The Economics of Health and Health Care

Cover......Page 1
Title......Page 4
Copyright......Page 5
Contents......Page 6
Preface......Page 24
Acknowledgments......Page 28
1 Introduction......Page 30
What Is Health Economics?......Page 31
Box 1.1 Technological Change and Health Care Costs—Why Rising Health Care Costs Affect All Nations......Page 32
Health Care's Share of GDP in the United States......Page 33
Importance of the Health Economy in Personal Spending......Page 34
Importance of Labor and Capital in the Health Economy......Page 36
The Importance Attached to Economic Problems of Health Care Delivery......Page 38
Inflation......Page 39
Economic Methods and Examples of Analysis......Page 40
Use of Models......Page 41
Does Economics Apply to Health and Health Care?......Page 42
An Example: Does Price Matter?......Page 43
Prominence of Insurance......Page 44
Problems of Information......Page 46
Role of Equity and Need......Page 47
Conclusions......Page 48
Postscript......Page 49
Discussion Questions......Page 50
Exercises......Page 51
2 Microeconomic Tools for Health Economics......Page 56
Scarcity and the Production Possibilities Frontier......Page 57
Box 2.1 There's Scarcity and Then There's Real Scarcity......Page 59
The Demand Curve and Demand Shifters......Page 61
The Supply Curve and Supply Shifters......Page 62
Comparative Statics......Page 63
Linear Functions......Page 64
Demand Functions......Page 65
Consumer Theory: Ideas behind the Demand Curve......Page 66
Utility......Page 67
Indifference Curves......Page 68
Consumer Equilibrium......Page 69
Individual and Market Demands......Page 71
Elasticities......Page 72
The Production Function......Page 74
Production Functions......Page 75
Cost Minimization or Output Maximization......Page 78
Marginal and Average Cost Curves......Page 79
The Firm Supply Curve under Perfect Competition......Page 80
Monopoly and Other Market Structures......Page 83
Box 2.2 Is Competition Better than Monopoly?......Page 85
Summary......Page 86
Exercises......Page 87
3 Statistical Tools for Health Economics......Page 90
Hypothesis Testing......Page 91
Difference of Means......Page 92
The Variance of a Distribution......Page 93
Standard Error of the Mean......Page 94
Hypotheses and Inferences......Page 95
Box 3.1 Do Cell Phones Cause Cancer?—Positive Reports but Inconsistent Data......Page 96
Ordinary Least Squares (OLS) Regressions......Page 97
A Simple Regression......Page 98
Estimating Elasticities......Page 99
Multiple Regression Analysis......Page 100
Interpreting Regression Coefficients......Page 101
Box 3.2 Hormone Replacement Therapy—Rigorous Statistics Reveal Surprising Results......Page 102
Dummy Variables......Page 103
Statistical Inference in the Sciences and Social Sciences......Page 104
Discussion Questions......Page 105
Exercises......Page 106
4 Economic Efficiency and Cost-Benefit Analysis......Page 110
Economic Efficiency......Page 111
Measuring Benefits and Costs......Page 114
Risk Equity versus Equality of Marginal Costs per Life Saved......Page 116
Box 4.1 When Is Preventative Medicine a Good Investment?......Page 117
Marginal Analysis in CBA......Page 118
Discounting......Page 119
Box 4.3 Discounting and Global Warming......Page 121
Valuing Human Life......Page 122
How Valuable Is the Last Year of Life?......Page 123
Cost-Benefit Analyses of Heart Care Treatment......Page 125
Cost-Effectiveness Analysis......Page 126
Cost-Utility Analysis, QALYs, and DALYs......Page 127
Extra-Welfarism......Page 129
The Ageism Critique......Page 130
Conclusions......Page 131
Discussion Questions......Page 132
Exercises......Page 133
Appendix—Discounting......Page 135
5 Production of Health......Page 138
The Production Function of Health......Page 139
The Rising Population and the Role of Medicine......Page 141
What Caused the Mortality Rate Declines? Was It Medicine?......Page 143
Box 5.1 Tuberculosis and The Magic Mountain......Page 144
What Lessons Are Learned from the Medical Historian?......Page 147
Preliminary Issues......Page 148
The Contribution of Health Care to Population Health: The Modern Era......Page 149
Box 5.3 Sulfa: A Drug That Really Made a Difference......Page 150
On the Effect of Social Health Insurance......Page 151
Prenatal Care......Page 152
On the Importance of Lifestyle and Environment......Page 154
Cigarettes, Exercise, and a Good Night's Sleep......Page 155
