Introduction to Health Economics. Prof. Jian Wang Shandong University, China.

Transcription

1 Introduction to Health Economics Prof. Jian Wang Shandong University, China

2 Chapter 1 Health and Health Care Economics Why have health and health care become dominant economic and political issues worldwide?

3 Rapid increase in health care expenditure Increase share of personal income spent on health care Limited access to health care service

4 Share of GDP In Major Developed Countries, UK Japan Italy Canada France Germany USA OECD HealthData, 2000

5 Why Health Care Spending Has Grown Rapidly? People demand more health services Increase of living standard Increase of the aging population People demand higher quality health services Technology improvement, such as Laser surgery, organ transplant Pay more for better quality

6 Why Health Care Spending Has Grown Rapidly? Government programs Medicare, Medicaid in the US National Health Service in UK National Health Insurance in Canada National Health Insurance and Service in China Increase in third party payment

7 Share of Personal Income Spent on Health Care 1960, food accounts 25% of spending housing 15% health care 5% 1989, food accounts 18.5% of spending housing 15.5% health care 14% 1997, food accounts 15.1% of spending housing 15.1% health care 17.4%

8 Share of Personal Income Spent on Health Care 1985, food accounts 52.3% of spending housing 4.8% health care 2.48 % 2001, food accounts 37.9% of spending housing 10.3% health care 6.47%

9 Share of Personal Income Spent on Health Care (rural China) 1980, food accounts 61.2% of spending housing 13.9% health care 2.1% 1985, food accounts 57.8% of spending housing 18.2% health care 2.4% 2001, food accounts 47.7% of spending housing 16% health care 5.5%

10 What is Health Care Economics What is economics? Economics is the study of how a society chooses to use its limited resources to produce, exchange, and consume goods and services What is scarcity? A society s unlimited desire for goods and services cannot be satisfied by the limited resources Health care economics? The study of how resources are allocated to and within the health care economy

11 What is Health Care Economics How much of our scarce resources should be spent on health care? What approach should be used for making this choice? What is the best way of providing health care services?

12 Important Aspects of Health Economics Uncertainty Patients are uncertain of their health status Heart attack, auto accident Providers are uncertain of the outcome of treatment Insurance Uncertainty and risk in health imply a role for insurance Government In the absence of government failure, price control can be an effective instrument in reducing monopoly profit, price, and welfare loss(deadweight loss)

13 Important Aspects of Health Economics Government Redistribution Governmental health care program: Medicare and Medicaid Provision of health care goods and services Public hospital Provision of health insurance Canada system Regulation health care market Price control License Quality and quantity control

14 Important Aspects of Health Economics Monopoly A single supplier ( or few suppliers) controls the entire market Hospital Pharmaceutical industry The problem of information Asymmetric information

15 Chapter 2 Importance of Financing Mechanism

16 Ultimate goal of health system Health Status Risk Protection Public Satisfaction Equal Fairness

17 Financing Macro Control Knobs Payment economics incentives Macro-systems: plan or market economics; profit or non-profit health organization Regulation Persuasion

18 Macro Control Knobs and Objectives Health status Financing Payment System Regulation Education Accessibility Quality Efficiency Public satisfaction Cost and expenditure Insurance (Social protection)

19 What does financing affect? Result Equal and Fairness Medical service quality Health status Medical service accessibility Financing Payment Cost and expenditure Medical service efficiency Public satisfaction Insurance (social protection) Fairness of taxes and benefits

20 Health policy and financing policy can t be separated, because financing policy determines Financing scale Who takes charge of funds and how to use it Who allocates resources and determines its usages Economic incentives towards patients and health services providers)

21 Financing policy determines Who can receive essential medical services How many people fall into poverty caused by illness Whether medical costs can be controlled or not)

22 Golden Rule Those who have the gold make the rules Alfredo Bengzon, M.D.

23 Effects of financing ways Incentives towards insures and insurers, e.g.. Adverse selection and risk preferences Economic incentives towards patients and health services providers, e.g. moral hazard and induced demand Changes of relationship between main participants and systems

