Santerre Neun - Chapter 1

Chapter 1
Introduction
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What is Health Economics?
• Study of health economics
– Application of various microeconomics tools
to health issues and problems
• Goal of health economics
– Promote a better understanding of the
economic aspects of health care problems
• So that corrective health policies can be designed
and proposed
What is Health Economics?
• Health economics
– Broad range of concepts, theories, and topics
– . . . studies the supply and demand of health
care resources and the impact of health care
resources on a population.
• The Mosby Medical Encyclopedia (1992, p. 361)
– Is defined in terms of determination and
allocation of health care resources
Health Care Resources
• Medical supplies
– Pharmaceutical goods, latex rubber gloves, bed
linens
• Personnel
– Physicians, lab assistants
• Capital inputs
– Nursing home and hospital facilities
– Diagnostic and therapeutic equipment
– Other items that provide medical care services
Health Care Resources
• Trade-offs are inevitable
– Resources are limited or scarce at a given
point in time
– Wants are limitless
– Society must make a number of fundamental
but crucial choices
• Scarcity
– Each society must make important decisions
regarding the consumption, production, and
distribution of goods and services
The Four Basic Questions
1. What mix of nonmedical and medical
goods and services should be produced
in the macroeconomy?
2. What mix of medical goods and services
should be produced in the health
economy?
3. What specific health care resources
should be used to produce the chosen
medical goods and services?
4. Who should receive the medical goods
and services that are produced?
• Allocative efficiency answers the first 2
– Choose the best way to allocate resources to
different consumption uses
• Production efficiency answers the 3rd
– Choose the best mix of inputs to produce the
maximum output
Production & Allocative Efficiency
• Production possibilities curve (PPC)
– Illustrates production and allocative efficiency
– An economic model that depicts the various
combinations of any two goods or services
that can be produced efficiently given:
• Stock of resources
• Technology
• Various institutional arrangements
Figure 1.1 - Production Possibilities Curve
for Maternity and Nursing Home Services
The PPC shows the trade-off between any two goods
given a fixed stock of resources and technology.
A A point outside the PPC, such as G, is not
Quantity of
maternity yet attainable but can be reached with an
B G increase in resources or through
services
(M) F institutional or technological changes that
MF improve productivity.
C
MC Any point on the PPC, such as points A
through E, reflects efficiency because
D units of one good must be given up to
MD
receive more of the other.
E
NF NC N D
Quantity of nursing
home services (N)
A point in the interior, such as F, reflects inefficiency because more of one
good can be attained without necessarily reducing the other.
Production Possibilities Curve
• Point C
– Medical resources are fully utilized
– MC units of maternity care services
– NC units of nursing home services
• Point D
– Medical resources are fully utilized
– MD units of maternity care services
– ND units of nursing home services
• Movement from point C to point D
– One more unit of nursing home services ND–
NC
• (MC – MD)units of maternity care services are given
up to receive the additional unit of nursing home
services
– Medical inputs must be reallocated from the
maternity care services market to the nursing
home services market
– Opportunity cost of producing an additional
unit of nursing home services
• Forgone units of maternity care services, MC – MD
• Opportunity cost
– Value of the next best alternative that is given
up
• Law of increasing opportunity cost
– Explains the bowed-out shape of the PPC
– Opportunity cost increases with a movement
along the curve
• Because of imperfect substitutability of resources
• Point F - Underutilization of resources
– Inefficient
– In the interior of the PPC
– More units of one medical service can be
produced without decreasing the amount of
the other medical service
• Point B on the PPC
• Point G
– Outside the current PPC
– Attainable in the future if:
• Stock of health care resources increases
• A new, productivity-enhancing technology is
discovered
• Various economic, political, or legal arrangements
change and improve productive relationships
– PPC shifts out and passes through a point like
G
• Production efficiency
– Attained when the health economy operates
at any point on the PPC
• Allocative efficiency
– Attained when society chooses the best or
most preferred point on the PPC
The Distribution Question
• The fourth question
– Deals with distributive justice or equity
– Is the distribution of services equitable, or fair,
to everyone involved?
• Two ways of distributing output:
– Pure market system
– Perfect egalitarian system
Pure Market System
• Goods and services - distributed based on
each person’s willingness and ability to
pay because:
– People face an incentive to earn income
• To better afford goods and services
– Tend to work hard and save for present and
future consumption
• Efficient allocation of resources
– Economy operates on the PPC
Pure Market System
• Price
– Rationing mechanism
• Differences in ability to pay
– Some have consciously chosen to work
harder and save more than others
– Some people have less income because of
unfortunate life circumstances
• People without sufficient incomes
– Face a financial barrier to obtaining goods
and services
Pure Market System
• Given income disparities
– Some people may be denied access to
needed goods and services
• Pure market system
– Viewed as inherently unfair by many
• In terms of distribution of important goods and
services such as health care
Perfect Egalitarian System
• A central committee
– Ensures everyone receives an equal share of
goods and services
• Everyone has access to the same goods and
services without regard to income status or
willingness to pay
