HCA 586 All Lectures

role of government

• maintain competition

• economic stabilization

• correct for externalities

• income redistribution

• provide public goods and services

• maintain legal and social framework

maintain competition

create and enforce antitrust laws and regulate natural monopolies

economic stabilization

reduce unemployment and inflation and promote economic growth

correct for externalities

reduce negative externalities

income redistribution

encourage increased production of goods and services that have positive externalities

provide public goods and services

these are those that markets will not provide in sufficient quantities

maintain the legal and social framework

define and enforce property rights, establish a monetary system

rationale for government intervention

• the main reasons are

  • to correct for market failures

  • to achieve a more equitable distribution of income and wealth

  • to improve the performance of the economy

• these will be the basis for determining the effectiveness of government intervention through the concepts of take up and crowd out

goals of legislation

• to redistribute wealth

  • this occurs by imposing tax, either directly or indirectly, on another portion of the population

• groups that are successful in the legislative arena will receive an increase in their wealth

objectives of government

• public interest theory

  • redistribution

    • assist those with low incomes

  • improve efficiency

    • remove and prevent monopoly abuses and protect the environment

• interest group theory

  • redistribution

    • provide enefits to those able to deliver political support and finance from those having little political support

  • improve efficiency

    • the efficiency objective is unimportant

the demanders of legislative benefits

• individual voters

• organized interest groups

the suppliers of legislative benefits

• the legislature

• the executive branch

• regulatory agencies

• the judiciary

individual voters

• proposed legislation does not have to be favored by a majority of the population for it to pass

  • in many circumstances groups representing a minority of voters are able to secure legislation

  • why? because for most voters there is an opportunity cost associated with taking the time to follow issues and to vote

opportunity costs and voting

• for many voters, it does not pay to invest time when the efforts will have little impact on the outcome

• the individual will vote if the benefits of voting are believed to make a difference in the election’s outcome

  • essentially, voters will weigh the costs and benefits, and if the issue is in their best interest, they will vote

  • few issues require this level of attention, thus, many people do not vote

• as a result, the minority of people who are interested in a specific issue will vote to impose a cost on the broader population

organized interest groups

• producer groups

• competitive economic markets

  • there are no persistent or long-run excess profits

    • if the market expands and the firm starts making excess profits, additional firms will be attracted to the industry

    • as new firms enter the market the excess profits enjoyed by the existing firm decline until they are back to normal

    • in very competitive markets, firms make a rate of return sufficient enough to allow them to stay in business

    • however, all firms would like to make higher profits

    • the only way they can earn excess or above normal profits is to prevent other firms from entering their industry

    • there is no legal way to directly do this task, however, it can be done indirectly through legislation

    • the established firms may use activities which may raise the cost to competitors or restrict entry, also known as protective legislation

    • the revenue effects of protective legislation are potentially so large that it makes it worth the time or money to become informed, raise funds, and hire lobbyists

    • the gains that producer groups received from legislation impose costs on the broader population

      • however, since the costs are spread over the broader population, the impact of the costs are diffuse

    • usually, individuals are for the most part, unaware of the impact

the legislature

• legislators and bureaucrats also weigh the costs and benefits and undertake actions to benefit themselves

  • the benefits to legislators for providing legislation to an organized interest group is the political support receieved from the interest group

  • the cost is the loss of political support from not supporting the actions

  • when the benefits exceed their costs they will support the legislation

• it is assumed that legislatures are primarily interested in maximizing their chances for re-election

legislatures and organized interest groups

• in deciding which legislation to vote for and which to vote against, legislators base their decisions on which legislative positions will provide the greatest amount of political support

legislation offered by one interest group

• in situations where there is legislation only offered by one interest group, the legislator will favor that legislation offered by that interest group

  • when only one organized intrest group has a concentrated interest in a particular piece of legislation, the cost of providing the legislation will be diffuse in both cost and response by the citizenry

visible legislation

• popular legislation

  • when this type of legislation come before the lawmaker, they will seek support from the specific population groups affected

    • when there is no organized opposition to a visible type of legislation, legislators go overbpard in their support and provide more money than what the targeted population expected

opposing interest groups

• when legislation benefiting specific population groups is opposed by other organized population groups, legislators face a difficult choice

  • when confronted with these opposing groups the legislator will lose support for one group

