Lecture 2

Dr. Aysun Hızıroğlu Aygün

HEALTH ECONOMICS

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Health Economics
 How does health produce utility? (Next: What effects
health (lifestyle and medical care choices)?
 Services delivered in health care markets are not
“goods,” they do not provide direct utility
 They may even have “bad” side effects
 Health as an economic good: stock (or capital) of
health generates happiness
 Derived demand for medical care
 Grossman, M., 1972, On the Concept of Health Capital
and the Demand for Health, Journal of Political
Economy 80 (2): 223–255

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Demand for Health
 Health is like a durable good
 Life starts with an inherent stock of health
 Different for each individual
 Utility=U(X,H)
 H is health, X is other goods
 Health leads to utility
 Utility from X or H increases in a decreasing manner
 Utility from other goods increases with health
 Utility from health increases with other goods
 Indifference curves may be drawn identifying different
combinations of health and other goods with same utility

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Production of Health
 Individual himself produces health using medical care
(health produces utility)
 The demand for the final product (health) leads to
derived demand for medical care to produce health
 Production function:
 H = g(m)
 Where m is medical care –broadly defined
 Generally: g’(m) > 0 and g’’(m) < 0
 Benefits of medical care decrease with usage
 May even become negative
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Health Production
 H = g(m,D)
 Where D is disease
 Impact of medical care depends on disease: disease and
medical care interact to determine health production
 Disease I: Health at mid-level, medical care provides
some help (e.g. allergies, asthma)
 Disease II: Worst health but medical care restores
health to a better level than DI (e.g. a broken leg)
 Disease III: A small health shock but medical care can’t
do much either (e.g. common cold)
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 Health
Disease 1

Disease II

Disease III

Medical

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Characteristics of Medical Care
 Marginal productivity of medical care falls, while average
productivity can be high
 Medical care is not a homogeneous activity
 Thousands of medical procedures, diseases, and injuries
 Current Procedural Terminology System
 International Classification of Diseases

 Medical care generally does not change ultimate outcome,

but speeds the “cure”
 Or slows death: AIDS, some forms of cancer, or Alzheimer’s
disease
 Outcomes of medical care is uncertain
 Life style also matters
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Health through the life cycle
 Aging: wearing of the health stock
 Life expectancy increased
 Public Health improvements
 Medical care improvements
 Typical plot of health stock (Figure 2.4):
 Decreasing trend with occasional troughs and recoveries, until Hmin
 Aggregate annual death rate per 100,000 persons (35 between
ages 1-4 and 15 thousand over 85)
 Technical change reduced these rates for most ages (for ages 15-24,
it’s mostly not technical change but reduction in drunk driving and
improvement in vehicle safety)
 Heart attack (20.1%) and cancer (17.5%) comprise more than 35%
of deaths in the US (2021 data).COVID is the 3 rd leading
cause(12%)

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 Health

 Hmin

Birth Time
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Lifestyle and Health
 “You are what you eat”
 “As you sow, so shall ye reap”
 Smoking, alcohol consumption, use of drugs, diet
composition (high cholesterol foods), nature of sexual
activities, amount of exercise
 H=g(XBAD, XGOOD, m)
g’(XBAD)<0, g’(XGOOD)>0, g’(m)>0
U’(XBAD) > 0
 These choices dominate a person’s health far more
than the medical care system

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Lifestyle and Health

Source: Charles Phelps, Health Economics Edition 6

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Lifestyle and Health
 Between ages 15-24 (causes that comprise more than
75% ):
 Vehicle crashes
 Other accidents
 Homicide
 Suicide
 Black males aged 15-24: death rate from homicide
alone exceeds all causes of white males
 So medical care system is ineffective in such issues

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Lifestyle and Health

Source: Charles Phelps, Health Economics

Edition 6
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Lifestyle and Health

Source: Charles Phelps, Health Economics

Edition 6
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Lifestyle and Health

Source: Charles Phelps, Health Economics

Edition 6
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 McGinnis and Foege, 1993 listed the main cause of
deaths in the US.