Social Capital and Health......Page 156
The Role of Schooling......Page 157
Empirical Studies on the Role of Schooling in Health......Page 158
Summary......Page 159
Exercises......Page 160
6 The Production, Cost, and Technology of Health Care......Page 162
Substitution......Page 163
Elasticity of Substitution......Page 165
Box 6.1 Health Care Professionals: Expanding the Possibilities......Page 166
Estimates for Hospital Care......Page 167
Deriving the Cost Function......Page 168
Cost Minimization......Page 169
Why Would Economies of Scale and Scope Be Important?......Page 170
Difficulties Faced by All Hospital Cost Studies......Page 172
Technical Inefficiency......Page 174
Allocative Inefficiency......Page 175
Frontier Analysis......Page 176
The Uses of Hospital Efficiency Studies......Page 178
Are Hospital Frontier Efficiency Studies Reliable?......Page 179
Technological Changes and Costs......Page 180
Health Care Price Increases When Technological Change Occurs......Page 181
Box 6.3 Aspirin, the Wonder Drug at a Bargain......Page 182
Other Factors That May Affect Adoption Rates......Page 184
Diffusion of Technology and Managed Care......Page 185
Summary......Page 186
Exercises......Page 187
7 Demand for Health Capital......Page 190
The Consumer as Health Producer......Page 191
Box 7.1 Exercise Technology—FitBits or Smartphones?......Page 192
Labor-Leisure Trade-Offs......Page 193
Trading Leisure for Wages......Page 194
Preferences between Leisure and Income......Page 195
Production of Healthy Days......Page 196
Production of Health and Home Goods......Page 197
The Demand for Health Capital......Page 198
The Decreasing MEI......Page 199
Age......Page 200
Wage Rate......Page 201
Empirical Analyses Using Grossman's Model......Page 202
Box 7.2 Rational Addiction......Page 203
Obesity—The Deterioration of Health Capital......Page 204
An Economic Treatment of Obesity......Page 207
Economic Effects......Page 208
Why Has Obesity Increased?......Page 209
Conclusions......Page 210
Discussion Questions......Page 211
Exercises......Page 212
8 Demand and Supply of Health Insurance......Page 214
What is Insurance?......Page 215
Insurance Terminology......Page 216
Expected Value......Page 217
Marginal Utility of Wealth and Risk Aversion......Page 218
Purchasing Insurance......Page 219
How Much Insurance?......Page 220
Changes in Premiums......Page 222
Changes in Expected Loss......Page 223
The Supply of Insurance......Page 224
Competition and Normal Profits......Page 225
The Case of Moral Hazard......Page 226
Demand for Care and Moral Hazard......Page 227
Effects of Coinsurance and Deductibles......Page 229
The Impact of Coinsurance......Page 230
Box 8.2 Got Insurance? You Still May Pay a Steep Price for Prescriptions......Page 232
The Welfare Loss of Excess Health Insurance......Page 234
Income Transfer Effects of Insurance......Page 237
Summary......Page 240
Exercises......Page 241
9 Consumer Choice and Demand......Page 244
Box 9.1 What Happens to Costs When Patients Participate in Medical Decision Making?......Page 246
The Consumer's Equilibrium......Page 247
Demand Shifters......Page 248
Health Status and Demand......Page 250
The Role of Time......Page 251
The Role of Coinsurance......Page 253
Issues in Measuring Health Care Demand......Page 255
Differences in the Study Populations......Page 256
Box 9.2 Oregon's Health Insurance Experiment......Page 257
Price Elasticities......Page 258
Income Elasticities across Countries......Page 260
Insurance Elasticities......Page 261
Ethnicity and Gender......Page 263
Box 9.3 Disparities in Health Care: A National Priority......Page 264
Age, Health Status, and Uncertainty......Page 265
Conclusions......Page 266
Summary......Page 267
Discussion Questions......Page 268
Exercises......Page 269
10 Asymmetric Information and Agency......Page 272
Overview of Information Issues......Page 273
On the Extent of Information Problems in the Health Sector......Page 274
Asymmetric Information in the Used-Car Market: The Lemons Principle......Page 275
Application of the Lemons Principle: Health Insurance......Page 277
Inefficiencies of Adverse Selection......Page 278
The Affordable Care Act and Adverse Selection......Page 279
Experience Rating and Adverse Selection......Page 280
Box 10.1 What Happens When the Patient Is a Medical Expert?......Page 281
