health economy midterm

list 3 caveats to the grossman model

1. salary is a fixed number.

2. mental health issues are not properly accounted for in terms of time sick

3. shadow prices of health are not mentioned, as you get older, you spend more money on health and get less return

explain how salary being a fixed number is an issue with the Grossman Model

Therefore, the model is able to isolate that factor because the amount of wealth a person is contributing to society is solely based on their number of hours worked. What Grossman does say, however, is that a person with a higher salary will be able to produce more health because they are able to consume more J&M. (J is equal to goods and services that are directly related to health, and M are goods and services that are in the market that are not related towards your health.) Commute and other sources of income are not directly in Grossman's equation, but those outside factors are included in the shadow price.

health economy

a branch of economics that deals with the supply and demand of healthcare and health

Indifference Curve

An indifference curve is a graph that shows different combinations of two goods that give a consumer the same level of satisfaction or utility.

You are advising the Secretary of the Department of Health and Human Services about how to improve population health. The secretary thinks the best way to improve health is to spend more on health care goods. Using the Grossman model, explain why another good strategy would be to spend more on improving the quality of air and water. Be as specific as possible in using the Grossman model to design your answer. Use graph to support your answer 

The Grossman Model states that everybody has a certain level of health at the beginning of their life, and that level of health (as shown by the PPF graph) will decrease over time. If you have a larger stock of healthy time, you are able to increase the quantity of labor they can supply and, via the investment component of health, raises their productivity and wages. Rather than spending more on health care goods, it would be vital to improve the quality of air and water, because those are public goods vs private goods. If you displayed it on a graph, you would see that the PPF graph would be expanded outward, and you would have a higher IC.

lifetime utility

on any day, an individual considers not only today’s utility, but all future utility as well

education and the grossman model

education s implicit in the production function for H+Z (and wages which means more income)

education improved production efficiency, better educated people can generate more H+Z with given resources

issue with investing in health care

grossman model shows it can have a large payoff up to a certain point because there are diminishing marginal returns as you get older (PPF curve)

Present and explain the main elements of the Grossman model; use graphs to support your answer. 

Maintaining good health requires more resources as we get older because OCs of maintaining health increases with age. Said another way, fighting against depreciation is more expensive

According to the Grossman model, health is an investment good (stock variable). Propose one public health policy that is aimed to improve individual health stock at birth

a public health policy that is aimed ot provide individual health stock at birth would be increased access to prenatal care. EX.effects of prenatal co exposure are 5x worse than being an active smoker during pregnancy, starvation ibn o ne generation can have impacts on the next

What policy implications can we implement from Grossman Model Knowledge

Since we know that the Grossman Model values education, and that if you are more educated your MEC curve will be shifted out to the right, that means that we should place more stock on education surrounding our health in high school. By investing more in health programs at public high schools around the country, we will see the MEC curve shift outwards.

 What are the potential channels through which education affects health? List 5 pathways. 

if you have increased access to education, your curve will be shifted to the right, increasing the demand for healthcare

1. your health awareness is increased

2. Your job is likely to be less physically intensive

3. Health insurance benefits coming from a college educated job

4. More access to HC in college

5. increased productivity

 What are the potential channels through which race affects health? List 3 pathways. 

1. Socioeconomic and Environmental Disparities (Structural Racism):

2. Implicit Bias and Clinical Communication

3. Chronic Weathering and Toxic Stress

socioecnomic determinants of health (shadow price of health)

Maintaining good health requires more resources as we get older because of the opportunity costs of maintaining health INCREASE with age. Said another way, fighting against aging (depreciation) gets more and more “EXPENSIVE" as we age ◉ Individuals who make more money (higher wage) will improve health (i.e. invest in health) by buying more health care rather than using their time since their time is more valuable

1. Socioeconomic and Environmental Disparities (Structural Racism)

• norities are more likely to live in historically segregated, underfunded neighborhoods. These areas often feature higher exposure to environmental toxins, limited access to fresh grocery stores (food deserts), and fewer safe recreational spaces, directly leading to higher rates of chronic conditions like asthma, diabetes, and heart disease. Black women are more likely to die of childbirth over white women

Implicit Bias and Clinical Communication

providers may hold unconscious biases that negatively alter their clinical decision-making and communication styles. Studies show this can lead to minority patients receiving less aggressive pain management, fewer diagnostic interventions, and shorter consultation times, which ultimately damages patient trust and worsens health outcomes. (ex. serena williams)

Chronic Weathering and Toxic Stress

intergenerational trauma and experiences of racism lead to heightened psychological stress and biological aging.

