Health Economics QUIZ 1

Health economics

studies the supply and demand of health care resources and the impact of health care resources on a population

oligopoly

few large firms and relatively high barriers to entry. These firms typically cooperate rather than compete on price

delivery of health care under imperfect market conditions

government as subsidiary to the private sector

demand is unpredictable

- do not know what is wrong, course of treatment and effectness -lack of knowledge and medical training -rely on provider of services -provider of services will oftentimes order tests -costs not readily available

premiums based on:

- expected payouts (claims) -insurer's administrative costs -statutory reserve funds -profit -premium taxes

MEC

- extra output produced from extra input (marginal benefit) Measures: halt stock (investment) and cost of capital (rate of return)

3 characteristics of vulnerable populations

- predisposing, - enabling -and need Predisposing Characteristics Racial/ethnic characteristics Age Geographic location (rural health) Gender and gender identity Sexual orientation Religion Enabling Characteristics Insurance status Income Education Transportation Language and health literacy Need Characteristic Mental health Physical health Level of function

Why do we want health

- quality of life -more productive (healthy days leads to income and leisure) -health care is an input to health

obesity epidemic

- strongly associated with SES - the public and policymakers need to develop and implement practical interventions, such as information and nutrition and good nutrition and lifestyle choices in order to reduce the morbidity due to obesity-related condions such as diabetes and cardiovascular disease

Monopoly

-One producer/seller for a product -No substitutes and there is no competition -In a market, the producer(s) can control price, consumers no choice, cannot maximize utility and have very little influence over the price of goods -High barriers, preventing the entry of new firms. Barriers against entry into a monopolistic market include (1) the exclusive rights to a natural resource, and (2) legal barriers, (3) a copyright or patent protection (Pfizer had a patent on Lipitor) The main characteristic of this market model is to use differentiated products. (differentiation includes "advertising, preferred location, in order to lead to brand loyalty, which allows them to raise price and continue to sell the product) For a firm to maintain its market power for an extended period of time, some types of barrier to entry must exist to prevent other firms from entering the industry.

The special interest theory states that the political venue can be treated like any private market for goods and services so that amounts and types of legislation are determined by supply and demand for such legislation.

-The suppliers: legislators, and their goal to maximize their chances for re-election. -The demanders: those with a concentrated interest, legislation will have a large effect on profitability, by affecting either their revenues or costs -To protect the public, government intervention includes regulations and laws since some special interest groups benefit at the expense of the general public.

Health does not depreciate instantly (capital good) -health is both a consumption good and an investment good: makes you feel better and increases number of healthy days

-consumption good-buy clothes because you feel better -investment good: buy food because it makes you productive

Other contributing factors to health

-diet -exercise -lifestyle choices -age -income -education

easy exit and entry are important characteristics of the perfectly competitive market

-easy entry ensures that any excess profits are quickly competed away, temporary profits attract additional resources to the market -Easy exit means that losses are only temporary as well, individuals can shift their resources to other, more profitable uses.

health stock-investment -depreciation: gradually through time with age -begin life with a stock of health capital

-health stock = health stock at the beginning of a period-depreciation + investment in health

Grossmans Model:

-looks at people as both consumers and producers of health -used idea of investing human capital through health and education(inputs)to improve outcomes in the workplace and household (outputs)

Gov can promote efficiency and equity by providing

-public goods -enforcing antitrust laws, and sponsoring redistribution programs (i.e. price fixing) - correcting for externalities, imposing regulations (i.e. tax firms to reduce the level of air or water pollution) -levying taxes

Government Intervention comes through 3 activities

-redistribution -provision of goods and services and -regulation

antitrust laws

-seeks to prevent market participants from engaging in anti-competitive behavior, ensuring fair competition exists in an open-market economy -enforcers of antitrust:Both the FTC and the U.S. Department of Justice (DOJ) Antitrust Division enforce the federal antitrust laws. State attorneys general can play an important role in antitrust enforcement

two external factors account for the dramatic growth of health economics as a field:

1. global health and longevity gains and 2 the expansion of health sectors throughout the world

