Health of economics

HEALTH ECONOMICS ECN 369 Dr Georgios Kavetsos Textbook: Folland, Goodman, Stano “The Economics of Health and Health Care”, 7th edition, Pearson.

1 ECN369 - Lecture 1

Structure of the Course •  2 hours Lectures per week: Mondays at 11:00-13:00 1 hour Class per week • Coursework (presentations): 25% of final mark •  Final exam: 75% of final mark • We’ll apply fundamentals of micro in the context of health. •  I assume you know basic econometric tools.


Plan of the Course Lecture 1: Introduction + Basic Tools for Health Lecture 2/6: Demand and Supply of Health:

Lecture 2: Determinants of Health Lecture 3: Demand for Health Capital Lecture 4: Health and Economic Outcomes Lecture 5: Demand of Health Care Lecture 6: Supply of Health Care

Lecture 7/8: Health Care Labour Markets (Key Players in the Health Care Sector) Lecture 9: Market Failure Lecture 10: Economic Evaluation Lecture 11: Health Economics of “Bads”


Today’s plan •  Introduction:

•  Health Economics? The Relevance of Health Economics •  Economic Methods and Examples of Analysis •  Does Economics Apply to Health and Health Care? •  Is Health Care Different?

•  Microeconomic Tools for Health Economics •  Econometrics you need to know for the course •  Paper from the economic literature Reading: FGS: Chapters 1 and 2 Paper: Fuchs, 2000


Health Economics? •  Health, and health care costs dominate the economic and political

landscape in many countries.

•  Health economics studies the allocation of resources to and within the health economy.

•  Given its relevance (size of the sector in the economy and share of GDP) it emerged as a distinct specialty within economics.

•  Kenneth Arrow (1963): conceptual distinctions between health and other goods.

•  Health: a key determinant of objective lists of well-being.

•  What distinguishes health economics from other disciplines? Eg extensive government intervention, intractable uncertainty in several dimensions, asymmetric information, barriers to entry, externalities and the presence of a third party agent.

•  Who is the third party agent? The physician, who makes purchasing decisions (eg whether to order a lab test, prescribe a medication, perform a surgery,…)


The relevance of Health Economics U.S. Health Expenditure Shares (%GDP), 1960 – 2020

Source: Centers for Medicare and Medicaid Services: http://www.cms.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp, accessed August 8, 2011.


The relevance of Health Economics

Health Expenditures as % of GDP in Selected OECD Countries



Total Consumption Expenditures in $ Billions, by Type, 2009



People Employed at Health Services Sites: 2009



Active Health Personnel and Number per 100,000 Population (in Parentheses)


Size of health workforce, 2008 (WHO Health Statistics, 2010)

European Region

Total number Density per 10,000

population Physicians 2,877,344 33

Nursing & midwifery

6,020,074 68

Dentists 428,343 5

11

The relevance of Health Economics National Health Expenditures and Other Data for Selected Years


Household out of pocket expenditures on health, 2008 (OECD Health Data, 2010)

13

What affects health and health care?

• Decisions about how health care is funded, provided and distributed are strongly influenced by the economic environment and economic constraints

• Global, national and local policy responses to health issues are increasingly being informed by economic models

ECN369 - Lecture 1 14

Economic methods • Scarcity of societal resources

• Assumption of rational decision making

• Concept of marginal analysis

• Use of economic models


Modelling in economics •  In economics, a model is a theoretical construct that

represents economic processes by a set of variables and a set of logical and/or quantitative relationships between them.

• Useful because:

•  Expression of concepts in formal language promotes clarity

•  Implicit assumptions easier to detect

•  Derive all implications of explicit assumptions

•  Promotes logical coherence

Gravelle, H. Connecting health and economics. Centre for Health Economics, York, 2011. ECN369 - Lecture 1 16

DOES ECONOMICS APPLY TO HEALTH CARE? Does Price Matter?

The curve is similar to a usual demand curve: It shows people consuming more care (Q) as the care becomes less costly (P) in terms of dollars paid out-of-pocket. Importantly, those facing higher prices demand less care.


Demand Response of Ambulatory Mental Health and Medical Care in the RAND Health Insurance Experiment

Is Health Care Different? •  Presence and Extent of Uncertainty

•  Prominence of Insurance in the US


Personal Health Care Spending, Selected Years (in $ Billions)

Is Health Care Different? (cont.)

