Download - Section 1 - Public Finance
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Economics 330Economics of Health
Care
Dr. Greg DelemeesterSpring 2010
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Course Essentials
Course Web Page www.marietta.edu/~delemeeg/econ330
Grade Exams (60%) Problem Sets (15%) Article Reviews (5%) Policy Brief (20%)
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Economic Roundtable
…to promote an interest in and to enlighten its members and others in the community on important governmental, economic, and social issues…
Business networking opportunity Student memberships: $5
EconomicRoundtable.org
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Do you qualify for ODE? Omicron Delta Epsilon is the International Honor
Society in Economics.
Minimum qualifications for undergraduate membership are: 1. Junior standing or higher. Student must be in residence
at least one semester. 2. Twelve semester hours of economics with an average
grade of at least a B. 3. A general average of at least a B and a class standing
in the upper one-third.
– If interested, see Dr. Delemeester
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Health Economics Survey
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National Health Care Expenditures
Year Total Spending (in billions)
Percent change
Percent of GDP
Per capita spending
1950 $ 13 -- 4.5 $ 82
1960 28 8.8 5.2 148
1970 75 10.5 7.2 356
1980 254 13.0 9.1 1,100
1990 714 10.9 12.3 2,814
2000 1,353 5.9 13.6 4,789
2005 1,982 7.9 15.7 6,701
2006 2,113 6.7 15.8 7,071
2007 2,240 5.6 15.9 7,423
2008 2,339 4.3 16.2 7,681
Source: http://www.cms.hhs.gov/NationalHealthExpendData/
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Why do Americans spend so much on medical care? Aaron (1991)
Expansion of 3rd party payment system Aging of the population Expanded medical malpractice litigation Increased use of medical technology
Other factors Physician-induced demand Entry restrictions Predominance of not-for-profit providers
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Personal Health Care Expenditures
(in billions of dollars)Private Spending Public Spending
Year Out of pocket
Private Insurance
Federal State
1960 $ 12.9 $ 5.9 $ 2.0 $ 2.9
1970 24.9 14.0 14.4 7.8
1980 58.1 61.2 62.3 23.9
1990 136.1 204.7 172.8 63.5
2000 192.6 402.8 369.8 117.1
2005 247.5 599.8 562.3 176.9
2006 254.9 634.6 620.1 178.7
2007 270.3 665.0 661.3 188.7
2008 277.8 691.2 718.0 189.8
Source: http://www.cms.hhs.gov/NationalHealthExpendData/
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2008 National Health Care Dollar…
…Where it Came From …Where it Went
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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Private vs Public Spending on Personal Health Care Expenditures
PrivatePublic
% o
f P
HC
E
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1960 1970 1980 1990 2000 20100%
10%
20%
30%
40%
50%
60%
Spending as % of Personal Health Care Expenditues
Out of pocketHealth InsFedState%
of
PH
CE
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Changes in Hospital Usage
Short-Stay Community Hospital Characteristics, United States Category 1970 1980 1990 2000 2003 2004 2005 Beds (per 1,000 population)
4.17 4.38 3.73 2.93 2.79 -- 2.71
Admissions (per 1,000 population)
144.0 159.6 125.4 117.6 119.4 119.3 118.9
Average length of stay (days)
7.7 7.6 7.2 5.8 5.7 5.6 5.6
Outpatient visits (per 1,000 population)
657.2 893.2 1,211.6 1,882.8 1,933.4 1,943.7 1,972.0
Outpatient visits per admission
4.6 5.6 9.7 15.8 16.2 16.3 16.6
Percent occupancy 78.0 75.4 66.8 63.9 66.2 -- 67.3 Source: Health United States, various years.
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The Lockhorns
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Changes in Medical Care Delivery
Shift from private to public financingShift to 3rd party financingChanges in hospital usage and pricingDeregulation and growth in managed care
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Payment StructureTraditional fee structure
Fee for service Retrospective payment Incentive to overspend
Managed care Capitation and risk sharing Prospective payment Incentive to limit care
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Health Care As a Commodity
Demand is irregular Asymmetric information problems Widespread uncertainty Reliance on not-for-profit providers Insurance as the primary means of payment
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Health System GoalsAccess to care
Who’s covered? What’s covered?
