Chapter 2: Chapter 2: Health, Medical Care, andHealth, Medical Care, and

Medical SpendingMedical Spending

Can we apply the tools of managerial economics to health care?

OutlineOutline

An economic model of utility, health, and medical care.

Measuring health status. Empirical evidence on health

production. Health care expenditures.

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.

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.

Utility

HealthH0 H1 H2 H3

U0

U1

U2

U3

Total

Utility

The Total Utility Curve for Health

Marginal Utility

Health

The Marginal Utility Curve for Health

MU

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.

Medical Care Medical Care

HealthMarginal Increase in Health

Total Product

MP

The Total and Marginal Product of Medical Care

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.

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.

A Shift in the Total Product Curve A Shift in the Total Product Curve for Medical Carefor Medical Care

Health

Medical Care

TP0

TP1

MEASURING HEALTHMEASURING HEALTH

Important for all health care managers today.

Insurers and consumers are demanding

costs AND quality.

HEALTH OVER THE LIFE CYCLEHEALTH OVER THE LIFE CYCLE

TIME

HEALTH

BIRTH

Hmin

Appendicitis

Auto Crash

Cancer (radiation therapy)

Cancer complications

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.

MORTALITYMORTALITY

Alive vs. Dead

Advantages:

Disadvantages:

MORTALITY MEASURESMORTALITY MEASURES1950 1970 1980 1990 1996-98

1. Crude death rate 963.8 945.3 878.3 863.8 867.3 (per 100,000)

2. Age-adjusted death rate 840.5 714.3 585.8 520.2 480.7

3. Age-specific death rate

15-24 128.1 127.7 115.4 99.2 86.0

65-74 4067.7 3582.7 2994.9 2648.6 2514.5

4. Infant mortality 29.2 20.0 12.6 9.2 7.2

Neo-natal 20.5 15.1 8.5 5.8 4.8

Postneonatal 8.7 4.9 4.1 3.4 2.5

5. Life Expectancy 68.2 70.8 73.7 75.4 76.7(at birth) (1998)

MORTALITY MEASURESMORTALITY MEASURES

Life expectancy NOT a prediction of how long people live.

76.7 is a summary of age-specific death rates in 1998.

“If those born in 1998 experienced age-specific death rates prevailing in 1998, on average they would live to be 76.7”

MORBIDITYMORBIDITY

The relative incidence of disease

Advantages: Captures quality of life.

Disadvantages: Difficult to measure Difficult to aggregate when patient has >1

problem.

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.

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?

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.”

LEADING CAUSES AND NUMBER OF LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED 15-24 (1998)DEATHS, PERSONS AGED 15-24 (1998)

CAUSE OF DEATH DEATHS

Unintential injuries 13,349

Homicide and legal intervention 5,506

Suicide 4,135

TOTAL “Violent Deaths” 22,990 75%

Cancer 1,699

Heart Disease 1,057

HIV 194

All other nonviolent causes 4,687

TOTAL “Nonviolent Deaths” 7,637 25%

LEADING CAUSES AND NUMBER OF LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED 65+ (1998)DEATHS, PERSONS AGED 65+ (1998)

CAUSE OF DEATH DEATHS

Heart disease 605,373

Cancer 384,186

Cerebrovascular Disease 139,144(Stroke)

Chronic Obstructive Lung Disease 97,896

Pneumonia and Influenza 82,989

Diabetes mellitus 48,974

Unintentional injuries 32,975 2%

Nephritis 22,640

Empirical Evidence on Health Prod’nEmpirical Evidence on Health Prod’n Bunker et. al. (1995) estimated the

increases in LE due to 26 preventive & curative medical services.13 preventive services raised LE by 1.5

years.13 curative treatments raised LE by 3.5-4

yrs. on average for the entire U.S. Given that LE rose from 62.9 to 75.4

yrs. (~12 yrs.) b/w 1940 & 1990, medical care had a significant impact on health.

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)

OTHER FACTORS AFFECTING HEALTHOTHER FACTORS AFFECTING HEALTH

Environmental factors

e.g. air pollution, water quality, climate, occupational hazards

Empirical studies inconclusive, but may be due to lack of good data.

OTHER FACTORS AFFECTING HEALTHOTHER FACTORS AFFECTING HEALTH Socioeconomic status

Education strongly correlated with health. May help in “direct” production of health. Or, may reflect high preference for future

(low discount rate)Income

Strong correlation with health in U.S. from mid 1700’s to mid 1900’s

Less relation between income and health since, maybe because most important public health problems are already solved

– e.g. Adequate nutrition, sanitation

Higher income may increase “bad” habits– e.g. Smoking, excess drinking, reckless driving

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

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

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?

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?

Marginal Productivity of Provider Marginal Productivity of Provider Services for Infant HealthServices for Infant Health

(1-mortality rate)%

Medical Care

Blacks

Whites

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.

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.