How much of the economy does healthcare account for?
17.9%
GDP
Sum of all products and services in the economy
What was the GDP of 2010 and what was the total health care spending?
� 1n 2010 the GDP was $14,527 billion
� Or $14.5 trillion
� 1 trillion=1,000,000,000,000
**Health care spending= $2.59 trillion
Characteristics Of The Health Care System
� Uncertainty
� Asymmetric information
� Externalities
--Market failure
--A lot of government involvement
Uncertainties
1) Onset of disease:
a. Insurance
b. Capacity planning
2) Disease progression:
a. Medical decision making
b. Quality of care assessment
c. Diagnostic tests
d. Efficacy of treatments
Asymmetric Information
� Definition: when one side of the encounter has more information than the other side
� Between patients and physicians
� Between patients and insurers
Externalities
� Definition: an action such that the costs and benefit do not accrue to the same party.
� Positive externality: an acPon that confers a benefit on someone other the person taking the action.
� Negative externality: an action that imposes a cost on someon
Optimal Action:
Total Costs = Total Benefits
� Decision to act based on internal costs and benefits:
Internal costs = internal benefits
� If total cost > internal costs => too much action
� If total benefit > internal benefit => too little action
Government Involvement In HealthCare-- uncertainty and asymmetric information
� To address uncertainty:
- Insurance
- Price controls
- Supply controls
� To address asymmetric information:
- Report cards
- Drugs regulation
- Licensing of professionals
Government Involvement In HealthCare -- externalities
- Public health
- R&D
Who Is Involved In The HealthCare System
� Patients/consumers
� Providers: hospitals, physicians, nursing homes, home health agencies, clinics, nurses, nurse's aides, dentists, hygienist, therapists, clinicians, laboratories, alternaPve medicine providers
� Insurance
� Government - insurer, regu
Health Care's 1%: The Extreme Concentration of U.S. Health Spending
One percent of the U.S. population accounts for nearly 23 percent of overall health care spending, and 5 percent are responsible for a full 50 percent of spending. In stark contrast, the lowest-spending half of the population generates less than 3 percent
Inflation
the rise in the level of prices
Current price/$
the price you are charged
at the store
Real price/$=Constant price/$
price that has been adjusted for inflation
CPI
Consumer Price Index:
� The CPI is an index measuring the average price of a standard basket of goods consumed by the average family. It includes food, transportation, medical services, education, entertainment, etc...
� The CPI was set (arbitrarily) to e
look at slide 34-36
...
What Contributes To The Increase In NHE
1) Inflation
2) Population growth and aging
3) Once we account for #1 and #2 we are left with technology.
Decision Makers Make Decisions Such That:
1) They maximize an objective 2) Subject to a constraint
For- Profit Firms Objectives and Constraints
� Objective: Profit
� Constraints: - Technology
- Costs of inputs - Demand
- Laws and regulations
Non-Profit Firms Objectives and Constraints
� Maximize: mission of the organiza:on
� Constraints: same as for-profits
For Individuals objectives and constraints
� Maximize u:lity = well being
� Constraints: - Income
- Prices - Time - Information
all this Implies That
� Decision are made at the margin � Costs=benefits -high utility=high health. -low utility=low health
Diminishing Returns
� Definition: at the margin-every addi:onal unit of investment brings a lower level of return than the previous unit.
Health Production Good goods and bad goods
� Good "goods" - Health food
- A good mattress - Gym membership
� Bad "goods" - Drugs
- Alcohol - Red meat
� Medical care
why is health important with utility
� Health is important because it increases utility
� There is more than one way to produce health
� The effectiveness of medical care in producing health depends on the disease and the state of the art of medicine.
Demand For Medical Care Is Derived Demand. What influences it?
� What influences it?
