Health, Medical Care, and

Medical Spending

Health Economics
Professor Vivian Ho
Fall 2009

These slides summarize material in Santerre & Neun: Health Economics, Theories
Insights and Industry Studies, Southwestern Cengate 2010
 Can we apply the tools of
managerial economics to
health care?
 Outline

 An economic model of utility, health,

and medical care
 Measuring health status
 Empirical evidence on health production
 Health care expenditures
 A Basic Economic Model

 Health as a consumer durable good:

 Utility = U (X, Health)

 X represents “other goods and services”

 H is a stock -- every action will affect health

 On its own or combined with other goods and

services, the stock of H generates a flow of

services that yield satisfaction=utility
 A Basic Economic Model (cont.)
 Medical care is not homogeneous and differs
in:
 Structural quality (e.g. facilities and labor)
 Process quality (e.g. waiting time, case mgmt.)
 Outcome quality (e.g. patient satisfaction,
mortality)

 Therefore medical services are often difficult

to quantify
 A Basic Economic Model (cont.)
Health=H(Profile, Medical Care, Lifestyle,
Socioeconomic Status, Environment)
 If an individual has a heart attack, then
overall health decreases, regardless of the
amount of medical care consumed
 Thetotal product curve for medical care shifts
down
 As a person ages, both health and the
marginal product of medical care are likely to
fall
 The total product curve shifts down and flattens
out
 MEASURING HEALTH

 Important for all health care managers

today

 Insurersand consumers are demanding

 costs AND  quality
 HEALTH OVER THE LIFE CYCLE
HEALTH

Appendicitis

Auto Crash

Cancer (radiation therapy)

Cancer complications

Hmin

TIME
BIRTH
 HEALTH OVER THE LIFE CYCLE
 Individuals make choices about health (make
tradeoffs) which maximize U over time

 Relatively high value for the future

• Low discount rate
 e.g. Low-fat diet and exercise to avoid heart disease

 Relatively low value for the future

• High discount rate
 e.g. Smoking, excess drinking, drug abuse
 DISCOUNTING

 Required when costs are incurred in the

future
 Why? Individuals have a positive value of time
preference
 If r = 10%, then $100 invested today yields $110 next
year

 Spending $100 one year from now is

“cheaper” than spending $100 today
 DISCOUNTING

CHOICES

Invest $100 = $90.91

(1 + .10)
Spend $100
today and
have $9.09 left over
 DISCOUNTING
 If costs occur over multiple time periods, we must
calculate the present discounted value (PDV) of these
costs:
T
1
PDV =
Σ
t=0
(1 + r) t
COSTSt

• Example:
A project requires: $100 in year 1
$ 75 in year 2
$ 50 in year 3

PDV = $100 + $ 75 + $ 50 = $209.50

(1 + .10) (1 + .10) 2
 DISCOUNTING
 If we discount costs, we must also discount
benefits
Assume r = 10%

$990

Invest $900 to
Spend $990 save 1 year of life
to save next year
1 year of life and
today have $90 left to
spend this year
 DISCOUNTING
 Appropriate discount rate?

• The medical literature has settled on 5% for

comparative reasons

 Discounting is not an adjustment

for inflation
1
COST Σ (1 + r)t COST
=
YOLS 1
Σ (1 + r)t YOLS
 Why we discount cost AND benefits
 Consider an intervention which costs $100 and saves 10 years of life

Also assume r = 10%

Option 1:
C 100
Spend $100 today: = = 10
E 10
Option 2:
Invest for 1 year → $110, saves 11 YOL. If we
discount costs to present value, but don’t discount YOL:
C 100 1
E = 11 = 9 11

 If we discount both costs and benefits:

1
110
(1 + .10)
C
= = 10
E 1
11
(1 + .10)
 MORTALITY

 Alive vs. Dead

 Advantages:


 Disadvantages:

 MORTALITY MEASURES
1950 1970 1980 1990 2000
1. Crude death rate 963.8 945.3 878.3 863.8 873.6
(per 100,000)

2. Age-adjusted death rate 1446.0 1222.6 1039.1 938.7 869.0

3. Age-specific death rate

15-24 128.1 127.7 115.4 99.2 81.5
65-74 4067.7 3582.7 2994.9 2648.6 2432.9

4. Infant mortality 29.2 20.0 12.6 9.2 6.9

Neo-natal 20.5 15.1 8.5 5.8 4.6
Postneonatal 8.7 4.9 4.1 3.4 2.3

5. Life Expectancy 68.2 70.8 73.7 75.4 76.9

(at birth)
 MORTALITY MEASURES

 Life expectancy NOT a prediction of

how long people live

 76.9 is a summary of age-specific death

rates in 2000
 “If those born in 2000 experienced age-
specific death rates prevailing in 2000, on
average they would live to be 76.9
 MORBIDITY

 The relative incidence of disease

 Advantages:
 Captures quality of life

 Disadvantages:
 Difficult to measure
 Difficult to aggregate when patient has >1

problem
 MORBIDITY
 Acute disease
 e.g. appendicitis, pneumonia, gun shot wounds

 Chronic disease
 e.g. arthritis, diabetes, asthma

 Incidence
 occurrence of new cases in any particular year

 Prevalence
 new and ongoing cases in any particular year

 Heart disease is more prevalent, but its incidence is declining

 MEASURING MORBIDITY
 Distinguish between symptom and disease
 e.g. high blood pressure vs. stroke

