ECONOMICS OF SOCIAL POLICY: HEALTH CARE

DISTINCTION OF PROBLEM AND AIMS:

Health Care aims at improving the Health Status of an individual; however, the Health Status of an individual is not just contingent on the Health Care he/she receives.
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There are many exogenous sources ² Environment, individual endowments, habits, Nutrition etc. Therefore health care needs to be wider than just medical treatment (although we shall examine the latter).

AIMS: EFFICIENCY:
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Allocative/External producing the quantity, quality and mix of health interventions that bring about the greatest improvement of health status. Productive/Internal Running medical institutions as efficiently as possible. See Essay; most common in the developed World stems from an Egalitarian perspective and is focused around Equality of Opportunity and Equality of Access.

EQUITY:
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However, Le Grand notes that both these aims can·t be simultaneously achieved with Administrative feasibility in a second best World, therefore one is usually chosen over the other.

PROBLEMS IN MEASUREMENT

Measuring costs is difficult, but in health care, the problem comes in measuring the benefits. Benefits are to MEASURE and hard to QUANTIFY, because:
Health Status is hard to rank, even on an ordinal scale. y Causality is difficult to determine. y Marginal Health Status is hard to value. y Utility benefits are incredibly difficult to pin down due to unobservable preference functions.
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Hence, there are three different methodologies of measuring efficiency in health care: COST ² BENEFIT ANALYSIS COST ² EFFECTIVENESS ANALYSIS COST ² UTILITY ANALYSIS.

ECONOMIC EVALUATION IN HEALTH CARE

Cost ² Benefit Analysis
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Attaches a monetary valuation on outcomes. To quantify the benefits, two approaches are used:

HUMAN CAPITAL approach (a person·s worth is loosely proportional to their wage) STATED/REVEALED PREFERENCE approach (stating a willingness to pay by selecting from a list of alternatives or observing willingness to pay by scaling up risk premiums).

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The Human Capital Approach has the following main problems: Labour markets are imperfect, such that wage  MPL, and it uses a third party·s evaluation of an individual·s worth, rather than that individual·s self evaluation. The Stated Preference approach has numerous faults as well:

Scaling up risk premiums is complex and dubious Individuals may indulge in tactical behaviour when stating preferences Willingness to Pay scales with income

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However, Robinson argues that it is the most comprehensive and powerful evaluation tool due to it·s ability to be sensitive to a wide range of criteria that affect an individual·s wellbeing ² the outcome of Health Care.

It is rarely used due to the wealth of practical problems, however.

ECONOMIC EVALUATION IN HEALTH CARE

Cost Effective Analysis
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Whilst CBA evaluates whether we should do something or not, CEA questions the best METHOD of doing something. Best used for procedures where outcomes are expressed in naturally identical units (lives saved). Therefore compare procedures in terms of cost per marginal unit of outcome. Sensitivity Analysis is used to determine the robustness of the conclusion. However, data is often difficult to come by ² ideally derived from medical trials, but often taken from medical literature and thus may not accurately represent the institution in question (different levels of skill for doctors etc). In addition, a debate as to whether benefits can be discounted in a similar manner to the costs ² if they aren·t, then it could skew the conclusion in favour of a treatment with many long ² term benefits.

ECONOMIC EVALUATION IN HEALTH CARE

Cost Utility Analysis
Expresses outcomes in a single measure, based on utility. Most common form is cost per Quality Adjusted Life Year (Cost per QALY), which weights augmented years by quality of life. y A large problem with such an approach is measurement of quality of life: One widely used way is the Rosser Index, which uses measurements of disability and distress. y There is a desire to use QALY ² League Tables, however caution must be exercised:
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Studies may not have been conducted in the same year, they may have used different technologies, there may have been different methodologies and price ratios.

Mooney And Gerard note that the results of QALY analysis will likely be specific to a certain location. y Also problems of Equity:
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Elderly people will be discriminated against Moves resources away from people with low capacity to benefit from treatment. Implicitly absorbs societies weightings on the valuations of different individuals productivities Higher productivity, lower net cost; This runs against proponents· claims that a QALY is equitable as it is equal for everyone Wagstaff Concludes that Health maximisation in QALY terms fails to adequately reflect societies· aversion to Inequality in HEALTH STATUS. However, this could be rectified by using an appropriate social welfare function to aid resource allocation.

ECONOMIC EVALUATION IN HEALTH CARE

In conclusion: Cost ² Benefit Analysis would be the most ideal tool to use, however is stymied by practical problems, particularly in determining the willingness to pay. Of the remaining tools, the optimal one to use depends on the situation: If the choice is between procedures where outcomes are expressed in the same natural units, then cost ² effective analysis is desirable. If the choice is between procedures where outcomes differ, then QALY evaluation may be more appropriate, although there are substantial equity issues to be addressed. NICE currently uses a form of QALY to direct it·s resource allocation recommendations. However For ALL appraisal techniques, the following criteria must be satisfied:
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Clear Objectives. Distinct methods to achieve these objectives. Costs (and Benefits) can be Quantified in some form.

