Economics 5550/6550

Health Economics

A. Goodman

The course• Class Meets: MW 3:00 – 4:50 • Office Hours: MW 1:00 –2:30, after class

or by appointment• Office location: 2145 FAB• Phone: 577-3235; e-mail:

allen.goodman@wayne.edu• Department and Course Web-site:

http://www.econ.wayne.edu/agoodman/

Text materials

The text materials will be:

The Economics of Health and Health Care, by Sherman Folland, Allen C. Goodman, and Miron Stano, to be purchased at the appropriate location.

Selected readings on reserve at the course web site.

Exams and Grading

• There will be 2 in-class mid-term exams and a final exam. The mid-term exams will be:– Monday, September 29 – 20% of course

grade– Monday, October 27– 20% of course

grade.• The final exam, as noted on the exam schedule

http://reg.wayne.edu/finals/final_exam_schedule_fall_2014.pdf

• will be :– Friday, December 12 from 1:20 – 3:50

27.5%!

Other assignments32.5% of your grade.

These will include presentations and short writing assignments, including materials available on the University’s personal computing facilities and the World Wide Web.

We will use EXCEL and PowerPoint, and you will be expected to have (or to obtain) a passing familiarity with it.

The Curve

The following percentage curve will guide the grading policy in the course. 90 – 100 A ; 80 – 84.9 B+; 65 – 69.9 C+ ; 50 – 54.9 D+ ; 85 – 89.9 A-; 75 – 79.9 B ; 60 – 64.9 C ; 45 – 49.9 D ;

70 – 74.9 B- ; 55 – 59.9 C- ; 40 – 44.9 D- ; Below 40 F

Resources

• Department and Course Web site: http://www.econ.wayne.edu/agoodman/5550/

• Learn to use Library Resources. Invaluable ones include:– Science Direct– OECD

Cell Phones

• You may not realize you’re even looking at them … but

• I get really crabby about them.

• TURN THEM OFF AND PUT THEM AWAY.

Journals and Web Sites

• There are some terrific places to find information and data.

• Information WSU Library (for Science Direct). Journals such as Journal of Health Economics.

• Another excellent journal is Health Economics.

• More topical stuff is at Health Affairs.

Web Sites

• Medicare and Medicaid – CMS

• Center for Disease Control – CDC

• OECD

• Data for analysis – MEPS

Relevance of Health Economics

The health care sector is bigbig, and is getting

biggerbigger. In 1950, less than 5% of GDP went to health care. By 1976, it was about 8%, and now (2014) it’s over 17%. This means that not only has health care grown absolutely, it has grown relative to everything else.

Historical NHE, 2012 – 1

• NHE grew 3.7% to $2.8 trillion in 2012, or $8,915 per person, and accounted for 17.2% of Gross Domestic Product (GDP).

• Medicare spending grew 4.8% to $572.5 billion in 2012, or 21% of total NHE.

• Medicaid spending grew 3.3% to $421.2 billion in 2012, or 15% of total NHE.

• Private health insurance spending grew 3.2% to $917.0 billion in 2012 or 33% of total NHE.

• Out of pocket spending grew 3.8% to $328.2 billion in 2011, or 12% of total NHE.

Historical NHE, 2012 – 2

• Hospital expenditures grew 4.9% to $882.3 billion in 2012, faster than the 3.5% growth in 2011.

• Physician and clinical services expenditures grew 4.6% to $565.0 billion in 2012, a faster growth than the 4.1% in 2011.

• Prescription drug spending increased 0.4% to $263.3 billion in 2012, slower than the 2.5% growth in 2011.

Health Share

s = pq/y.

s = share; p = price of health care; q = quantity of healthy care; y = income

• So the increased share of health care in the economy is related to three possibilities:

- Increased prices (relative to other goods) p.

- Increased usage q.

- Changed income y.

Some Numbers

• Nominal health expenditures per capita were:

$147 in 1960. Rose to $8,915 in 2012 - a factor of 60.6!

• But the CPI rose from 29.6 in 1960 to 229.6 in 2012, or by a factor of 7.76.

• This means that a bundle of goods that cost $100 in 1960, cost $776 in 2012.

Some Numbers

• Dividing $8,915 by 7.76 gives • Real health expenditures per capita ($1960)

were:

$147 in 1960; $1,149 in 2012. • $1,149/$147 = 7.82• Increase of about 682%. Are we 6-7 times as

healthy as in 1960?

Nat’l Health Expenditures per capita by Year

Health Expenditures Per Capita

0

1000

2000

3000

4000

5000

6000

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9000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Year

Exp

end

itu

res

Exp per capita

Real Exp per capita

U.S. Expenditure Shares

Figure 1-1 U.S. Health Expenditure Shares, 1960-2020

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Year

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are

(in

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t)

% Actual

% Projected

Percent of GDP Spent on Health Care, 1960-2010

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

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Canada

France

Germany

Japan

United Kingdom

United States

UK

CA

US

Still another cause for concern

• Problems that people have getting insured. • Between 45 and 50 million Americans do not

have health insurance. • Until recently, only the U.S. and South Africa,

among advanced countries, did not have some form of universal health coverage.

• ACA will insure about 2/3 of those currently uninsured, but it will take a while.

Origins – Physician ShortageHealth economics has evolved from applied work

in more general economics. An example.• In early 1940s Milton Friedman and Simon

Kuznets, looked at the so-called physician shortage of the 1930s.

