HEALTH ECONOMICS AND FINANCING

Transcription

1 HEALTH ECONOMICS AND FINANCING Fourth Edition Thomks E. Getzen Temple University WILEY JOHN WILEY & SONS, INC.

2 Preface xxi Acknowledgments About the Author xxiii xxiii Foreword 1 Choices: Money, Medicine, and Health l Questions WHAT IS ECONOMICS? 2 Terms of Trade 2, Can We Pay Somebody to Care? 3 Financing Health Care 4 Value 5 ' \ 1.2 THE FLOW OF FUNDS 5 Health Care Spending in the United States 6 Sources of Financing 8 Health Care Providers: The Uses of Funds ECONOMIC PRINCIPLES AS CONCEPTUAL TOOLS 11 Scarcity (Budget Constraints) 11 Opportunity Cost 11 Willingness to Pay 12 Trade 12 Money Flows in a Circle 12 Maximization: Marginal Costs and Marginal Benefits 12 Choice: Are Benefits Greater than Costs? 12 Investment 13 Contracts: Complex Exchanges to Deal with Timing and Risk 13 Organizations Adapt and Evolve HEALTH ECONOMICS: WHAT MAKES MEDICINE DIFFERENT? 14 Illness Is Contingent, Urgent, Uncertain 14 Health Is Priceless 15 vu

3 viii CONTENTS Health Affects the Value of All Other Goods 15 Having More Does Not Reduce the Value of Health 15 Dynamic Change, Driven by Research and Technology 15 Differences over Time and Place Are Larger than the Choices Patients Face 16 Quality, Not Quantity 16 Quality Is Hard to Measure, and Not Additive 16 Individual Choices: Lifestyle Matters More than Medicine 17 Health Risks Are More Public than Private 17 Personal Tastes and Preferences Are Secondary RESEARCH, TEACHING, AND CHARITY: SHIFTING OVERHEAD EQUITY AND DISTRIBUTION WHOSE CHOICES: PERSONAL, GROUP, OR PUBLIC? SOCIAL SCIENCE AND RATIONAL CHOICE THEORY 21 Suggestions for Further Reading 22 Summary 22 Problems 23 ' Endnotes 24 *; t Demand and Supply 26 Questions THE DEMAND CURVE 26 The Diamonds-Water Paradox: An Example of Marginal Analysis 27 Consumer Surplus: Marginal versus Average Value of Medicine 28 Ceteris Paribus 30 Individual, Firm, and Market Demand Curves THE SUPPLY CURVE 30 Marginal Revenue PRICE SENSITIVITY 32 Price Elasticity and Marginal Revenue 33 Price Discrimination IS MONEY THE ONLY PRICE? 35 The Labor-Leisure Choice INPUTS AND PRODUCTION FUNCTIONS 37 Marginal Productivity 37 Production Functions 37

4 CONTENTS IX 2.6 MARKETS: THE INTERSECTION OF DEMAND AND SUPPLY NEED VERSUS DEMAND THE PRODUCTION OF HEALTH 40 How Much Is a Doctor Visit Worth? 41 The Demand for Medical Care Is Derived Demand 41 The Demand for Health: What Makes Medical Care Different EFFICIENCY 42 Suggestions for Further Reading 44 ; Summary 44 Problems 46 Endnotes 47 3 Cost-Benefit and Cost-Effectiveness Analysis 48 ^Questions COST-BENEFIT ANALYSIS IS ABOUT MAKING CHOICES 49 An Everyday Example: Knee Injury 49 Stepwise Choices: Yes-6r No? How Much? 52 Calculating Marginal and Average Costs 53 Denning Marginal: What Is the Decision? 54 Opportunity Cost: Looking at Alternatives 57 Expected Value MAXIMIZATION: FINDING THE OPTIMUM 59 Declining Marginal Benefits 60 Optimization: Maximum Net Benefits 60 Why Marginals Are "the Max," and Averages Are Misleading MEASURING BENEFITS 62 Health 62 Productivity 63 Reductions in Future Medical Costs MEASURING COSTS 64 Medical Care and Administration: Charges versus Costs 64 Follow-up and Treatment 64 Time and Pain of Patient and Family 65 Provider Time and Inconvenience EVIDENCE-BASED MEDICINE THE VALUE OF LIFE QUALITY-ADJUSTED LIFE YEARS (QALYs) 68 Discounting Over Time 69 QALY League Tables 69