3 areas in health care must make choices

1. how much to spend on medical services 2. how best to produce those services, and 3 how to distribute them

4 characteristics of perfect competition

1. many sellers possessing tiny market shares 2. a homogeneous prodcut (a uniform product) 3. freedom of entry and exit (no barriers) 4. perfect consumer information

4 types of externality

1.External Costs of Production (MEC>0; SMC>PMC) (a net social loss is generated) 2.External Benefits of Production (MEB>0; SMB>PMB) 3.External Costs of Consumption (MEB<0; SMB<PMB) 4.External Benefits of Consumption (MEB>0; SMB>PMB) Efficient output should be until marginal social cost and marginal social benefit are equal. (SMB=SMC)

6 forces shaping the healthcare landscape in the New health economy

1: regulatory changes 2. demographics 3; consumer empowerment 4. employer 5. new entrants 6. care anywhere

Population Health

A focus of public health that has a very general connotation

Health

A state of either an individual or of a community WHO definition of health is "a state of physical, mental, and social well being and not merely the absence of disease"

Scarcity

Addresses the problem of limited resources and the need to make choices given unlimited human wants

Look at the the entrants expected - younger or older community -income levels -payor mix ( medicare, medicaid, private insurance)

Also what inpatient services should be provided (medical,surgical, obstetrics, psychiatric)

Antitrust issues

An economic concept is often used -- Cross Elasticity of Demand, also called Cross Price Elasticity of Demand, to measure whether a firm has monopoly power in supplying a good or service in the given market. % change in quantity of good X demanded OVER/ % change in price of another good Y

Market failure

Arises when the free market fails to promote efficient allocation of goods and services. Sources of "failures"- of the free market - include natural monopoly, oligopoly, externalities of production or consumption, public goods, and incomplete information.

An increase in wage increases the value of healthy days. The corresponding level of health stock is higher since healthy days yield more income.

As depreciateation increases, the MEC rises and health stock declines; this could be offset in part by an increasing investment in health

Moral hazard

Behavior Affected by Insurance Coverage Disincentive to Take Measures that Would Otherwise Reduce the Amount of Care Provided Results in Increase in Demand for Health Care Services Broader Range of Services Exacerbates Problem More Likely When Out-of-Pocket Costs are Less Than Market Price for Services Insurance Company and Employer Responses - High Deductible Plans

cost sharing

Cost Sharing Arrangements: Deductibles Coinsurance Copayments Deductibles - Amount Incurred Before Benefits are Paid Coinsurance - Sharing of Benefit Payments (%) Copayments - Sharing of Benefit Payments ($) Combined Deductible and Coinsurance/Copayment

-Needs: basic human requirements for survival (physical, social, and individual) - wants: desired but not required to survive (boundless, change frequently)

Demands: willingness and ability to pay for needs and wants

Managed care

Designed to: Reduce Costs Improve Quality Gatekeeper Function In-Network Providers Selective Contracting Referrals to Specialists Pre-Certifications

elasticity of demand is the responsiveness of demand to changes in price/income

Elastic: slight change in price/income leads to larger changes in demand (hospital outpatient services, nursing home services)

Superior goods:

Elasticity is Greater than One (Elastic) Quantity Consumed Increases at a Faster Rate than the Increase in Price/Income Makes Up a Larger Proportion of Consumption Expensive and Scarce Luxury Automobile

Inferior goods:

Elasticity is Negative (Elastic) Quantity Consumed Decreases as Price/Income Increases Consumers Demand Less as Their Incomes Rise Inverse Relationship Second-Hand Clothing

Normal goods:

Elasticity is Positive but less than One (Inelastic) Quantity Consumed Increases but at a Slower Rate than the Increase in Price/Income Direct Relationship Name-Brand Clothing

Employer provided health insurance

Employer Pays Premiums Portion of Premium is Shared with Employees Employee's Portion is a Payroll Deduction Employee Pays Out-of-Pocket Costs as Services are Used (Deductibles and Coinsurance) - the less an employee pays out of pocket the greater the demand for health care services

