Lecture Health economics - Chapter 2: Health, medical care, and medical spending

Lecture Health economics - Chapter 2: Health, medical care, and medical spending. This chapter presents the following content: An economic model of utility, health, and medical care, measuring health status, empirical evidence on health production, health care expenditures.

Health, Medical Care, and

Medical Spending

Health Economics Professor Vivian Ho

Fall 2009

These slides summarize material in Santerre & Neun: Health Economics, Theories Insights and Industry Studies, Southwestern Cengate 2010

 Can we apply the tools of

managerial economics to health care?

An economic model of utility, health,

and medical care

Measuring health status

Empirical evidence on health production Health care expenditures

A 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 (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 (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

MEASURING HEALTH

Important for all health care managers today

Insurers and consumers are demanding

 costs AND  quality

HEALTH OVER THE LIFE CYCLE

HEALTH 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

Spending $100 one year from now is

“cheaper” than spending $100 today

CHOICES

Spend $100

today

Invest $100 = $90.91 (1 + 10)

and

have $9.09 left over

DISCOUNTING

If costs occur over multiple time periods, we

must calculate the present discounted value

(PDV) of these costs:

PDV = Σt = T

0

1(1 + r)t COSTSt

• Example:

A project requires: $100 in year 1

$ 75 in year 2 $ 50 in year 3

PDV = $100 + $ + $ = $209.50 75

(1 + 10) (1 + 10)50 2

DISCOUNTING

If we discount costs, we must also discount benefits

next yearandhave $90 left tospend this year

DISCOUNTING

Appropriate discount rate?

• The medical literature has settled on 5% for

comparative reasons

Discounting is not an adjustment

for inflation

COST YOLS =

Σ

YOLS

1 (1 + r) t

1 (1 + r) t

DISCOUNTING

Consider an intervention which costs $100 and saves 10 years of life

Invest for 1 year → $110, saves 11 YOL If we discount costs to present value, but don’t discount YOL:

If we discount both costs and benefits:

C

110 11

1 (1 + 10)

1 (1 + 10)

MORTALITY MEASURES

(per 100,000)

2 Age-adjusted death rate 1446.0 1222.6 1039.1 938.7 869.0

3 Age-specific death rate

MORTALITY MEASURES

Life expectancy NOT a prediction of

how long people live

76.9 is a summary of age-specific death rates in 2000

“If those born in 2000 experienced

age-specific death rates prevailing in 2000, on average they would live to be 76.9

 new and ongoing cases in any particular year

Heart disease is more prevalent, but its incidence is declining

MEASURING 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 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 DEATHS, PERSONS AGED 15-24 (2000)

CAUSE OF DEATH DEATHS

All other nonviolent causes 757

LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED 65+ (2000)

CAUSE OF DEATH DEATHS

Heart disease 593,707

Cerebrovascular Disease 148,045

(Stroke) Chronic Lower Respiratory Disease 106,375

Pneumonia and Influenza 58,557

Diabetes mellitus 52,414

Alzheimer’s disease 48,993

Kidney disease 31,225

Unintentional Injuries 31,050

Empirical Evidence on Health Prod’n

Hadley (1982) a 10% ↑ in medical care

$ per capita →↓mortality rate by only

1.5%

Auster et al (1969) 10% ↑ in medical

services →↓age-adjusted mortality rate

by 1%

Enthoven (1980) “flat-of-the-curve”

medicine

(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 HEALTH

People w/o high school educ & income

<$10k were 2-3 x’s more likely to have

functional limitations and poorer self-rated health

Sturm, Health Affairs 2002

OTHER FACTORS AFFECTING HEALTH

Determinants of Infant Health

Corman and Grossman, 1985

Determinants of Infant Health

Corman and Grossman, 1985

Selected Regression Results, Neonatal Mortality Rates

Determinants 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 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

Services for Infant Health

(1-mortality rate)%

Medical Care

Blacks

Whites

Marginal Productivity of Provider Services for Infant Health (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

Health in the 50 States

One measure of health status in the

population in the # of deaths (per 100,000 residents) from heart disease

Suppose we have data on deaths from heart disease and other population characteristics

by state

 See Excel Spreadsheet

What factors might explain death from HD?

 Why?

Health in the 50 States

Which of the previous variables would you include in the multivariate regression for the determinants of death from heart disease?

Health in the 50 States

Which of the variables are statistically

significant at the 95% confidence level?

Suppose the fraction of residents who are obese/overweight were reduced by 0.10.

 How much would death rates from heart disease fall?

Suppose that you could obtain data on a

different variable that may explain heart

disease death rates, but isn’t in this data set.

 What would it be?

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