Chapter 1: Choices: Money,

Medicine, & Health

Getzen’s Health Economics & Financing, 6th Edition

Copyright © John Wiley & Sons, Inc.
Adapted to lectures of Felipa Sampayo
QUESTIONS
1. Who pays when you skip a workout to
watch television?
2. Is health scarce?
3. Do some people pay more (or less) than
their fair share?
4. Does everyone get the same kind of care?
5. Who decides: the patient, the doctor, the
hospital, or the government?
QUESTIONS cont.
5. Who is made better off: the surgeon or the
patient?
6. Why does health care cost so much?
7. Are there futures contracts in health care?
8. Why is health care bought and sold
differently from other goods and services?
1.1 WHAT IS ECONOMICS?

Fundamental Theorem of
Exchange
Terms of Trade
Value
1.1 WHAT IS ECONOMICS? cont.

Can We Pay Somebody to Care?

Financing Health Care
Full Cost: Paying For Medical
Care
1.2 THE FLOW OF FUNDS

Health Care Spending in the

United States
Sources of Financing
Health Care Providers: The
Uses of Funds
1.3 ECONOMIC PRINCIPLES AS
CONCEPTUAL TOOLS

Scarcity (Budget Constraints)

Opportunity Cost
Willingness to Pay
Trade
Money Flows in a Circle
1.3 ECONOMIC PRINCIPLES AS
CONCEPTUAL TOOLS cont.
The Margin: What Matters?
Maximization: Marginal Costs
and Marginal Benefits
Choice: Are Benefits Greater
than Costs?
1.3 ECONOMIC PRINCIPLES AS
CONCEPTUAL TOOLS cont.
Investment in Human Capital
Contracts: Complex Exchanges
to Deal with Timing and Risk
Distribution: Who Gets What
1.4 HEALTH DISPARITIES
1.4 HEALTH DISPARITIES
1.5 WHOSE CHOICES:
PERSONAL, GROUP, OR PUBLIC?
Do you choose to smoke?
Personal and collective decisions
1.6 SOCIAL SCIENCE AND
RATIONAL CHOICE THEORY
The definition of “rationality” is
important. It does not mean people
always make the best health decisions.
Rather, it means they make decisions
that balance expected outcomes and
costs.
 Chapter 2: Demand and Supply

Getzen’s Health Economics & Financing, 6th Edition

Copyright © John Wiley & Sons, Inc.
Adapted to lectures of Felipa Sampayo
 QUESTIONS
1. What is the difference between Mr. Axel’s
demand for physical therapy, and his need for
physical therapy?
2. Is price the only thing that matters? What is
the difference between price and value ?
3. Why would a life-saving cardiac drug cost less
than one providing only temporary
symptomatic relief ?
4. Do buyers and sellers face the same demand
curve?
 QUESTIONS cont.
5. Can better quality actually decrease demand?
6. Which is more sensitive to price changes—
one person, one firm, or the whole market?
7. Is the price of a treatment determined by the
cost of production? Or by the benefits it
produces? Measured in total, on average, or at
the margin?
8. Do politicians face demand curves?
 2.1 THE DEMAND CURVE
 The Diamonds–Water Paradox: An Example of
Marginal Analysis
 Consumer Surplus: Marginal versus Average
Value of Medicine
 Angioplasty and Aspirin
 Perceptions: A Water–Water Paradox
 Ceteris Paribus
 Individual, Firm, and Market Demand Curves
100,000,000

100,000

+36 people
2.2 THE SUPPLY CURVE
 Marginal Revenue (MR)
The way to maximize profits is to sell
additional units as long as the MR is
greater than the marginal cost (MC)
A decision at margin!
2.3 PRICE SENSITIVITY
 Price Elasticity = % Change in Quantity /
% Change in Price
 Price Elasticity and Marginal Revenue
 Price Discrimination – Doctors play price
discrimination and behave as monopolists.
 MR>0 MR=0 MR<0

Elastic Inelastic
2.4 IS MONEY THE ONLY
PRICE?
There are factors beyond price that may be used to ration
goods and services: “time price” “pain price”.
Example:
Most people criticize UK and Canadian healthcare because
patients must often wait for tests that are available quickly in
the US.