24 Chapter 3 Functions of Financing

25 Functions and goal of health financing Collecting functions goals Fairness and high efficiency to make sustainability of financing, and provide basic medical service to reduce the possibility of illness-induced poverty Risk pooling Purchasing This leads to fairness and high efficiency of protection Ensure efficiency and quality of medical services

26 Narrow definition of financing manage economic resources

27 Broad definition of financing Collection Risk sharing Allocation Payment

28 What is risk sharing? Cross-subsidy of low risk to high risk (risk subsidy) Subsidy from the rich to the poor (fairness subsidy) Subsidy from productive term to non-productive term Resource endowment $ $ Resource endowment $ $ Resource endowment $ $ Low risk High risk poor rich produc tive Nonproduc tive Medical risk Income Age

29 Organization and incentive

30 Chapter 4 Different Ways of Financing

31 Out of pocket (OOP) Taxes Insurance Ways of Financing social insurance: compulsory; government or NGO private insurance: voluntary Community financing

32 Policy option of health financing To choose what kind of combination method of financing What s resource of social insurance? How to determine target population to whom government subsidies are offered? To determine priory health services Protect the insures interests What kind of payment can be selected in order to improve efficiency and quality of medical services?

33 What kinds of taxes are general tax? Government business income (such as oil) Direct taxes personal income tax corporate profit tax property tax wealth tax Indirect taxes sales tax value added tax privilege tax (e.g. tax on wine and tobacco) import tax export tax

34 Advantages of social insurance Imbalance distribution of medical risks, e.g., 10% population consume 60% of total health expenditure, 30% population never visit doctor Pooling all risk of younger and elder population, as well as of healthy and patients Fairness can be improved by function of social redistribution: subsidy could be transferred from healthy and rich people to patient and poor population, government subsidy low income population premium. More collection of health resource: employee pay themselves premium, poor people s premium subsidized by government Management costs are low Well-designed insurance plan can control escalating cost of health expenditure

35 Function of insurance funds Contract with qualified hospital and doctors Competition should be advocated Set up quality standards Supervise health service quality Carry out payment based on quality: performance-based payment Negotiate reasonable payment rate Information should be provided to patient to reduce information asymmetric

36 Disadvantages of social insurance Adverse selection:young and health people avoid premium Report low salary in order to reduce their premium Negative effect of insurance, e.g. moral hazard Professionals and perfect system Unless government support the poor and selfemployers, otherwise, no universal coverage Social insurance managers behave from the point of their interest, immoral behaviors

37 Commercial insurance Advantage: Free choice Competition leads to low premium and high quality Disadvantage: Risk selection: For profit motivation, insurer are unwilling to provide the old, disability, unhealthy with insurance) Management costs are high Lack of competition and legislation lead to excessively high profit The poor have no purchasing capacity

38 Ideal mode of social medical insurance National social insurance scheme Enforce employee insurance Government finance support the self-employers, migrants, and low-income population Most of medical services should be covered Case-mix payment to control cost Make commercial insurance as complementary insurance

39 Effective ways of community financing Community funds: residents pay for essential medical services and government provide the poor with subsidies Establish community (village)-level health organization to improve efficiency and quality Purchase, contract and pay for the second and tertiary level medical services Community residents participates in management, community organizations are responsible for residents Set up funds management organization and relative regulations

40 Community financing (NCMS): How to improve efficiency and quality of essential medical service? Ways of improving efficiency: economic incentive, mass drug purchasing, high level of medical services provided) Reduce costs: mass purchasing and allocation of drugs; eliminate incentive of induced demand Improve efficiency and responsibility; residents participation) Improve responsiveness and quality of health services, management and surveillance of community residents

41 International Experience Five modes of health systems in developed countries and their advantages Improve stability of politics and solidarity: Great Britain, Germany, Japan, South Korea) Better effectiveness, accessibility and fairness, health expenditure has been controlled. Canada, Great Britain, Japan Managed care reduced costs of medical services and improve efficiency, USA

42 The Combination of Financing Methods A Nation Chooses Should Depend on What Goal A Nation Wants to Achieve

43 A summary of different financing model best fairness risk coordination Way of reducing risk efficiency* revenue revenue finance revenue OOP Social insurance Social insurance Social insurance Social insurance community financing community financing community financing Community financing private insurance private insurance Private insurance (high administrative cost) worst OOP OOP Revenue/direct provision (loe efficiency) *effiency means technical effiency and administrative cost