Allostatic Load Theory

Insidious: proceeding in a gradual, subtle way, but with harmful effects ▸ Pervasive: spreading widely throughout an area or a group of people ▸ One mechanism is stress, but not the only one

What would be the supply-side strategy to address the physician shortage?

ncentive people to pediatric care. Medschool acceptance rates are extremely low, but according to NYT there are 250+ open residency slots for pediatrics as of 2025

• also, lowering tuition: some ways to do this are by subsidizing loans, increasing residency spots in rural areas, or programs that skip undergrad and go straight to medschool

What are the economic incentives for physicians/hospitals to integrate with other physicians/hospitals horizontally? 

formerly independent but sell the same product join forces (Hospital x Hospital or Dr x Dr)

• shared cost

• increased specialization (one private dr expert in XYZ, other in ABC)

• collaborative

• control prices (oliogopaly)

• economics of scale in production —> FC has been up over time due to tech + bureaucracy. Rising FC makes it economically challenging to be in a small practice

• increased market power

Explain what the “fee-for-services” payment system is and the incentives and unintended consequences of FFS. 

hospitals get paid for each day the person stays + each service

• rewards action over results —> doctors will do more than necessary because they want to maximize their profits, this happens because we give drs agency over our health (see PiD)

• now its a DRF system: reimbursement method used by medicare where hospitals get paid a fixed amount due to the initial diagnosis

What are the economic incentives for hospitals to integrate with physician practices, nursing homes, physical therapy centers vertically? 

one buys out the other (Hospital eats Dr)

• steady flow of patients

• efficiency (everything in the same building)

• better coordination of care

• more bargaining power

demand-side strategy to address physician shortage?

more education, welfare programs, increase vaccines

to make the dmeand curve left: prenatal care, preventative care

why is med system not a perfectly competitive market?

Centers for Medicaid and Medicare Services: supply of new entrants is constrained primarily by CMS, an agency that provides the bulk of funding for hospital residencies. due to individual and institutional barriers, consumers pay above the competitive price for healthcare.

Physician induced Demand

financial incentive for Drs. to provide more services than needed, empirical evidence that when reimbursement rates for various procedures change, dr prescription practices change

Two Constraints accounted for by the Grossman Model (give one sentence on each)

Budget and Time Constraints

time: 24 hours = Time to improve Health + time for fun + time to work + time spent sick

budget: wage x hours worked

US spends 18% of its GDP on health care without having a better health outcome relative toother OECD countries. List one reason why this could be harmful for the entire US economy. 

Less investment into other industries such as education, infrastructure

education is important to invest in since if you are more educated and receive doctorate degrees, your chances at receiving a high paying job are higher

market power

more bargaining power with insurance companies eases the burden of managing practice

 Present and explain two factors that contribute to differential hospital prices. 

1. The level of competitiveness in the market (if there is a monopoly, prices can be driven up)

2. insurance —> 89% of hospitals don’t accept, more accept private insurance

Do higher-priced hospitals provide better quality of care? Explain based on studies we discussed in class. 

Unless there is a competitive market, higher priced hospitals do not provide better quality of care

Present, explain and evaluate the effectiveness of two strategies for controlling rising health care costs. 

Hospital Price transparency ▫ In 2018, CMS required each hospital to post its list prices online, “chargemasters” However, Data quality issues: Only a small fraction of compliant hospitals provide clear, exact dollar amounts for most services; many use incomplete files, vague algorithms, or massive machine-readable files that are difficult for regular consumers to parse. [1, 2]

reference pricing - payer sets the maximum price for a serviceixed reimbursement limit for hospital services—typically calculated as a percentage of Medicare rates (such as 120% to 200%)—rather than paying traditional, pre-negotiated PPO network discounts or inflated hospital chargemaster prices

three reasons why the rate of hospitals have been on the decline

1. Technology Advancement : Technology advances have reduced recovery time = less time needed to stay in hospital post treatmen

2. Payment methods have changed for inpatient stays from FFS to DRG: FFS was better for the physician

3. Large-Scale industry consolidation: vertical and horizontal mergers