ECN 410 Midterm: ECN 410 Health Economics Midterm Study Guide
17 May 2018
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ECN 410 EXAM 1 STUDY GUIDE
Textbook & Lecture Notes - HW Questions Noted Where Applicable
Chapter 1 - Introduction
What is Health Economics?
Health economics studies the allocation of resources to and within the health economy
Defined by who health economists are and what they do
o Morrisey & Cawley - 2005 survey of US health economists describes who they
are:
Training
Employment
Academic Unit
o Survey also showed that health economists draw on various sub-disciplines of
training within economics, including labor economics, industrial organization,
public finance, and cost-benefit analysis
US devotes largest share of GDP healthcare spending and its per capita spending
greatly exceeds that of any other country
o Reflect rapid rate of adoption of new technology
When a patient’s health is impacted (ex., heart attack) immediate costs are faced and
additionally, the patient’s health is impacted for many years, affecting spending into the
future
o David Cutler (2007) addresses these complex interrelationships in “The Lifetime
Costs and Benefits of Medical Technology”
o Revascularization costs $33,000 for an extra year of life
Rising Health Care Costs Affect All Nations (Box 1.1)
o Countries around the world now have access to treatments available for heart
attacks today, which vary in technology in cost compared with 1960s treatments
Prices are higher now than they were in the 1960s due to improved
quality of medicine and technology
HW#1 Q2) Identify five distinctive features of the health economy. Examine each one
separately and describe other commodities or sectors that share those features.
Distinctive features of the health care market include the presence of uncertainty, prominence of
private and public insurance, information asymmetry, large role of nonprofit firms, restrictions on
competition, role of equity and need, and large role of government subsidies.
The Relevance of Health Economics
Health care of GDP has grown & is expected to continue to grow
o 1980 → 1 in $11
o 2020 Projection → 1 in $6
(HW 1 - Q1a) Factors that might have lead to this rapid growth of healthcare spending
o Consumers demand more & new medical services (increased units of healthcare
per person)
o Prices are higher relative to other goods (holding quality constant)
o Quality of services has improved
o Healthcare inflation may be higher than the general inflation rate (holding quality
constant)
May be attributable to increased prevalence of insurance
Compared with other countries → healthcare’s share in GDP in the US is nearly twice as
large as the share in the UK - a country with national health insurance
o Is care costlier in US?
o Is it higher quality care, or are we simply consuming more?
Importance of health economy in personal spending
o Size of health economy is also reflected through other key indicators:
Share of income spent on medical care
Number of jobs in the health economy
(HW 1 - Q1b) Compare health care spending to housing expenditures and to food
expenditures. How are the sectors similar? How do they differ?
o In 2015, 18.3 percent of consumer expenditures went towards health care. In
comparison, 15.6 percent went towards housing, 7.3 percent went towards food
and beverage, and 6.6 percent went towards food services and
accommodations.
o Health care, housing, and food are important necessities, so the elasticity of
demand within these expenditure categories may be relatively low.
o However, unlike the markets for housing and food, the market for health care is
affected by public and private insurance, which affects equilibrium prices and
quantities.
Reflecting increases in spending, health care sector serves increasingly as a source of
employment
In addition to labor, a substantial amount of capital has been drawn to the US healthcare
system
Inputs not bought & sold in the market → people’s’ own contributions of time and effort
in producing healthcare entail real costs to society
o Opportunity cost of:
Caregivers’ time
Patients’ work life given up when sick/disabled
Patients’ efforts to obtain care, including arranging appts, traveling to &
from care, and waiting for care
Importance attached to economic problems of healthcare delivery:
o Medical price inflation - common problem for maintaining health programs and
has spurred numerous cost-containment efforts by government
Medical care prices have grown faster historically than prices overall
Some healthcare services/commodities have risen much faster than the
CPI (consumer price index)
o Access - rising costs significantly reduce accessibility to healthcare (many cannot
afford)
o Quality - contributes to spending increase → concerns arise about access to
high-quality care
Not limited to those without/with minimal insurance
Some treatments are seen as excessive in the US - costs & resources
may exceed benefits to patient
o Economic side to other health issues - many health issues have economic
components, even though they may seem like purely medical concerns
Choice of treatment → patient-physician relationship
Economic reasons behind people’s health choices - people’s desired
health status can be understood as a meaningful economic choice
Economic Methods and Examples of Analysis
Features economic analysis
o Scarcity of societal resources
Individuals must give up one resource in order to get another -
opportunity cost (time = ultimate scarce resource)
Increasing shares of GDP to healthcare ultimately imply decreasing
shares for other uses
o Assumption of rational decision making
Making choices that best further one’s own ends given one’s resource
constraints
o Marginal analysis
Rational decisions made at the margin
Decision makers must understand the cost as well as the benefit of the
next/marginal unit
o Use of economic models
Simplification of abstract processes
Explain findings in data → make predictions about the world
Notable contributors to health economics
o Kenneth Arrow, Uncertainty and the Welfare Economics of Health Care
People’s healthcare needs = unpredictable
Licensure creates barriers to entry
Agency/trust issues in the provider/patient relationship exist in medical
care
Existence of insurance is not guaranteed in a free market
o Amy Finkelstein, Oregon Health Insurance Experiment
2008, natural experiment, 90,000 applicants for limited number of
insurance
Impact of having health insurance on multiple dimensions
Health care use increased - emergency room use, primary care
physician visits, prescription drug use, diabetes detection and
management increased
Healthcare outcomes: same as control group
After 2 years, improved self-reported health, reduced financial
strain
Does Economics Apply to Health and Healthcare?
Is HealthCare Different?
Conclusions
· Health Care Spending is summarized by: S= population size x health care quantity per
person x price per unit of health care
· Rand Health Insurance experiment: 2 groups, one had zero dollar co-pays, that is no
out of pocket expenses. The other group had positive out of pocket expenses. Result is
that even small copays change people’s behavior. Economics applies to health care
decisions
· Is health care different? - presence and extent of uncertainty, prominence of
insurance, problems of info, large roles of nonprofit firms, restrictions on competition,
role of equity and need, government subsidies and public provision
Document Summary
Textbook & lecture notes - hw questions noted where applicable. Health economics studies the allocation of resources to and within the health economy. Defined by who health economists are and what they do: morrisey & cawley - 2005 survey of us health economists describes who they are: Academic unit: survey also showed that health economists draw on various sub-disciplines of training within economics, including labor economics, industrial organization, public finance, and cost-benefit analysis. Us devotes largest share of gdp healthcare spending and its per capita spending greatly exceeds that of any other country: reflect rapid rate of adoption of new technology. Costs and benefits of medical technology : revascularization costs ,000 for an extra year of life. Rising health care costs affect all nations (box 1. 1: countries around the world now have access to treatments available for heart attacks today, which vary in technology in cost compared with 1960s treatments.
