POPHLTH 101- term 2

What is technical efficiency?

Achieving the same outcome with fewer resources, or achieving more outcomes with the same resources

What is allocative efficiency?

Resources are allocated to the uses that people value most highly.

What limitation is often associated with efficiency measures?

They often ignore whose needs are being met and focus on maximizing total efficiency.

What is opportunity cost?

The value of the next best alternative that was not chosen. May involve similar choices (produce more or less) or different choices (spend on defence not health)

What indicates an efficient decision?

The value of the chosen option exceeds its opportunity cost.

What indicates an inefficient decision?

The opportunity cost exceeds the value of the chosen option.

Can health itself be traded in a market?

No. Markets exist for healthcare and health inputs, not for health itself.

Who are the two groups involved in a market?

Sellers (producers), Buyers (consumers)

Why is competition important in markets?

The more competitive a market is, the more likely it is to function efficiently.

What makes a market more competitive?

What are gains from trade?

Benefits generated when a transaction occurs that both buyer and seller value.

How is gain from trade calculated?

Gain from trade = Buyer's value − Seller's cost

Buyers want lower prices, and the higher the price the

lower the quantity demanded.

Sellers want higher prices, and the higher the price the

higher the quantity supplied.

Gains from trade, if:

The price is high enough that a seller is willing to produce/sell the good, The price is low enough that a buyer is willing to pay for the good, Then there is a gain from trade, potentially shared between the buyer and seller.

What happens in a market equilibrium?

Buyers and sellers agree on price, All participants receive zero or positive surplus, All beneficial trades occur

What conditions are required for a "perfect" market?

Many buyers and sellers, The same product produced by all sellers, Everybody knows the value of the good/service to buyers and sellers, The same good can only be used by one person, All people are motivated only by their own wellbeing, Free entry and exit

What happens when markets move too far from perfect market conditions?

Market performance can deteriorate significantly.

What is Porter's Five Forces model?

A framework used to analyse competition and profitability within a market.

What are the five Porters forces?

Bargaining power of suppliers and buyers, threat of new entrants and substitutes, industry rivalry

When are profits likely to be high?

When competition is weak, including: Suppliers have little bargaining power, Customers have few alternatives, Few substitutes exist, Few potential competitors exist

In an efficient market, how much profit should firms earn?

Enough profit to justify investment, but no more.

Optum Health is a subsidiary of United Healthcare Group, a for-

profit provider in the US.

Largest health insurer in the US, and 7th largest company (any industry) in the world by revenue,

What is vertical integration?

Ownership of multiple stages of the healthcare pathway by one organisation.

How can vertical integration increase market power?

Control over providers, Control over referrals, Reduced competition, Patients restricted to "in-network" services

Why is United Healthcare considered highly profitable?

It scores strongly under Porter's Five Forces because it faces limited threats from suppliers, competitors, and customers.

Why might vertical integration be bad for consumers?

It can reduce competition and overall efficiency

Overall, Optum is bad for what?

consumers and efficiency

Why isn't NZ primary care highly competitive despite having many GPs?

Market power is concentrated in a few large companies.

In health systems, it’s rare that everybody just gets to choose as a buyer because :

Health insurance can have large limitations on reimbursement ‘out of network’, Public system has gatekeeping & access barriers, e.g. choice of GP, pharmacy etc.

What are examples of major primary care companies in NZ?

Green Cross Health, Tāmaki Health

Lots of GPs … but actually few providers, market power concentrated in a few big companies, meaning that

Not a lot of potential for price competition, Out of hours separated off as a separate, private services (primarily owned by GP providers), Some vertical integration, e.g. with other providers, Little ability to “force” people to go to networks, but if referral rules changed, this could be an issue.

What is the biggest concern in NZ primary care?

The funding model rather than provider behaviour.

Health economics, as a discipline, was founded on the idea that we have to expect markets to work ——-in health because it’s really unlikely to be ——-

poorly, efficient

Costs and value of health care isn’t always clear because ?

The value of healthcare might not be known to the consumer. The cost of producing health care might not be known to the supplier, Producing or consuming health care may affect people beyond the consumer and supplier.

What are the ultimate goals of health care?

health status, consumer satisfaction and risk protection (and equity)

Besides efficiency, what other goals matter in healthcare?

Quality, Access, Health status, Consumer satisfaction, Risk protection, Equity

What changes when government subsidises healthcare?