Determinants of Health

Environment - physical, socioeconomic, sociopolitical, and sociocultural dimensions of life. Behavior & Lifestyle - personal choices such as diet, exercise, and risky behaviors. Biology - genetic risk factors Education - more highly educated people are more efficient in the production of health Income/wage effect Age Medical care - both individual and population health are closely linked to access to adequate preventative and curative healthcare services.

two pricing methods: experience rating and community rating

Experience Rating: Historical Experience of Payouts Members Pay Different Amounts Automobile or Homeowners' Insurance Community Rating: Utilization Patterns of a Broader Population Each Member Pays the Same Trade-Off of Equity and Efficiency Health Insurance

Insurance: risk transfer, cap potential losses, highly variable for individuals, outlays for group are predictable , law of large numbers

Health insurance: Uncertainty of a Person's State of Health Potentially Significant Costs in Event of Illness Illnesses Occur Rarely and At Random Costs can be Significant Transfer from Those Who are Well to Those Who are Ill and Incurring Significant Costs

The effect of SES on health status

First, health care access gets most of the public and policymaker's attention since those with less income and inadequate health insurance will not be able to have access to affordable quality care, and thus have poorer health outcomes. A second pathway is environmental, where hazardous environments are often faced by those in lower SES due to occupational and residential exposures. Third, nearly all health behaviors and habits, such as diet, exercise, smoking, etc., are associated with SES and contribute to increased morbidity or illness among those in lower educational and income classes.

Two forms of health insurance: fully insured(risk transfer) and self insured (risk transfer for catastrophic cases)

Fully insured: governed by state law and mandated benefits -self-insured: law of large numbers, governed by federal law, and more flexibility in plan design)

Health Insurance Exchange: Part of ACA Regulated Online Marketplace to Purchase Private Insurance 12 Million Covered Through Exchanges Accepts All Applicants Provides Minimum Essential Coverage Charge Same Rates Regardless of Pre-Existing Conditions Premiums Vary by Age of Enrollee But Premiums for Older Enrollees (Ages 45-64) can only be Three Times Those of Young Adults (Ages 18-24) Coverage cannot be Cancelled if Policyholders get Sick Dependents Can Remain on Parents' Plan to 26th Birthday

Health Insurance Exchange (Continued): Individual Mandate - Buy Insurance or Pay Penalty Employer Mandate - Provide Health Insurance if 50 or More Employees or Pay Penalty Four Levels of Coverage: Bronze (Premiums Cover 60% of Costs) - Lower Premiums, Higher Out-of-Pocket Costs Silver (Premiums Cover 70% of Costs) - Baseline for Subsidies Gold (Premiums Cover 80% of Costs) Platinum (Premiums Cover 90% of Costs) - Higher Premiums, Lower Out-of-Pocket Costs

Preferred Provider Organizations (PPO): Fewer Restrictions In-Network (Lower Out-of-Pocket Requirements) Out-of-Network (Higher Out-of-Pocket Requirements)

Health Maintenance Organizations (HMO): More Restrictive than PPOs Services through Network PCPs are Gatekeepers Services Outside Network are not Covered

The movement is toward health equity, or the attainment of the best health status of all people regardless of gender, racial, ethnic, socioeconomic, or geographic diversity.

In general if a health outcome has variation within a population, then there is a health disparity

Opportunity Costs

In microeconomics, gien limited resources, choices must be made among mutually exclusive alternatives. The cost associated with the choice is the value of the foregone alternative. This valuation is a crucial component of determining and ensuring efficiency in the market. For example, the opportunity cost of purchasing this text is money that could have been spent on leisure pursuits instead.

SES and the life course

Individuals who are raised in higher SES families and environments have better access to information, nutrition, and lower hazardous exposures that usually lead to improved career and housing opportunities. a large amount of racial and ethnic health disparities in adults are affected by SES disadvantages in childhood and young adulthood

The public interest theory states that the government intervenes in the best interest of society to promote efficiency and equity in the market.

It assumes that the markets are very fragile and efficiency and equity cannot be achieved naturally in the private market behaviors without the government intervention.