Consumer Information and Prices......Page 283
Consumer Information and Quality......Page 284
Other Quality Indicators......Page 285
Box 10.2 Quality Rankings and Health Care Outcomes......Page 286
Conclusions......Page 287
Summary......Page 288
Discussion Questions......Page 289
Exercises......Page 290
11 The Organization of Health Insurance Markets......Page 292
Impacts of Loading Costs......Page 293
Loading Costs and the Uninsured......Page 295
Employer Provision of Health Insurance: Who Pays?......Page 296
Spousal Coverage: Who Pays?......Page 298
How the Tax System Influences Health Insurance Demand......Page 300
Who Pays the Compensating Differentials?—Empirical Tests......Page 302
Other Impacts of Employer Provision of Health Insurance......Page 303
Box 11.2 For Many with Pre-Existing Conditions, Obamacare's Flaws are Only a Small Price to Pay......Page 304
Health Insurance and Retirement......Page 305
Health Insurance and Mobility......Page 306
The Market for Private Insurance......Page 307
Insurance Practices......Page 309
The Uninsured: An Analytical Framework......Page 310
Box 11.3 Counting the Uninsured......Page 311
The Working Uninsured......Page 312
The Impacts of Mandated Coverage......Page 313
Evidence on the Impact of the ACA on the Uninsured......Page 315
Conclusions......Page 317
Discussion Questions......Page 318
Exercises......Page 319
12 Managed Care......Page 322
What Is the Organizational Structure?......Page 324
What Are the Economic Characteristics?......Page 325
The Emergence of Managed Care Plans......Page 326
Employer-Sponsored Managed Care......Page 327
Managed Care Contracts with Physicians......Page 329
Managed Care Contracts with Hospitals......Page 330
Federal Policy and the Growth of Managed Care......Page 331
Modeling Managed Care......Page 332
How Much Care?......Page 333
What Types of Care?......Page 334
Where Managed Care Differs from FFS—Dumping, Creaming, and Skimping......Page 335
Equilibrium and Adverse Selection in a Market with HMOs......Page 336
Methodological Issues—Selection Bias and Quality of Care......Page 338
The RAND Study—A Randomized Experiment......Page 339
More Recent Evidence......Page 340
Box 12.1 What Do HMOs Actually Do?......Page 341
Growth in Spending......Page 342
Theoretical Issues......Page 343
Managed Care Competition in Hospital Markets......Page 345
Managed Care and Technological Change......Page 346
The Managed Care Backlash......Page 347
Box 12.2 Pay-for-Performance......Page 349
Accountable Care Organizations (ACOs)......Page 350
Managed Care and the Affordable Care Act......Page 351
Summary......Page 352
Exercises......Page 354
13 Nonprofit Firms......Page 358
Why Nonprofits Exist and Why They Are Prevalent in Health Care......Page 359
Nonprofits as Providers of Unmet Demands for Public Goods......Page 360
The Public Good-Private Good Aspect of Donations......Page 361
Relevance to Health Care Markets......Page 362
Applications of Contract Failure to Health Care......Page 363
The Quality-Quantity Nonprofit Theory......Page 364
The Profit-Deviating Nonprofit Hospital......Page 366
Maximizing Net Revenue per Physician......Page 368
A Comparison of the Quantity-Quality and the Physicians' Cooperative Theories......Page 369
Competition from Home Care and Outpatient Care......Page 371
The Evidence: Do Nonprofit Hospitals Differ from For-Profit Hospitals?......Page 372
What Causes Conversion of Nonprofits into For-Profits?......Page 373
Are Nonprofit Health Care Firms Less Technically or Allocatively Efficient?—Hospital and Nursing Home Studies......Page 374
Summary......Page 375
Discussion Questions......Page 376
Exercises......Page 377
14 Hospitals and Long-Term Care......Page 378
Background and Overview of Hospitals......Page 379
History......Page 380
Organization......Page 381
Hospital Utilization and Costs......Page 382
Box 14.1 Game Theory and the Medical Arms Race (MAR)......Page 384
Closures, Mergers, and Restructuring......Page 388
Box 14.2 Hospitals and Airlines: What Are the Lessons?......Page 389
Quality of Care......Page 390
Background and Costs......Page 391
Quality of Care......Page 392
Excess Demand......Page 393
Financing Long-Term Care......Page 395
Hospice, Home Health, and Informal Care......Page 396
Conclusions......Page 397
Summary......Page 398
Exercises......Page 399
15 The Physician's Practice......Page 402
