Post on 02-Jan-2016
Health, Medical Care, andHealth, Medical Care, andMedical SpendingMedical Spending
Health EconomicsProfessor Vivian Ho
Spring 2006
These slides summarize material in Santerre & Neun: Health Economics, Theories Insights and Industry Studies, Thomson 2004
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OutlineOutline
An economic model of utility, health, and medical care
Measuring health status Empirical evidence on health production Health care expenditures
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A Basic Economic ModelA Basic Economic Model
Health as a consumer durable good: Utility = U (X, Health)
X represents “other goods and services” H is a stock -- every action will affect health On its own or combined with other goods and
services, the stock of H generates a flow of services that yield satisfaction=utility
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A Basic Economic Model A Basic Economic Model (cont.)(cont.)
Marginal Utility The increase in utility resulting from a given
increase in health
MUH = U/H
Law of diminishing marginal utility Each incremental improvement in health
generates smaller and smaller additions to total utility
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A Basic Economic Model A Basic Economic Model (cont.)(cont.)
• Production of health: H = g (Medical care, other stuff)
Marginal productivity The increase in health resulting from a given
increase in medical care (q)
MPq = H/q
• Law of diminishing marginal productivity• Health increases at a decreasing rate with respect
to additional amounts of medical care
9Medical Care Medical Care
HealthMarginal Increase in Health
Total Product
MP
The Total and Marginal Product of Medical Care
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A Basic Economic Model A Basic Economic Model (cont.)(cont.)
Medical care is not homogeneous and differs in: Structural quality (e.g. facilities and labor) Process quality (e.g. waiting time, case mgmt.) Outcome quality (e.g. patient satisfaction,
mortality)
Therefore medical services are often difficult to quantify
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A Basic Economic Model A Basic Economic Model (cont.)(cont.)
Health=H(Profile, Medical Care, Lifestyle, Socioeconomic Status, Environment)
If an individual has a heart attack, then overall health decreases, regardless of the amount of medical care consumed The total product curve for medical care shifts
down
As a person ages, both health and the marginal product of medical care are likely to fall The total product curve shifts down and flattens
out
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A Shift in the Total Product Curve A Shift in the Total Product Curve for Medical Carefor Medical Care
Health
Medical Care
TP0
TP1
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MEASURING HEALTHMEASURING HEALTH
Important for all health care managers today
Insurers and consumers are demanding
costs AND quality
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HEALTH OVER THE LIFE CYCLEHEALTH OVER THE LIFE CYCLE
TIME
HEALTH
BIRTH
Hmin
Appendicitis
Auto Crash
Cancer (radiation therapy)
Cancer complications
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HEALTH OVER THE LIFE CYCLEHEALTH OVER THE LIFE CYCLE
Individuals make choices about health (make tradeoffs) which maximize U over time
Relatively high value for the future• Low discount rate
e.g. Low-fat diet and exercise to avoid heart disease
Relatively low value for the future• High discount rate
e.g. Smoking, excess drinking, drug abuse
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DISCOUNTINGDISCOUNTING
Required when costs are incurred in the future Why? Individuals have a positive value of time
preference
If r = 10%, then $100 invested today yields $110 next year
Spending $100 one year from now is “cheaper” than spending $100 today
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CHOICES
Spend $100today
Invest $100 = $90.91 (1 + .10)
and
have $9.09 left over
DISCOUNTINGDISCOUNTING
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If costs occur over multiple time periods, we must calculate the present discounted value (PDV) of these costs:
PDV = ΣT
t = 0
1(1 + r)t
COSTSt
• Example:
A project requires: $100 in year 1 $ 75 in year 2 $ 50 in year 3
PDV = $100 + $ + $ = $209.50 75(1 + .10)
50(1 + .10)2
DISCOUNTINGDISCOUNTING
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If we discount costs, we must also discount benefits
Assume r = 10%
$990
Spend $990to save
1 year of lifetoday
Invest $900 tosave 1 year of life
next yearand
have $90 left tospend this year
DISCOUNTINGDISCOUNTING
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Appropriate discount rate?
• The medical literature has settled on 5% for comparative reasons
Discounting is not an adjustment for inflation
COST
YOLS=
Σ
Σ COST
YOLS
1(1 + r)t
1(1 + r)t
DISCOUNTINGDISCOUNTING
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Consider an intervention which costs $100 and saves 10 years of life Also assume r = 10%
Why we discount cost AND benefitsWhy we discount cost AND benefits
Option 1:Spend $100 today: = = 10
C
E
100
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Option 2:Invest for 1 year → $110, saves 11 YOL. If we discount costs to present value, but don’t discount YOL:
CE =
10011 = 9
111
If we discount both costs and benefits:
CE
= = 10
110
111(1 + .10)
1(1 + .10)
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MORTALITY MEASURESMORTALITY MEASURES1950 1970 1980 1990 2000
1. Crude death rate 963.8 945.3 878.3 863.8 873.6 (per 100,000)
2. Age-adjusted death rate 1446.0 1222.6 1039.1 938.7 869.0
3. Age-specific death rate
15-24 128.1 127.7 115.4 99.2 81.5
65-74 4067.7 3582.7 2994.9 2648.6 2432.9
4. Infant mortality 29.2 20.0 12.6 9.2 6.9
Neo-natal 20.5 15.1 8.5 5.8 4.6
Postneonatal 8.7 4.9 4.1 3.4 2.3
5. Life Expectancy 68.2 70.8 73.7 75.4 76.9(at birth)
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MORTALITY MEASURESMORTALITY MEASURES
Life expectancy NOT a prediction of how long people live
76.9 is a summary of age-specific death rates in 2000
“If those born in 2000 experienced age-specific death rates prevailing in 2000, on average they would live to be 76.9
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MORBIDITYMORBIDITY
The relative incidence of disease
Advantages: Captures quality of life
Disadvantages: Difficult to measure Difficult to aggregate when patient has >1
problem
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MORBIDITYMORBIDITY
Acute disease e.g. appendicitis, pneumonia, gun shot wounds
Chronic disease e.g. arthritis, diabetes, asthma
Incidence occurrence of new cases in any particular year
Prevalence new and ongoing cases in any particular year
Heart disease is more prevalent, but its incidence is declining
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MEASURING MORBIDITYMEASURING MORBIDITY
Distinguish between symptom and disease e.g. high blood pressure vs. stroke
Disabilities are also a sign of morbidity
Subjective measures - i.e. self-rated health
“Is your health excellent/good/fair/poor?” Problem: 1970-80, # of people with high blood pressure
declined. But % of people reporting restricted activity due to HTN doubled!
