disparities are caused by income inequality, which in and of itself is a source of allostatic load for the poor. (More equal societies are also less stressful ones, and so, according to the allostatic load hypothesis, are generally more healthy)

Direct income hypothesis

health disparities arise because the rich have more resources available to invest in health

Efficient Producer Hypothesis

health disparities exist because better-educated individuals are more efficient producers of health than less well-educated individuals (ex. better at being diligent/navigating complex treatment plans, follow directions, figuring out the right doses/calories, etc)

health insurance moral hazard

increased health insurance coverage leads to increased healthcare utilization and increased demand for healthcare Ex-ante moral hazard: having insurance may lead to less preventive healthcare, as the price of being sick is effectively lowered Ex-post moral hazard: having full insurance may lead to overconsumption of healthcare, as the price of extra healthcare is much less/negligible to consumer

Health ppf

pt A: at min H so has no productive time to work, play, or improve health (so can't afford any Z) pt B: free-lunch zone (all pts b/w A and C): an hour spent increasing health yields more than an hour reduction in sick time. Can increase Z without giving up H. Never an optimal point pt C: one extra hour spent on health yields exactly one extra hour of productive time. The max amount of Z possible. If tries to increase Z by shifting resources from H to Z, the increase in sick time will outweigh the gain in resources available for Z production pt D: Tradeoff Zone (all pts b/w D and E): Increases in H yield small decreases in sick time. To increase H, must shift resources away from Z pt E: Spends all time and money on health, Z = 0

Grossman Model Time Constraints

⦵=TW + Tz + TH+TS w = working, z = playing, H = improving health, S = sick