MECS 551-1

Health Economics PhD Course

Professor David Dranove

MECS 551-1 is the first of a two-quarter sequence in Health Economics. Health

Economics applies microeconomics to further the understanding of healthcare
institutions, regulators, and markets. In the first part of the course, students will learn
basic institutional details and discuss seminal papers by Arrow and Weisbrod. The
remainder of the course examines medical innovators, patients, providers, and insurers.

For each research topic area, we will begin by discussing early contributions and move
forward through time. For those topics that will be reprised in MECS 551-2, we will save
the most recent work, including current working papers, for the second quarter course.

During the quarter, students will begin work on an original empirical research project.
(Students will learn about the vast amount of data available at Kellogg.) Students will
present their papers in the Winter Quarter MECS 551-2.

A note about grading: Grades will be based on the following:

∙ Student presentations of assigned research papers (30 percent)

∙ Class participation, especially during student presentations (20 percent)
∙ Research proposal (10 percent)
∙ Final exam (40 percent)

A note about student presentations: All students, including auditors, must present
research papers. Students taking the course for credit will present at least two papers
(depending on enrollments.) Auditors will present one paper. Presentations will last 45-
60 minutes. Students should present papers as if they were giving a job market talk. This
means that students must provide motivation for the paper, including a description of
prior work, and explain the contribution of the paper to the literature.

A note about the research proposal: Students must submit a 3-5 page research proposal
and give a short (~30 minute) presentation on the last day of class. I have moved the final
class from 11/ 28 to 12/5 to allow more time for proposal development. I encourage all
students to meet with me during the quarter to discuss their ideas for the proposal.

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 Course Outline

Note: Papers denoted by an asterix (*) are to be presented by students. All papers,
including recommended readings, are available through the Canvas course site. On rare
occasion, the published version is not available. In these cases, I posted working papers.

Part One: Healthcare Institutions (September 19-26)

1) The Value Chain

Required Reading:

Arrow, K. 1963, “Uncertainty and the Welfare Economics of Medical Care” American
Economic Review, 53(5): 941-73

2) The Innovation Sector

3) The Provider Sector

Required Reading:

Donabedian, A. 1988, “The Quality of Care: How Can It Be Assessed? Journal of the
American Medical Association 260(12): 1743-48.

Recommended Reading:

Miller, D. et al. 2011, “Large Variations in Medicare Payments for Surgery Highlight
Savings Potential from Bundled Payment Programs” Health Affairs 30(11): 2107-15.

4) The Insurance Sector

Required Reading:

Kaiser Family Foundation, 2016, “Employer Health Benefits: 2016 Summary of

Findings”

5) Pharmaceuticals

Required Reading:

Weisbrod, B. 1991, “The Health Care Quadrilemma” Journal of Economic Literature

29(June): 523-52

Recommended Reading:

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DiMasi, J., Grabowski, H. and R. Hansen, 2016, “Innovation in the Pharmaceutical
Industry: New Estimates of R&D Costs” Journal of Health Economics 47:20-33.

5) Data available for research at NU (Limbrock)

Part Two: The Economics of Medical Innovation (September 26-October 10)

1) Evidence on incentives for R&D

Required Readings:

Acemoglu, D. and J. Linn, 2004, “Market Size in Innovation: Theory and Evidence from
the Pharmaceutical Industry” Quarterly Journal of Economics, 119(3): 1049-90.

*Finkelstein, A., 2004, “Static and Dynamic Effects of Health Policy: Evidence from the
Vaccine Industry” Quarterly Journal of Economics 119)2): 527-64.

Dranove, D. Garthwaite, C., and M. Hermosilla, 2014, “Pharmaceutical Profits and the
Social Value of Innovation” NBER Working Paper No. 20212.

Recommended Readings:

Henderson, R. and I. Cockburn, 1994, “Measuring Competence? Exploring Firm Effects

in Pharmaceutical Research” Strategic Management Journal 15(S1): 63-84

Peltzman, S., 1973, “An Evaluation of Consumer Protection Legislation: The 1962 Drug
Amendments” Journal of Political Economy 81(5): 1049-91

Ward, M. and D. Dranove, 1995, “The Vertical Chain of Research and Development in
the Pharmaceutical Industry” Economic Inquiry 33(1): 70-87.

Blume-Kohout, M. and N. Sood, 2013, “Market Size and Innovation: Effects of Medicare
Part D on Pharmaceutical Research and Development” Journal of Public Economics, 97:
327-36.

2) Is Medical Technology Worth the Cost?

Required Readings:

Cutler, D. and M. McClellan, 2001, “Is Technological Change in Medicine Worth It?”
Health Affairs, 20(5): 11-29.

