Advanced Health Economics

Econ555/HPA543 Week 1:
Introduction and Overview

• Why Health Economics? – size and scope of the health care
economy

National Health Expenditures, 1960-2003
$1,800.00 $1,600.00 $1,400.00 $1,200.00 $1,000.00 $800.00 $600.00 $400.00 $200.00 $0.00 1961 1964 1967 1970 1973 1976 1979 1982 Year 1985 1988 1991 1994 1997 2000 2003

Total

Private

Federal

State & Local

Billions of Dollars

Per Capita Health Expenditures, 1960-2003
$6,000.00

$5,000.00

$4,000.00

$3,000.00

$2,000.00

$1,000.00

$0.00 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year

Total

Private

Federal

State & Local

Dollars

Personal Consumption Expenditures, 1960-2003
1,800,000 1,600,000 1,400,000
Millions of Dollars

1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1960
Food Recreation

1966
Housing Clothing

1972

1978
Medical Care Pers.Bus.

1984
Transportation Other

1990
Hshld.Op.

1996

2002

1960-2003 100% 80% 60% 40% 20% 0% 1960 Medical Care Food 1966 Housing 1972 Transportation 1978 Hshld.Op.Bus. 1984 Recreation Clothing 1990 Pers. 1996 Other 2002 .Personal Consumption Expenditures.

Annual Percentage Change in US Health Care Expenditures. 1961-2003 18 16 14 12 10 8 6 4 2 0 1963 1967 1971 1975 1979 Year 1983 1987 1991 1995 1999 2003 .

1960-2003 18 16 14 12 10 8 6 4 2 0 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 .US Health Care Expenditures as Percent of GDP.

. Hosp.Medical Care Prices. Svcs. Drugs Phys. 1960-2004 450 400 350 300 CPI 250 200 150 100 50 0 1960 1964 1968 All 1972 1976 1980 1984 1988 1992 1996 2000 2004 Medical Care P resc. Svcs.

et al. (2003).Source: Heffler. Health Affairs .

Health Care Financing Review. 2003 .Source: Huber and Orosz.

2003 . Health Care Financing Review.Source: Huber and Orosz.

2003 .Source: Huber and Orosz. Health Care Financing Review.

2003 – Major Categories Source: DHHS.asp . http://www.gov/statistics/nhe/historical/chart.US Health Care Spending.hhs.cms.

Health Care Expenditures by Type.000 100.000 400.000 200. Pub.Drug Const.000 0 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 Hospital Oth.Hlth/Res. Nursing Home .000 300. 1960-2002 500. Physician Admin Other Prof.Pers. Presc.

Physician Admin Other Prof. Pub. Presc. 1960-2002 100% 80% 60% 40% 20% 0% 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 Hospital Oth.Hlth/Res. Nursing Home .Health Care Expenditures by Type.Drug Const.Pers.

.

• Why Health Economics? – size and scope of the health care economy – Role of government in health care markets • share of overall spending .

2003 – Source of Funds Source: DHHS.cms. http://www.gov/statistics/nhe/historical/chart.asp .hhs.US Health Care Spending.

1960-2003 100% 80% 60% 40% 20% 0% 1963 1967 1971 1975 1979 Year 1983 1987 1991 1995 1999 2003 Private Federal State & Local .Percent of Total Health Care Expenditures by Source.

000 0 1963 1967 Total 1971 Medicare 1975 1979 Medicaid/SCHIP 1983 Defense/VA 1987 1991 Public Health/Research 1995 Other 1999 2003 .Federal Health Care Expenditures.000 500. 1960-2003 600.000 400. by Program.000 300.000 100.000 200.

1960-2003 100% 80% 60% 40% 20% 0% 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 Medicare Medicaid/SCHIP Defense/VA Public Health/Research Other .Federal Health Care Expenditures. by Program.

000 200.000 150. 1960-2003 250.000 50. by Program.000 100.State and Local Health Expenditures.000 0 1963 1967 Total 1971 1975 1979 Public Health 1983 1987 1991 Hospitals/Schools 1995 Other 1999 2003 Medicaid/SCHIP Workers' Comp .

State and Local Health Expenditures. by Program. 1960-2003 100% 80% 60% 40% 20% 0% 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 Medicaid/SCHIP Public Health Workers' Comp Hospitals/Schools Other .

Source: Huber and Orosz. 2003 . Health Care Financing Review.

legislation and programs .• Why Health Economics? – size and scope of the health care economy – Role of government in health care markets • share of overall spending • regulation.

Government Intervention in HealthRelated Markets • Demand Side – Provision of insurance – Efforts to affect health behavior • Supply Side – – – – – Price controls Restrictions on entry/exit Subsidization of research Promotion of competition Tax policy And much more…….. .

legislation and programs – Role of Uncertainty .• Why Health Economics? – size and scope of the health care economy – Role of government in health care markets • share of overall spending • regulation.

• Uncertainty and Health – Often the result of asymmetric information – Demand Side • Uncertainty about probability of illness • Uncertainty about treatments • Uncertainty about quality and aims of supplier – Supply Side • Uncertainty about treatment options • Uncertainty about risk for insurers Key factor behind demand for insurance .