5 X CONTENTS 3.8 PERSPECTIVES: PATIENT, PAYER, GOVERNMENT, PROVIDER, SOCIETY 71 Distribution: Whose Costs and Whose Benefits? 71 CBA Is a Limited Perspective 72 CBA and Public Policy Decision Making 72 Suggestions for Further Reading 72 Summary 73 Problems 74 Endnotes 76 v 4 Health Insurance: Financing Medical Care 79 Questions METHODSFOR COVERING RISKS 80 Savings 80 Family and Friends 80 Charity 80 Private Market Insurance Contracts 81 Social Insurance.' 82 Strengths and Weaknesses of Different Forms of Risk Spreading *; INSURANCE: THIRD-PARTY PAYMENT 83 Why Third-Party Payment? 84 Variability 85 Third-Party Transactions 86 Who Pays? How Much? 87 How Are Benefits Determined? RISK AVERSION ADVERSE SELECTION MORAL HAZARD 92 Welfare Losses Due to Moral Hazard TAX BENEFITS EFFECTS OF HEALTH INSURANCE ON LABOR MARKETS HISTORY OF HEALTH INSURANCE FINANCING HEALTH CARE: INSURANCE AS A FUNDING MECHANISM 100 Entitlements: Open or Closed Financing? 100 Suggestions for Further Reading 101 Summary 102 Problems 103 Endnotes 105

6 CONTENTS xi Insurance Contracts and Managed Care 108 Questions, TYPES OF INSURANCE PLANS 108 Medicare 109 Employer-Based Group Health Insurance 109 Self-Paid Private Insurance 112 Medicaid 112 Other Government Programs and Charity 112 The Uninsured 112 State Children's Health Insurance Program HSAs, MEDICAL SAVINGS ACCOUNTS, AND HIGH-DEDUCTIBLE "CONSUMER-DRIVEN HEALTH PLANS" 113 Defined Contribution Health Plans 114 High-Deductible Insurance A RANGE OF RISK BEARING: FIXED PREMIUMS, ADMINISTERED SERVICES ONLY, AND SELF-INSURANCE 116 The Underwriting Cycle 117 ERISA, Taxes, and Mandated Benefits MANAGED CARE PLANS 119 Why Managed Care?.119 Management: The Distinctive Feature of Managed Care 120 Contractual Reforms to Reduce Costs 121 A Fourth Way: Reforming the Organization to Reduce Cost 122 Medical Loss Ratios THE RANGE OF MANAGED CARE PLANS 124 Provider Networks 124 Gatekeeping 125 Capitation 125 Withholds 127 Utilization Review MANAGED COMPETITION AND THE FEHBP INCENTIVES TO PATIENTS, TO PAYERS, AND TO PROVIDERS 128 Suggestions for Further Reading 129 Summary 130 Problems 131 Endnotes 133

7 XU CONTENTS 6 Physicians 135 Questions FINANCING PHYSICIAN SERVICES: REVENUES 135 Copays, Assignment, and Balance Billing 139 Physician Payment in Managed Care Plans 140 Incentives: Why Differences in the Type of Payment Matter 141 A Progression: From Prices to Reimbursement Mechanisms PHYSICIAN INCOMES PHYSICIAN FINANCING: EXPENSES 143 Physician Practice Expenses 143 The Labor-Leisure Choice 144 The Doctor's Workshop and Unpaid Hospital Inputs 145 Malpractice THE TRANSACTION BETWEEN DOCTOR AND PATIENT 146 Asymmetric Information 147 Agency: Whose Choices? UNCERTAINTY* LICENSURE: QUALITY OR PROFITS? 148 How Does Licensure Increase Physician Profits? 149 Supply and Demand Response in Licensed versus Unlicensed Professions 150 How Does Licensure Improve Quality? 151 A Test of the Quality Hypothesis: Strong versus Weak Licensure 152 Suggestions for Further Reading 153 Summary 153 Problems 154 Endnotes Medical Education, Organization, and Business Practices 157 Questions MEDICAL EDUCATION THE ORIGINS OF LICENSURE AND LINKAGE TO MEDICAL EDUCATION 158 AMA Controls over Physician Supply, Breaking the Contract: The Great Medical Student Expansion of

