ECO 332 Midterm 2

two relavent margins when changing labor

extensive and intensive

extensive margin

adding or taking away workers. This is the yes/no question “are you working?”

intensive margin

changing the number of hours a worker provides. This is the how much question “how many hours are you working?”

if individuals are willing to supply labor

more wages and labor

elasticity of supply

shows how responsive to wages workers are

compensating wage differential

the amount of wages that can be substituted with another form of compensation and keep hours stable; value of the non-wage

compensation

Extensive margin changes: inflows

Where do healthcare workers come from?

• You can train them (medical school, nursing school, etc.)

• You can attract them from elsewhere (in-migration)

Extensive margin changes: outflows

How do you lose healthcare workers?

• They can move away (out-migration)

• They can leave the profession

stock of labor

all the labor that is available

what do people care about when picking a location to work

pay, cost of living, amenities

amenities

good features of a location such as parks or social opportunities

disamenities

bad features of a location such as noise or crime

brain drain

when a location consistently loses high-skilled labor to out-migration

and becomes a supplier of skills to elsewhere while having a dearth of skilled local labor

what do licenses do

Provide a minimum level of quality to be able to participate in the

labor force

2. Restrict the labor force to those them

quality-quantity tradeoff

can increase quality of labor but must sacrifice quantity, and vice versa

monopsony

when there is a single buyer, or a single employer – in this case workers have little ability to bargain over wages

Why are there so few female surgeons?

• Taste-based vs. Statistical discrimination

• Stereotype threat

• What happens when a female surgeon makes a mistake?

incentive

a change in the costs or benefits of a choice that makes it more attractive

disincentive

a change in the costs or benefits of a choice that makes it less attractive

two common physician pay schemes

fee for service and salary

fee for service

pay for each thing you do. This creates an incentive to do as much as possible as quickly as possible

salary

pay a flat amount for a set amount of time. This creates an incentive to do as little as possible as slowly as possible

profit sharing

workers get a share of firm profits. This creates an incentive to act in a profit-maximizing way

why the strength of profit-sharing is variable

only effective to the extent that a worker feels like their individual efforts have an influence over firm profitability

shirk

goof off

why shirking is hard to detect in a larger firm

1. When production responsibilities are more spread out it is harder to

detect where drains are coming from

2. The more workers you have, the more costly it is to monitor them.

Eventually you need monitors for your monitors

induce demand

when providers can have an incentive to convince a patient to

purchase care that is not in their financial best interest (having a

patient consume additional care for which the benefit is not

worth the cost)

audit study (Currie et al. 2014)

• An audit study sends trained actors (or “secret shoppers”) to complete

transactions

• In this case they sent similar actors with fake vague symptoms (that did not merit

antibiotics) to try to get a prescription for antibiotics

• This was in China, where at the time, hospitalists got a cut of hospital

pharmaceutical sales

• One actor would present the symptoms, the other would present the same

symptoms but also mention that they would get the prescription filled elsewhere

• The first actor got a prescription 10 percent of the time, the second 55 percent of

the time!

fee splitting

form of induced demand, Sending a patient to another provider who sends

money back to you

self referral

form of induced demand, Sending a patient to another facility that you have an investment in

different entities hospitals can be operated as

for-profit or not-for-profit

for-profit hospital

able to pay some of these profits out to investors, not-for-profit hospitals cannot

not-for-profit hospital

putting profit back in is the only option, for-profits can pay some (or all) of it out, gain tax advantages

line staff

workers who report to managers and so on for almost all hospital operations

medical staff

the physicians and other practitioners with medical authority

two authority structures of hospitals

line staff and medical staff

hospital administration in charge of:

what the hospital can provide and management of the facilities (how many x-ray machines you have in operation)

medical staff in charge of:

decides what a patient gets and when (who gets an x-ray)

resource allocation

A hospital makes considerable profit (revenue – cost), and must decide how to allocate those profits among many potential internal and external stakeholders

what does hospital leadership want

• The hospital leadership has their own preferences (utility functions)

• The leaders of a given hospital may care more about one type of

service and want to invest in that (such as more charity care or more

technological investment)

how does hospital leadership get what they want

• The hospital leadership explicitly gets to decide how resources are

allocated

• To the extent that other parties want things they need to exert influence

over hospital leadership

what does medical staff want

• Better compensation

• This can mean pay, but can also mean other features of the job such

as benefits or access to “cool toys”

how does medical staff get what they want

• The medical staff steers patient care, so when they say they “need”

something, such as upgraded equipment, it carries a lot of weight

• The medical staff is not necessarily a monolith, different factions may

want different things, and the more agreement among the medical staff

the stronger the leverage

what does line staff want

• Better compensation

• This can mean pay, but can also mean other features of the job such as

benefits or access to “cool toys

how does line staff get what they want

• The line staff can ask for things much like the medical staff does, but lacks the

singular focus of the medical staff (line staff has a much wider set of

responsibilities) and lacks the leverage from steering patient care

• Can collectively bargain to increase leverage, note that unlike the medical

staff which has some collective bargaining baked in due to the nature of their

relationship, line staff must actively organize if they wish to collectively

bargain

what do patients want

• Better quality (for the same price)

• Better price (for the same quality)

• Either price or quality may be more salient for some populations

how do patients get what they want

• Choose where to go (vote with their feet)