2003 – Source of Funds Source: DHHS.gov/statistics/nhe/historical/chart.US Health Care Spending. http://www.cms.asp .hhs.

000 200.000 500. by Source.000 100.000 300.Private Health Care Expenditures. 1960-2003 600.000 400.000 0 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 Year Out-of-Pocket Private Insurance Other Private Millions of Dollars .

by Source.Private Health Care Expenditures. 1960-2003 100% 80% 60% 40% 20% 0% 1963 1967 1971 1975 1979 Year 1983 1987 1991 1995 1999 2003 Out-of-Pocket Private Insurance Other Private .

et al.Source: Heffler. Health Affairs . (2003).

• Information and Types of Medical Care – Pauly (1978. 1988) describes three types of ‘medical care’ • “services which are purchased relatively frequently by most households” • “services a typical producer produces relatively frequently but which a typical consumer can consume relatively infrequently. perhaps once in a lifetime” • “services which a typical produce produces and a typical consumer consumes relatively infrequently” Concludes that increased “commercialism” has made medical care less different from other goods &services over time .

legislation and programs – Role of Uncertainty – Externalities .• Why Health Economics? – size and scope of the health care economy – Role of government in health care markets • share of overall spending • regulation.

• Externalities – Communicable diseases • Significant reductions in spread of communicable disease account for much of improvement in health in developed countries • Still a significant problem in less developed countries – Individual behaviors • Direct impact on health • Impact on publicly provided health costs .

Developed vs.edu/health .Causes of Death. http://ucatlas. Developing Countries Source: UC Atlas of Global Inequality.ucsc.

7. 2. 8. HIV/AIDS 2. 6. 7. 5. 8. http://ucatlas.php . 3. 9. 4. 5.ucsc.Measles 674 000 10. 4. 2 678 000 1.edu/health/cause. 3. 6.Self-inflicted 499 000 Source: UC Atlas of Global Inequality. Tuberculosis 571 000 10.Leading Causes of Death in 2001 Developing Countries Number of Deaths Developed Countries Number of Deaths 1. Ischaemic heart disease 3 512 000 Lower respiratory infections 2 643 000 Cerebrovascular disease 3 346 000 Ischaemic heart disease 2 484 000 Chronic obstructive pulmonary disease 1 829 000 Diarrhoeal diseases 1 793 000 Lower respiratory infections 1 180 000 Cerebrovascular disease 1 381 000 Trachea/bronchus/lung cancers 938 000 Childhood diseases 1 217 000 Road traffic accidents 669 000 Malaria 1 103 000 Stomach cancer 657 000 Tuberculosis 1 021 000 Hypertensive heart disease 635 000 Chronic obstructive pulmonary disease 748 000 9.

edu/health . http://ucatlas.ucsc.Source: UC Atlas of Global Inequality.

2000 Source: Mokdad et al.Actual Causes of Death in US. 2004 .

2004 . 2000 Source: Mokdad et al.Actual Causes of Death in US.

org/depweb/english/modules/social/life/map1.worldbank. http://www.html .Life Expectancy at Birth. 1990-1998 Source: World Bank.

edu/health .Source: UC Atlas of Global Inequality.ucsc. http://ucatlas.

0 40.0 0.0 1900 1950 1960 1970 1980 1990 2000 Year Male Female Years .0 80.Life Expectancy at Birth.0 20. United States 100.0 60.

• Why Health Economics? – size and scope of the health care economy – Role of government in health care markets • share of overall spending • regulation. legislation and programs – Role of Uncertainty – Externalities – Importance of Non-Profits .

• Why Health Economics? – size and scope of the health care economy – Role of government in health care markets • share of overall spending • regulation. legislation and programs – Role of Uncertainty – Externalities – Importance of Non-Profits – Issues of Equity and Need .

b) – Explains demand for health and demand for health care – Key features: • Consumers want health • Demand for medical care is derived from demand for health • Consumers produce health in various ways • Health should be thought of as a stock that depreciates over time and that can be added to • Health is both an consumption good and an investment good .Human Capital Model of the Demand for Health • Based on Grossman (1972a.

Health Indifference curves reflect tradeoffs between health and other consumption Consumption .

Income Labor – Leisure Tradeoff Time(days)=365 = TH + TI + TW + TL Improved Health increases time Available for work and leisure Y1 Yo TLo TL1 Leisure Time .

Consumption Good Budget constraint Y = PMM + PCC C1 Co M1 Mo Medical Care .

similar for other inputs into health production (e.g.Health Production Function Health . time on health) . and endowment Ht+1 = (1-d )H t + It H0 H1 Medical Care . knowledge.depends on medical care. time spent in health production.

Health Production Possibilities Frontier reflects tradeoffs between what can be produced given resources. etc. technologies. H0 H1 Consumption .

4 Quadrant Model Health Medical Care Consumption Consumption .

Rise in Medical Care Prices Health Medical Care Consumption Consumption .

Factors affecting demand for health • • • • • • • Prices of medical care and other goods Wages Education Age Health Endowment Preferences Environmental Factors .

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