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Lifestyle and Health
 Ages 65 and over, major causes of death
 Heart disease (smoking )
 Cancer
 Stroke
 Lung disease (tobacco)
 In mid-ages, it’s a mix
 Epidemiological data shows systematically increased risk
with lifestyle choices
 Smoking one or more packs causes 2.5 times the risk of a fatal
heart attack, similar data for high blood pressure (salt,
alcohol, stress), cholesterol (diet), no exercise
 Tobacco, diet/activity patterns and alcohol account for 3/8
of all deaths in the US (1990)
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Lifestyle Choices (Consumption of
Bads)
 Obesity

 Tobacco

 Alcohol

 Education

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Obesity
 Linked to transportation
 Coggon et al. (2001) estimate that ¼ of all knee
surgeries could be eliminated but for BMI under 25

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Obesity

Overweight and obesity trends in the United States, 1960–

2008 Source: Ogden and Carroll (2010)
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More on lifestyle
 Causes of obesity (economics predicts these)
 Technology -> Increase in marginal productivity of workers,
calories spent decline (2/3 of increase in BMI since 1960s,
(Lakdawalla and Philipson, 2002) )
 Increased value of time increases the opportunity cost of exercise,
encourages shift to fast food (with more women in workforce, time
becomes more valuable, less home-cooking)
 Budget for restaurant meals was 1/3 of food budget in 1970s, recently
became ½
 Larger portions were introduced starting from 1970s, obesity
increases closely track these
 Technology -> Increase in agricultural productivity and mass
production and marketing of food (1/3)
 Density of restaurants per capita explain obesity the most
(Chou et al. 2002)
 Number of fast-food restaurants per capita doubled between 1970
and 1990, full service restaurants increased by 35%

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 Taking into account the effects on people’s physical activity
(and hence health outcomes), do you think that the
American population is better off or worse off with higher
gasoline prices?

 A $1 increase in gasoline prices would (by his work) reduce

obesity-related fatalities by 16,000 per year and save $17
billion annually in health care costs (Courtemanche (2011) )
 Courtemache shows higher gasoline prices cause weight loss
 $1/gallon increase reduces 16,000 fatalities per year and saves $17 bn
in health care costs (400 mn/d gallons are consumed -- $145 bn spent
annually)

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Tobacco –why smoke?
 Stigler and Becker (1977)
 de gustibus non est disputandum
 Rational individuals choose to be addicted now and quit
later in life
 Lack of information
 Decreases with education
 From ~30% to ~8% (college)
 <3% for physicians
 Even health workers’ consumption decreases with education

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Alcohol
 Patterns and intensity matter for constant
consumption
 Heavy drinking:
 Liver cirrhosis
 Some cancers
 Heart disease
 Type of alcohol matters
 Study on Danish adults (Gronbaek et al., 2000):

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Types of alcohol
 Heavy drinking (more than 21 drink per week) of beer and
distilled spirits increases mortality from all causes and
specifically
 Cancers (double the risk)
 Mixed results re: Coronary Heart Disease
 Wine reduces all-cause deaths by about 20%, even for
heavy drinkers, heart disease by 50%
 Red wine is not as bad as white wine due to procyanadin in
red wine (also in chocolate, cranberry juice, pomegranates)
 General alcohol use increases with education
 People with higher education tend to consume healthier
alcohol (Klatsky et al. 1990)

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FIGURE 2.8 Alcohol use in past month,
adults 18+ years of age, by educational
attainment
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Alcohol and lifetime income
 Moderate consumption may increase lifetime income,
heavy consumption decreases
 Through labor force participation, not wage (Mullahy
and Sindelar, 1993)
 Income increases access to a healthier life as well as to
restaurants!
 Moreover, better health means higher productivity and
income

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 Education

FIGURE 2.9 Prevalence of overweight (BMI > 25) and obesity (BMI > 30) among U.S. adults
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Education
 Could it be that both education and healthier lifestyle
choices could depend on something more
fundamental:
 Time preference differences (discounting) (Fuchs
hypothesis)

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 Resources:
Income,
health
insurance,
and other
economic
indicators
Cognitive
ability
Tastes:
discounting,
risk aversion,
or the value
of future
Personality:
self-esteem,
sense of
control,
stress,
depression, or
anxiety
D.M. Cutler, A. Lleras-Muney, 2010 Social
Integration 30
Health Disparities in the US
Life expectancy at 40 y.o.
 Life expectancy increases continuously with income.
 The gap in life expectancy between individuals in the top and bottom 1% of the income
distribution in the United States is 15 years for men and 10 years for women.
 Inequality in life expectancy increased over time (2001-2014)
 Life expectancy increased by 2.34 years for men and 2.91 years for women in the top 5%
of the income distribution but by only 0.32 years for men and 0.04 years for women in
the bottom 5%
 Life expectancy for low-income individuals varied substantially across local areas

 Geographic differences in life expectancy for individuals were significantly

correlated with health behaviors (smoking) but not with access to medical care,
physical environmental factors, income inequality, or labor market conditions.

 Source: Chetty et al. JAMA 2016

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