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Industry OverviewIndustry Overview
Health EconomicsProfessor Vivian Ho
Fall 2009
Health Care Expenditures in the Health Care Expenditures in the United States, 1960-2007United States, 1960-2007
1960 1970 1980 1990 2000 2005 2007
Nominal health expenditures $27.5 74.9 253.9 714.0 1,353.3 1,987.7 2,241.2(billions of dollars)
Annual rate of growth -- 10.5% 13.0 10.9 5.9 8.9 6.2(average annual % changefrom previous period shown)
Nominal per capita health $148 356 1,102 2,813 4,790 6,697 7,421expenditures
Health expenditures as 5.2% 7.2 9.1 12.3 13.8 16.0 16.2percentage of GDP
Source: CMS Homepage: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf
The Health Care Industry is The Health Care Industry is Rapidly EvolvingRapidly Evolving
Advances in medical technology and drugs are dramatically improving patient care But, these improvements are costly
Aging U.S. population
% 65 years+ 1950 8.1 1970 9.8 2008 12.8
Increased cost containment efforts Changes in government reimbursement of health care
providers Private insurers are exercising more control over patient care
Increased competitive pressures Mergers of existing providers Entry of new competitors
Where are the most promising business opportunities?
The Health Care Industry is The Health Care Industry is Rapidly EvolvingRapidly Evolving
Which category has the largest share Which category has the largest share of health care expenditures?of health care expenditures?
Hospital Care
Physician Care
Prescription Drugs
America’s Top 100 Fastest-Growing CompaniesAmerica’s Top 100 Fastest-Growing CompaniesFORTUNE, September 29, 2008FORTUNE, September 29, 2008
100 RANK
COMPANY
EPS
GROWTH
RATE
REVENUES
(millions)WHAT THEY DO
9 Intuitive Surgical 62% 753.7 Makes and services surgical robots that allow for less invasive procedures
29 Natus Medical 57% 139.8 Makes products to detect, treat and monitor newborn health conditions
64 Psychiatric Solutions
44% 1686.0 Provides in-patient behavioral-health services in 27 states
66 Omnicell 26% 238.6 Sells devices for controlling, dispensing and tracking medications in 1,100 hospitals
67 Kendle International
44% 633.3 Provides support for clinical development, regulatory affairs, biometrics, and late phase projects
70 Health Extras 57% 2233.3 Manages 60,000 network pharmacies that process prescriptions (now Catalyst Health Solutions)
76 Amedisys 43% 900.7 Provides home health care and hospice services
94 Allscripts Healthcare Solutions
46% 300.4 Develops software for doctors to reduce errors, costs, and paper in charts, prescriptions and orders
PHARMACEUTICAL INDUSTRYPHARMACEUTICAL INDUSTRY
U.S. prescription drug expenditures reached $228b in 2007
Industry highly dependent on research and development (R&D) $897m to bring a new drug to market
Aggressive marketing to physicians, hospitals, pharmacists, and even the patient
PHARMACEUTICAL INDUSTRYPHARMACEUTICAL INDUSTRY
Pfizer
$48.3b in sales in 2008
40.8% of sales come from 4 drugs: Lipitor, Lyrica, Celebrex, Norvasc.
PHARMACEUTICAL INDUSTRYPHARMACEUTICAL INDUSTRY
The Wall Street Journal Online April 6, 2005
Pfizer Plans a RevampAnd $4 Billion in Cost Cuts
Drug Giant Scales BackEarnings Estimates, Citing Patent and Safety Woes
MANAGED CAREMANAGED CARE
Systems which manage the quality and cost of patient care
Most common: Health Maintenance Organization (HMO)
Consumer pays a fixed annual capitation fee, for which HMO agrees to provide comprehensive medical services
21% of U.S. population (64.5m) enrolled in 2009
MANAGED CAREMANAGED CARE
ADVANTAGE: If capitation fee > costs, HMO keeps the profit
DISADVANTAGE: HMO responsible for cost overruns
Subject to lawsuits if provides sub-optimal care
WSJ 2/17/98
LONG-RUN KEY TO SURVIVALLONG-RUN KEY TO SURVIVAL
Be an efficient provider of high-quality patient care
Can we apply the tools of economics to study the health care sector?