ECONOMIC EVALUATION IN HC

Limitations of Econ. Eval. In HC: Economic evaluation is primarily concerned with EFFICIENCY; however there are alternative criteria to consider when allocating resources:
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NEED (problem: how to define?), EQUITY (problem: how to define, extent of trade ² off?)

CEA League tables (QALY tables) suffer from inconsistency in methodologies used to ascertain QALY figures ² see CUA slide. In Practice: NICE was established to address geographical variations in access (Postcode Lotteries) by providing national guidance about the cost-effectiveness of different treatments. Postcode lotteries were seen as inequitable (because location is seen as a ¶nonneed· variable), but they are also inefficient:
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Each region may perceive DIFFERENT MARGINAL BENEFITS arising from a drug, and thus may under or over consume USE DIAGRAM!!!!!!!!!!!!!!!!!!!!!!!!!! This occurred with Breast Cancer drugs in England ² women in one area were able to procure a new drug, others weren·t. NICE offers national guidance, hence these regional variations do not arise.

Therefore, Economic Evaluation in HC, in practice, is usually concerned with three primary aims:
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I - To maximise the benefits of HC spending. II - Overcome Regional Variations in access. III ² Contain costs/Manage Demand (Oregon Health Plan

Medicaid)

THE DEMAND FOR HEALTHCARE

The Grossman Model: If Health is an asset that depreciates over time, and that depreciation can be remedied via appropriate investment in health care, then there will be an optimal level of demand for health care services. This demand will be in order to maximise, subject to constraints, the amount of time spent in good health, and minimise the amount of time spent in ill health. Therefore, the Grossman Model is a Human Capital approach to the demand for healthcare. Risk Aversion: See Micro slides on Risk Aversion. Consider living as a gamble ² either you are in good health and maximise your income (xn), or you fall ill and receive a much smaller amount of income (x0). As one·s utility function is concave, it will be advantageous to purchase insurance and thus receive a smaller income with certainty. More on next slide.

THE DEMAND FOR HC
Utility

The uncertainty model can be shown as thus: Initial income = x1, income if a medical emergency occurs w/o U(x1) insurance = x0. U(X) Therefore, mean income is X with utility U(X). EU However, the EXPECTED UTILITY of the gamble is actually EU. The level of income with certainty that would provide the same level of utility is x* Therefore: A Risk ² Averse individual (as shown) would buy a premium up until the point where it reduces his/her income to x*. The total premium can be decomposed into the Fair Premium and Risk premium, as shown.

U(x)

Risk

Fair

Total x0 x* X x1

Income

EFFICIENCY GROUNDS FOR INTERVENTION
Price

Do the standard assumptions of Perfect Information, Perfect Competition, No Externalities and no Increasing returns to Scale hold with Health Care? (short answer: No). Information Problems: Perfect Information requires knowledge of:
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D· True MPV D··

I - Quality of the product II - Prices III - The Future

I: Health information is often highly technical, and thus there is an information processing problem. However, this is not, in itself, a reason for intervention due to information being costly to consume.
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However, there also needs to be Equal Power; income may be different, but otherwise there can·t be any discrimination. This is unlikely to be the case ² the less educated may place an incorrect Marginal Personal Valuation on health care, as shown in the diagram.

Q of HC Q·· Q* Q·

II: Unlikely, but efficiency requires both I + II, so rather a moot point. If just the problems of the first 2, solution would be regulation. However, III is also violated. III: See Insurance slides.

EFFICIENCY GROUNDS FOR INTERVENTION

Perfect Competition: Doctors do not behave competitively, on aggregate, due to the constraints not being faced by them personally(how much an insurance company will pay). Bias in distribution towards more ¶glamorous· practices in a search for peer approval. Therefore, they will oversupply in a biased fashion. Solution is regulation. Externalities + IRS: Externalities exist in two forms:
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Caring externalities (warm glow, aversion to destituteness) Technical externalities (herd effect due to mass immunization)

Existence of externalities implies a MSB > MPB, and therefore an under consumption. Solution is Pigovian subsidies or regulation. No real evidence of IRS. Conclusion: Although none of the solutions to the individual problems is public provision, the fact that Health Care fails most of the ¶standard assumptions· is indicative of potential efficiency gains to be had from public provision.

EQUITY GROUNDS FOR INTERVENTION

See Essay. On the whole, most developed countries agree on an egalitarian approach to social justice. The NHS, in particular an anomalous institutional structure, is based on the equity grounds of equality of opportunity. Other potential equity considerations are:
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Equality of Access Equality of Utilisation Equality of Health Status

However, whilst the latter is widely held to be the ¶best· objective, it is rarely explicitly mentioned in policy documents due to it being unattainable without severe efficiency implications. The US is a juxtaposition ² it is a far more libertarian society, and reforms are much more focused around reform of the free market, rather than direct public involvement. Schism in the literature:

Can talk about theoretical notions of equity (Libertarianism, Rawlsianism etc.), but most empirical literature simply considers HORIZONTAL and VERTICAL EQUITY, because problems of measurement.