• This steers resources to hospitals with things that patients want

perraillon et al. (2019)

consumers respond to ratings in healthcare,

They solve this by looking for a discontinuity at whole numbers

• Providers rated 3.99 and 4.01 after thousands of reviews are

basically the same

• Getting just above 4 causes a large bump in admissions

what do investors want

• Better return on their investment

• This can be more profits overall or a larger share of existing profits

how do investors get what they want

• Investors can pressure hospital leadership

• In some cases, investors directly appoint the hospital leadership and

can choose leaders that share values with them

what do donors want

Donors may want a hospital to behave in a way aligned with their desires (may want to see more of a certain type of care)

how do donors get what they want

• Donations with strings attached: “if you receive my donation, then you

must do x”

• This is only as effective as the incentives are clever – this is because

money is fungible: hospitals can shuffle money around when they get a

donation

economies of scale

he more a firm produces, the less it costs per unit

• Bulk purchasing

• Spreading out fixed costs

• More room to specialize

diseconomies of scale

the more a firm produces, the more it costs per unit

• Bureaucracy

• Monitoring costs

economies of scope

the more different things a firm produces, the less it costs per unit

diseconomies of scope

the more different things a firm produces, the more it costs per unit

how can hospitals compete

based on price and quality

Cooper et al (2022)

higher prices mean higher quality? - it depends

Paper uses the relatively random assignment of ambulances

• How does this solve the problem?

• They find that being admitted to a hospital with higher prices

increases spending but reduces mortality!

• Only works for hospitals in less concentrated markets

hospital systems

A system of hospitals under the same management

how do hospital systems benefit

a referral network

referral network

patients get referred for additional care to providers under the same umbrella

what insurance does

protects you when you have a risky asset

risky asset

something that has a high value, like a car or a home, that has the

potential to be severely diminished in value with some probability

premium

price of insurance plan, covers asset

risk averse

don’t like risk, more likely to pay for insurance

what does health insurance protect

pays for asset maintenance, can not restore health, protects wealth

Bankruptcy

legal maneuver that allows an individual (or business entity) to sell their assets in exchange for eliminating their debt

expected value

probability average, multiplies each outcome by its probability and adds them up

uncorrelated risk

the chance of one person needing a payout is not influence by another

group insurance

seek out groups to sell insurance to that do not likely have

correlated risks

• why employers are so attractive for health insurers: it is a group of people that are together for a reason that is not buying insurance

experience rating

charging each person based on their

individual risk, so each person has an individual premium

moral hazard

not having an incentive to protect against risk when you are shielded from the consequences

adverse selection

form of asymmetric information where one party (the patient) has hidden information (their risk of getting sick)

uninsurable

If the health insurance premium for a person is so large that the cost of the premium defeats the purpose of financial protection

who is uninsurable?

• High risk individuals (high E[payout]) will have larger premiums

and be more likely to be uninsurable

• Low wealth individuals will also be more likely to be uninsurable, as it will take a smaller premium to be large enough to defeat the purpose of financial protection

publically provided insurance

medicare, medicaide, tricare, the VA

medicare

older people are likely to have more health issues and larger E[payout]

medicaid

ow-income people are likely to have low wealth and a smaller premium would defeat the financial protection of health insurance

tricare and the VA

people attached (or formerly attached) to the military may have a higher health risk due to engaging in conflicts

Patient Protection and Affordable Care Act (ACA)

solution is to make experience rating in the insurance market illegal

way to avoid adverse selection

single payer, market based

single payer avoiding adverse selection

government provide insurance for the population, government is the only insurer for healthcare, insurance paid for with taxes

market based avoiding adverse selection

• Another way is to keep a market-based system and provide

incentives for low-risk individuals to stay in the market

• This can be “carrots” or positive incentives (such as price

subsidies)

• Or it can be “sticks” or negative incentives (such as tax

penalties for failure to buy insurance

general strategy of the ACA

1. Eliminate experience rating in health insurance

2. Incentivize purchasing insurance via carrots and sticks

3. Expanded insurance for the poor for those who are now incentivized

negatively but still can’t afford it

price felt by consumers

out-of-pocket expenditure

prices felt by providers

total amount that they are paid for a service, sum of component paid by the patient and component paid by insurer

chargemaster

a master list of services that a provider can do, and the price associated

with each one

how a medical bill is generated

listing each thing that was done and adding the price from the chargemaster

line item

Each individual thing that listed on the bill

charged amount

associated price on the bill for each line item

claime

bill is then sent to the insurance company and attempt to try to collect

from an insurance policy

denial of payment

insurers refuse to pay

price competition

• Providers can compete with each other based on price, with

better prices meant to attract patients

• However, in many (possibly most cases) price is not the biggest

concern for patients

• Patients care much more about quality when they do not pay

the full price

• Patients care much more about expediency when it is an

emergency

quality competition

• Providers seek to compete on quality, but this is only to the

extent that patients can perceive quality

• This can mean that many of the dimensions of quality that they

compete on are “creature comforts”

• There is also difficulty with many quality measures due to

patient selection into hospitals: the hospitals with the best staff

and equipment may have worse outcomes because they attract

the sickest patients

risk adjustment

tries to correct quality measures for this selection

price transparency

making price information public and easy for patients to see in advance

Managed Care Organization (MCO)

offer

the same health outcomes for cheaper by limiting E[payout], limits wasteful spending

MCO strategy

try to eliminate care on the flat of the curve using incentives on parties within the healthcare system

basic structures of MCO

1. Health Maintenance Organization (HMO)

2. Preferred Provider Organization (PPO)

3. Point of Service (POS)

Health Maintenance Organization (HMO)

fully integrated, where the insurer and provider are the same entity, Patients can get care from the HMO, but care outside is not usually covered,

higher degree of control (employ caregivers directly and can choose to hire providers who fit their preferred practice style)

have baked-in cost saving from having integrated billing systems and less billing uncertainty