8 CONTENTS xiii Building Pressure: Fixed Domestic Graduation Rates ADJUSTING PHYSICIAN SUPPLY 162 -\ The Flow of New Entrants and the Stock of Physicians 162 Immigration of International Medical Graduates 163 Growth in Non-M.D. Physicians 163 Balancing Supply and Incomes: Tracing the Past and Projecting the Future GROUP PRACTICE: HOW ORGANIZATION AND TECHNOLOGY AFFECT TRANSACTIONS 165 ~ 7.5 KICKBACKS, SELF-DEALING, AND SIDE PAYMENTS PRICE DISCRIMINATION PRACTICE VARIATIONS INSURANCE, PRICE COMPETITION, AND THE STRUCTURE OF MEDICAL MARKETS CHOICES BY AND FOR PHYSICIANS 176 Suggestions for Further Reading 176 Summary 177 Problems 178 ' Endnotes 182 *. 8 Hospitals 184 Questions 184 f 8.1 FROM CHARITABLE INSTITUTIONS TO CORPORATE CHAINS: DEVELOPMENT OF THE MODERN HOSPITAL HOSPITAL FINANCING: REVENUES 186 Sources of Revenues HOSPITAL FINANCING: EXPENSES FINANCIAL MANAGEMENT AND COST SHIFTING HOW DO HOSPITALS COMPETE? 196 Competing for Patients 196 Competing for Physicians 197 Competing for Contracts 197 Measuring Competitive Success 198 Measuring the Competitiveness of Markets ORGANIZATION: WHO CONTROLS THE HOSPITAL AND FOR WHAT ENDS? 199 Suggestions for Further Reading 201 Summary 201 Problems 202 Endnotes 204

9 xiv CONTENTS 9 Management and Regulation of Hospital Costs 206 Questions WHY DO SOME HOSPITALS COST MORE THAN OTHERS? HOW MANAGEMENT CONTROLS COSTS 207 Short-Run versus Long-Run Cost Functions 207 Uncertainty and Budgeting CONFLICT BETWEEN ECONOMIC THEORY AND ACCOUNTING MEASURES OF PER UNIT COST 211 Timing 211 Whose Costs? ECONOMIES OF SCALE 214 The Hospital Is a Multiproduct Firm 215 Contracting Out QUALITY AND COST 215 Technology: Cutting Costs or Enhancing Quality? 215 Improved Efficiency May Raise Total Spending CONTROLLING.HOSPITAL COSTS THROUGH REGULATION 217 Suggestions for Further Reading 220 Summary 220 * Problems 221 Endnotes Long-Term Care 224 Questions DEVELOPMENT OF THE LONG-TERM CARE MARKET DEFINING LTC: TYPES OF CARE MEDICAID: NURSING HOMES AS A TWO-PART MARKET CERTIFICATE OF NEED: WHOSE NEEDS? 232 Money and Quality 232 Competing for Certificates of Need, Not for Patients 232 Evidence on the Effects of CON CASE-MIX REIMBURSEMENT SUBSTITUTION FINANCIAL REIMBURSEMENT CYCLES THE EFFECTS OF AGING ON COST AND UTILIZATION 239 Age and Health Care Spending 239 Defining Boundaries: Is Long-Term Care "Medical"? 240