• one strategy is to not vote on the issue

  • when this occurs the political leadership usually forms a bipartisan commission to resolve the issue

• an altrnative strategy is to enact symbolic legislation

  • if the legislation is enacted, the legislation will contain limited or no enforcement mechanisms. this will ensure that the legislation will not achieve its stated goals

  • it relies on the public’s lack of knowledge regarding the specifics of the legislation

the executive branch

• the motivation of this branch is assumed to be like that of the legislative branch

  • re-election

• both a demander and a supplier of political benefits

  • it proposes policies/lobbies congress

• as a supplier of political benefits, the executive branch can

  • provide political support to legislators by judicial and government appointments

• can also appoint agency managers and judges

• has important influences of the overall government budget and on departmental expenditures

• faces certain contraints on its efforts to maximize political support

• it is held responsible for the performance of the economy

the judicial branch

• if congress passes legislation that is favorable to special interests, it cannot ensure that a future congress will not overturn it

• a special-interest group would not be willing to pay as much for legislation that has the possibility of lasting only a short period of time

• if the judiviary accepts the congressional deal as given, the legislator can extend the life of its legislation

  • this thereby increases its value

  • if the court interprets the law according to the intent of congress, then they can provide a special interest group with a lifelong or long term contract

  • this is a possible reason why the legislative branch pays so much attention to selection of federal judges

health provider-population ratio

• widely used metric to determine how many health providers are appropriate for the population

• this can be used for any professionals that are viewed as important to the functioning of society

limitations of nurse-population ratio

• based on a need for services that currently exist

• static point measure

• the ratio does account for possible productivity changes, which are likely to occur due to technology, or changes in the way care is given

• it does not provide info on the importance of a surplus or shortage

• projections of shortages and surpluses using the ratio technique has been notoriously inaccurate over time

rate of return

• calculated by comparing the costs of the investment with the expected higher financial returns that result from that investment

• these relationships are typically illustrated graphically using supply and demand style charts

short term effects of a nurse shortage in a private market

• there will be an increase in the number of patients needing services

  • this will initially mean patients would find it more difficult to schedule an appointment with a health provider

• likely

  • waiting times will increase

  • the nurses bargaining position with the employer will improve, and nurses salaries, bonuses will increase

  • they will likely add staff to increase their productivity, so that the nurses can care for more patients

• when demand for nurses exceeds supply, the labor market moves to a new, higher price equilibrium

• these higher costs lead to more frequent cases of cost-related medical non-adherence

long term effects of a nurse shortage in a private market

• as nurses’ incomes rise, the demand for nursing education increases

  • students are more likely to pursue nursing degrees, and demand grows even more rapidly for specialties experiencing the highest patient demand

• a central question is whether nursing schools can expand capacity to meet the rising demand

• if nursing schools are not able to expand, students who are pursuing a nursing education will seek such an education in non-traditional areas

• as a result of the greater supply of nurses, generated by a higher rate of return on a nursing education, the following effects may be seen

  • the number of students graduating from nursing school will continue to increase

  • nursing incomes will no longer increase more rapidly than those of other professions

• the response by students, hospital administrators, and nursing schools will result in the elimination of a shortage over time, however, the change will not be immediate

short term effects of a nurse surplus in a private market

• reduced workload and lower patient volume

• greater willingness to negotiate for patient volume

• downward pressure on wages

• wages may lag behind inflation

long term effects of a nurse surplus in a private market

• as the supply of nurses continues to exceed demand, downward pressure on wages persists, and nurse salaries stabilize at lower levels

• over time, this reduces the financial attractiveness of entering the profession, leading fewer students to pursue nursing education

• hospitals and other private market employers benefit from greater staffing flexibility and lower labor costs, which may allow them to expand services or invest in other areas of care delivery

• however, the reduced rate of return on nursing education gradually slows the inflow of new nurses

• as fewer individuals enter the profession, the surplus diminishes, and the market moves toward a new long-run equilibrium, which is very close to the initial equilibrium point

hospitals early 1800s-1900

• they functioned as aplace where food, shelter, and meager medical care was supplied to the sick/poor, armies, and those with contagious disease

  • essnetially, where they went to die

• served as a social welfare function

  • financed through charitable gifts and local government donations

  • done instead of having taxes pay for services

  • NPO model was adopted in the past, America was. amajority agriculture country and many did not see the need for organized medical establishments

hospitals 1900-present

• factors that led to a shift in demand for hospitals

  • technological advancement

  • Baby Boomers

    • created huge demands for maternity and pediatric services

  • Medicare/Medicaid Act 1965

  • PPACA 2010

economic evaluation

• those who plan, provide, or pay for health services face a persistent barrage of questioning such as

  • should individuals be encouraged to request annual check ups?