Health care costs are much lower in the UK and Canada.

The study of health economics will give you the tools needed to
address questions like this.
2.5 INPUTS AND PRODUCTION
FUNCTIONS
 Production Functions
 Marginal Productivity

Price Input A Marginal Productivity of A

TMRSAB = ---------------- = -------------------------------
Price Input B Marginal Productivity of B
2.6 MARKETS: THE
INTERSECTION OF DEMAND AND
SUPPLY
2.7 NEED VERSUS DEMAND
 How Much is a Doctor Visit Worth?
 The Demand for Medical Care Is Derived
Demand
 The Demand for Health: What Makes Medical
Care Different
It is health that people want, not medicine.
Healthcare is drastically different from other
industries.
2.8 DETERMINANTS OF
HEALTH
Why do most doctors ask new patients if they have a family
history of diabetes, heart attack or stroke?

Although medical care provided by physicians and in hospitals is

the most expensive and visible part of health care, it is not the
most powerful determinant of an individual's chance of living a
long and health life.

“Production of health” is determined by:

Biology genetics – DNA
Living conditiond – food, shelter, sanitary conditions
Health system: Internet, Hospitals, Pharmacies
Medical Treatment/Technology
2.9 EFFICIENCY
 Chapter 3: Cost-Benefit and Cost-
Effectiveness Analysis

Getzen’s Health Economics & Financing, 6th Edition

Copyright © John Wiley & Sons, Inc.
Adapted to lectures of Felipa Sampayo
 QUESTIONS
1. How much is too much to spend to save someone’s
life? Is one life worth more than another?
2. Is the effort expended to save one more life a total,
average, or marginal cost?
3. Is it more beneficial to screen high-risk or low-risk
people for disease?
4. Can the statistical probability of death among
teenagers be compared to ordinary mortality among
the retired elderly?
 QUESTIONS cont.
5. Which are better measures of the value of care:
patient choices or professional judgments?
6. Is there necessarily a trade-off between health and
money?
7. Why do decisions based on the average benefit from
treatment lead to too much medical care?
 3.1 COST-BENEFIT ANALYSIS IS
ABOUT MAKING CHOICES
1. An Everyday Example: Knee Injury
2. Stepwise Choices: Yes or No? How Much?
1. Decision Rule:
Marginal Benefit > Marginal Cost Try doing more
Marginal Benefit < Marginal Cost Try doing less
Marginal Benefit = Marginal Cost Stop––
this is the best
one can do
 3.1 COST-BENEFIT ANALYSIS IS
ABOUT MAKING CHOICES cont.
1. Calculating Marginal and Average Costs
2. Defining Marginal: What Is the Decision?
1. Quality Margin Example: What Treatment?
2. Severity Margin Example: Which Patients to Treat? How
Many?
3.2 MAXIMIZATION: FINDING
THE OPTIMUM
1. Declining Marginal Benefits
2. Optimization: Maximum Net Benefits
Maximum net gains at
Marginal Benefit = Marginal Cost
so that
MB − MC = 0
3.2 MAXIMIZATION: FINDING
THE OPTIMUM cont.
1. Expected Value
1. Expected Value of Z = (Probability that Z will occur) × (Value of Z)
2. An option is chosen if
(Probability of Gain)×(Benefit)>(Probability of Loss)×(Cost)

(Number of people for whom Zi occurs) x (Value of Zi)