10 CONTENTS XV ETC Insurance 241 Continuing Care Retirement Communities and the Wealthy Elderly 242 Suggestions for Further Reading 243 Summary 244 Problems 245 Endnotes Pharmaceuticals 248 Questions 248 v 11.1 PHARMACEUTICAL REVENUES: SOURCES OF FINANCING 249 Inpatient Pharmaceuticals USES OF FUNDS 251 Retail Pharmacies 252 Wholesalers 253 Insurance Companies and PBMs 253 Pharmaceutical Firms 253 Cost Structure HISTORY AND REGULATION OF PHARMACEUTICALS RESEARCH AND DEVELOPMENT PHARMACOECONOMICS AND TECHNOLOGY ASSESSMENT INDUSTRY STRUCTURE AND COMPETITION 262 Medicare D: An Experiment in Rational Choice 263 Market Segmentation: Types of Buyers 264 Contractual Responses to Pharmacy Benefits Management 264 Value and Cost 265 The Role of Middlemen: Distribution versus Marketing 266 Research Productivity TRENDS: FORM FOLLOWS FUNCTION (AND MONEY) 270 Suggestions for Further Reading 270 Summary 271 Problems 272 Endnotes Capital Financing and Ownership of Health Care Providers 275 Questions WHAT IS CAPITAL FINANCING? VALUE AND RATE OF RETURN 276

11 xvi CONTENTS The Time Value of Money 276 Interest Rates and Present Value 277 IRR: The Internal Rate of Return 278 Human Capital: Medical Education as an Investment 280 Risk 281 Valuing Assets UNCORRELATED (INDEPENDENT) AND CORRELATED (SYSTEM) RISKS 284 Which Is Riskier: Nursing Homes or Drug v Companies? Assessing Business Risk OWNERSHIP AND AGENCY 287 Equity and Debt 287 Who Owns the Business? Who Owns the Patient? Agency Issues 288 The Role of Financial Intermediaries 289 Health Insurers as Financial Intermediaries CAPITAL FINANCING: HOSPITALS HMO OWNERSHIP AND CAPITAL MARKETS: SUCCESS AND FAILURE *;293 Business Risks foj an HMO 293 Kaiser Health Plan: The Evolution of an HMO 294 GHA: A Consumer Co-op Gets Bought Out by a Franchise Chain CORPORATE ADVANTAGE 297 U.S. Healthcare: A Profitable Growth Company 298 Suggestions for Further Reading 300 Summary 300 Problems 302 Endnotes Macroeconomics of Medical Care 305 Questions WHAT IS MACRO? 305 Micro and Macro Perspectives on Spending THE CONSUMPTION FUNCTION 307 The Permanent Income Hypothesis 309 Shared Income 310 Public and Private Decisions 311 Budget Constraints: Borders that Matter 312

12 CONTENTS xvii 13.3 ADJUSTING TO CHANGE: DYNAMICS 312 Permanent Income and Adjustment of Health Spending to GDP 314 Adjustment to Inflation 315 Adjustment to GDP: Rates of Change and Time Series Analysis FORECASTING FUTURE HEALTH EXPENDITURES COST CONTROLS: SPENDING GAPS AND THE PUSH TO REGULATE 320 Capacity Constraints and Budget Constraints WORKFORCE DYNAMICS: "SPENDING" IS MOSTLY LABOR 323 Employment 323 Wages 327 Suggestions for Further Reading 328 Summary 328 Problems 329 Endnotes The Role of Government- 333 Questions 333 * 14.1 GOVERNMENT HEALTH FINANCING THE ROLES OF GOVERNMENT 335 Government Is Necessary, Even for Private Exchange 335 Efficiency of Markets under Conditions of Perfect Competition 336 Government in a Mixed Economy LAW AND ORDER PUBLIC GOODS AND EXTERNALITIES 338 Externalities 339 The Coase Theorem: Transaction Costs and Property Rights 339 Politicians: Entrepreneurs Who Try to Get Votes MARKET FAILURE 341 Monopoly 341 Paternalism REDISTRIBUTION AND CARE OF THE POOR 343 Medicaid and Medicare: Dependency or Rights? HOW GOVERNMENT WORKS 344 The Voluntary Sector 345 Government as the Citizen's Agent 346 Winners and Losers 348