*Almond, D. et al., (2010), “Estimating Marginal Returns to Medical Care” Quarterly

Journal of Economics, 125(2): 591-634

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Recommended Reading:

Viscusi, K., 2013, “Using Data from the Census of Fatal Occupational Injuries to
Estimate the Value of a Statistical Life” Monthly Labor Review

3) Medical Practice Variations

Required Readings:

Wennberg, J., Fisher, E. and J. Skinner, 2002, “Geography and the Debate over Medicare
Reform” Health Affairs W96-114.

Chandra, A., and D. Staiger, 2007, “Productivity Spillovers in Health Care: Evidence
from the Treatment of Heart Attacks” Journal of Political Economy 115(1): 103-140.

*Finkelstein, A., M. Gentzkow, and H. Williams (2016), “Sources of Geographic

Variation in Healthcare: Evidence from Patient Migration” Quarterly Journal of
Economics, 131(4): 1681-1726

Recommended Readings:

Cutler, D. et al., 2017, “Physician Beliefs and Patient Preferences” NBER Working Paper
19320.

Epstein, A., and S. Nicholson, S., 2009, “The Formation and Evolution of Physician
Treatment Styles: An Application to Cesarean Sections” Journal of Health Economics
28(6): 1126-40.

Part Three: Demand (October 10)

Required Readings:

*Manning, W. et al., 1987 . Health Insurance and the Demand for Medical Care:
Evidence from a Randomized Experiment. American Economic Review, pp.251-277.

Aron-Dine , A., L. Einav, and A. Finkelstein, 2013, “The RAND Health Insurance
Experiment, Three Decades Later” Journal of Economic Perspectives 27(1): 197-22

Finkelstein, A. et al., 2012, “The Oregon Health Insurance Experiment: Evidence from
the First Year” Quarterly Journal of Economics 127(3): 1057-1106.

Recommended Readings:

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Cherkin, D.C., Grothaus, L. and Wagner, E.H., 1989. “The effect of office visit
copayments on utilization in a health maintenance organization,” Medical Care, pp.669-
679.

Selby, J.V., Fireman, B.H. and Swain, B.E., 1996. “Effect of a copayment on use of the
emergency department in a health maintenance organization,” New England Journal of
Medicine, 334(10): 635-642.

Chandra, A., Gruber, J. and R. McKnight, 2007, “Patient Cost-Sharing, Hospitalization

Offsets, and the Design of Health Insurance for the Elderly” NBER Working Paper
12972.

Kowalski, A., 2016, “Censored Quantile Instrumental Variable Estimates of the Price
Elasticity of Expenditure on Medical Care” Journal of Business & Economic Statistics,
34(1) 107-17.

Part Four: The Economics of the Provider Sector (October 17-31)

Supplier Induced Demand

Required Readings:

Fuchs, V., 1978 “The Supply of Surgeons and the Demand for Operations” Journal of
Human Resources 13 (Supplement): 35-56.

*Gruber, J. and M. Owings, 1996, “Physician Financial Incentives and Cesarean Section
Delivery” RAND Journal of Economics 27(1): 99-123.

Recommended Readings:

Evans, R. 1974, “Supplier-Induced Demand: Some Empirical Evidence and Implications.

“ In: Perlman M. (eds) The Economics of Health and Medical Care. International
Economic Association Series. Palgrave Macmillan, London

Cromwell, J. and Mitchell, J.B., 1986. Physician-induced demand for surgery. Journal of
Health Economics, 5(4): 293-313.

Dranove, D., 1988, “Demand Inducement and the Physician-Patient Relationship”

Economic Inquiry 26: 281-98.

McGuire, T. and M. Pauly, 1991. “Physician Response to Fee Changes with Multiple
Payers” Journal of Health Economics 10(4): 385-410.

Dranove, D. and Wehner, P., 1994. Physician-induced demand for childbirths. Journal of
Health Economics, 13(1):61-73.

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Traditional Studies of Incentives

Required Readings

*Gaynor, M. and Gertler, P., 1995. Moral hazard and risk spreading in partnerships. The
RAND Journal of Economics, pp.591-613

Recommended Reading:

Epstein, A., Ketchum, J. and S. Nicholson, 2010, “Specialization and Matching in

Professional Services Firms” RAND Journal of Economics

Disclosure

Required Readings:

Dranove, D. et al., “Is More Information Better? The Effects of ‘Report Cards’ on health
Care Providers” Journal of Political Economy, 111(3): 555-88.

Dranove, D. and A. Sfekas , 2008, “Start Spreading the News: A Structural Estimate of
the Effects of New York Hospital Report Cards” Journal of Health Economics 27(5):
1201-7.

*Cutler, D., Huckman, R. and MB Landrum, 2004, “The Role of Information in Medical
Markets: An Analysis of Publicly Reported Outcomes in Cardiac Surgery” American
Economic Review” 94(2); 342-6.

Recommended Readings:

Spence, A.M., 1975. Monopoly, quality, and regulation. The Bell Journal of Economics,
pp. 417-429.