The amount consumers pay differs from the amount producers receive.

Why can free healthcare be economically inefficient?

People may consume services even when the value gained is less than the cost of providing them.

What is one reason free healthcare may still be justified?

A healthier workforce improves economic productivity.

People are consuming the health care they can, at a zero price to them, even if it costs the government a lot.

Gains from trade (buyer value – seller cost) will be negative for lots of units, Other beneficial things may be cancelled to fund an inefficient use of resources, People react to free health care by changing their behaviours.

Providing some health care free makes sense on efficiency grounds:

A country having a sick workforce is inefficient, You being sick can affect other people.

Why is deciding the balance between efficiency and equity a political issue?

Economics provides information, but society decides which values should be prioritised.

The more health system ownership is ‘vertically integrated’ (i.e. organisations cover lots of potential markets/parts of clinical pathways), ——- becomes very important.

policy

Barriers to entry in healthcare?

Gatekeeping, Laws determine registered health professionals, and regulation requires qualifications, professional development, Laws restrict what healthcare can be (legally) traded.

Barriers to exit a market?

Some health care is addictive / continuing treatment is necessary for life, Some technologies requires ongoing maintenance, Some providers can’t leave without making arrangements for their existing patients.

Why do barriers to exit a market make people reluctant to come in?

In a market, competitors often enter a market with low prices to force others to drop their prices, and then leave, however this cant be done in health

How can health insurance be a barrier?

In USA, reimbursement is often network only, if your a new practice, insured patients wont come to you at the risk of insurance not reimbursing, prevents entry and competition.

How can research and development costs be a barrier to market entry?

Many medicines fail before they reach market, very high costs. Might not work, Might work but don’t have evidence, Might work, have evidence, but are too expensive to justify funding

The price of a drug reflects the

cost of producing the drug now AND the value to patients

Why do people often not invest in researching / producing a new drug?

The profit you get by producing the drug now might not be (probably won’t be) enough to recoup the cost of research and development. Investors need protection to make their money back.

Patents provide a

Loophole

Patents provide the

sole right to produce a technology, for a period time, free from competitors using that same way of producing

What do patents not protect against?

people creating different drugs for the same disease using different mechanisms, ‘me‐ too’ drugs that provide the same effect from medicine but in a slightly different way. The actual period of time is often biggest issue.

In the US, the pharmaceutical issue has a massive influence on policy. Pharmaceutical costs are much higher than elsewhere:

Impact of litigation, Lack of competition between companies, and issues with the way drugs are reimbursed, overpatented

According to I.MAK (2022), The top 10 selling drugs in the US have a combined —— patents. On average, there are —- patents filed for each of these drugs, with 66% of these filed after FDA approval.

740, 140

According to I.MAK (2022), —— times as many patents are granted in the US as Europe, and these patents have meant that generics and ——— have not been able to enter the US market in the way they have elsewhere.

four, biosimilars

Humira

cost increased from about US$50,000 (1996) to over US$80,000 (2023) per patient per year, AbbVie delayed competition through lawsuits, settlements with rival companies, and additional patents on minor product changes meaning patent remained.An anti‐TNF agent that reduces inflammation in autoimmune diseases.

Avastin and Lucentis

Both are equivalent in preventing AMD, however lucentis is $2000 whilst Avastin is $100.

Insulin

Patent was originally sold for $1, now people prevent injecting enough due to high prices (27x cost to make). A tweet in 2022 prompted the drop of prices in 2023

Why are drug prices so high in the US?

Lack of competition between companies (mainly due to strict overpatenting) and issues with the way drugs are reimbursed

Why are patents necessary?

Without them we wouldnt get the investments we needed because people wont invest im areas that wont pay off (easy to compete with)

Why are patents not working well?

Changes to formulations, packaging, dosages etc. are used to extend protection,Off‐label usage carries risks, but pharmaceutical companies seem to game the system.

One fifth of drugs in development aren’t developed by the company that ends up marketing them instead —-

the drugs are researched and then sold / acquired. Should patents be allowed in acquired drugs?

5 ways to ‘fix’ patents in the US

Raise the bar for patents, change financial incentives for the patent office, increase public participation, allow public to have legal standing, expand oversight

“Everybody knows the value of the good/service to buyers and sellers” when they have good information regarding

The options available, risks each option poses, The quality of treatments, What the treatment might lead to

Derived demand

occurs when the demand for a good or service exists because it is needed to produce or provide something else. (If more people need surgery, demand for surgeons and operating theatres increases.)