13 XV111 CONTENTS 14.8 PROS AND CONS OF REGULATION AND COMPETITION 348 Suggestions for Further Reading 350 Summary 350 Problems 351 Endnotes Public Goods and Public Health 354 Questions CHARACTERISTICS OF PUBLIC GOODS 354 Privatizing Public Goods 355 Social Costs Depend on the Number of People 356 Insurance Makes Any Good More Public INFORMATION 357 Rational Consumer Ignorance 358 Milk or Bread: Which Is More Public? THE THEORY OF PURE PUBLIC GOODS 359 Public Goods Make Most People Better Off, but Few Happy INFECTIOUS DISEASE EXTERNALITIES 363 Epidemics 363 HIV/AIDS.364 The Sanitary Revolution: A Moral Campaign for Public Health 365 Formation of the U.S. Public Health Service SEX, DRUGS, AND WAR: PUBLIC HEALTH IN ACTION 366 Who Counts as a Citizen? Abortion and Other Dilemmas 367 Addiction 368 War and Public Health 369 Suggestions for Further Reading 370 Summary 370 Problems 371 Endnotes History, Demography, and the Growth of Modern Medicine 373 Questions ECONOMIC GROWTH HAS DETERMINED THE SHAPE OF HEALTH CARE BIRTH RATES, DEATH RATES, AND POPULATION GROWTH THE STONE AGE 374

14 CONTENTS XIX 16.4 THE AGRICULTURAL AGE 375 Investment and Trade 376 Civilization, War, and Government 376 The Decline of Civilizations Leads to Population Declines 377 The Plague 378 Food Supply Determines Population 378 The Rise of Economics 378 The Malthusian Hypothesis' THE INDUSTRIAL AGE 380 Why Malthus Was Wrong 381 Demographic Transition 382 Demographic Change, Income Distribution, and the Rise of the Middle Classes THE INFORMATION AGE INCOME AND HEALTH REDUCING UNCERTAINTY: THE VALUE OF LIFE AND ECONOMIC SECURITY 387 The Value of Risk Reduction 388 Social Security and Health Insurance THE RISE OF MODERN MEDICINE 389 Preconditions for Change 390 The Growth of Medical Science and Technology 390 Did Better Medical Care Increase Life Expectancy? 392 Suggestions for Further Reading 393 Summary 393 Problems 395 Endnotes International Comparisons of Health and Health Expenditures 399 Questions WIDE DIFFERENCES AMONG NATIONS 399 Size of the Market MICRO VERSUS MACRO ALLOCATION: HEALTH AS A NATIONAL LUXURY GOOD CAUSALITY: DOES MORE SPENDING IMPROVE HEALTH? LOW-INCOME COUNTRIES 405 Sudan 406 Health Care in Kenya 408

15 XX CONTENTS 17.5 MIDDLE-INCOME COUNTRIES 409 The Health Care System of Mexico 410 Poland HIGH-INCOME COUNTRIES 413 Japan 413 The Health System in Germany 417 The Expensive Exception: The United States INTERNATIONAL TRADE IN HEALTH CARE 422 People and Ideas Services 423 Equipment Pharmaceuticals 423 Suggestions for Further Reading 425 Summary 425 Problems 426 Endnotes 426 l 8 Value for Money in the Future of Health Care 429 Questions FORCING THE QUESTION: WHO GETS HEALTHY AND WHO GETS PAID? 429 \ 18.2 SPENDING MONEY OR PRODUCING HEALTH? DYNAMIC EFFICIENCY DISTRIBUTION, DISTRIBUTION, DISTRIBUTION PATH DEPENDENCE AND THE POSSIBILITIES FOR REFORM 435 How Did We Get Here? 435 What Did Medicine Miss? 436 What Went Wrong? Notable Failures and Unresolved Dilemmas THE PATH FORWARD: STEP BY STEP 439 What Might Work? THE SHAPE OF HEALTH CARE SPENDING TO COME THE LONG RUN: 2050 AND BEYOND 442 Suggestions for Further Reading 443 Summary 443 Problems 444 Endnotes 445 Glossary 447 Index 457