Modeling Supplier-Induced Demand......Page 403
Do Physicians Respond to Profit Incentives?......Page 404
Box 15.1 SID and Target Income: A Physician's Perspective......Page 406
The McGuire and Pauly Model......Page 407
Box 15.2 Supplier-Induced Pregnancies......Page 410
A Marketplace Approach......Page 411
Small Area Variations (SAV)......Page 412
Contributions to These Variations......Page 413
The Demand Side......Page 414
Malpractice......Page 415
Box 15.3 Clinical Decision Making and Patient Preferences......Page 416
Conclusions......Page 417
Discussion Questions......Page 418
Exercises......Page 419
16 Health Care Labor Markets and Professional Training......Page 420
Production Functions and Isoquants......Page 421
Marginal Productivity of Labor......Page 422
Factor Substitution and Labor Demand......Page 424
Factor Productivity and Substitution among Factors......Page 425
The Efficient Utilization of Physician Assistants: Substitution among Inputs......Page 426
Box 16.1 Recent Productivity Studies......Page 427
Availability of Physicians......Page 428
Box 16.2 Dealing with Shortages of Primary Care Physicians......Page 429
The Role of Monopsony Power: Shortages of Registered Nurses......Page 432
Medical Education Issues and the Question of Control......Page 434
Teaching Hospitals, Medical Schools, and Joint Production......Page 435
Foreign Medical School Graduates......Page 436
Control over Entry......Page 437
Licensure and Monopoly Rents......Page 439
Licensure and Quality......Page 441
Specialization......Page 442
Private Practice or Employed......Page 443
Physician Income by Gender—The Increasing Role of Women......Page 444
Conclusions......Page 445
Summary......Page 446
Exercises......Page 447
17 The Pharmaceutical Industry......Page 450
Box 17.1 Patents and Media Attention......Page 451
Box 17.2 Martin Shkreli and Valeant Pharmaceuticals......Page 453
Competition......Page 454
Barriers to Entry......Page 455
Box 17.3 Direct-to-Consumer (DTC) Advertising......Page 456
Regulation......Page 457
The Production of Health and Substitutability......Page 458
Insurance and Substitutability......Page 460
Technological Change......Page 462
Monopoly Pricing......Page 463
Price Discrimination......Page 464
Monopsony Pricing and Price Controls......Page 465
Research and Development (R&D) and Innovation......Page 466
Investment Decisions......Page 467
R&D Spending......Page 468
Prices, Price Regulation, and Innovation......Page 469
Copayments......Page 470
Drug Formularies......Page 472
New Drugs and Health Care Spending......Page 473
The ACA and the Pharmaceutical Industry......Page 474
Summary......Page 475
Exercises......Page 476
18 Equity, Efficiency, and Need......Page 480
Efficiency and Competitive Markets......Page 481
The Concept of Pareto Efficiency (Optimality)......Page 482
The Competitive Equilibrium......Page 483
The First Fundamental Theorem of Welfare Economics......Page 484
Redistribution of the Endowment......Page 485
Trade-Offs between Equity and Efficiency......Page 486
The Assumptions under Perfect Competition......Page 487
The Theorem of the Second Best......Page 488
An Economic Efficiency Rationale for Social Health Insurance......Page 489
Need and Need-Based Distributions......Page 491
Health Care Needs and the Social Welfare Function......Page 492
Box 18.1 The Extra-Welfarist Critique......Page 494
Norman Daniels's Concept of Health Care Need......Page 496
Economic Criticisms of Need-Based Distributions......Page 497
Horizontal Equity and Need......Page 498
Income Inequality......Page 500
Schooling and Income Inequality......Page 501
Utilitarianism......Page 502
Rawls and Justice as Fairness......Page 503
Liberalism, Classical, and Modern......Page 504
Conclusions......Page 505
Discussion Questions......Page 506
Exercises......Page 507
19 Government Intervention in Health Care Markets......Page 508
Monopoly Power......Page 509
Public Goods......Page 511
Other Rationales for Government Intervention......Page 513
Commodity Taxes and Subsidies......Page 514
Box 19.1 Is There a Case for a Sugar-Sweetened Soda or "Junk Food" Tax?......Page 516
Regulation......Page 518
Box 19.2 What Is HIPAA?......Page 519
Department of Veterans Affairs and Department of Defense......Page 520
Tax Policy......Page 521
Other Government Programs......Page 522
Health Sector Regulation and the Prospective Payment System......Page 523