Education increases productivity and raises health stock. Education may also be correlated with different time preferences (the extend to which people consider the future as opposed to living for today)

Lifestyle: Shifts MEC to the Left (Consuming Rich Foods) Shifts MEC to the Right (Devoting More Time to Exercise) Chemical Dependency: Shifts MEC to the Left Environment: Shifts MEC to the Right (Wealthier with Better Physical Conditions) Shifts MEC to the Left (Poverty with More Environmental Risks) Biology: Shifts MEC to the Left (Poor Genetics, Family Histories of Disease)

employer based health insurance

Majority of Non-Retired are Covered by Employer Group Contracts Experience Rating for the Employer Lower Administrative Costs Community Rating for Employees Adverse Selection is a Problem Favorable Tax Treatment Reduces Labor Mobility COBRA Offers Some Protection

examples of managed care:

Managed Care Organizations: Preferred Provider Organizations (PPO) Health Maintenance Organizations(HMO) Point-of-Services Plans (POS) Patient-Centered Medical Homes (PCMH) Accountable Care Organizations (ACO)

Efficiency

Measures how well resources are being used to maximize the production of goods and services. Economic efficiency occurs if nothing more can be achieved given limited resources.

Medicare (Title XVIII): Federal Program for the Elderly Funded Through Payroll Tax, Premiums, Surcharges and General Tax Revenues Rates Set Through Regulations Rates Cover About 80% of Costs for Hospitals Rates Cover Costs for Home Health Agencies Rates Approximate Costs for Physicians

Medicare Advantage: Medicare Shifts Risk to Medicare Advantage Plans Most Common Forms are HMOs and PPOs Covers About 17 Million (1/3 of Beneficiaries) Medicare Advantage Plans Receive a Fixed Amount per Member per Month to Provide Medicare Benefits Rules, Costs and Restrictions May Differ from Medicare and from Plan to Plan Beneficiaries Purchase Medicare Advantage: To Fill in Gaps in Coverage Can Lower Out-of-Pocket Costs Can Offer Expanded Coverage (Vision, Hearing, Dental, Health and Wellness Programs) Provider Rates Approximate Traditional Medicare Rates

demand with no need: willingness to pay

Need with no demand: -lack of information -unavailiabilty of services -cost of services -income -insurance coverage

The key assumption of economics that makes this discipline different from other social sciences is that decisions to choose an alternative, given scarcity, are determined rationally.

Often, particularly in the healthcare market, decision makers make choices based on incomplete information, which can yield results that are not optimal compared to when information is freely available

Oligopoly

Only a few large firms that make up an industry, the other firms exist but small and price takers Products that the oligopolistic firms produce are often nearly identical High barriers to entry Competing for market share, and interdependent Competitive oligopolies are where firms act competitively, do not cooperate, and seek to maximize their own profits Examples of Oligopoly Markets: Computer Operating Systems, Pharmaceutical Industry, Health Insurance)

Point-of-Service Plans (PPO): Choices with Consequences (Similar to PPO) Gatekeepers Authorize Certain Services (Similar to HMO)

Patient Centered Medical Home (PCMH): Led by PCP Coordinated Care to Enhance Quality and Patient Satisfaction Providers are Paid a Care Coordination Fee

Production of Health is function of market inputs, time spent improving health, and level of education

Production of consumption goods is a function of market produced goods, time spent on consumption goods, and level of eduction

Competition

Productive resources are allocated to highly valued and specialized uses and therefore encourage efficiency. Competition takes production out of the hands of the less competitive and places it into the hands of the more efficient-constantly promoting the efficient methods of production. This causes firms to develop new, similar products cheaply, improving the selection of products available to consumers

vulnerable population groups

Public Law 106-129 includes: Racial and ethnic minority groups Low-income groups Women Children (under age 18) Older adults (age 65 and over) (can people be both aged and poor?) Residents of rural areas (geographic distribution) Individuals with special health care needs, including individuals with disabilities and individuals who need chronic care or end-of-life care Other populations, such as LGBT (lesbian, gay, bisexual and transgender persons) and those with multiple chronic medical conditions (MCC), are also included.