  • should local health departments move scarce nursing personnel from well baby clinics, so they can carry out home vists on the home bound senior population?

  • should hospital administrators purchase new diagnostic equipment?

  • should a drug be listed on the formulary?

meaning of economic evaluation

• cost and consequences

• choice

cost and consequences

• few of us would pay a specific price for package whose contents were unknown

• conversely, few of us would accept the package, even if its contents were known and desired, until we know the specific price being asked

choice

• resource scarcity, and our inability to be all things to all people requires that choices be made

  • these choices are based on many criteria which sometimes explicit but often implicit

  • economic analysis seeks to identify and to make explicit one set of criteria which may be useful in deciding among different choices

definition of economic evaluation

• the comparative analysis of alternative courses of action, which is based in terms of the specified action’s cost and consequences

  • the basic task of any economic avaluation are to identify, measure, value, and compare the cost and conseuqneces of the alternatives being considered

the focus of economic evaluation

• can it work?

  • concerned with efficiency

• does it work?

  • concerned with effectiveness or usefulness

• is it reaching those who need it?

• resources such as people, time, facilties, equipment, and knowledge are scarce

• without systematic analysis, it’s difficult to identify the relevant alternatives

• the viewpoint assumed for the analysis is important

• without some attempted measurement, the uncertainty surrounding orders of magnitude can be critical

CMA

• cost minimization analysis

• focused on achieving the least cost alternative

• not concerned with the effectiveness of the procedures

• only addresses on dimension

CEA

• cost effectiveness analysis

• focus on the costs and effectiveness of an action

• expressed in terms of a ratio

  • the denominator is the gain in health

  • the numerator is the costs associated with the health gain

• costs are related to the effects of the action

• assumes the onset that the indefensible do-nothing alternative does not exist

• it is not possible to reduce the outcome of interest to a single effect common to both alternatives

• without a common denopminator, comparison is impossible

CBA

• cost benefit analysis

• measures both the cost and consequences of alternatives in dollars

• can be used to make an economic decision of any kind

• provides an estimate of the value of resources used by each program compared to the value of resources the program might save or create

• assigns a monetary value to the measure of effect

• the consequences of a service program will often be expressed in terms of the dollar benfit

• expresses effects into their dollar benefit

  • the monetization of an outcome is not an easy task

  • sometimes inappropriate to assign

  • ethical problems

• as a result, often not used in healthcare delivery

• implicitly assumes that each program is being compared to do nothing alternative which entails no cost and no benefits

CUA

• cost utility analysis

• enables comparison across different health programs and policies by using a common unit of measurement

  • a comparison unit is known as a quality-adjusted life year

• provides a more complete analysis of total benefits

• what do QALYs measure?

  • number of people helped

  • duration of effects

  • time preference

  • risk attitudes

  • illness severity

  • patient age

• ignores

  • personal responsibility

  • fairness

small firms and health insurance

• research has identified that when compared to large firms, small firms are less likely to self-insure

• possible reasons for this occurrence

  • small firms may not get good deals from insurance companies

  • workers in small firms are more likely to need more health/medical services

    • more likely to have poor or unhealthy lifestyles

    • high percentage of women in childbearing age

  • small firms are more likely to have secondary earners who do not need insurance and won’t pay a premium

    • as a result, the co-workers who need health insurance will not get insurance

mandated coverage

• government can legislate mandate that health insurance covers certain types of services such as

  • chiropractor services

  • dentist services

  • substance treatment

  • maternity length of stay

• mandates are more likely to affect small firms more

  • large employers self-insure under Employee Retirement and Income Security Act (ERISA)

  • with self-insurance the organization becomes exempt from state health insurance mandates

  • firms that cannot self-insure may stop offering health insurance altogether or they may hire fewer workers/part time workers

RAND health insurance experiment

• effect of cost sharing on medical expenditures across various income and health states

• investigated

  • how does cost sharing or membership in an HMO affect use of health services compared to free care?