Induced demand

occurs when health care providers influence or increase the demand for services beyond what patients would have requested on their own, often because providers have more information than patients.

Supplier induced demand

increases prices, and increases the quantity a market provides beyond the efficient level. Good for sellers but not for buyers.

Allowing direct to patient advertising:

Raises patient awareness of options, may complicate the doctor‐patient relationship, may encourage off‐label prescribing, but definitely raises issues of supplier induced demand.

Changing the payment system changes the way people do things. Give an example.

Diagnostic imaging in Switzerland, hospitals encouraged unecessary scans because they got paid more

Insurance is an example of

risk pooling - combining risks across a group of people, overall risk is more predictable and can be paid for by the group

Deductible

The initial amount someone pays out of pocket to join health insurance

Coinsurance

form of cost-sharing where the patient pays a percentage of the cost of a health care service, while the insurer pays the rest until youve paid the out of pocket maximum

Two classical problems with insurance markets based on the information that people hold

adverse selection, moral hazard

Adverse selection

occurs when people with a higher risk of needing health care are more likely to buy health insurance, while healthier people are less likely to enroll, results in higher fees and higher risk consumers

Moral Hazard

a person changes their behaviour because they are protected from the full cost or consequences of their actions.

What does perfect information require in health care markets?

Sellers must know the true cost of providing care, as this represents the value of the health care service.

Which is a bigger problem in health, moral hazard or adverse selection?

Moral hazard

What is adverse selection using health insurance and community rating as an example?

A premuim is defined based on an average person, people with higher risks think its a good deal and pay for it, whilst low risk people dont, meaning almost all customers are high risk and company loses money, and increases premium cost.

What is a partial insurance contract?

An insurance plan that doesnt provide full coverage, requiring individual to pay a percentage out of pocket

Often in health insurance, higher risk people are under-insured (———) and lower risk people are also under-insured (———). This is an ———

affordability, by design, access issue

Risk rating

the practice of setting insurance premiums based on a person's estimated risk of making claims. A version of cream skimming to discover lowest risk individuals

Moral Hazard can be described as a

lack of incentive to look after yourself (structure), can mean an incentive not to take care of yourself (conduct), leading to poorer health outcomes for both you and lower profits for insurer (performance)

Moral Hazard is less likely when

insurance coverage is conditional on behaviour, reduced coverage (out of pocket percentage), tax is taken from all people not just patients

How is demand (especially in secondary care) managed in New Zealand?

Gatekeeping and waitlists

How can financial incentives affect health professionals' behaviour and quality of care?

Incentives can improve targeted behaviours, but may crowd out intrinsic motivation and professional standards. When incentives are removed, performance may fall back—or even below—its original level.

What are externalities?

costs or benefits of producing or consuming a good/service that affect people beyond the buyer and seller.

What are some examples of production externalities?

Positive externality – innovation from basic research, Negative externality – pollution

What are some examples of consumption externalities?

Positive externality – herd immunity from vaccination, Negative externality – increased risk from second‐hand smoking

How can governments address externalities?

Negative externalities: Use taxes to reduce overproduction/overconsumption, Positive externalities: Use subsidies to increase production/consumption (e.g., vaccinations).

In health, are there many buyers and sellers?

Often only one company/patent holder, or limited providers for specialist services/insurance

In health is the same product produced by all sellers?

Lots of quality differences and variation in practice

In health does everybody knows the value of the good/service to buyers and sellers?

Supplier induced demand, moral hazard, adverse selection

In health, can the same good can only be used by one person?

Never in public health; externalities elsewhere (e.g. vaccinations)

In health, is there free entry and exit?

no, patents, professional standards & licensure.

Markets are generally ‘better’ at ————— (for those able to afford it) than guaranteeing health status or risk protection

consumer satisfaction

Because markets are focused on cinsumer satisfaction rather than guaranteeing health status or risk protection,

Many people will go untreated, Quality of health care may be lower, Prices for treatment will be higher, Administrative costs.

What are 5 ways government can intervene in health?

Collect information, Regulate and monitor, Fund health care, Purchase services, Provide services (bonus- invest in training and/or research)