44 Chapter 5 Demand for Health Services A derived demand The demand for health care is derived from the demand for health The demand for health care is consumers utility maximization choice

45 The Consumer s Choice A consumer s consumption choice is determined by Budget constraint Preference

46 The Consumer s Choice Budget constraint Assume only two goods: other goods and health goods Price of other goods quantity of other goods + Price of health goods quantity of health goods = income

47 Budget constraint Budget constraint x p x + p m = I x m constraint m

48 Budget constraint X 300 B 2 B 1 and B 2 D F 150 D E F x + 15m = M B 1

49 Budget constraint The rotating of budget constraint as the relative price changes C 1,C, C 2 BC 1,F to F BC 2,F to F 2 B 300 Other 200 F F 1 F 0 C 1 C C Health product

50 Budget constraint Other B 2 x + 15m = b B B 1 x + 15m = 300 C 1 C C 2 Health product

51 The Consumer s Choice Preference Utility The satisfaction that a consumer gets from the consumption of goods and services. Marginal utility The additional satisfaction that a consumer gets from the consumption of one more unit of good or service The principle of diminishing marginal utility The more of a good or service a consumer has, the less will be the marginal utility of an additional unit.

52 Indifference curve Indifference curve The set of combinations of two goods that create the same level of utility

53 Indifference curve Ot her IC D C 150 A 130 B F Health product

54 Indifference curve Commod ity2 C B A I 1 I 0 Commoda ty 1

55 Indifference curve Marginal Rate of Substitution Physician services - y/ x y x Nursing services

56 Indifference curve Y A Y 1 B X C D Y 4 E X

57 The Consumer s Choice The utility maximization choice Consumer has allocated his or her income in the way that maximizes total utility Consumer equilibrium x IC Budget Constraint m

58 Utility Maximization Price = MRS Point A Point B Point E Other product A E B I 1 I 0 I 2 Health product

59 From Indifference Curves to Demand Curves Holding price of other goods and income constant If the price of health goods increases, swinging the budget line inward, holding its intercept on the y-axis constant If the price of health goods decreases, swinging the budget line outward, holding its intercept on the y-axis constant

60 Other product B 0 P m M 3 M 1 M 2 C 3 C 1 C 2 Health product care P 3 P 1 P 2 0 M 3 M 1 M 2 M

61 How Demand Curves Depend on Illness Events p m Serious illness Small illness Modest illness m

62 Other product B 0 P m M 3 M 1 M 2 C 3 C 1 C 2 Health product care P 3 P 1 P 2 0 M 3 M 1 M 2 M

63 The Effects of the Consumer Income Unchanged income OG Increasing income X 2 X 1 0 M 1 M 2 M

64 The Effects of the Consumer Getting Sick If illness doesn't harm the consumer s ability to earn income OG OG 1 Preference without illness Preference after illness OG 2 0 M 1 M 2 M

65 The Effects of the Consumer Getting Sick If illness harms the consumer s ability to earn income BC after illness OG BC without illness Preference without illness X 1 X 2 Preference after illness X 3 0 M 2 M 1 M 3 M

66 How Insurance Affects a Demand Curve for Health Care Health insurance reduces the price consumers pay when they consume health services If health care obeys the law of economics, people with health insurance should increase their consumption of health care Coinsurance rate The percentage of medical bill paid by the patient Co-payment The amount of medical bill paid by the patient

67 How Insurance Affects a Demand Curve for Health Care The impact of health insurance depends on the coinsurance rate The lower the coinsurance rate, the higher the demand The higher the coinsurance rate, the lower the demand Health insurance increases the demand for health care

68 How Insurance Affects a Demand Curve for Health Care p m Demand without insurance Demand with 50% copayment rate m

69 How Insurance Affects a Demand Curve for Health Care p m 30 Demand without insurance Demand under copayment rate 75% Demand fully paid by insurer m

70 How Insurance Affects a Demand Curve for Health Care The impact of health insurance depends on the price elasticity of demand The more elastic, the more the impact The more inelastic, the less the impact Health insurance increases the demand for health care

71 How Insurance Affects a Demand Curve for Health Care p m Fully covered Non covered 0 m

72 Chapter 6 Asymmetric Information Information Problems Patients lack of information and inability to discern quality Insurers lack of information about individual s health background Adverse selection Suppose there are 10 low risk people and 10 high risk people, the high risk people s expected health care expenditure will be $1000, the low risk s will be $100. The health insurance premium is based on average expected expenditure, which is $550.