3. Expected Value = -----------------------------------------------------------------
-
Total number of people
3.3 THE VALUE OF LIFE
3.4 QUALITY-ADJUSTED LIFE
YEARS (QALYs)
1. Discounting Over Time
2. QALY League Tables
3.5 PERSPECTIVES: PATIENT,
PROVIDER, PAYER,
GOVERNMENT, SOCIETY
1. Distribution: Whose Costs and Whose
Benefits?
2. CBA and Public Policy Decision Making
3. CBA Is a Limited Perspective
 Chapter 4: Health Insurance:
Financing Medical Care

Getzen’s Health Economics & Financing, 6th Edition

Copyright © John Wiley & Sons, Inc.
Adapted to lectures of Felipa Sampayo
 QUESTIONS
1. Who pays for losses: insurance companies or the
people who buy insurance?
2. What is an “actuarially fair” premium?
3. Does pooling of funds reduce losses or reduce
variance?
4. Do insurance companies take risks, or do they just
put a price on risks?
5. Who takes care of people when they need medical
care they cannot afford?
 QUESTIONS cont.
6. Is a favor from a friend similar to a loan from a bank?
7. Are people who think they will become sick more
likely to obtain insurance?
8. Are people with insurance more likely to sustain a
financial loss?
9. Does company health insurance make people work
more hours or less?
10. Does insurance increase or decrease the demand for
medical care?
 4.1 METHODS FOR COVERING RISKS
1. Savings
2. Family and Friends
3. Charity
4. Private Market Insurance Contracts
5. Social Insurance
6. Strengths and Weaknesses of Different Forms
of Risk Spreading
 4.2 INSURANCE: THIRD-PARTY
PAYMENT
1. Why Third-Party Payment?
2. Variability
3. Third-Party Transactions
4. Who Pays? How Much?
5. How Are Benefits Determined?
4.3 RISK AVERSION

Risk aversion is the desire to replace an uncertain loss

with a steady and certain premium payment

Some people go to great lengths to avoid risk and

uncertainty.

With insurance, people can obtain medical care they

otherwise could not afford and when it comes to life
and death, being able to get help is extremely
important.
4.4 ADVERSE SELECTION
People will only buy health insurance when they feel sick
The flip side of adverse selection is ‘cream skimming’

Discussion is needed in order to balance risk

While adverse selection is problematic for the insurance

company, increasing losses without bringing in more
premiums, reverse or positive selection is the opposite—
drawing in low cost people who still pay regular premiums,
which increases company profit margins.
4.5 MORAL HAZARD
1. Welfare Losses Due to Moral
Hazard
2. Ex Ante Moral Hazard
4.6 TAX BENEFITS
4.7 EFFECTS OF HEALTH
INSURANCE ON LABOR
MARKETS
4.8 HISTORY OF HEALTH
INSURANCE
• Health care costs in the U.S. are much higher than anywhere else.
• Yet much of the U.S. health care system is private, for-profit
companies.
• Aren’t for-profit companies supposed to be more efficient than those
government agencies running health care in other countries?
• Can profit motives in any private system explain some of the cost
difference?
• Or is it because health care in the U.S. is just much, much better
quality?
• Are Americans just sicker?
The Role of Government and Public
Goods