Marginal analysis

Recognizes that choices are made incrementally. In this environment, optimal decision making is based on the incremental benefits and the costs of an alternative, where, in equilibrium, the incremental benefits equal the incremental costs of the alternative.

providers are not perfect agents

Referrals with a Financial Interest Perform Services that Generate Higher Fees Pressure to Refer within Health System

Types of Regulations in health care

Regulation of costs and prices (rate control commission) Regulation of capital investment (programs to control capital investment, CON. Legal barriers to entry to the healthcare market) Regulation of institutional quality (licensure, certification and accreditation are regulatory mechanisms designed to assure minimum level of quality) Regulation of healthcare personnel (assure that those providing health service meet minimum levels of competences) Regulation of the provision of healthcare (including utilization review and claims review, medical audits. The regulation of provision of care focuses on procedures, treatments, and lengths of stay recommended by individual provider for individual patients. Assure that patients receive appropriate treatments and that facilities are appropriately utilized)

Private Health Insurance: Commercial Insurance Pooling of Risks Premiums Cover Losses, Overhead and Profit Buyers Protect Themselves by Paying Market-Competitive Premiums Losses can be Estimated Statistically

Social Insurance: Medicare, Medicaid, ACA Government is Insurer Premiums are Heavily Subsidized Participation is Based on Eligibility Determined by Government Transfer of Income from One Segment of Society to Another

Grossman's model applies:

Socioeconomic Disparities, Maldistribution of Care and Chronic Illness (Reasons for Higher Health Care Expenditures in US) Similar in Other Developed Countries Low Income and Acute Illness (Reasons in Developing Countries) Stress and Coping Play a Dominant Role in Determining Health Status

Individual Health

Status can be measured by a physical examination of the person along any of several dimensions, such as the presence of illness, risk factors for mortality or morbidity, and overall health as determined through visual and biological testing

Entry and exit barriers refers to legal, institutional, technological, financial, and marketing factors that impede the free of flow of resources.

Such barriers, many of which are created by regulations that occur throughout the entire health care system.

Sherman antitrust act

The Sherman Antitrust Act of 1890, named after its author Sen. John Sherman, the first antitrust law passed by Congress, protected consumers from the efforts of trusts. Its purpose was to preserve economic competition in the marketplace, and it imposed severe penalties on those violating the legislation

Marginal benefit

The additional benefit received from consuming the next unit of a good or service.

Market

The market accomplishes its pricing and exchange of goods and services through a free-price system. Prices increase when more is desired. The market reaches equilibrium when the quantity supplied of a good or service equals the quantity demanded of a good or service at a given price level.

Producer surplus

The net benefit to producers from the free-market exchange. Measures the difference between the actual price received by the seller and the required price as reflected by the MPC for each additional unit produced

adverse selection

Those with Acute Needs are More Likely to Purchase Higher Levels of Insurance Those with Less Acute Needs are More Likely to Purchase Lower Levels of Insurance Cross-Subsidization Insurance Companies Seek Lower-Risk Subscribers and Attempt to Minimize Adverse Selection

economic model

Within this framework, the optimal consumption of goods and services is where the marginal benefit from consumption (i.e., the additional benefit received from consuming the next unit of the good or service) equals the marginal cost of consumption (i.e., the additional cost of consuming the next unit of a good or service).

externaltiy

a consequence of an economic activity experienced by unrelated third parties ex(cigarette smoke)

substitute good

a good that is used instead of the good in question

marginal efficiency of capital

a measure of how much extra output can be produced with an extra unit of capital input.

Health disparities

a multidimensional concept that includes such aspects of the population as race, ethnicity, gender, and geographic location, and socioeconomic status

Market clearing condition

a price level where there are no surpluses or shortages of the good or service in the market (demand=quantity)

Profit Maximization

a process that firms use to determine the most output given price levels that will yield the most return after production costs and the total cost outlay are taken into account.

health care

a range of services and products whose end purpose is the preservation or enhancement of health

Pareto efficiency

a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off.