• These shortages are often defined through the health care sector, by positing a technological ratio (e.g. z physicians per capita), then calculating the number of physicians necessary, and comparing it to the number available.

• NY Times (7.28.12) has a recent piece on this. Not “no care” but “delayed care.” Are they the same?

Physician shortage

• FK discovered that physicians, at the time, were earning about 32% more than dentists, while their training costs were about 17% higher. As economists, what would we expect to see over some adjustment period ???

• A> Entry into the physician market. Friedman and Kuznets attributed long-term high returns to barriers to entry into the medical profession through licensure, and education.

Shortages approaching?

Shortages estimated by fixed coefficient method.

Discuss.

If population increases by x%, we’ll need x% more doctors?

Why or why not?

Does Economics Apply to Health and Health Care?

1. Uncertainty

• Most analysis that we do in economics ignores uncertainty. Where does this occur?– Patient status - How healthy are we? Will

we need treatment?– Efficacy of treatment - Do we need the

treatment? Will it work?

2. Prominence of InsuranceNo other sector features insurance so

prominently.

In 1960 about 55% of all personal health care expenditures were paid out-of-pocket; 45% by third party payers and/or government.

By 2000, 82.6% was paid by third party payers. In 2009, the percentage was 84.7.

Does Economics Apply?

Does Economics Apply?2. Prominence of Insurance• Availability of insurance. Who has it? Who

doesn't?• Effect of insurance on technology. Does

insurance impact which kinds of treatments are given, and which aren't?

• Do insurance and medical care prices combine to raise health care costs?

• Information• Lots of economic analysis assumes perfect

information on the parts of buyers and sellers. This is “symmetric” information. Both parties have it.

• Sometimes neither party has the information. e.g. Neither the gynecologist nor her patient may recognize early stages of cervical cancer without a Pap smear.

• Asymmetric information – You and your mechanic!

Does Economics Apply?

• Sometimes, physician knows more about disease, and must act as an agent for the patient. Some feel that this can lead to the recommendation of too much, or even unnecessary care.

• How informed are patients? A> Probably pretty well informed for a substantial proportion of their care. – Pauly did kind of a back of the envelope calculation for

1971 and found that a large portion of care WAS well-informed.

• Think about yourself. How well informed are you?

Does Economics Apply

How well informed?

• Things we may know – Asthma, allergies, diabetes?

• Things we may suspect – Heart disease, circulatory issues

• Things we may not know – High blood pressure, glaucoma, infertility?

Does Economics Apply?4. Role of Non-Profit Firms

– What’s a Non-Profit Firm?– Unlike most other economic analysis, there is an

important role for non-profit firms in the industry. How does this work out in economic models in which profits are maximized?

– How does a hotel differ from a nursing home?– If we want to send aid to New Orleans, or to Haiti,

who do we go to? Why?

Does Economics Apply?

5. Restrictions on Competition

There are many. These include:– Licensure requirements for providers– Traditional restrictions on advertising (although

these seem to be waning – there doesn’t seem to be much that we can’t advertise).

– Only US and New Zealand allow advertising of prescription drugs.

– Standards which frown on price competition.

Does Economics Apply?

6. Need and Equity

• Finally, the health care sector engenders considerable discussion of the role of need, as well as equity.

• The whole debate about National Health Care policy illustrates this concern.

Does Economics Apply?

• This is a particularly interesting issue teaching things as an economist. As an economist, we look at markets FIRST. The rest of the world, including those who make policy, are more likely to look at government FIRST, markets LAST.

Compared with Others

Country 1960 1970 1980 1990 2000 2008a

Australia 6.3 6.9 8.3 8.5

Austria 4.3 5.2 7.5 8.4 9.9 10.5

Belgium 3.9 6.3 7.2 8.6 10.4 11.1

Canada 5.4 6.9 7.0 8.9 8.8 10.4

Czech Republic 4.7 6.5 7.1

Denmark 8.9 8.3 8.3 9.7

Finland 3.8 5.5 6.3 7.7 7.0 8.4

France 3.8 5.4 7.0 8.4 9.6 11.2

Germany 6.0 8.4 8.3 10.3 10.5

Greece 5.4 5.9 6.6 7.8 9.7

Hungary 6.9 7.3

Iceland 3.0 4.7 6.3 7.8 9.5 9.6

Ireland 3.7 5.1 8.3 6.1 6.3 8.7

Italy 7.7 8.1 9.5

Japan 3.0 4.6 6.5 6.0 7.7 8.1

Korea 3.4 4.0 4.6 6.5

Luxembourg 3.1 5.2 5.4 5.8 7.8

Mexico 4.8 5.6 5.9

Netherlands 7.4 8.0 8.0 9.9

New Zealand 5.2 5.9 6.9 7.7 9.9

Norway 2.9 4.4 7.0 7.6 8.4 8.5

Poland 4.8 5.5 7.0

Portugal 2.5 5.3 5.9 8.8 10.2

Slovak Republic 5.5 8.0

Spain 1.5 3.5 5.3 6.5 7.2 9.0

Sweden 6.8 8.9 8.2 8.2 9.4

Switzerland 4.9 5.4 7.3 8.2 10.3 10.7

Turkey 3.3 3.6 4.9 6.2

United Kingdom 3.9 4.5 5.6 6.0 7.2 8.7

United States 5.1 7.0 8.7 11.9 13.2 16.0

What Next??

• Some tools !!!– For analysis -- Chapter 2– For numbers -- Chapter 3