  • how does cost sharing or membership in an HMO affect appropriateness and quality of care receieved?

  • what are the consequences for health?

• key findings

  • while medical care does respond to price, the rate of response is small

  • hospital care is most inelastic, preventative care is most elastic

  • mental health services are more price elastic than acute medical services

  • rich people use relatively more outpatient services, while poorer people use more inpatient services

perfect competition

• no one individual has the power to set the price of a good or service in question

• 4 market assumptions

  • many sellers possess many shares

  • a homogenous product

  • no barriers to entry

  • perfect consumer information

market failure

• occurs when the free market fails to promote efficient allocation of goods and services

• sources of failures include

  • monopolies/oligopolies

  • externalities

  • the presence of public goods

  • incomplete information

  • etc

monopolies

• there is one large firm

• unique products

• high barriers to entry

• they are price setters

• the sole provider of a good or service in a well-defined market with no close substitutes

• since it is the only seller in the market, it faces th market demand curve which is always downward sloping

externalities

• the costs or benefits encouraged by the consumption or production of goods and services that are not born by the individual consumer or producer

public goods/services

• a good that is both non-excludable and non-rivalrous

• ex. national defense, clean air

non-excludable

• individuals cannot be excluded from the use of the good/service

• individuals could benefit from it without paying for it

non-rivalrous

• the goods/services can be used by more than one person

• the use of them does not reduce the availability of other goods/services

importance of certainty

• certainty in healthcare markets implies buyers know exactly what health care they wish to consume, when they want to consume it, and how they can obtain it

• the consumption of certainty may hold for certain aspects of health care such as care needed for pregnancy and things such as annual physicals

imperfect information

• healthcare markets experience it because of

  • information asymmetry

  • principal-agent relationship

  • unpredictable nature of illness and recovery

  • market power

  • ethical and social considerations

information asymmetry

• a significant imbalance of knowledge exists between patients and healthcare providers

• patients often lack complete information about their conditions, treatment options, costs, and quality of care, placing them at a disadvantage in making informed decisions

principal-agent relationship

• in healthcare, asserts that providers, being imperfect agents of patients, will act to maximize their profits at the expense of the patients’ interests

  • the principal (the patient) appoints an agent to advise the principal in making decisions about treatment or to make decisions on the principal’s behalf

  • the provider is expected to be a perfect agent, combining professional knowledge with the patient’s preferences to determine a choice that the patient would make based on that information

unpredictable nature of illness and recovery

• the incidence and severity of diseases are inherently unpredictable, making it dificult for both patients and providers to forecast healthcare needs and outcomes

• the course of treatment can change, and the effectivemess of medical interventions can be uncertain

market power

• some healthcare providers and pharaceutical companies may possess significant market power, resulting in reduced competition and potentially higher prices, as well as limited consumer choices

ethical and social considerations

• can influence market dynamics and lead to calls for government intervention or regulation

capital good

• a capital good is a manufactured means of production

• individuals, organizations, and governments use capital goods in the production of other goods or commodities

human capital

• the collective knowledge, skills, and health of a population that enables its members to be productive members of society and contributes to economic growth, both in the present and the future

  • individuals make choices about investing in human capital based on rational benefits and costs, including the return on investment

  • ex. schooling, training courses, internship

• investing in human capital takes time, effort, and money but people do it because returns seem worthwhile

• human capital does not depreciate quickly, but it will decline in the future if not maintained

health capital

• the health-related assets individuals possess, which enable them to maintain their health and well-being over time

  • encompasses an individual’s physical and mental health, as well as their ability to access and manage healthcare services effectively

  • factors such as access to healthcare, healthy lifestyle choices, and social support networks can impact an individual’s health capital

• health can be seen as a form of capital that individuals invest in, impacting their ability to participate in economic and social activities

health capital shares many traits of human capital

• it does not depreciate instantaneously

• it enhances future productivity and thus future income

• it requires investments

  • medical checkups and treatments

  • exercise

  • proper nutrition

assumptions of health capital

• the consumer in a household behaves similarly to a firm

• the consumer trades off the purchase of health vs other goods

• the consumer actively participates in producing health

• medical care is an input in the production of health

health as an investment good

• the belief that prioritizing and dedicating resources to health not only improves individual well-being but also yields various returns, similar to a financial investment