Externalities

are costs and benefits incurred in the consumption or production of goods and services that are not borne by the individual consumer or producer. ex: if your neighbor got their flu sot you may benefit from a reduced risk of illness even though you yourself didn't get the flu shot.

Health affects the enjoyment of life

ability to contribute to your families well being and to be a productive member of the workforce and in school

Barriers to entry make it pricy for new firms to enter market

also legal restrictions to prevent and licensing

product differentiation leads to brand loyalty

brands can charge more because of their "name"

Health Insurance Portabilty and Accountability Act

breaches in electronic health records can not only violate confidentiality but also create economic loses due to resulting job loss in regard to discovery of a particular health issue of the employed person

wealthier people may eat richer foods and decreasing exercise

but also being wealthier may put you in a healthier environment

Positive economics (factual)

describes the facts and behavior in the economy (i.e. unemployment rate)

Comparative statistics

examines how changes in market conditions influence the positions of the demand and supply curves and cause the equilibrium price and quantity to change

Normal economic profit

exist when there are no excess profits or losses

long run average total cost

existing firms have a cost advantages

The US spends more on health care than any other country in the world

for all this spending it is unclear whether or not we are healthier than our foreign counterparts

- time constraints in health -budgets constraints in health -people can control their health by influencing their health-affecting consumption patterns, their health care utilization, and their environment

fundamental commodity: -object of peoples wants -other goods and services are a means to create or maintain health

social insurance

funded by mandatory contributions through some form of taxation. have goals in addition to pooling of risk, which include transfers of benefit between groups, from more affluent to the poor, from younger adults to senior citizens, from adults to children, or the able-bodied to the disabled. ex: medicare/medicaid, native americans, poor, senior citizens

complementary good

good that is used in companion to the good in question

Public goods

goods in which may be jointly consumed by everyone simultaneously (i.e. national defense.) they have two characteristics: non-excludable and non-rival

Higher Income- higher demand for health -as health status deteriorates demand for health care increases -education: if more efficient, demand is reduced if maintaining health, demand is increased

health insurance; greater coverage(less out of pocket costs), greater demand

Correlation between income of a country and demand for health care services

higher income= greater demand lower income=less demand

more educated people invest more in health/ more productive

increase in demand for health is associated with an increase in education

Health is an investment decision: time and money

individuals invest in themselves(human capital theory): education, training, and health -stock of health/ health stock-output of healthy time

Normative economics (value judgments)

involves ethics and value judgements (i.e. should the gov give money to poor people>)

Marginal private benefit

is the additional benefit gained from the consumption of the next unit for the individual.

Marginal private cost

is the additional cost of producing the next unit for the firm.

The market clearing price and quantity of good or service

is when MPB=MPC

Utility Maximization

is when a consumer strives to get the greatest satisfaction or value from the bundle purchased using the least amount of budgeted money.

For-profit

owned by investors whether they are private or public shareholders. The ability to distribute profits to its investors; the ability to raise capital through investors; and the obligation to pay income and property taxes.

Supply and Demand

serves as the foundation of price determination in microeconomic analysis. In equilibrium, price converges where the quantity demanded by the consumer equals the quantity supplied by the producer.

Marginal cost

the additional cost of consuming the next unit of a good or service

Marginal revenue

the additional revenue generated from selling one more unit of a good or service

Consumer surplus

the difference between what a consumer is willing to pay and what the consumer actually pays for some level of output.

Provision of information

the government may help to correct the market failure problem via provision of information. The provision of information for the general public on the benefits of certain types of health care includes , such as the safety of the mumps, measles, and rubella vaccine. Other forms of information can include public announcements or advertisements concerning the outcomes of certain activities, such as smoking and its health consequences.

non-profit

the obligation to invest all profits in the organization. an exemption from paying state and federal taxes on income and property . required reporting of community benefits offered by the facility.

external cost: pollution impose health

the producer may choose to produce more of the product than would be produced if the producer had to pay environmental costs

allocative efficiency

where the marginal benefit = the marginal cost