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					    Economics 330
Economics of Health Care
    Dr. Greg Delemeester
         Spring 2010
Course Essentials
 Course Web Page
   www.marietta.edu/~delemeeg/econ330
 Grade
     Exams (60%)
     Problem Sets (15%)
     Article Reviews (5%)
     Policy Brief (20%)
 Economic Roundtable
 …to promote an interest in and to enlighten
  its members and others in the community
  on important governmental, economic, and
  social issues…
 Business networking opportunity
 Student memberships: $5


 EconomicRoundtable.org
Do you qualify for ODE?
 Omicron Delta Epsilon is the International Honor
  Society in Economics.

 Minimum qualifications for undergraduate
  membership are:
    1. Junior standing or higher. Student must be in residence
       at least one semester.
    2. Twelve semester hours of economics with an average
       grade of at least a B.
    3. A general average of at least a B and a class standing
       in the upper one-third.

–   If interested, see Dr. Delemeester
Health Economics Survey
National Health Care Expenditures
   Year               Total              Percent             Percent of   Per capita
                   Spending              change                GDP        spending
                  (in billions)
   1950               $ 13                   --                 4.5         $ 82
   1960                 28                  8.8                 5.2          148
   1970                 75                 10.5                 7.2          356
   1980                254                 13.0                 9.1         1,100
   1990                714                 10.9                12.3         2,814
   2000               1,353                 5.9                13.6         4,789
   2005               1,982                 7.9                15.7         6,701
   2006               2,113                 6.7                15.8         7,071
   2007               2,240                 5.6                15.9         7,423
   2008               2,339                 4.3                16.2         7,681

  Source: http://www.cms.hhs.gov/NationalHealthExpendData/
Why do Americans spend so much on
medical care?
 Aaron (1991)
     Expansion of 3rd party payment system
     Aging of the population
     Expanded medical malpractice litigation
     Increased use of medical technology
 Other factors
   Physician-induced demand
   Entry restrictions
   Predominance of not-for-profit providers
Personal Health Care Expenditures
                           (in billions of dollars)

                     Private Spending                        Public Spending
Year              Out of              Private              Federal      State
                  pocket            Insurance
1960             $ 12.9                $ 5.9               $ 2.0       $ 2.9
1970                24.9                 14.0               14.4         7.8
1980                58.1                 61.2               62.3        23.9
1990               136.1                204.7               172.8       63.5
2000               192.6                402.8               369.8       117.1
2005               247.5                599.8               562.3       176.9
2006               254.9                634.6               620.1       178.7
2007               270.3                665.0               661.3       188.7
2008               277.8                691.2               718.0       189.8

Source: http://www.cms.hhs.gov/NationalHealthExpendData/
2008 National Health Care Dollar…




 …Where it Came From   …Where it Went
                                 Private vs Public Spending
                            on Personal Health Care Expenditures
            90%


            80%


            70%


            60%
% of PHCE




            50%

                                                                                           Private
            40%                                                                            Public


            30%


            20%


            10%


            0%
              1960   1965   1970   1975   1980   1985   1990   1995   2000   2005   2010
                  Spending as % of Personal Health Care Expenditues
            60%




            50%




            40%
% of PHCE




                                                                   Out of pocket
            30%                                                    Health Ins
                                                                   Fed
                                                                   State

            20%




            10%




            0%
              1960      1970     1980     1990     2000     2010
Changes in Hospital Usage
Short-Stay Community Hospital Characteristics, United States
Category                1970      1980      1990       2000     2003      2004      2005
Beds                     4.17     4.38       3.73      2.93     2.79       --       2.71
 (per 1,000 population)
Admissions              144.0    159.6      125.4     117.6    119.4     119.3     118.9
 (per 1,000 population)
Average length of stay    7.7      7.6        7.2       5.8      5.7       5.6       5.6
 (days)
Outpatient visits       657.2    893.2     1,211.6 1,882.8     1,933.4   1,943.7   1,972.0
 (per 1,000 population)
Outpatient visits per     4.6      5.6        9.7      15.8     16.2      16.3      16.6
 admission
Percent occupancy        78.0     75.4       66.8      63.9     66.2       --       67.3
Source: Health United States, various years.
The Lockhorns
Changes in Medical Care Delivery
Shift from private to public financing
Shift to 3rd party financing
Changes in hospital usage and pricing
Deregulation and growth in managed care
Payment Structure
Traditional fee structure
   Fee for service
   Retrospective payment
   Incentive to overspend
Managed care
   Capitation and risk sharing
   Prospective payment
   Incentive to limit care
Health Care As a Commodity
 Demand is irregular
 Asymmetric information problems
 Widespread uncertainty
 Reliance on not-for-profit providers
 Insurance as the primary means of payment
Health System Goals
Access to care
   Who’s covered?
   What’s covered?
Quality of care