• An incentive may exist for people to
choose to work and save less
– Inefficient allocation of resources
– Economy may operate inside the PPC
Mixed Systems
• Most countries
– Rely on central versus market distribution
varying by degree across countries
• In the United States
– Many goods and services are distributed by:
• Market
• Government
– Supplemental Nutrition Assistance Program, Temporary
Assistance for Needy Families, Medicaid programs
Implications of the Four Questions
• Scarcity of economic resources
– Results in each society making hard choices
concerning consumption and production
activities
– Generally, societies wish to produce the best
combination of goods and services
• By employing least-cost methods of production
• Trade-offs are inevitable
– Some amount of one good or service must be
given up for the production and consumption
of another good or service to increase
– Societies’ choices may involve sensitive
trade-offs
• Young vs. old
• Prevention vs. treatment
• Men (prostate cancer) vs. women (breast cancer)
• Achieving equity
– Desirable goal
– Society seeks redistribution of income
• Redistribution of income – Taxation
– Creates a disincentive for efficiency
• Production inside the PPC
• Trade-off between equity and efficiency
often exists
Pulse of the Health Economy
• Health economy involves activities related
to population health:
– Production and consumption of goods and
services
– Distribution of those goods to consumers
• Performance indicators of medical care
– Costs
– Access
– Quality
Medical Care Costs
• Represent the total opportunity costs when
using various societal resources to
produce medical care
• Centers for Medicare and Medicaid
Services (CMS), United States
– Collects and reports data on the uses,
sources, and costs of medical care
• Data yield important insights on the utilization of
health care funds, their source, and the actual
amount spent on medical care
Figure 1.2 - Uses of Health Care Funds in
the United States, 2010
Sources of Medical Funds
• Funds spent on national health
– From the private sector
• 53% in 2010
• 76% in 1960
• Mid-1960s saw the introduction of:
– Public health insurance programs
• Medicare and Medicaid
• Private insurance
– Has expanded its role as a source of funds
– Substituted greatly for out-of-pocket payments
– Reflects a greater number of individuals and
more types of medical care covered
• Government funds
– Spent by Medicare and Medicaid
– Amount to less than half of all health care
spending in the U.S.
Figure 1.3 - Sources of Health Care
Funds in the United States, 2010
• Woolhandler and Himmelstein explain:
– CMS includes only direct purchasing of
medical care (Medicare, Medicaid, and
government-owned hospitals)
– CMS excludes public employee benefits
• Federal Employees Health Benefits Program
• Various state employee health insurance programs
– Employer-sponsored health insurance
premiums are exempted from various federal,
state, and city taxes
• Woolhandler and Himmelstein explain:
– Government - responsible for financing nearly
60 percent of all health care costs
• Direct spending of government = 45%
• Public employee benefits = 5 to 6%
• Tax subsidy for health insurance premiums = 9%
or more
Amount of Medical Care Spending
• Costs of health care are high and
continually rising
– U. S. spent $2.6 trillion or $8,400 per person
in 2010
• Compared to $26.9 billion and $141, respectively,
in 1960
• Trade-offs may be involved
– High health care costs = Lower amounts of
other goods produced and consumed
Amount of Medical Care Spending
• Greater productive capacity, over time
– Productivity-improving technologies
– More labor and capital resources
– PPC has likely shifted out
• More of one good or service can be produced
without sacrificing the others
• To control differences in the productive
capacity
– Divide amount of health care spending by
GDP
Figure 1.4 - National Health Care Costs as a
Percentage of GDP from 1960 to 2010
Medical Care Access
• Does everyone have reasonable access to
medical care on a timely basis?
– Timely access is often measured by
percentage of individuals with health
insurance
– Insurance provides access to high-cost, life-
saving interventions, for a small premium
• Cost of catastrophic care – very high
Medical Care Access
• The health insurance product
– Before the 1970s most people purchased only
hospital insurance
– Today people purchase health insurance for
other types of medical care
• Amount of medical care expenditures
covered by insurance has increased over
the years
Figure 1.5 - Percentage of the U.S. Population
without Health Insurance from 1940 to 2010
Medical Care Quality
• Measure of medical care quality
– Infant mortality rate (IMR)
• Number of children below one year of age that
died as a percentage of all live births in that same
year
– IMR has improved significantly over time
Figure 1.6 - Infant Mortality Rates in
United States, 1960 to 2009
System Structure & Performance
• System structure
• Ways in which various organizations are designed
in terms of their size and scope
• Mix of market activities and government
involvement
• Financing and reimbursement mechanisms
– Helps to establish the prevailing incentives in
a health economy
– Influences how people, organizations, and
government itself behave
Figure 1.7 - Structure,
Performance, and Policy
Structure
•Organizations Structural Remedy
•Markets
•Government (Laws, Regs)
Conduct Remedy
Behavior of people Behavior of Organizations Behavior of government

•Work and Markets •Pursue public or
•Consumption •Pricing special interests
•Savings •Production
•Investment
Performance Public Policy

•Efficiency •Antitrust
•Equity •Regulation
(Social and Industrial)
•Taxes
Patient Protection and Affordable
Care Act of 2010
• The PPACA contains many provisions that
should monumentally alter the financing,
reimbursement, and delivery of health care in
the U.S.
• At this time, it is unclear if the U.S. Supreme
Court will uphold or invalidate this new health
care reform legislation

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