What is Health Economics?

Introduction to Health Economics

Dr. Katherine SauerOutline:

I. What is Health Economics?II. Is health care so different that it needs its own branch of economics?Why is Health Economics important? How do we go about producing health?The Demand for health careEmployer-Provided health insuranceI. What is Health Economics?Health economics is the study of how (scarce) resources are allocated to and within the health economy.II. Is health care so different that it needs its own branch of economics?7 distinctive features of the health sector:

1. presence and extent of uncertainty- you cant predict your health- your health care costs could be hundred of thousands of dollars

2. prominence of insurance- for the majority of goods/services that people purchase, insurance is not involved- in health care, people who can afford insurance, often choose to buy it3. information asymmetry- you may have more information than your doctor- your doctor is better informed on treatment - you know more about your health than your insurance company

4. role of nonprofit firms - health care industry has a mix of for-profit and non-profit firms

5. restrictions on competition- board certification / medical license- standards6. role of equity and need- no one needs a pair of Nike shoes, but you mightneed to see a doctor- what constitutes need?- should access to health care be equitable?

7. government subsidies and public provision- immunizations- US: Medicare/MedicaidIII. Why is Health Economics important?

1 magnitude of health sector in the economy2 national policy concerns 3 many health issues have an economic component

1. Magnitude of Health Sector in the US economyHealth Spending in the US

National Health Expenditures (NHE)Source: Centers for Medicare and Medicaid Services , Offices of the Actuary: Data from the National Health Statistics Grouphttp://www.cms.hhs.gov/NationalHealthExpendData/Health Care Spending as a share of GDP

Source: OECD Health Data 2008Health Care and the US Labor Force (2007)

Source:BLS.gov2 National Policy Issuessubstantial government resources are devoted to health care research funding Medicare / Medicaid- growing costs are an issue- ensuring quality3 Economic components of health issues- production / costs- insurance- economic reasons behind peoples health choices- extent of government interventionIV. How do we go about producing health?

Health is influenced by many factors:- professional health care- human biology- lifestyle- environment- education

Lets focus on the professional health care factor. - more health care generally leads to higherlevels of health- the returns to health care are decreasingThe production function for health: Health 96 95

92

85

50Health Care Inputs0 1 2 3 4 measure of health (ex: life expectancy)As more health care is used, health increases.

As health care is increased, health increases by a smaller and smaller amount. HealthHealth Care Inputsmeasure of healthIt is possible to get too much health care.

Too much health care can actually reduce health.

- iatrogenic disease (provider caused)ex: drug interactions, surgery risks, hospitalinfections

- medicalization takes away ability face natural hardshipsIn health care, more is not always better. V. The Demand for health care

The amount of health care a person is willing and able to purchase is inversely related to its price. - Do people really consider price when it comesto their health?Generally yes!The demand curve will be flatter, the more optional a procedure is.DDPQPQ502254500 540Insurance and the demand for health care

If the price of an office visit is $50, how many visits will you make?

If the price of an office visit is $50, how much money will you spend on health care?Suppose you purchase an insurance policy which pays for all of your health care. Now the cost of an office visit to you is $0. How many visits will you make?Health insurance causes people to seek more health care than they would if they had to pay all of their expenses themselves. VI. Employer-Provided health insuranceMany people receive health insurance through their employer. Labor Market Q*number of workersw*wageSupply of workersDemand for workers Q1number of workersw1wageSDSuppose that an employer provides a health insurance benefit to its workers. It costs $1 per worker per hour to provide.

It is worth $1 to the workers. Q1number of workersw1wageSDWorkers would be willing to earn $1 less per hour, because they would be getting $1 worth of insurance.

This would shift the supply of workers curve down by $1. S2$1 Q1number of workersw1wageSDSince the employer now has to pay $1 per hour for insurance for each worker, it is more expensive to hire workers.

The demand for workers curve would shift down by $1.S2$1D2 Qnumber of workersw1wageSDThe new equilibrium wage is lower.

The same number of workers are hired. S2D2w2What do you suppose would happen if the benefit was worth $2 to workers and cost $1 to provide?What happens when employers are required by the government to provide a certain level of insurance benefits?

total compensation = wages + insurance benefit

If the employer is required to raise the insurance benefit that they provide, - they may choose to lower the wages they pay, and keep total compensation the same

- they may choose to keep wages the same and raisetotal compensationexample:Suppose a firm pays its workers $50,000 each in total compensation. $45,000 is monetary wages$5,000 is an insurance benefit

Suppose the government requires each firm to provide a minimum level of insurance benefits. For this firm to reach the minimum, it will cost an additional $1,000 per worker. The firm would have a couple of options:

- Choose to keep monetary wages at $45,000 and pay the $6,000 worth of insurance. total compensation = 45,000 + 6,000 = 51,000

- Choose to lower monetary wages by $1,000 to offset the cost of the required insurance. total compensation = 44,000 + 6,000 = 50,000

What do you think the firm would choose to do?Questions?