Quality of care
Cost of care
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Private Health Insurance Coverage
(under age 65, numbered in millions)
With Health Insurance* Without Health Insurance
Year Number Percent Number Percent
1999 161.2 68.3 38.5 16.1
2000 160.8 67.1 41.4 17.0
2001 162.4 67.0 40.3 16.4
2002 159.4 65.3 41.7 16.8
2003 157.5 64.4 41.6 16.5
2004 159.5 64.0 42.1 16.6
2005 160.1 63.6 42.1 16.4
2006 155.8 61.5 43.9 17.0
2007 157.9 61.6 43.3 16.6
* Employer-based.
Source: Health, United States, 2008, http://www.cdc.gov/nchs/hus/updatedtables.htm, Table 138 and 140.
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Health System GoalsAccess to care
Who’s covered? What’s covered?
Quality of care Medical outcomes Medical efficacy
Cost of care Who pays? How much?
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Review of Economic
Methodology
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Economic FundamentalsOptimizationMarginal AnalysisSupply and Demand
Equilibrium
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1) Health insurance coverage is expanded to cover all elective procedures, such as tummy tucks, nose jobs, and liposuction
2) The FDA (Food and Drug Administration) takes all silicone-based implants off the market fearing a connection with certain connective-tissue diseases
3) Personal finance companies start a nationwide lending program for cosmetic procedures not covered by health insurance
4) Medical malpractice insurance premiums increase for plastic surgeons
5) Medical schools announce that residents in plastic surgery can be licensed after only five years instead of the current seven years
What are the likely consequences of the following events in the U.S market for cosmetic surgery?
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OptimizationMarginal AnalysisSupply and Demand
Equilibrium Elasticity Welfare analysis Effects of government intervention
Economic Fundamentals
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Suppose the market for lasik eye surgery can be described by the following equations: Qd = 5100 – 6P Qs = - 400 + 5P
a) Solve for the market equilibrium price and quantity.b) Calculate consumer and producer surplus.c) Calculate the elasticity of demand at the equilibrium.d) Suppose the government imposes an excise tax of $100
per surgery on eye surgeons. What is the new equilibrium price and quantity? What happens to social welfare?
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Many buyers/sellers Homogeneous product No entry barriers Perfect information
Competitive Market Model
MC
quantity
$
q1
P1
ATC
MR1
AVC
Profit max rule: P = MC
LR Equil: π = 0
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Market Failures Market Power
MonopolyRestricted entry (AMA, CON)EOS
Monopsony
Externalities Communicable diseases/immunizations Uninsured and cost shifting
Public goods Free-riders R&D
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Imperfect/Asymmetric information Agency problem (induced demand) Adverse selection Moral hazard
Third-party payers
Imperfections in Medical Markets
Hospitals: 3¢ per $1Physicians: 20¢ per $1
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Dealing with Market Failure
Collective provision Medicare Medicaid
Government regulation Price controls Entry restrictions FDA
Tax Policy Tax exemptions
Government Failure?
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Economic Evaluation in Health Care
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The Inevitability of Trade-Offs
The value of a medical interventionThe inclusion of a drug on the formularyPaying for an experimental procedureInvesting in new technology
Is it worth it? How do we measure value to insure we get value for spending?
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Options for colorectal cancer screening
Is it worth the extra money?
Fecal blood test($20)
Sigmoidoscopy ($150 - $300)
Barium enema($250 - $500)
Virtual Colonoscopy ($500 - $900)
Colonoscopy($800 - $1200)
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Types of Economic Evaluation
Cost of illness studies Cost-benefit analyses Cost-effectiveness studies
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Cost of Illness Studies What does it cost? Burden of 5 chronic conditions in US (Druss et al., 2001)
Mood disorders, diabetes, heart disease, asthma, and hypertension Direct cost of treatment: $62 billionCost of treating coexisting conditions: $208 billionLost productivity: $36 billion
Role in analysis – increased awareness
$306 billion
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Cost-Benefit Analysis
Net PV =
time
Costs
Benefitstoday
tt
r
B
r
B
r
BC
)1()1()1( 22
11
0
The higher the discount rate, r, the lower the PVThe higher the discount rate, r, the lower the PV
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Cost-Benefit Criterion If net benefit stream is positive, project is acceptable
If ratio is greater than one, project is acceptable
Examples Clarke (1998): mobile mammographic screening and travel cost method Ginsberg and Lev (1997): riluzole and ALS
tt
n
tt
tn
t r
C
r
BCB
)1(/
)1(/
11
ttt
n
t r
CBNPV
)1(1
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Challenges of Cost-Benefit Analysis
Valuing benefits How do you place a value on a human life? Willingness-to-pay approach
wealth life expectancy current health statuspossibility of substituting current consumption for future
consumption
Choosing a discount rate
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Cost-Effectiveness Analysis
Measures health benefit by health outcome, not the dollar value of life
Using the decision makers’ approach Maximize the level of health for a given population subject
to a budget constraint Practical guide for choosing between programs or
treatment options when budgets are limited
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Cervical Cancer ScreeningThe medical evidence is clear: Cervical cancer screening
saves lives. Much of the focus of cost-effectiveness research addresses issues concerning the appropriate screening interval.