  • production of healthy days yields significant returns in various dimensions, impacting individuals, communities, and national economies

why is health considered an investment

• long term returns

• improved quality of life

• as an individual increases their health stock, their potential healthy days increase to a potential maximum of 365 days

• however, health stock yields diminishing returns

long-term returns

• healthy habits, such as good nutrition, exercise, and preventative care, can lead to a longer and healthier life, reducing future healthcare costs and enhancing overall productivity

improved quality of life

• beyond financial or economic benefits, investing in health leads to a higher quality of life, characterized by greater energy, improved mood, and stronger relationships

the law of diminishing returns in healthcare

• when one input factor is increased while others remain constant, the resulting output will eventually increase at a diminishing rate

• initial investments yield high returns: early investments in health tend to have the most significant positive impact on health outcomes

  • declining marginal gains with increased spending: as spending on healthcare or specific interventions increases, the additional health benefits gained tend to decrease

age and health

• age is one of the strongest predictors of health status

• as individuals grow older, biological, social, and economic factors interact to influence health outcomes in predictable ways

  • biological changes: natural physiological decline

  • accumulation of risk factors

  • increased health care utilization

  • social and economic influences

  • health production function

environment and health

• influences exposure to risks, access to resources, and overall ability of individuals and communities to maintain good health

  • physical environment

  • built environment

  • social environment

  • economic environment

discounting health expenditures

• adjusting dollar amounts to reflect the time value of money by assigning lower values to dollars paid in the future than dollars paid in the present

factors associated with discounting health

• tendency to value future health outcomes less than immediate ones

  • in health economics, individuals often apply a discount rate when considering long-term health benefits or costs

    • time preference: people generally prefer immediate benefits over future benefits

  • as a result, future health improvements are valued less than health gains experienced today

• uncertainty about future health

  • the more you discount the future, the less you are willing to give up today for future returns

• opportunity cost of time and resources

• behavioral factors

  • present bias, limited self-control, etc

  • ex. young people

• changes in health productivity over time

  • as individuals age, the ability to convert health inputs into health outcomes declines

  • ex. elderly individuals also have high discount rates

Barsky’s paradox

• although the nation’s pverall health has improved over the last 30 years, self-reported satisfaction with personal health has declined

• possible explanations:

  • shift from acute to chronic conditions

  • longer life expectancy with lower quality of life

why do people buy insurance?

• the purpose of health insurance is to enable people to get rid of uncertainty

  • insurance does not protect against the probability of an accident

  • instead, insurance protects against the monetary loss associated with the accident

• individuals can convert this relatively rare possibility of a large loss into a small but certain loss by buying health insurance

  • most individuals choose this option because they are risk-averse

why do firms sell insurance?

• insurance companies are paid to assume risk

• the risk can be managed by spreading it over a large pool of the insured

  • insurance companies receive guaranteed premiums to insure against infrequent payouts

• insurance markets exist when consumers are willing to pay enough to induce insurance companies to assume risk

risk

• possibility of substantial monetary loss from an event where the probability of an occurrence is small

  • ex. auto accidents are common in the US, however, the likelihood is quite small that in a given year a specific individual will have a car accident

  • even though the risk is small, people buy insurance to insure against risk

insured

protected against risk (beneficiary)

insurer

agency that assumes risk

underwriting

systematic technique for evaluating, selecting (or rejecting), classifying, and rating risks

indemnity plan

• reimburses the beneficiary for services covered under the plan

  • cash is paid directly to the beneficiary. the beneficiary then pays the provider

  • if expenses are more than the indemnity amount, the beneficiary will have to pay the rest out of pocket

reasons for erosion of indemnity plans

• the cost of health insurance

• the use of allowed (contract) amounts in health insurance

defined benefit plan

• employee receives a defined benefit package, and the employer/employee pay a premium

• the premium is adjusted annually based on employee usage (experience)

• concept of the past

defined service/ contribution plan

• employees typically choose from a variety of healthcare plans

  • only a specified amount of health benefits is paid for by the employer

• the employee pays for any costs above the contributed amount

• defined contribution plans shift more of the financial responsibility to the employee