- Desire for health
- Beliefs about effectiveness - Advice from providers
- Education
- Income
when should we increase treatment by 1 unit?
marginal productivity > marginal costs
Intensive margin
increasing the intensity with which a treatment is given to the same population
Extensive margin
increasing the population that will receive the same treatment
F
probability of disease
p
true positive rate=sensitivity
q
false positive rate
Y
yield rate of the test= Fxp+(1-F)xq
what would produce the best test?
highest p and lowest q
how do we measure productivity of medical care?
Cross sectional studies
Chartpack
National Scorecard on U.S. Health System Performance, 2011
This Chartpack presents data for all indicators scored
in the National Scorecard on U.S. Health System Performance, 2011. Charts display average performance for the United States as a whole and th
Randomized Control Trials
� An experiment in which a population is randomly split into 2 groups:
- Intervention
- Control
� Intervention group receives the
experimental treatment
� Control group receives usual care
-->Because of randomization, the two groups are the same except fo
RAND Health Insurance Study (HIS)
� 2 questions:
- Does type of health insurance affect use
of medical care?
- What is the productivity of medical care?
� RCT:
- 6000 people
- 4 ciCes, 2 rural areas
- Enrolled for 3 or 5 years
- Enrolled in different insurance types
� To measure from the
Productivity Of Medical Care
� Definition: (Change in health / Change in medical care)
Cost Benefit Of Low Dose Cholesterol Drug
� Males 55-64 survived following heart attack with high cholesterol
$3,237/additional life year
� Females, 35-44 non-smokers $3,035,160/additional life year
Cost Benefit Of Pap Smear For Cervical Cancer Starting At Age 20
� Every 3 years compared to no screening $36,017/additional life year
� Every 2 years compared to every 3 years $711,671/additional life year
Insurance
Changes the price of MC at THE TIME OF DECISION TO USE MC
� 3 different types
� Often used in combination
look at lecture 4 slides 8-10
...
Deductibles
� Until the deductible is satisfied the patient does not have any insurance
� Once the deductible is reached, the patient can have any of the previous three types.
Caps
� Annual caps on patient out of pocket expenses - catastrophic insurance
� Life time maximum on benefits - insurer will not pay above a very high amount (e.g. $1 million). No longer allowed under ACA.
Patients cannot determine quality on their own
� They look for signals:
- Non-profit
- Medical school
- Hotel services (e.g. is the hospital clean)
- Certification by Government or other professional organizations
� Quality report cards
� Pay for performance - P4P
� Quality Improvement Organizations -
P4P/VBP
� Pay for Performance=Value Based Purchasing
� Payer sets quality targets:
- Targets can be absolute
- Targets may be any improvement
� Providers who meet targets are rewarded with increased payment
� Providers who do not meet the targets may be penalized
Authorized as part of Health Reform
� For hospitals (1.5%)
� Home health agencies
� Nursing homes
- On a demonstration basis at this time
- Also adopted by states and private payers
- Quality measures are oHen the same as those in the report card
MC Use Should Increase When:
� Prices fall
� People are sicker (and a proxy for that might
be older and poorer)
� Income increases
� With generosity of insurance
� As time to obtain services decrease
� As value of Ame decrease
� With higher quality
� With people's beliefs about the e
How Do We Measure It?
� Responsiveness of MC use to price - Price elasAcity of demand
----% change in MC use/% change in price
----Or: % change in MC use per I% increase in price
� Responsiveness of MC use to income - Income elasticity of demand
----% change in MC use/% change
RAND HIS - Insurance Plans
� Full coverage = 0 copayments and deductible. Free care.
� 25% copayment
� 50% copayment
� 50% copayment only for dental and mental
� A deductible of $150 for ambulatory care only - everything else covered.
� Full cost (except for 5% to give incentives t
2014 Study of Mid-Westerners
� Enrollees in a high deductibles insurance plan
� For every $100 spent on outpatient care: - 1.9% higher probability of inpatient
admission
- 4.6% higher inpatient expenditures
Observational Study: NYS Cardiac Report Cards
� Quality magered before and aher report cards were published:
- Before: based on signals: price and physician experience
- After: reported risk adjusted mortality rate
- After: signals became half as important
- After: disparities changed from race to lo