Cost of care
Private Health Insurance Coverage
              (under age 65, numbered in millions)

                With Health Insurance*                    Without Health Insurance
Year             Number                Percent              Number                Percent
1999               161.2                  68.3                 38.5                  16.1
2000               160.8                  67.1                 41.4                  17.0
2001               162.4                  67.0                 40.3                  16.4
2002               159.4                  65.3                 41.7                  16.8
2003               157.5                  64.4                 41.6                  16.5
2004               159.5                  64.0                 42.1                  16.6
2005               160.1                  63.6                 42.1                  16.4
2006               155.8                  61.5                 43.9                  17.0
2007               157.9                  61.6                 43.3                  16.6

* Employer-based.
 Source: Health, United States, 2008, http://www.cdc.gov/nchs/hus/updatedtables.htm, Table 138 and 140.
Health System Goals
Access to care
   Who’s covered?
   What’s covered?
Quality of care
   Medical outcomes
   Medical efficacy
Cost of care
   Who pays?
   How much?
Review of Economic
   Methodology
Economic Fundamentals
Optimization
Marginal Analysis
Supply and Demand
   Equilibrium
What are the likely consequences of the
following events in the U.S market for cosmetic
surgery?

1) Health insurance coverage is expanded to cover all
   elective procedures, such as tummy tucks, nose
   jobs, and liposuction
2) The FDA (Food and Drug Administration) takes all
   silicone-based implants off the market fearing a
   connection with certain connective-tissue diseases
3) Personal finance companies start a nationwide
   lending program for cosmetic procedures not
   covered by health insurance
4) Medical malpractice insurance premiums increase
   for plastic surgeons
5) Medical schools announce that residents in plastic
   surgery can be licensed after only five years instead
   of the current seven years
Economic Fundamentals
Optimization
Marginal Analysis
Supply and Demand
   Equilibrium
   Elasticity
   Welfare analysis
   Effects of government intervention
Suppose the market for lasik eye surgery can be
described by the following equations:
      Qd = 5100 – 6P
      Qs = - 400 + 5P
a)   Solve for the market equilibrium price and quantity.
b)   Calculate consumer and producer surplus.
c)   Calculate the elasticity of demand at the equilibrium.
d)   Suppose the government imposes an excise tax of $100
     per surgery on eye surgeons. What is the new equilibrium
     price and quantity? What happens to social welfare?
Competitive Market Model
 Many buyers/sellers
 Homogeneous product
 No entry barriers
 Perfect information
                           $
                                    MC
                                          ATC

Profit max rule: P = MC
                                         AVC
                          P1                     MR1

    LR Equil: π = 0

                               q1               quantity
Market Failures
 Market Power
    Monopoly
       Restricted entry (AMA, CON)
       EOS
    Monopsony


 Externalities
    Communicable diseases/immunizations
    Uninsured and cost shifting


 Public goods
    Free-riders
    R&D
Imperfections in Medical Markets
Imperfect/Asymmetric information
   Agency problem (induced demand)
   Adverse selection
   Moral hazard
Third-party payers
      Hospitals:   3¢ per $1
      Physicians: 20¢ per $1
Dealing with Market Failure
Collective provision
   Medicare
   Medicaid
Government regulation
   Price controls
   Entry restrictions
   FDA
Tax Policy
   Tax exemptions

 Government Failure?
Economic Evaluation in
     Health Care
The Inevitability of Trade-Offs
The value of a medical intervention
The inclusion of a drug on the formulary
Paying for an experimental procedure
Investing in new technology

Is it worth it? How do we measure value to insure
 we get value for spending?
Options for colorectal cancer screening
 Fecal blood test
   ($20)

 Sigmoidoscopy
   ($150 - $300)

 Barium enema
   ($250 - $500)

 Virtual Colonoscopy
   ($500 - $900)

 Colonoscopy
   ($800 - $1200)




   Is it worth the
   extra money?
Types of Economic Evaluation
 Cost of illness studies
 Cost-benefit analyses
 Cost-effectiveness studies
Cost of Illness Studies
 What does it cost?
 Burden of 5 chronic conditions in US (Druss et al., 2001)
    Mood disorders, diabetes, heart disease, asthma, and hypertension
        Direct cost of treatment: $62 billion
        Cost of treating coexisting conditions: $208 billion   $306 billion
        Lost productivity: $36 billion


 Role in analysis – increased awareness
Cost-Benefit Analysis
                         Benefits
   today                                                      time
           Costs


                             B1       B2             Bt
  Net PV =         C0                     
                          (1  r ) (1  r )
                                  1         2
                                                  (1  r )t


    The higher the discount rate, r, the lower the PV
Cost-Benefit Criterion
 If net benefit stream is positive, project is acceptable
                             n
                                   Bt  Ct
              NPV  
                            t 1   (1  r ) t