  • this type of health sinruance is widely used today and is gaining in popularity

cost sharing

• employer/employee share cost of providing health insurance

  • cost sharing is usually in the form of deductibles, copayments, and the use of co-insurance

deductible

• amount the insured pays before the policy benefits are active

  • deductibles lowers the insurance premium because it eliminates many of the small medical expenses that most families have each year

  • as a result, most people do not use indurance for small claims

  • this occurrence allows the insurer to lower its administrative costs

copayment

• the amount the insured must pay each time health services are received

  • ex. usually a defined amount: $20 copay for primary care, $30 for specialty

• the patient has an incentive to use fewer services because he/she will have to balance the value of additional visit against its cost

coinsurance

• usually consists of an 80-20 ratio of cost sharing between the plan and the insured

  • instead of defined/predetermined amount, proportions of medical costs are incurred

  • believed to expose customers to the true cost of medical services

stop loss

• maximum amount of out-of-pocket liability an insured person would incur in a given year

• after a certain amount of out-of-pocket expenses are met, the plan will pay 100% of costs

maximum payment limit

• a cap on how much the insurance company will pay for a certain procedure

• this has been changed due to the passage of the PPACA

PPACA

• as a result, there are no lifetime or annual dollar limits on the following essential benefits:

  • emergency services

  • hospitalizations

  • lab services

  • maternity care

  • mental health and substance abuse treatment

  • outpatient or ambulatory care

  • pediatric care

  • prescription drugs

  • preventative care

  • rehabilatative services

  • vision and dental care for children

catastrophic coverage

• major medical expenses (hospital care)

• comprise the tail end of medical expenditures

  • are usually only incurred by a small percentage of families

• def of catastrophic expenses is relative

  • it depends on the patient’s family income

  • a $2,000 expense may be a catastrophic expense to some but not others

community rating

• everyone pays the same insurance premium

  • risk is spread among the whole group

  • based on the utilization experience of the entire group

  • healthy people subsidize the care of sicker people

experience rating

• premiums are based on an individual’s medical experience

expected value

• what an individual will be willing to pay for health insurance, or an individual’s expected value of a health insurance policy

• when a certain outcome is not known, but a series of outcomes may occur with different probabilities, then one computes an expected value of the outcome

expected value assumptions

• very rational way of thinking

• outcomes are mutually exhaustive

• that all outcomes can be converted to numerical values

• a definite probability/percentage of chance can be assigned to each value

risk aversion

• these people will be willing to give up income to avoid risk

• buying insurance assures a person of having similar income, whether or not there is a loss

• having a certain amount of money with certainty is preferable to having an expected value of that amount of money

  • expected utility vs expected value

insurance purchase decision making

• actual premium>pure premium

  • this occurs because the actual premiums contain in a loading charge

• the size of the loading charge often determines if people will buy the health insurance for some medical expenditures but not for others

• if individuals could buy health insurance at a pure premium, most people would buy health insurance for almost everything because it would reflect on average, what they would likely spend anyway (rationality assumption)

• however, when charges more than the pure premium, the individual must decide whether to buy health insurance or self-insure

  • going without insurance

  • factors in play: degree risk aversion, price of the actual premium

• the higher the loading charge relative to the pure premium, the less insurance the individual will buy

• the individual will buy only what they can afford, not what they need or want

  • main factor which leads to underinsurance

moral hazard

• after purchasing insurance, the insured person’s cost for purchasing medical services has decreased

• the demand for certain medical procedures may be elastic

  • ex. cosmetic surgery

• reductions in what the consumer pays may cause large increases in quantity demanded

  • over-purchase of insurance causes a loss of well-being for society, it represents a waste of scarce resources

the degree of moral hazard may increase if

• physicians consider a patient’s insurance status when determining the appropriate treatment to prescribe

  • supplier-induced demand

• the procedures are price elastic

  • the more price elastic the demand for medical care, the less desirable it is to insure against that risk with normal types

protecting against moral hazard

• do not provide insurance for procedures with very elastic demand

• offer different co-insurance rates for various procedures

  • the more elastic the procedure, the higher the copayment

• add additional costs to procedures with elastic demand

  • increase wait times for gastric bypass

• consider a gatekeeper system