 Disabilities are also a sign of morbidity

 Subjective measures - i.e. self-rated health

 “Isyour health excellent/good/fair/poor?”
 Problem: 1970-80, # of people with high blood pressure declined.
But % of people reporting restricted activity due to HTN doubled!
 Depends on what you want to do - e.g. astronaut, airline pilot, or
professor?
 MEASURING MORBIDITY

 How far do we go in classifying

“medical” problems?
 e.g. cosmetic surgery

 Beware of phrases in contracts or policy

statements such as “providing all
medical care” or “basic needs”
 LEADING CAUSES AND NUMBER OF
DEATHS, PERSONS AGED 15-24 (2000)

CAUSE OF DEATH DEATHS

Unintential injuries 14,113
Homicide 4,939
Suicide 3,994
TOTAL “Violent Deaths” 23,046 85%

Cancer 1,713
Heart Disease 1,031
Congenital anomalies 441
All other nonviolent causes 757
TOTAL “Nonviolent Deaths” 3,942 15%
 LEADING CAUSES AND NUMBER OF
DEATHS, PERSONS AGED 65+ (2000)

CAUSE OF DEATH DEATHS

Heart disease 593,707
Cancer 392,366
Cerebrovascular Disease 148,045
(Stroke)
Chronic Lower Respiratory Disease 106,375
Pneumonia and Influenza 58,557
Diabetes mellitus 52,414
Alzheimer’s disease 48,993
Kidney disease 31,225
Unintentional Injuries 31,050
Empirical Evidence on Health Prod’n
 Hadley (1982) a 10% ↑ in medical care
$ per capita →↓mortality rate by only
1.5%

 Auster et al. (1969) 10% ↑ in medical

services →↓age-adjusted mortality rate
by 1%

 Enthoven (1980) “flat-of-the-curve”

medicine
 LIFESTYLE
  cigarette smoking 10% →  mortality:
blacks whites
men 45-64 2.3% 1.4%
women 45-64 1.1% 1.1%
(Hadley, 1982)

 A one-pack-a-day smoker incurs 10.9 more sick days

every six months than a comparable non-smoker
(Leigh and Fries, 1992)

 Not smoking, regular exercise, moderate/no use of alcohol,

7-8 hours of sleep per day, proper weight, eating breakfast,
and no snacking leads to 28% lower mortality for men,
43% lower for women
(Breslow and Enstrom, 1980)
OTHER FACTORS AFFECTING HEALTH

 Education
 One more year of schooling →↓prob of
dying w/in 10 years by 3.6% (Lleras-Muney 2001)

 Income
 People w/o high school educ & income
<$10k were 2-3 x’s more likely to have
functional limitations and poorer self-rated
health
 OTHER FACTORS AFFECTING HEALTH

Sturm, Health Affairs 2002

 Determinants of Infant Health

Corman and Grossman, 1985

 Determinants of Infant Health

Selected Regression Results,

Neonatal Mortality Rates
Whites Blacks

% HS Educated -0.037 -0.056

Newborn Intensive Care -44.196 -86.196

Hospitals/1000
Abortion Providers/1000 -3.198 -16.838

Corman and Grossman, 1985

 Determinants of Infant Health

 Does more schooling and the

availability of more providers improve
infant health?

 Is the marginal productivity of more

providers greater for blacks or whites?
 Determinants of Infant Health
 Why might the marginal productivities
for blacks and whites differ?
 The regressions have poor controls for
income,health status, preferences, etc.
which may be correlated with schooling
and the availability of providers

 If the marginal productivity for most

factors is greater for blacks then whites,
why isn’t the overall neonatal mortality
rate lower for blacks than whites?
 Marginal Productivity of Provider
Services for Infant Health
(1-mortality rate)%
Blacks

Whites

Medical Care
Marginal Productivity of Provider
Services for Infant Health (cont.)
 For any given level of provider services,
marginal productivity may be higher for
blacks than whites

 However, the level of services may be higher

for whites than blacks

 Knowing the shape of the total product curve

is not enough. You must also know where
you are on it
 Health in the 50 States

 One measure of health status in the

population in the # of deaths (per 100,000
residents) from heart disease
 Suppose we have data on deaths from heart
disease and other population characteristics
by state
 See Excel Spreadsheet

 What factors might explain death from HD?

 Why?
Health in the 50 States
Health in the 50 States
Health in the 50 States
Health in the 50 States
Health in the 50 States
 Health in the 50 States

 Which of the previous variables would you

include in the multivariate regression for the
determinants of death from heart disease?
 Smoking?
 Overweight/Obese?
 Binge Drinking?
 Household Income?
 High School Graduation Rate?
 Health in the 50 States
 Which of the variables are statistically
significant at the 95% confidence level?

 Suppose the fraction of residents who are

obese/overweight were reduced by 0.10.
 How much would death rates from heart disease
fall?

 Suppose that you could obtain data on a

different variable that may explain heart
disease death rates, but isn’t in this data set.
 What would it be?
 Conclusions
 In an economic model, medical care
and other goods and services are
combined to produce health, which
yields utility to the consumer
 The production of health can be
measured in a variety of ways
 Both higher health care expenditures
and other factors are improving health
status over time