Health Economics Lecture Notes: Foundations, Demand, Grossman Model, Disparities, and Physician Labor Markets

Comprehensive vocabulary flashcards covering the economic analysis of healthcare demand, the Grossman model of health capital, socioeconomic health disparities, and the physician labor market.

Mortality Rate

The rate of deaths occurring within a specified population over a given period.

Morbidity Rate

The rate of incidence or prevalence of diseases and illnesses within a population.

Health Production Function

An economic relationship describing how health outcomes are produced through inputs including living standards/behavior, environmental factors, genetic inheritance, and health care quality and availability.

Asymmetric Information

A market situation where one party to an economic transaction possesses greater or superior material knowledge compared to the other party.

Moral Hazard

A situation where an insured party engages in riskier behavior or increases utilization because they are insulated from the full financial consequences of that risk, while another party bears the cost.

Adverse Selection

A market phenomenon occurring when buyers or sellers have unobserved private information about their risk or product quality prior to entering a contract, causing disproportionate participation by higher-risk individuals.

Normative Statement

A statement based on subjective value judgments or opinions about how the economy ought to be, whose validity cannot be empirically tested.

Positive Statement

An objective and verifiable claim or theory describing how the world or economy functions that can be tested against real-world data.

Price Elasticity of Demand

The economic metric measuring how the quantity demanded of a good or service responds to a percentage change in its price: $\epsilon = \frac{\%\Delta Q}{\%\Delta P}$.

Price-Inelastic vs. Price-Elastic Demand Curves

The graphical distinction between demand that does not change with price ($D_I$, a vertical curve where $\epsilon = 0$) and demand that responds to price variations ($D_E$, a downward-sloping curve).

Randomized Controlled Trial (RCT)

An experimental research method where participants are allocated by chance alone to a treatment group receiving an intervention or a control group receiving no intervention, a placebo, or standard care.

RAND Health Insurance Experiment (RAND HIE)

A large-scale randomized trial conducted between $1974$ and $1982$ across six US cities that randomly assigned approximately $2{,}000$ families to insurance plans with $0\%$, $25\%$, $50\%$, or $95\%$ coinsurance rates to assess price sensitivity.

Oregon Medicaid Experiment

A natural randomized evaluation initiated in $2008$ comparing low-income adults in Oregon who won a lottery to apply for Medicaid with those who did not win.

Coinsurance

A cost-sharing mechanism where an insured patient pays a designated percentage of each medical bill out of pocket, while the insurance provider pays the remaining percentage.

Copayment

A cost-sharing arrangement requiring an enrollee to pay a predetermined, fixed dollar amount for each medical encounter, with the insurer covering the remainder.

Deductible

A fixed annual dollar threshold that an insured patient must spend entirely out of pocket on medical care before health insurance begins covering expenses.

Outpatient Care

Medical care services—such as doctor's office consultations, day procedures, or emergency room visits—that do not require an overnight hospital stay.

Inpatient Care

Medical treatment and hospital services that necessitate at least one overnight stay by the patient.

Pent-Up Demand

A spike in medical service utilization occurring immediately after gaining insurance coverage because individuals had previously postponed expensive elective treatments while uninsured.

Arc Elasticity

A method of calculating price elasticity evaluated at the midpoint between two coordinates to produce consistent results regardless of the direction of the price change: $\epsilon_{\text{arc}} = \frac{\frac{Q_2 - Q_1}{Q_1 + Q_2}}{\frac{P_2 - P_1}{P_1 + P_2}}$.

Grossman Model

An economic framework developed by Michael Grossman in which health is treated simultaneously as a consumption good yielding direct utility and as a capital good generating productive time.

Composite Good ($Z$)

An aggregate variable in the Grossman model representing all non-health consumption goods and leisure activities that generate immediate utility within period $t$.

Productive Time ($T^P$)

The total amount of non-sick time within a period that can be allocated among working ($T^W$), leisure ($T^Z$), and health-improving activities ($T^H$), defined as total time ($\Theta$) minus sick time ($T^S$).

Illness-Avoidance Function

A mathematical relationship in the Grossman model demonstrating that sick time ($T^S$) falls monotonically as health stock ($H_t$) rises, reaching total time ($\Theta$) at minimum health ($H_{\min}$).

Free-Lunch Zone

The upward-sloping segment of the Grossman Production Possibility Frontier (between points $A$ and $C$) where marginal investments in health yield substantial gains in productive time, allowing both health ($H$) and other goods ($Z$) to increase concurrently.