•  Problems of Information • Restrictions on Competition

• Role of Equity and Need

• Government Subsidies and Public Provision


Summing up… The greatest strengths of economics and economists are a framework of systematic theory,

•  an array of concepts and questions that are particularly relevant to the choices facing policy makers, and skill in drawing inferences from imperfect data. . . .

Economists’ framework of systematic theory facilitates the transfer of knowledge drawn from other fields of study to the health field. But… need to be aware of the peculiarities of the health care!

Health economists have also inherited from economics a set of concepts and questions that have proven to be particularly relevant to the policy problems that have emerged in health during the past three decades. Scarcity, substitution, incentives, marginal analysis, and the like were ‘‘just what the doctor ordered,” although in many cases the ‘‘patient’’ found the medicine bitter and failed to follow the prescribed advice. (Fuchs, 2000, p. 148)


Microeconomic Tools for Health Economics • Scarcity and the Production Possibilities Frontier •  Practice with Supply and Demand •  Functions and Curves • Consumer Theory:Ideas Behind the Demand Curve •  Individual and Market Demands • Elasticities •  Production and Market Supply • The Firm Supply Curve Under Perfect Competition • Monopoly and Other Market Structures • Conclusions

• Let’s briefly look at these ECN369 - Lecture 1 21

Scarcity and the Production Possibilities Frontier (PPF)


Society’s Trade-Off Between Guns and Butter

Demand/Supply Curve and Demand/Suppy Shifters


•  Income •  Prices of Other Goods •  Insurance •  Tastes

•  Technological Change •  Input Prices •  Prices of Production-Related Goods •  Size of Industry •  Weather

Market Effects of Supply and Demand Shifts


Health Economics Examples


•  A national health insurance proposal is passed that provides comprehensive health insurance to everyone

•  A new law requires that hospitals hire only nurses with B.A. degrees

– demand curve shifts to the right resulting in an increase in the equilibrium price and quantity.

– cost of hospital care rises shifting supply curve to the left resulting in an increase in the equilibrium price and a reduction in the equilibrium quantity of care

FUNCTIONS AND CURVES


Linear Functions y = a + bx

•  y is dependent variable and x is independent variable

•  a is the y-intercept, the value of y when x is 0

•  b is the slope of the function, the amount that the variable y changes when x changes

Demand Functions Qd = a – bP

•  where, Qd is quantity demanded and P is price

•  when graphing demand functions, economists customarily put the independent variable, P, on the vertical axis and the dependent variable, Qd on the horizontal axis

Qd = f (Ps, Po, Y, Z ) •  for example, the quantity of

spaghetti demanded is a function of the price of spaghetti (Ps), the price of related goods (Po), the individual’s income (Y) and tastes and preferences (Z)

Ideas behind the Demand Curve: Consumer Theory

•  Utility (a measure of an individual’s satisfaction with various combinations of consumer goods).

•  Marginal utility is the extra utility achieved by consuming one more unit of a good.

•  Indifference curves summarize a person’s preferences with regards to two goods. They are downward sloping and convex to the origin.

•  The budget constraint indicates the set of bundles the consumer can afford with a given income.

•  Consumer equilibrium: to maximize satisfaction given a budget constraint, the consumer will seek the highest attainable indifference curve


Market Demand Derivation of a market Demand Curve


Price Elasticity • Elasticity is defined as the responsiveness of a dependent variable to changes in an independent variable.

•  Price elasticity: the responsiveness of quantity demanded to changes in price

• Ep = (% change in Qd)÷ (% change in P)

or (ΔQ/Q) ÷ (ΔP/P)


E.g.Policy makers may impose a tax on the sale of cigarettes both to raise revenue and curb smoking. The concept of elasticity helps us to see these as contradictory goals.

Production Function


•  PF shows the maximum output that can be obtained from various combinations of inputs, with existing technology.

•  Q = f(X1, X2, X3, …), where X1, X2 and X3 represent inputs

•  Ex X-ray services: A commonly applied functional form: Cobb-Douglas: Q = L0.8 + K 0.2 a 1% increase in L will increase output by 0.8%

Isoquants and Isocost Curves •  Isoquant Q* represents all the combinations of capital and labour that could be used to produce 10 units of output.

•  Isocost TC = 686 represents all combinations of capital and labor that cost $686.


Cost Minimization (or Output Maximization) - Determining Efficient Combinations of Labor and Capital

Summing up…


•  Production possibility frontier

•  Demand-and-supply analysis

•  Utility and indifference curve analysis

•  Production and cost curves of a typical firm

Fuchs, ‘The future of health economics’ (2000) Structure: •  Future of health economics depends on how well health economists do 2 things:

•  contribute to the understanding of economic behaviour •  provide input into health policy and health services research.