D.M. Eddy (Screening for cervical cancer, Annals of Internal Medicine 113, 214-226, 1990) studied the issue and estimated that annual screening for a hypothetical cohort of 1,000 22-year-old women screened until age 75 would cost $1,093,000 and would save 27.6 life years. If screened every three years instead, the cost would be $467,000 and 26.8 life years would be saved.
Is annual screening cost effective?
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Incremental Cost-Effectiveness Ratio
If CA > CB and EA < EB, B dominates.
If CA < CB and EA > EB, A dominates.
If, however, CB > CA and EB > EA, choice is not obvious. Use CE.
AB
AB
EE
CCICER
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ICER Curve: 2 Treatments
Cost
Effectiveness
A
B
CA CB
EA
EB
Large ICER = flat slopeLarge ICER = flat slope
AB
AB
EE
CCICER
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Cervical Cancer Screening: Redux D.M. Eddy (Screening for cervical cancer, Annals of Internal
Medicine 113, 214-226, 1990) studied the issue and estimated that annual screening for a hypothetical cohort of 1,000 22-year-old women screened until age 75 would cost $1,093,000 and would save 27.6 life years. If screened every three years instead, the cost would be $467,000 and 26.8 life years would be saved.
What is the ICER?
500,782$8.266.27
000,467000,093,1
ICER
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ICER Curve: Multiple Treatments
Cost
Effectiveness
A
BC
D
E
FG
Treatments C and E are dominatedTreatments C and E are dominated
“flat of the curve”“flat of the curve”
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Measuring Costs
Direct – associated with use of resources Medical Non-medical
Indirect – related to lost productivityIntangible – associated with pain and suffering, grief,
anxiety, and disfigurement
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Measuring Effectiveness
Surrogate measures stated in terms of clinical efficacy Blood pressure, cholesterol levels, bone mass density, or
tumor sizeIntermediate measures stated in terms of clinical
effectiveness Events (heart attack, stroke, cancer), scores on exams
Final outcomes measure economic effectiveness Events avoided, disease-free days, life-years saved,
quality-adjusted life years saved
Improvements in Health
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Survival Measures
Time (years)
Survivalprobability
100%
90%
77%
A
B
C
D
1.5 6.5
Survival function for treatment group
Survival function for control group
Improved Life Expectancy Due to Clinical Treatment
Life expectancy = area under survival function
Gain in LE during trial = ½(.90-.77)1.5 = 0.0975 yrsGain in LE after trial = ½(.90-.77)5 = 0.325 yrs
Total Gain in LE = 0.4225 yrs
LE w/o treatment = ½(1.00-0.0)6.5 = 3.25 yrs
Problem Set 1: #16
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Quality of Life Measures: QALY
Quality-Adjusted Life Year Measured on a preference scale anchored by
death (0) and perfect health (1)
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Calculating a QALY
Time (years)
Utility
6 15
U(H1)
U(HD)
Normal 55-yr old male has LE of 25 more yrs
Diabetic 55-yr old male has LE of 15 more yrs
Value of one year in chronic health state is x/t
Utility value of 15 years = 6/15 = 0.40
QALY of remaining 15 years = (.40)(15) = 6 years
x = healthy yearst = chronic health years
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Decision Trees
Handout
Treatment A Treatment BMortality Rate 2% 5%Life Expectancy for Survivors
20 years 10 years
Initial Treatment Cost $10,000 $3,000Follow up cost, year 1 $5,000 $1,000Annual follow up costs, all subsequent years
$1,000 $500