Tradeoff Zone

The downward-sloping segment of the Grossman Production Possibility Frontier (between points $C$ and $E$) where marginal gains in health yield diminishing returns in productive time, requiring an individual to sacrifice consumption goods ($Z$) to attain higher health ($H$).

Marginal Efficiency of Health Capital (MEC)

A downward-sloping schedule representing the expected lifetime rate of return generated from an additional marginal unit of health capital investment at any given level of health stock.

Optimal Health Stock Equilibrium ($H^*$)

The equilibrium level of health stock where the marginal efficiency of health capital balances the marginal cost of health capital: $\text{MEC} = r + \gamma$.

Health Depreciation Rate ($\gamma$)

The rate at which physical health capital deteriorates across periods due to biological aging, which increases with age and raises the marginal cost of maintaining health ($r + \gamma$).

Efficient Producer Hypothesis

The theory that more educated individuals obtain greater health improvements from equal health inputs because schooling increases their efficiency in producing health capital.

Thrifty Phenotype Hypothesis

The hypothesis (also called the Barker hypothesis) that deprivation experienced in utero or in early infancy triggers epigenetic adaptations that optimize the body for resource scarcity, predisposing individuals to adult metabolic and chronic illnesses when resources are abundant.

Direct Income Hypothesis

The hypothesis asserting that wealthier individuals attain superior health because higher financial resources relax their budget constraint and shift their production possibility frontier outward.

Allostatic Load

The cumulative physiological toll inflicted on the human body over time by recurrent activation of hormonal and neuroendocrine stress responses.

Social Gradient in HDL Cholesterol

The empirical finding in both baboon hierarchies and British civil servants showing that subordinate, lower-grade individuals exhibit lower levels of protective high-density lipoprotein cholesterol compared to dominant, high-grade individuals.

Income Inequality Hypothesis

The proposition that the degree of socioeconomic inequality within a society acts as an independent societal stressor that degrades the health status of all members, particularly the poor.

Access to Care Hypothesis

The hypothesis that health disparities between socioeconomic groups are primarily driven by unequal financial and logistical access to medical care.

Productive Time Hypothesis

The reverse-causal explanation that health determines socioeconomic status because worsening health decreases productive time ($T^P$), thereby lowering hours worked, income earned, and wealth accumulated.

Fuchs Hypothesis

Victor Fuchs's proposition that an unobserved third variable—time preference or patience—determines both educational attainment and investments in health, without education necessarily causing health directly.

Natural Experiment

An observational study exploiting an exogenous shock (such as a famine, disease outbreak, or arbitrary policy cutoff) that inadvertently assigns subjects into treatment and control groups akin to a randomized trial.

Medical Residency

A mandatory period of post-graduate, on-the-job clinical medical training in hospitals and health systems required for physicians prior to independent practice.

July Effect

An observed spike in hospital medical errors and accidental inpatient deaths in the United States occurring annually in July when new, inexperienced residents first begin hospital duties.

Net Present Value (NPV)

The present capitalized value of an expected stream of future incomes discounted back to the present day: $\text{NPV} = \sum_{t=0}^T \delta^t I(t)$.

Internal Rate of Return (IRR)

The specific discount rate ($r^*$) that equalizes the net present values of two alternative career paths, rendering an individual financially indifferent between them: $\sum_{t=0}^T \frac{I_P(t) - I_C(t)}{(1 + r^*)^t} = 0$.

Career Choice Threshold ($r^*$)

The decision model threshold along the discount rate spectrum where patient individuals ($r < r^*$) choose medicine due to high back-loaded payoffs, while impatient individuals ($r > r^*$) choose alternative careers with immediate compensation.

Monopoly Rents

Economic earnings above the competitive market-clearing wage captured by professionals due to artificial constraints on labor supply and barriers to market entry.

Flexner Report (1910)

A comprehensive review of American medical education that set rigorous accreditation standards, leading to the closure of nearly half of existing US medical schools and significantly restricting physician supply.

Physician-Induced Demand (PID)

The extra demand for medical treatments and diagnostic services induced by a physician's advice that serves objectives other than the patient's well-being, such as provider financial gain.

Defensive Medicine

Deviations from standard medical care—such as ordering unnecessary diagnostic procedures or turning away complex patients—undertaken primarily to minimize exposure to malpractice lawsuits.

Taste-Based Discrimination

Inefficient, differential treatment of patients driven by personal animus, bias, or preference for certain demographic groups rather than medical need.

Statistical Discrimination

Differential treatment of patients based on observable demographic characteristics when those characteristics are correlated with underlying biological risk profiles or treatment efficacies.