Introduction to Health

Economics

William G. Johnson, Ph.D.

Professor Biomedical Informatics
Founder, Center for Health Information & Research
Research Affiliate, The Mayo Clinic
Health Economics
• Economics is the study of efficiency and is applied
to many industries but why is there a special
branch devoted to the study of health care
markets?

• Because the healthcare market is so different

from most other markets

• The market for health care has never been a

“free” or “competitive” market driven by
consumer choice, even before Medicare,
Medicaid or the ACA.
Why is Healthcare Different?

• Provider and consumer uncertainty about

the effectiveness of health care for many conditions.(judgement
versus engineering)

• Patients often do not give full information to providers

• The mix of equity and efficiency conditions in the operation of

healthcare

• Understanding these facts is fundamental to understanding why

healthcare markets are so different than markets for other
consumer goods
Uncertain Effectiveness of Care

Gawande: Complications
“medicine…is an imperfect science, an enterprise of
constantly changing knowledge, uncertain information,
fallible individuals and..lives on the line. There is science
in what we do, but also habit, intuition and, sometimes
plain old guessing.”

The gap between what we know and what we aim for persists.
And this gap complicates everything we do.”
Provider Uncertainty About Outcomes of Care
• More than ½ of all treatments lack clear evidence as to
whether they are effective

• Where there are 2 or more different treatments for the

same condition there is rarely adequate evidence about
which is relatively effective

• Less than 20% of the 2,700 practice guidelines from the

American College of Cardiology and the American Heart
Association are supported by evidence that the
recommended treatment is useful and effective .
 Uncertainty
The Harvard Medical Practice Study
Largest study of “adverse events” during hospital stays ever
conducted
• Structured review of 30,000 acute care hospital admissions
in NY State + Interviews of injured patients
• 4% of patients suffered disability or death as a result of
errors in treatment
• 2/3 of the errors were negligent (in a clinical but not
necessarily in a legal sense)
• Extrapolated to US: 44,000 patients die per year either
totally or partially as a result of error
• Basis for series of Errors in Medicine studies by National
Institute of Medicine
Process vs. Judgment
Gawande, Complications:
The Computer vs. the Expert: Reading EKGs
• World class expert physician vs. software evaluating 2,240 EKGs
(1,120 indicated heart attacks)
• Expert: correctly identified 620
• Software: correctly identified 738

Note neither found them all

• Software: neural network with feedback loop that should continue to

improve with experience
• Advantage of software much greater when tested against practicing (non-
expert) physicians

Q: has the software been widely adopted??

Practice vs. Judgement
The Hernia Factory (Gawande: Complications)
 Simple, standard surgery for hernia repair: on average 10-
15% of surgeries, typically done by general surgeons, fail
 Except, in a small medical center in Canada, only 1% of the
surgeries fail
 The secret: surgeons; do more hernia surgeries in a year than
most general surgeons do in a lifetime
 Entire center environment built for hernia patients
Provider Uncertainty Concerning
Patients’ Health Behaviors
• Patients may not reveal full information about their health
problems and practices to their healthcare providers
• Some classic questions in health assessments that are
unlikely to produce accurate answers:
• How many alcoholic drinks do you consume in a day?
• How often do you use recreational drugs?

• Patients are notoriously bad at adhering to regimens of

prescription drugs and prescribed exercises and may misstate
their adherence
Asymmetric Information

• So, the provider is uncertain

about patient behaviors and the
outcomes of care
but
• The provider has more information than the
consumer (asymmetric information)
so
• Providers, unlike most producers, have been given
a social obligation to put the interests of the
patients first (not just profit maximization)
Chronic Problems
• Large numbers of persons who are not employed had
difficulty paying for health care
• Retired
• Homemakers not included in spousal coverage
• Children not included in parental employment
coverage
• Persons living at or near poverty levels (some of whom
are employed)but not insured

Question: who would bear the burden of health care costs

for the retired population absent Medicare?
Historically

• Recognition that conventional markets could not adequately

address the characteristics of health care

• Hospitals were not-for-profits whose deficits were filled by

community contributions (changed but payments regulated by
public and private insurors)

• Health care providers were tasked with being motivated by the

needs of the patients rather than the providers’ economic incentives
(not changed)

• Income disparities among patients were addressed by healthcare

providers charging sliding scales for fees for service (Medicaid,
Emtala, Medicare)

• Advertising by health care providers was forbidden (allowed)

Problem Solving Attempts
• The special characteristics of the healthcare markets did not eliminate
the chronic programs that we have described

• Attempts to create national health insurance began as early as the 1930s

as part of the original Social Security Act but all faced fierce opposition
• Thus, segments of a comprehensive insurance plan have been
introduced over time

• Medicaid (1965)
• Medicare (1965)
• HMO law (1973)
• EMTALA (1985)
• Medicare Part D (2003)
• ACA (2010)
The Affordable Care Act (ACA) 2010
•  A very extensive and complex law, it includes among
others :
• Mandate for most citizens to have health insurance
• Subsidizes insurance costs for low income citizens
• Imposes tax penalties on those who do not buy insurance
• Prohibits exclusions from insurance based on pre-existing
conditions
• States could expand Medicaid to non-elderly with incomes up
to 133% FPL
• Most obvious impact is on the number of persons without
health insurance (next slide)
Uninsured Rate Among the Nonelderly
Population,1972-2017
Share of population uninsured:
Politics and Healthcare
• You could hardly avoid being aware of the political
controversy surrounding healthcare.

• We will not discuss politics but rather learn enough

economics to understand the differences between the
healthcare market and the consumer driven markets that
typify other goods and services.
Hint: Follow the $ and identify
the stakeholders: each group
has an interest in how public
financing changes
1. Tax payers, including low income folks, who must pay fixed
percentage taxes for Social Security, Medicare etc.

2. Beneficiaries .Medicare, Medicaid, Veterans, SSDI(Medicare for

Disabled persons); others

3. Suppliers: for profit health insurers; for profit and not for profit
hospitals; physician practices; chiropractors; physical therapists;
etc. etc.; nursing homes; pharmaceutical companies etc.

4. Politicians: typically want to adopt the attitudes of those who

influence their re-elections through financing and/or voting.
Take any proposed change in government policy
• Compare it to the interests of each group
• See who wins and who loses
Some Things to Think About

• The uncertainty surrounding health care is the

primary reason that health care markets are
different than traditional models of competitive
markets.
• There is no developed country in the world, except
perhaps China, in which the government is not
involved in the health care market. Why is that?
• Why do we worry so much about the costs of
health care and so little about the costs of football?