Dranove, David, and Ginger Zhe Jin. 2010, "Quality Disclosure and Certification: Theory
and Practice." Journal of Economic Literature 48(4): 935-963.

Dranove, David, and Mark A. Satterthwaite 1992, "Monopolistic Competition When

Price and Quality Are Imperfectly Observable." The RAND Journal of Economics: 518-
534.

Romano, and Zhao, 2004, “Do Well-Publicized Risk-Adjusted Outcomes Reports Affect
Hospital Volumes? Medical Care 42(4): 367-77.

Pope, D.G., 2009. Reacting to rankings: evidence from “America's Best Hospitals”.
Journal of Health Economics, 28(6):1154-1165.
Competition among providers

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Required Readings:

Robinson, J. and H. Luft, 1985, “The Impact of Hospital Market Structure on Patient
Volume, Average Length of Stay, and the Cost of Care” Journal of Health Economics, 4:
333-56.

Dranove, D., Shanley, M. and W. White, 1992, “Price and Concentration in Hospital
Markets: The Switch from Patient-driven to Payer-driven Competition” Journal of Law
and Economics, 36(April): 179-204.

*Kessler, D. and M. McClellan, 2000, “Is Hospital Competition Socially Wasteful?”

Quarterly Journal of Economics, 115(2): 577-615.

Capps, C., Dranove, D. and M. Satterthwaite, 2003, “Competition and Market Power in
Option Demand Markets” RAND Journal of Economics, 34(4): 737-63.

Recommended Readings:

Zwanziger, J. and Melnick, G.A., 1988. The Effects of Hospital Competition and the
Medicare PPS Program on Hospital Cost Behavior in California. Journal of Health
Economics, 7(4):.301-320.

Dafny, L., 2009, Estimation and Identification of Merger Effects: An Application to

Hospital Mergers. The Journal of Law and Economics, 52(3): pp.523-550.

Lynk, W.J., 1995. Nonprofit Hospital Mergers and the Exercise of Market Power. The
Journal of Law and Economics, 38(2):437-461.

Elzinga, K.G. and Hogarty, T.F., 1998. The Problem of Geographic Market Delineation
in Antimerger Suits. J. Reprints Antitrust L. & Econ., 28:.203+

Capps, C. and Dranove, D., 2004. Hospital Consolidation and Negotiated PPO Prices.
Health Affairs, 23(2):175-181.

Town, R. and Vistnes, G., 2001. Hospital competition in HMO networks. Journal of
Health Economics, 20(5):733-753.

Capps, C.S., Dranove, D., Greenstein, S. and Satterthwaite, M., 2002. Antitrust Policy
and Hospital Mergers: Recommendations for a New Approach. The Antitrust Bulletin,
47(4):677-714.

Tenn, S., 2011. “The price effects of hospital mergers: a case study of the Sutter–Summit
transaction,” International Journal of the Economics of Business, 18(1):65-82.

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Part Five: The Economics of the Insurer Sector (November 7-14)

Adverse selection

Required Readings:

Cutler, D. and S. Reber, 1998, “Paying for Health Insurance: The Trade-off Between
Competition and Adverse Selection” Quarterly Journal of Economics¸113(2): 433-66.

*Einav, L.. Finkelstein, and Cullen, M., 2010, “Estimating Welfare in Insurance Markets
Using Variation in Prices” Quarterly Journal of Economics 75(3); 877-921.

Handel, B. 2013, “Adverse Selection and Switching Costs in Health Insurance Markets:
When Nudging Hurts” American Economic Review 103(7): 2643-82.

Recommended Readings:

Rothschild, M. and Stiglitz, J., 1976. “Equilibrium in competitive insurance markets: An

essay on the economics of imperfect information” QJE, 90(4):629-649.

Nicholson, S., Bundorf, K., Stein, R.M. and Polsky, D., 2004. The Magnitude and Nature
of Risk Selection in Employer‐Sponsored Health Plans. Health Services Research,
39(6p1):1817-1838.

Altman, D., Cutler, D.M. and Zeckhauser, R.J., 1998. Adverse selection and adverse
retention. The American Economic Review, 88(2):122-126.

Competition among insurers

Required Readings:

Dafny, L. 2010, “Are Health Insurance Markets Competitive?” American Economic

Review 100(4): 1399-1431.

*Dafny, L. Duggan, M. and S. Ramanarayanan, 2012 “Paying a Premium on Your

Premium,” American Economic Review, 102(2): 1161-85.

Recommended Readings:

Wholey, D., Feldman, R. and Christianson, J.B., 1995. The effect of market structure on
HMO premiums. Journal of Health Economics, 14(1): 81-105.

Dranove, D., Gron, A. and Mazzeo, M.J., 2003. Differentiation and competition in HMO
markets. The Journal of Industrial Economics, 51(4): 433-454.

Part Six: Students present research proposals (December 5) – Note Date!