TYPES OF INTERVENTION

Therefore, there are three possible scenarios: PURE MARKET:
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This will fail on efficiency grounds alone (and most likely equity grounds), as shown. Could lead to OVERCONSUMPTION or UNDERCONSMPTION depending on what effects are more predominant. For Production, since the supply side is characterised by the third ² party payment problem

MIXED MARKET:
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Therefore use regulation OR internalise the externality by forcing the doctors to face a MC essentially a HMO; the doctors provide the insurance. Private finance with residual state funding; i.e., ¶easy cases· are outsourced to the private sector, whilst ¶hard/uninsurable· cases are taken up by the state. But where to set the border? Pure state finance via social Insurance or tax revenues; therefore taxes act as premiums and are based on ability to pay.

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For Finance, two possibilities:

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Canada is an example of a Mixed Market Solution; compulsory insurance, publicly financed, privately provided w/ global B.C. Because of imperfect information on the supply and demand side, there is a case for this. But only if it goes WITH the grain of economic theory, therefore: DEMAND SIDE CONDITIONS:

PURE PUBLIC:
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Doctors decide treatment eliminates problems of imperfect consumer info + power. HC is mostly tax financed + mostly free at point of use Small fee for service, reducing oversupply incentives. HC is faced with a budget constraint + rationed via administration to restrain output.

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SUPPLY SIDE CONDITIONS:

THE UK HC SYSTEM: THE NHS

Institutions GP System:
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They act as both the guide and a gatekeeper to steer patients to the correct services and prevent trivial complaints from creating bottlenecks. Doctors paid a salary, not fee for service (reduces incentive to oversupply). Foundation trusts control hospitals and are a more devolved version of the larger NHS trusts (Quasi Markets). Foundation Trusts are financed by Primary Care Trusts. NHS is by and large, free at the point of consumption. Small, fixed, charges for prescriptions; allowances for certain contingencies. Patients may choose their GP and the Hospital in which they are treated. NHS has low spending/GDP ratio compared to Europe, but pressures such as an ageing population has been putting pressure on. In addition the relative price effect is playing a part Relative price effect is due to the price of labour rising faster than other input prices. HC revenues largely come from General tax (75%) and National Insurance (20%). Charges account for a very small percentage (~2%). Central Government decides overall expenditure and allocates funds to PCTs as appropriate (weighted by population). Thus PCTs have hard budget constraints.

Hospitals:
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Individual Consumption Decision:
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Finance:
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Aggregate Production Decision:
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EFFICIENCY AND THE NHS

Advantages of Principle:
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Supply Side Incentives:

No incentive to oversupply. Doctors allocate the services. Acts as a redistributive vehicle, addressing equity concerns; pure public finance, therefore no insurance problems. Prevents under consumption, addresses equity concerns (equality of access).

No demand-side Information problems:

Finance:

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Treatment is free at point of use:

Practical Advantages:
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Macro ² Efficiency:

NHS is cheap relative to international comparisons and outcomes are comparable. Unified structure allows action to be taken on overall objectives.

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Micro ² Efficiency:

EFFICIENCY AND THE NHS

Criticisms:
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Too few resources being diverted to the NHS manifest themselves via waiting lists as a form of rationing. Geographical distribution of hospitals and health care services is skewed and out of date: The Resource Allocation Working Party specified proposals for geographical redistribution of services. Incentive problems: Consultants did not receive extra resources for extra patients. Over ² Centralisation: Bottlenecks due to scarce Labour in parts of the system. Lack of accountability and flexibility.

Therefore, the NHS is inefficient, but it does tackle most of the problems of the free market. Greater efficiency would require:
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Technical Information on health benefits. Knowledge of the Social Welfare Function.

EQUITY AND THE NHS

See Essay Income does not act as a constraint. Preserve·s Britain·s aggregate notion of social justice. However, distribution of Health is unclear. There is evidence to suggest inequalities by Social-Economic Group (SEG), in terms of utilisation of health care. Can be explained by differing marginal costs/marginal personal valuations, as shown by the diagram.
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Price MPCpoor Drich Dpoor MPCrich

However, is equality of use a desirable objective? Too Elitist. In addition, other studies show the poor consume more HC, but have poor Health.

The NHS may not provide equal treatment for equal need, but still acts as an equalising force when expenditure and finance are taken together, the income of the poor rises from 1/4 of the rich to 1/2. No international comparisons suggest a ¶better· method in terms of Equity. Propper finds the NHS is financed progressively. In a cross ² country study, Van Doorslaer finds that there seems to generally be pro-poor inequality in HEALTH STATUS. The UK was found to have high levels of income ² related health inequality, relative to Europe.

Q of HC Q·· Q·

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