Economics of Health & Health Care

Outline Measuring health care costs and expenditures Current levels Future predictions Iron triangle: three key policy issues: iron triangle Tradeoff between quality, cost and access Quality, access, cost Today we focus on cost

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Health spending is growing faster than GDP Health Services and Supplies How much is the hospitals proportion of spending? 1) Hospitals: 31.4 2) Physician/clinical services 3) Prescription drugs Home health and nursing home care = small amount of people but the people who are using it are spending a lot of money Transfers from the government: difference between medicare (elderly and disable) and medicaid (federal state matching program largest amount of nursing home aid) SCHIP: childrens program Medicare part D d is for drugs: extended drug insurance for the elderly has a lot to do with General trends: increasing sift from private to public finance - the government is picking more of the tab We think about healthcare problems particularly because of the shift from private to public - this is why it becomes a healthcare spending problem: despite spending increasing overall its still a lot.

We have talked about sources of what we spend our money on and who pays the bills now rates of growth: when we think about what explains the growth rate: we need to come up with something that will affect spending over multiple years: intervention 1 off savings: growth and healthcare savings - disaster that gets rid of hospitals example

Epidemic: example HIV Temporarily freezing medicare payments We are looking for lasting consistent reduction rates not one time reduction rate Tax advantage sponsored employment coverage. Assume people dont respond to We are not just spending our money on healthcare, we are also spending on other things: richer because we do not have to pay those taxes: increase in consumption is not soley on healthcare - you are overall richer so you will be spending on goods overall. Managed care: if you get care at Yale health. Before managed care expansion: you went to the doctor: had insurance instead of paying doctors for the bills they had, they only paid negotiated bills. People didnt like being told that they only have to go to this specific doctor I will pay each doctor less for each given service cut growth rate at least for a while? Future pedictions Expenditure identity: totally expenditure: price, quantity, mix, population: Total exp = sigma I sigma n Pn Qn Divide healthcare into different categories in each category Change in prices and change in quantities function of both.

Preliminary punchline: change in quantities is much more important than the change in price.. Lots of nuancing said here Explanations of why healthcare costs are increasing: Demographics: people are growing older: aging population Technology: illness increasing More unhealthy population: obesity Moral hazard: growth in moral hazard due to an increase in healthcare coverage (insurance) Supplier induced demand: if we build it they will come Changing fraction of specialists Market power/doctors (lecture economics of doctors) Were getting richer more disposable income and more of that is going to healthcare Medical malpractice Politics Price transparency Income elasticity of demand > 1 Social security problem: medicare problem: if it was all about aging: social security problem will be just as bad Moral Hazard Solow model: Y = A K^a L^1-a Log Y = log A + alogK + (1-a)logL Log Y = E + BlogK +GlogL Epsilon all the error and this we will call technology Public health programs tend to have lower administrative costs Regulate administrative cost directly

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Health Production Function

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Marginal Health Product: as we increase medical care input by 1 unit, how much more health output are we getting We usually think that MHP is diminishing (even decreasing in some cases) Downward sloping (iatrogenic medicine) We often think of this region as the flat of the curve We choose where marginal cost is equal to marginal benefit MC=MB Health Production Theory (health) Empirical evidence Huge increase in the number of people since the year 1750 Malthusian hypothesis (sidenote) Looks like health is increasing over time Nutrition and Health Production To look at health in the past: measure mortality, and measure height o Hypothesis as nutrition improves, height should also o o o o improve/increase Height good proxy of health Income and health First look at time series and then look at cross-section: discontinuity variation Cross-sectional comparison: specifically those men in those time period. Do countries that have higher incomes have better health? Kind of looks like the health production function

At very low incomes, adding a little bit of income, improves health by more than the additional income. Education and Health Debate about casual relationship o Education health (direct) o Education income health o

Education and mortality risk paper: as you get more years of education then your 5 year mortality rate will go down. Looks like more education is decreasing your mortality? Another way to measure health is not just mortality. o On a 5 point scale: how healthy are you? Completed Grades and smoking o If there is something causal between education and smoking patterns? There does seem to be some sort of causal pathway between those two Completed Grades and wearing seat belts Completed Grades and cancer

Lifestyles and Health: The Tale of Two States Excess death Rates in Nevada , higher death rates than Utah overall Excess death Rates only due to Cirrhosis of Liver (alcohol) and Respiratory Malignant Neoplasms (1966-1968) also higher overall Public Health: Jogn Snow and the Broad Street Pump Handle: Cholera in London (1850s) Germ theory of disease replaces miasma bad air theory Environment vs Technology Technology as the big increase of health spending. Social Status and Health Whitehall Studies (Marmot) The early declines in mortality occurred because of increase in nutrition, hygiene, and Public Health Antibiotics Stasis CVD Products

Another story about Technology Policy and Marginal Health Product

Efficiency condition What do we get for our moneys worth, today (or recently)? You can figure out what qualities are by asking people if you lost arm how many years of life would it be worth to you so just survey? OR other research methods: Would losing your arm be equivalent to losing $2? And keep going up until you reach the threshold.. QALYs: Quality Adjusted Years Production of Health Care We can have a production function for health and also production function for healthcare. Economies of Scale: Economies of Scope: If you have two individual technologies or services, and you put them together then their output is greater than the sum of their parts. So their cost is lower than the sum of the costs of their parts Diseconomies of scale: has to do with the sign: additional cost Practice for short papers