•  This role expanded, but there are still pockets of strong resistance to the application of economics to health problems. Why?

•  How can health economists provide input to health policy and health services research? •  How can we do these 2 things better? •  Tremendous expansion of the field in the past 35 years: •  Fuchs illustrates this using data on publications and citations (of journals and economists). •  What explains this growth? •  Intellectual advances, greater availability of data, ever-increasing health care expenditure (which we

discussed earlier today) •  Strengths and weaknesses of economics.

•  Potential for interdisciplinary research. •  Reasons why demand for health economists will continue.


Fuchs, ‘The future of health economics’ (2000)




How can health economists provide input to health policy and health services research? - Strengths of economics - Weaknesses of economics - Interdisciplinary and multidisciplinary research



Will the bull market in health economics continue? Factors fuelling the demand for health economics: -  Growing gap between what medicine can do, and what it is

economically feasible to do.

-  Aging population will put more pressure on health care resources.

-  Data are getting better.

-  Anti-egalitarian trend?

For next week

• Read Paper: Hitiris T., J. Posnett, “The Determinants and Effects of Health Expenditure in Developed Countries”, Journal of Health Economics, 11 (1992), 173-181.

•  To be presented by?


Statistical Tools for Health Economics


• Hypothesis Testing • Difference of Means •  Regression Analysis • Multiple Regression Analysis •  Endogeneity

Endogeneity


The problem of endogeneity occurs when the independent variable is correlated with the error term in a regression model. This implies that the regression coefficient in an Ordinary Least Squares (OLS) regression is biased The endogeneity can come from: -  an uncontrolled confounding variable. -  measurement error -  simultaneity in simultaneous equations models

Omitted variables


A variable is both correlated with an independent variable in the model and with the error term. Assume that the "true" model to be estimated is but we omit Zi (perhaps because we don't have a measure for it) when we run our regression Zi will get absorbed by the error term and we will actually estimate: If the correlation of X and Z is not 0 and Z separately affects Y, then X is correlated with the error term.

Measurement Error


Suppose that we do not get a perfect measure of one of our independent variables.

Imagine that instead of observing Xi we observe Where is the measurement "noise".

When we try to estimate the following univariate regression we actually end up estimating Since both and depend on they are correlated. NB Measurement error in the dependent variable, however, does not cause endogeneity (though it does increase the variance of the error term).

Endogeneity


There are many methods of overcoming this:

-  Fixed Effects Models -  Instrumental Variables

Fixed Effects •  Fixed effects models come primarily out of longitudinal data designs

in which we have repeated observations on an individual over time.

•  We can take advantage of the longitudinal design to eliminate some of the unobserved heterogeneity.

•  First, let's define a set of dummy terms, Di, which will be “one” if the observation comes from individual “i” and “zero” otherwise

•  These dummy variables allow us to fit a term for every individual. Because we have multiple observations per individual, doing this will not saturate the model. Essentially, we are trying to explain variation within individuals. The αi terms are our "fixed effects."

•  The FEs can account for both observed and unobserved time-constant variables. Thus we can be certain that our new estimate are not the result of lurking variables that are constant across time.


Instrumental Variables •  In some cases we may not be able to rule out that x is partially

endogenous but we may have another variable z which we can be fairly certain has an effect on x but not on y.

•  The best situation is when we know that z has been completely randomized.

•  This situation is rare. The more common situation is a natural experiment in which for some historical reason we observe a shock to a system which can reasonably be treated as random. •  The most famous example here is the use of birthdates in the question

of whether military service affected subsequent labor market experience. Because the draft was assigned on the basis of birthdates, it is highly correlated with military service, but unlikely to be correlated with labor market experience.

•  If this relationship holds, then we can treat z as an instrument for inducement into the "treatment" of x.


Instrumental Variables •  The most common method for doing the actual estimation: two-

stage least squares (2SLS) •  As a first step, predict the value of from xi from zi. (If you plan on including other terms in your final model for y, say wi, it is typical to include them at this stage as well):

•  Now use the predicted value of x rather than its real value in an OLS regression predicting y

•  Because you are using the predicted value of x you are essentially leaving behind the residuals from the first equation.

•  Since z is an exogenous shock on x, those residuals are the part of x which are potentially endogenous with y. You have stripped them away.


Health of economics

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