Health Economics

Taggert J. Brooks

Spring 2013

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

~F. A. Hayek The Fatal Conceit

Why study health economics?

The basic economic questions which every society faces

• PPF• Opportunity cost • Pareto optimal• Positive versus normative

Research in Economics

• RAND Health Experiment– Gold standard, randomized treatments

What is special about Health (Care) Economics?

• Uncertainty and Incomplete Information• Asymmetric Information• Regulation and Government Intervention• Externalities

Uncertainty and Incomplete Information

• Random illness striking individuals• Random outcomes from medical

interventions• Professional uncertainty about efficacy of

treatment

Asymmetric Information

• Health professional know more about the healing process and the efficacy of different treatments

• Consumers know more about their own health condition than insurers

• Physician Agency

Regulation and Government Intervention

• Health Practitioners (Licensure)• Drugs and Products• Price Controls• Capital Construction, entry, and exit• Provision of insurance• Research and Development• Professional Education• Favored Tax Treatment

Externalities

• Negative– Communicable Diseases– Reckless Lifestyles (e.g., Drunk Driving)– Gun Ownership

• Positive– Production of Knowledge

Medical Care vs. Health Care

• Most of the improvement in life expectancy comes from public health– Chlorinated and Filtered water.

• Effect of medical care on health– Limited– Extensive versus Intensive Margins

From: Peter Orszag - Director CBO

From: Peter Orszag - Director CBO

Grossman Model

• Economists think about Health in terms of a stock of Health.– The stock of health generates flow of utility

increasing life – Medical Care is an investment in that stock– Other investments

Preconceptions

• Health Care Spending as % of GDP

• Government’s Share of Health Care Spending

• % of people covered by health insurance

• Life Expectancy at Birth.

99% 44 44 Kurtosis 3.63458995% 40 40 Skewness 1.2084890% 36 36 Variance 113.897275% 18 32 Largest Std. Dev. 10.6722650% 16 Mean 17.52174

25% 10 8 Sum of Wgt. 2310% 6 6 Obs 23 5% 5 5 1% 5 5 Percentiles Smallest care?-us spends the us currently spends what % of gdp on health

. sum q11_1, d

Spring 2010

99% 59 59 Kurtosis 4.41828795% 45 45 Skewness 1.18904690% 39 39 Variance 112.165275% 31 37 Largest Std. Dev. 10.5908150% 26 Mean 26.37037

25% 18 16 Sum of Wgt. 2710% 16 16 Obs 27 5% 16 16 1% 15 15 Percentiles Smallest care?-us spends the us currently spends what % of gdp on health

. sum q11_1, d

Spring 2013

99% 75 75 Kurtosis 2.0800695% 71 71 Skewness -.102881890% 70 70 Variance 353.99675% 61 65 Largest Std. Dev. 18.8147850% 46 Mean 43.78261

25% 28 25 Sum of Wgt. 2310% 25 25 Obs 23 5% 10 10 1% 10 10 Percentiles Smallest consist of ___% of all health c government expenditures on health care currently

Spring 2010

Spring 2011

Spring 2013

99% 100 100 Kurtosis 2.99536395% 85 85 Skewness .059825790% 84 84 Variance 202.487275% 76 84 Largest Std. Dev. 14.229850% 65 Mean 66.77778

25% 60 52 Sum of Wgt. 2710% 47 47 Obs 27 5% 41 41 1% 37 37 Percentiles Smallest or private health insurance?-c what percentage of citizens are covered by public

99% 93 93 Kurtosis 3.74603395% 90 90 Skewness -1.16628690% 85 85 Variance 518.936875% 85 85 Largest Std. Dev. 22.7801850% 72 Mean 65.86957

25% 60 45 Sum of Wgt. 2310% 39 39 Obs 23 5% 11 11 1% 10 10 Percentiles Smallest or private health insurance?-co what percentage of citizen are covered by public

Spring 2010

Spring 2011

Spring 2013

99% 79 79 Kurtosis 1.88983595% 75 75 Skewness -.029962690% 71 71 Variance 304.772175% 60 64 Largest Std. Dev. 17.4577250% 50 Mean 47.18519

25% 33 25 Sum of Wgt. 2710% 24 24 Obs 27 5% 23 23 1% 18 18 Percentiles Smallest consist of ___% of all health c government expenditures on health care currently