 If ratio is greater than one, project is acceptable
                      n                n
                               Bt            Ct
          B/C                     t 
                                     /
                     t 1   (1  r ) t 1 (1  r ) t


 Examples
    Clarke (1998): mobile mammographic screening and travel cost method
    Ginsberg and Lev (1997): riluzole and ALS
Challenges of Cost-Benefit Analysis
Valuing benefits
   How do you place a value on a human life?
   Willingness-to-pay approach
     wealth
     life expectancy
     current health status
     possibility of substituting current consumption for future
      consumption
Choosing a discount rate
Cost-Effectiveness Analysis
Measures health benefit by health outcome, not the
 dollar value of life
Using the decision makers’ approach
    Maximize the level of health for a given population subject
     to a budget constraint
    Practical guide for choosing between programs or treatment
     options when budgets are limited
Cervical Cancer Screening
The medical evidence is clear: Cervical cancer screening
  saves lives. Much of the focus of cost-effectiveness
  research addresses issues concerning the appropriate
  screening interval.

D.M. Eddy (Screening for cervical cancer, Annals of
  Internal Medicine 113, 214-226, 1990) studied the issue
  and estimated that annual screening for a hypothetical
  cohort of 1,000 22-year-old women screened until age
  75 would cost $1,093,000 and would save 27.6 life
  years. If screened every three years instead, the cost
  would be $467,000 and 26.8 life years would be saved.

Is annual screening cost effective?
Incremental Cost-Effectiveness Ratio

                  CB  C A
           ICER 
                  EB  E A
If CA > CB and EA < EB, B dominates.
If CA < CB and EA > EB, A dominates.

If, however, CB > CA and EB > EA, choice is
 not obvious. Use CE.
ICER Curve: 2 Treatments
   Effectiveness

                        Large ICER = flat slope



                                 B
       EB

                                              CB  C A
                   A                 ICER 
       EA                                     EB  E A



                                                  Cost
                   CA           CB
Cervical Cancer Screening: Redux
 D.M. Eddy (Screening for cervical cancer, Annals of Internal
  Medicine 113, 214-226, 1990) studied the issue and
  estimated that annual screening for a hypothetical cohort of
  1,000 22-year-old women screened until age 75 would cost
  $1,093,000 and would save 27.6 life years. If screened
  every three years instead, the cost would be $467,000 and
  26.8 life years would be saved.

 What is the ICER?


                1,093 ,000  467 ,000
         ICER                         $782 ,500
                     27 .6  26 .8
ICER Curve: Multiple Treatments
   Effectiveness                   “flat of the curve”


                                                   G
                                   F
                           D


                                       E
                       B
                               C

                   A           Treatments C and E are dominated



                                                         Cost
Measuring Costs
Direct – associated with use of resources
    Medical
    Non-medical
Indirect – related to lost productivity
Intangible – associated with pain and suffering, grief,
 anxiety, and disfigurement
Measuring Effectiveness
                         Improvements in Health
Surrogate measures stated in terms of clinical efficacy
    Blood pressure, cholesterol levels, bone mass density, or
     tumor size
Intermediate measures stated in terms of clinical
 effectiveness
    Events (heart attack, stroke, cancer), scores on exams
Final outcomes measure economic effectiveness
    Events avoided, disease-free days, life-years saved,
     quality-adjusted life years saved
                                                                   Problem Set 1: #16
Survival Measures
                  Improved Life Expectancy Due to Clinical Treatment

                                    Life expectancy = area under survival function
Survival
probability                         LE w/o treatment = ½(1.00-0.0)6.5             = 3.25 yrs
              A
    100%                            Gain in LE during trial = ½(.90-.77)1.5 = 0.0975 yrs
                             B      Gain in LE after trial = ½(.90-.77)5    = 0.325 yrs
      90%
                                                         Total Gain in LE       = 0.4225 yrs

      77%
                         C
                                                 Survival function for
                                                 treatment group




                                 Survival function for
                                       control group

                                                                            D
                          1.5                                          6.5      Time (years)
Quality of Life Measures: QALY
Quality-Adjusted Life Year
   Measured on a preference scale anchored by
    death (0) and perfect health (1)
Calculating a QALY
 Utility                                     Normal 55-yr old male has LE of 25 more yrs

                                             Diabetic 55-yr old male has LE of 15 more yrs



  U(H1)

                                                      x = healthy years
                                                      t = chronic health years


  U(HD)




                    6                   15                             Time (years)

           Value of one year in chronic health state is x/t

                Utility value of 15 years = 6/15 = 0.40

           QALY of remaining 15 years = (.40)(15) = 6 years
Decision Trees
Handout

                          Treatment A   Treatment B
Mortality Rate                2%            5%
Life Expectancy for         20 years      10 years
Survivors
Initial Treatment Cost     $10,000        $3,000
Follow up cost, year 1     $5,000         $1,000
Annual follow up costs,    $1,000          $500
all subsequent years

				
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