Getzen’s Health Economics & Financing, 6th Edition

Copyright © John Wiley & Sons, Inc.
Adapted to lectures of Felipa Sampayo
 QUESTIONS
1. Who paid for Pasteur to discover bacteria?
2. Are clean water or the theory of relativity public
goods? Are they free or costly?
3. Should treatment of syphilis be part of the public
health system or private medical care? What
about psoriasis? Psychosis? Scoliosis?
4. Why not charge people full price for
vaccinations?
 QUESTIONS cont.
5. Why are new surgical techniques developed with
public funds whereas pharmaceutical research
and development is conducted privately by for-
profit firms?
6. Why pay for cost-benefit analysis to decide
which public programs are worthwhile instead
of using prices to let the market decide?
7. Should I pay taxes to care for the poor?
8. Is medical care for homeless and terminally ill
AIDS patients a public good or a waste of money?
 QUESTIONS cont.
9. Do the preferences of smokers, patients who are
mentally ill, or unborn children count when
assessing the efficiency of the public health
system?
10. Does the Food and Drug Administration, or any
other agency that regulates health, operate in the
interest of the public, in the interest of the
people who work there, or for the special-
interest lobbies?
11. Do people vote for what is good for society or
what is good for themselves?
14.1 THE ROLES OF
GOVERNMENT
1. Markets are Perfectly Efficient,
but only with Perfect
Competition
2. Government in a Mixed Economy
3. How Government Works
14.1 THE ROLES OF
GOVERNMENT cont.
1. The Voluntary Sector
2. Government Is Necessary, and
Costly
3. Markets are Costly, Limited and
Always Regulated
14.2 GOVERNMENT HEALTH
FINANCING
14.4 PUBLIC GOODS AND
EXTERNALITIES
1. Privatizing Public Goods
2. Insurance Makes Any Good More
Public
3. Externalities
4. The Coase Theorem: Transaction
Costs and Property Rights
14.5 MONOPOLY AND
MARKET FAILURE
 14.6 INFORMATION

1. Rational Consumer Ignorance

2. Social Costs Depend on the
Number of People
3. Milk or Bread: Which Is More
Public?
4. Infectious Disease Externalities
 14.6 INFORMATION cont.

5. Epidemics
6. The Sanitary Revolution: A Moral
Campaign for Public Health
7. Formation of the U.S. Public
Health Service
14.7 DRUGS, SEX AND WAR:
PUBLIC HEALTH IN ACTION
1. Addiction
2. Sexual Behavior
3. Who Counts as a Citizen? Abortion
and Other Dilemmas
4. War and Public Health
14.8 POLITICS, REGULATION
AND COMPETITION
1. Politicians: Entrepreneurs Who Try to
Get Votes
2. Government as the Citizen’s Agent
1. Public Welfare Maximization
2. Regulatory Capture
3. Bureaucratic Objectives
4. Political Interest Group Balance
14.8 POLITICS, REGULATION
AND COMPETITION cont.
3. Public Goods Make Almost
Everybody Better Off, But Nobody
Happy
4. Winners and Losers
14.9 TRUST, CARE AND
DISTRIBUTION

Insurance is a way of redistribution mainly when benefits are

independent of premiums – as is the case of Medicare or
subsidies to employer to provide health plans.
History, Demography, and the Growth
of Modern Medicine

Getzen’s Health Economics & Financing, 6th Edition

Copyright © John Wiley & Sons, Inc.
Adapted to lectures of Felipa Sampayo
 QUESTIONS
1. Does economic growth cause population
growth?
2. Is medical care the main reason life
expectancy is increasing?
3. Must a society be wealthy to invest in
medical care?
4. Do economic failures cause plagues and
other mortality?
 QUESTIONS (cont.)
5. Was Malthus right? Will populations
continue to expand until food supplies
are exhausted?
6. Why do families have fewer children
today?
7. Does medical technology create
economic growth or does economic
growth create new medical technology?
15.1 ECONOMIC GROWTH HAS
DETERMINED THE SHAPE OF
HEALTH CARE
1. -Low risk of death
2. -Afford Healthcare
3. -Medical Technology
4. -Insurance and Government
Programs
15.2 BIRTH RATES, DEATH
RATES, AND POPULATION
GROWTH

Natural Rate of Population Increase =

Birth Rate − Death Rate
15.3 THE STONE AGE
1. Time span: 5 million to 10,000 b.c.
2. Economy: Subsistence hunter-
gatherer
3. Total population: Beginning to 4
million
4. Distribution of income: Roughly
equal
15.3 THE STONE AGE (cont.)
5. Growth rate (doubles): .0007% (100,000
years)
6. Medical care: Shaman/witch doctor
7. Life expectancy: 28 years
8. Medical $: Not applicable
15.4 THE AGRICULTURAL AGE
1. Time span: 10,000 b.c. to 1800 a.d.
2. Economy: Farming and harvesting
3. Total population: 4 million to 400
million
4. Distribution of income: Top-heavy,
unequal
15.4 THE AGRICULTURAL AGE
(cont.)