Health Insurance Coverage in the U.S., 2008

Employer-Sponsored Insurance

52%

Uninsured15%

Private Non-Group5%

Medicare14%

Medicaid/Other Public

13%

NOTE: Includes those over age 65. Medicaid/Other Public includes Medicaid, SCHIP, other state programs, and military-related coverage. Those enrolled in both Medicare and Medicaid (1.9% of total population) are shown as Medicare beneficiaries. SOURCE: Kaiser Commission on Medicaid and the Uninsured/Urban Institute analysis of March 2009 CPS

Total = 300.5 million

Source: Stan Dorn, Bowen Garrett, John Holahan, and Aimee Williams, Medicaid, SCHIP and Economic Downturn: Policy Challenges and Policy Responses, prepared for the Kaiser Commission on Medicaid and the Uninsured, April 2008

Impact of Unemployment Growth on Medicaid and SCHIP and the Number Uninsured

1%

Increase in National Unemployment

Rate

=1.0 1.1

Increase in Medicaid

and SCHIP Enrollment

(million)

Increase in Uninsured(million)

&$2.0

$1.4

$3.4

Increase in Medicaid and

SCHIP Spending(billion)

State

Federal

Japan United States

Ukraine Venezuela -

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Longest Life Expectancy at Birth: Your Responses Spring 2010

Rank Country Life

3 Japan 82.12

50 US 78.11

103 Venezuela 73.61

150 Ukraine 68.25

Life Expectancy at Birth

Sources of Rising “Costs”

• Expenditures = Price X Quantity

From: Peter Orszag - Director CBO

1960 1965 1970 1975 1980 1985 1990 1995 2000

National Compensation Measures as a Share of GDP, NIPA 1960-2006

Source: Kaiser Family Foundation analysis of data from the U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, 1960-2006, Tables 1.1.5, 2.1, 6.11B, 6.11C, & 6.11D, 2008.

2006

Wages

Other Fringe Benefits and Payroll Taxes

51.8%

Private Group Health Insurance

0.6%

3.8%

45.6%

4.1%

6.7%

56.3% of GDP

56.4% of GDP

Health Care as an Economic Issue

11%

6%

6%

6%

9%

10%

11%

13%

26%Inflation or rising prices overall

All of these/Other/Don’t Know

Price of gasoline

Health care costs

Problem getting a good-paying job or a raise in pay

Cost of housing

Difficulty saving for retirement

Credit card debt and other personal debt

High taxes

Which of the following is the single most important economic issue facing you and your family? (Feb. 2008, registered voters)

SOURCE: Kaiser Health Tracking Poll: Election 2008 Issue 6: March 2008 (conducted February 7-16, 2008)

16%

18%

18%

19%

29%

44%

28%

As a result of recent changes in the economy, have you and your family experienced any of the following problems, or not? Was this a serious problem,

or not?

Problems Experienced as a Result of Changes in the Economy

Percent saying each was a “serious problem”

Problems paying for gas

Problems getting a good-paying job or a raise in

pay

Problems paying yourrent or mortgage

Problems paying for health care and health insurance

Problems paying for food

Problems with credit card debt or other personal

debtLosing money in

the stock market

SOURCE: Kaiser Family Foundation Health Tracking Poll: Election 2008 (conducted April 3-13, 2008)

Mean Health Insurance Costs Per Worker Hour for Employees with Access to Coverage, 1999-

2005

$1.60$1.72

$1.81

$2.01

$2.23

$2.42$2.59

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

1999 2000 2001 2002 2003 2004 2005

Source: Kaiser Family Foundation analysis based on data from the National Compensation Survey, 1999-2005, conducted by the Bureau of Labor Statistics.

International comparisons:

• Some stylized facts about health care

Top 10 Causes of Death: 1900 vs. 2010.

Jones DS et al. N Engl J Med 2012;366:2333-2338.

Total 27 100.00 physician salaries 3 11.11 100.00medical malpractice/litigation 7 25.93 88.89 rising incomes 1 3.70 62.96 government intervention 8 29.63 59.26 prescription drugs 8 29.63 29.63 health care costs in t Freq. Percent Cum. most likely cause of rising which of the following is the

$10,000 $20,000 $30,000 $40,000 $50,000$0

$2,000

$4,000

$6,000

$8,000

GDP Per Capita $PPP

To

tal

exp

en

dit

. o

n h

ea

lth

/ca

pit

a,

$

PPP France

US

Korea

$10,000 $20,000 $30,000 $40,000 $50,000$0

$2,000

$4,000

$6,000

$8,000

GDP Per Capita $PPP

To

tal

exp

en

dit

. o

n h

ea

lth

/ca

pit

a,

$

PPP France

US

Korea

• Notes:– Differences in mortality, life expectancy at

different ages and causes of death over time and across countries