Description of PPS......Page 525
The Theory of Yardstick Competition and DRGs......Page 527
Who Does the Regulator Represent?......Page 530
Conclusions......Page 532
Discussion Questions......Page 533
Exercises......Page 534
20 Social Insurance......Page 538
Social Insurance Policies and Social Programs......Page 539
Program Features......Page 540
Box 20.1 Increased Longevity Favors the Rich in Social Security......Page 541
European Beginnings......Page 542
The Establishment of Medicare and Medicaid......Page 543
The Affordable Care Act (ACA) of 2010......Page 544
Medicare......Page 545
Part C—Medicare Managed Care......Page 546
Part D—Prescription Drug Insurance......Page 547
Medicaid......Page 551
Medicaid Eligibility......Page 552
Box 20.2 Oregon Medicaid's Doctor-Assisted Suicide—18 Years Later......Page 554
The Medicaid-Medicare Relationship......Page 555
Medicare and Medicaid: Conflicting Incentives for Long-Term Care......Page 556
Public Insurance and Health......Page 557
Costs and Inflation......Page 560
Health Status......Page 564
Medicare: Recent Changes and Future Prospects......Page 565
Conclusions......Page 566
Summary......Page 567
Exercises......Page 568
21 Comparative Health Care Systems......Page 570
A Typology of Contemporary Health Care Systems......Page 571
The National Health Service......Page 577
A Model of Rationed Health Care and Private Markets......Page 578
Box 21.2 How Your Health Visitor Can Help......Page 579
China—An Emerging System......Page 581
Background......Page 585
Physician Fees and Quantity......Page 587
Administrative Costs......Page 588
A Comparison......Page 589
Box 21.3 "Someone Else Needed It Before I Did"......Page 593
A Model of Health Expenditure Shares......Page 594
Summary......Page 597
Discussion Questions......Page 598
Exercises......Page 599
22 Health System Reform......Page 602
Goals of Reform......Page 603
Basic Issues in Reform......Page 604
The Costs of Universal Coverage......Page 605
Ensuring Access to Care......Page 606
Employer versus Individual Mandates......Page 607
Single-Payer versus Multiple Insurers......Page 608
Quality of Care......Page 609
Box 22.1 Preventive Care and Cost-Effectiveness Analyses......Page 610
The "Three-Legged Stool"......Page 611
The ACA—Basics......Page 612
Economic Analysis of the ACA......Page 613
Competitive Strategies in the Post-ACA Era......Page 615
Development of Alternative Delivery Systems......Page 616
Consumer-Directed Health Plans and Health Savings Accounts......Page 617
Graphical Representation of the Competitive Approach......Page 618
Health Care Access......Page 619
Box 22.2 Has the ACA Improved Access to Care?......Page 621
Health Care Costs......Page 622
The ACA and Quality......Page 623
Employment Effects......Page 624
Meeting Reform Goals......Page 626
Conclusions......Page 627
Summary......Page 628
Discussion Questions......Page 629
Exercises......Page 630
23 The Health Economics of Bads......Page 634
Box 23.1 Who Smokes and Who Drinks? Cultures and Behaviors......Page 635
Imperfectly Rational Addiction Models......Page 638
Rational Addiction......Page 639
Rationales for Public Intervention......Page 641
Advertising Restrictions on Cigarettes and Alcohol......Page 642
Box 23.2 Can Advertising Lead Patients Astray? The Case of Medical Quackery......Page 643
The Possible Effects of Brand Switching......Page 644
Increased Demand or Brand Switching?......Page 645
The Consumption-Reducing Effects of Excise Taxes in Theory......Page 646
Excise Taxes and Cigarette Consumption in Practice......Page 647
Box 23.3 Mind If I Smoke?......Page 648
Excise Taxes and Alcohol Consumption......Page 650
Summary......Page 652
Discussion Questions......Page 653
Exercises......Page 654
24 The Economics of Social Capital and Health......Page 656
The Individual Case......Page 657
How Could Increments to Social Capital Improve Health?......Page 659
Empirical Tests of Social Capital and Health......Page 660
Testing the Social Capital Effect for Causality......Page 663
Elements of Trust......Page 664
The Geography of Τrust and of Social Capital......Page 665
Social Capital and Risky Choices......Page 666
Social Capital and Smoking......Page 667
Summary......Page 668
Exercises......Page 669
Glossary......Page 670
References......Page 681
Author Index......Page 729
Subject Index......Page 732