Depends on what you want to do - e.g. astronaut, airline pilot, or professor?
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MEASURING MORBIDITYMEASURING MORBIDITY
How far do we go in classifying “medical” problems?
e.g. cosmetic surgery
Beware of phrases in contracts or policy statements such as “providing all medical care” or “basic needs”
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LEADING CAUSES AND NUMBER OF LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED 15-24 (2000)DEATHS, PERSONS AGED 15-24 (2000)
CAUSE OF DEATH DEATHS
Unintential injuries 14,113
Homicide 4,939
Suicide 3,994
TOTAL “Violent Deaths” 23,046 85%
Cancer 1,713
Heart Disease 1,031
Congenital anomalies 441
All other nonviolent causes 757
TOTAL “Nonviolent Deaths” 3,942 15%
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LEADING CAUSES AND NUMBER OF LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED 65+ (2000)DEATHS, PERSONS AGED 65+ (2000)
CAUSE OF DEATH DEATHS
Heart disease 593,707
Cancer 392,366
Cerebrovascular Disease 148,045(Stroke)
Chronic Lower Respiratory Disease 106,375
Pneumonia and Influenza 58,557
Diabetes mellitus 52,414
Alzheimer’s disease 48,993
Kidney disease 31,225
Unintentional Injuries 31,050
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Empirical Evidence on Health Prod’nEmpirical Evidence on Health Prod’n
Hadley (1982) a 10% in medical care $ per capita mortality rate by only 1.5%
Auster et al. (1969) 10% in medical services age-adjusted mortality rate by 1%
Enthoven (1980) “flat-of-the-curve” medicine
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LIFESTYLELIFESTYLE cigarette smoking 10% mortality:
blacks whites
men 45-64 2.3% 1.4%
women 45-64 1.1% 1.1%(Hadley, 1982)
A one-pack-a-day smoker incurs 10.9 more sick days every six months than a comparable non-smoker
(Leigh and Fries, 1992)
Not smoking, regular exercise, moderate/no use of alcohol, 7-8 hours of sleep per day, proper weight, eating breakfast, and no snacking leads to 28% lower mortality for men, 43% lower for women
(Breslow and Enstrom, 1980)
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OTHER FACTORS AFFECTING HEALTHOTHER FACTORS AFFECTING HEALTH
EducationOne more year of schooling prob of dying
w/in 10 years by 3.6% (Lleras-Muney 2001)
IncomePeople w/o high school educ & income
<$10k were 2-3 x’s more likely to have functional limitations and poorer self-rated health
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Determinants of Infant HealthDeterminants of Infant Health
Whites Blacks1964 16.2 27.61977 8.7 16.1
Neonatal Mortality per 1000 Live Births
Corman and Grossman, 1985
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Determinants of Infant HealthDeterminants of Infant Health
Corman and Grossman, 1985
Selected Regression Results,
Neonatal Mortality RatesWhites Blacks
% HS Educated -0.037 -0.056
Newborn Intensive Care Hospitals/1000
-44.196 -86.196
Abortion Providers/1000 -3.198 -16.838
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Determinants of Infant HealthDeterminants of Infant Health
Does more schooling and the availability of more providers improve infant health?
Is the marginal productivity of more providers greater for blacks or whites?
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Determinants of Infant HealthDeterminants of Infant Health
Why might the marginal productivities for blacks and whites differ?The regressions have poor controls for
income,health status, preferences, etc. which may be correlated with schooling and the availability of providers
If the marginal productivity for most factors is greater for blacks then whites, why isn’t the overall neonatal mortality rate lower for blacks than whites?
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Marginal Productivity of Provider Marginal Productivity of Provider Services for Infant HealthServices for Infant Health
(1-mortality rate)%
Medical Care
Blacks
Whites
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Marginal Productivity of Provider Marginal Productivity of Provider Services for Infant Health Services for Infant Health (cont.)(cont.)
For any given level of provider services, marginal productivity may be higher for blacks than whites
However, the level of services may be higher for whites than blacks
Knowing the shape of the total product curve is not enough. You must also know where you are on it
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ConclusionsConclusions
In an economic model, medical care and other goods and services are combined to produce health, which yields utility to the consumer
The production of health can be measured in a variety of ways
Both higher health care expenditures and other factors are improving health status over time