5. Growth rate (doubles): .046% (1,500

years)
6. Medical care: Empirical
7. Life expectancy: 24 years
8. Medical $: Perhaps 1%
15.4 THE AGRICULTURAL AGE
(cont.)

9. Investment and Trade

10. Civilization, War, and Government
11. The Decline of Civilizations Leads to
Population Declines
12. The Plague
15.4 THE AGRICULTURAL AGE
(cont.)

13. Food Supply Determines Population

14. The Rise of Economics
15. The Malthusian Hypothesis
15.5 THE INDUSTRIAL AGE
1. Time span: 1800 to 1950 a.d.
2. Economy: Manufacturing
3. Total population: 0.4 billion to 1.6
billion
4. Distribution of income: Mixed
15.5 THE INDUSTRIAL AGE
(cont.)

5. Growth rate (doubles): .65% (108 years)

6. Medical care: Empirical
7. Life expectancy: 35–65 years
8. Medical $: 2% to 4%
15.5 THE INDUSTRIAL AGE
(cont.)

9. Why Malthus Was Wrong

10. Demographic Transition
11. Demographic Change, Income
Distribution, and the Rise of the
Middle Classes
15.6 THE INFORMATION AGE
1. Time span: 1950 to future
2. Economy: Services
3. Total population: 1.6 billion to 20
billion?
4. Distribution of income: Not yet clear
15.6 THE INFORMATION AGE
(cont.)

5. Growth rate (doubles): 1.88% (40 years)

but slowing (perhaps toward 0%)
6. Medical care: Scientific
7. Life expectancy: 70+ years
8. Medical $: 6% to 16%+
15.7 INCOME AND HEALTH
15.8 REDUCING
UNCERTAINTY: THE VALUE OF
LIFE AND ECONOMIC
SECURITY
1. The Value of Risk Reduction
2. Social Security and Health
Insurance
15.9 THE RISE OF MODERN
MEDICINE
1. Preconditions for Change
2. The Growth of Medical Science and
Technology
3. Did Better Medical Care Increase Life
Expectancy?
International Comparisons of Health
and Health Expenditures

Getzen’s Health Economics & Financing, 6th Edition

Copyright © John Wiley & Sons, Inc.
Adapted to lectures of Felipa Sampayo
 QUESTIONS
1. Which country is the healthiest?
2. Which country has the best medical care
system?
3. Which country has the largest health care
market?
4. Is health care trade more or less international
than other goods and services?
5. Is there more trade between countries in
goods, services, people, or ideas?
 QUESTIONS cont.
6. What differences are greatest across
countries: disparities in doctor supply,
hospital technology, life expectancy, or per
capita spending?
7. Is it high income or high medical
expenditures that makes wealthy countries
more healthy?
8. Does the distribution of income within a
country determine the distribution of health?
16.1 WIDE DIFFERENCES
AMONG NATIONS
 Size of the Market
16.2 MICRO VERSUS MACRO
ALLOCATION: HEALTH AS A
NATIONAL LUXURY GOOD
16.3 CAUSALITY: DOES MORE
SPENDING IMPROVE HEALTH?
16.4 LOW-INCOME
COUNTRIES

1. Health Care in Ghana

2. Sudan
16.5 MIDDLE-INCOME
COUNTRIES
1. China
2. The Health Care System of Mexico
16.6 HIGH-INCOME COUNTRIES
1. Health Care in Japan
2. The Expensive Exception: The
United States
16.7 INTERNATIONAL TRADE IN
HEALTH CARE
1. People and Ideas
2. Services
3. Equipment
4. Pharmaceuticals