Valuing Human LifeValuing Human Life
Individuals make decisions everyday that reflect how they value health and mortality risks.
Driving a car
Smoking a cigarette
Eating a medium-rare hamburger
Note: These slides draw from material in Viscusi WP and Aldy JE, “The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World,” The Journal of Risk and Uncertainty 2003; 27(1): 5-76.
Valuing Human LifeValuing Human Life
Many of these decisions involve observable market choices Purchase of a safety device.
Working on a risky job.
These decisions involve implicit tradeoffs between risk and money.
Economists can use data on these decisions to construct the value of a statistical life (VSL).
Valuing Human LifeValuing Human Life
Example: How much additional money must a firm offer a worker to take on a risky job, versus one with no risk?
To answer this question, one could compare the average wages of risky jobs vs. non-risky jobs.
Working as a coal miner is more risky than working as an investment banker, but investment bankers get paid more.
One must examine the tradeoff between wages and risks, holding constant all other factors that influence pay.
Valuing Human LifeValuing Human Life
Dataset with observations on workers, their annual Earnings, worker characteristics, job characteristics, including the risk of dying on the job in that worker’s industry.
Ln(Earningsi) =α0 +α1(Educationi) + α1(Experiencei) +
α2(Management Positioni) + α3(Fatality Riskj) + εij
One can estimate this regression, and the estimate of α3 can be used to derive a VSL.
Valuing Human LifeValuing Human Life
Suppose the estimated coefficient α3 = 300.
This implies that a worker requires 300 times more earnings for a job with a 100% fatality risk versus a job with a 0% fatality risk, holding all other factors constant.
If average earnings are $32,000 then the VSL = $32,000 * 300 = $9,600,000
Valuing Human LifeValuing Human Life
Data on worker characteristics is available from the Bureau of the Census.
The Department of Labor collects data on fatal occupational injuries by industry.
U.S. Occupational fatality rates by industry, 2005
Industry BLS, CES survey
Natural resources and mining 139.0
Mining 28.3
Construction 16.2
Manufacturing 2.8
Trade, Transportation, & Utilities 5.8
Wholesale Trade 3.5
Retail Trade 2.6
Financial Activities 1.2
Educational & Health Services 0.9
Fatality Rates Per 100,000 Workers
Valuing Human LifeValuing Human Life
Labor market data from the U.S. typically finds a VSL $4m to $9m in year 2000 dollars.
One can also estimate a VSL based on the prices that people pay for safety devices that reduce the risk of death. Price of smoke detectors vs. reduction in fire
fatality risks.
Premium paid for areas with low air pollution vs. reduction in death from clean air.
Price of children’s car seats vs. reduction in auto fatalities when in use.
Policy ImplicationsPolicy Implications
U.S. agencies are required to compare the costs of proposed regulations to the benefits, which are often in terms of lives saved.
Values of a statistical life used by U.S. Regulatory Agencies, 1985-2000
Agency Regulation Value of a statistical life (millions, 2000 $)
Federal Aviation Administration
Protective Breathing Equipment $1.0
Food & Drug Administration
Regulations Restricting the Sale & Distribution of Cigarettes & Smokeless Tobacco to Protect Children & Adolescents
$2.7
Environmental Protection Agency
National Ambient Air Quality Standards for the Ozone
$6.3
Policy ImplicationsPolicy Implications
Should the VSL vary with:
Age?
Income?
Country?
ConclusionConclusion
Because resources are limited, health economists are concerned with determining what medical services to produce, how they should be produced, and who should receive them
As we will see in this course, the tools of economics can be applied to the health care sector to derive valuable insights about our health care system