73 Adverse Selection The insurance company is unable to distinguish between high and low risks. The insurance premium only reflects the average risk of the two groups. Then, the high risk group will purchase insurance since a premium based on the average risk is lower than a premium based solely on their own risk. The low risk individuals may not purchase insurance since a premium based on the average would be greater than their own risk-based premium.

74 Adverse Selection Adverse selection would result in a biased sample of those that purchase health insurance Predominantly, more high risk individuals would purchase insurance The Lemons Principle The bad drives out the good until no market is left

75 The Lemons Principle Akerlof (1970) used the idea of asymmetric information to analyze the used car market Used cars available for sale vary in quality Asymmetric information The sellers know better the true quality of their cars than the buyers There are 9 cars for sale Q= 0, ¼, ½, ¾, 1, 1 ¼, 1 ½, 1 ¾, 2 Seller (owner) knows each car s quality Buyer only knows the distribution of quality

76 The Lemons Principle Seller has a reserve value=$1000xq Buyer has a reserve value=$1,500xq An auctioneer is hired to call out prices. Sales take place when the auctioneer finds a price that makes quantity demanded equal quantity supplied We do the sales game together in class

77 The Lemons Principle If information had been symmetric, both owners and buyers were uncertain of the quality, they only know the average quality of cars, then is there a market for the used cars? What would be the market price?

78 Application of The Lemons Principle: Health Insurance Information asymmetry The potential insured person knows more about her (his) expected health expenditures in the coming period than does the insurance company. More specifically Insured knows her (his) future expenditure exactly (similar to the owner of the cars) Insurance company knows only the distribution of expenditures for all insured persons(similar to the buyer of the cars)

79 Application of The Lemons Principle: Health Insurance There are 5 persons in health insurance market Expected expenditure=0, ¼, ½, ¾, 1 Average expenditure= ½ We do the game again in class to check if there is health insurance market If information had been symmetric, both insured and insurance company only know the distribution of expenditure, then?

80 Agency Relationship The Principal Agent Problem Agency relationship A principal delegates decision-making authority to another party, the agent Asymmetric information and agency are closely related phenomena The Principal Agent Problem How to determine the physician is acting in the patient s best interests

81 Supplier-Induced Demand The Supplier-Induced Demand problem The physician has a financial interest to influence the demand. The physician can create the demand by providing the biased information to the patient The SID problem results from asymmetric information Both patients and insurers lack the necessary information to make many medical-related decision The patient depends upon the physician for both advice and service

82 Supplier-Induced Demand The traditional economic model The traditional economic model, which assumes the physician is a perfect agent for the patient, would predict that an increase in supply, other things being equal, would result in a decline in physician s fees, and consequently physician incomes. The observation in reality is opposite Need alternative theory to study physician behavior

83 Supplier-Induced Demand The traditional economic model supply increase price decrease P m S 0 S 1 P 0 E 0 P 1 E 1 D 0 Q 0 Q 1 M

84 Supplier-Induced Demand The price rigidity model of SID One approach that can explain demand inducement within the context of a competitive market model is to argue that prices tend to be rigid As supply increases, in order to fix the price, the physician has incentive to induce demand But this model can only explain why price doesn t go down and can t explain why price goes up

85 Supplier-Induced Demand The price rigidity model of SID Supply increase Price decrease P m S 0 S 1 P 0 E 0 E 2 D 0 D 1 Q 0 Q 2 M

86 Supplier-Induced Demand The target income model of SID The price of health care increases despite rapid increase in physician supply The target income model is used to explain the rapid increase in physician fees. Under the target income hypothesis, increase in supply of physicians lead to higher fees in order for earning to be maintained, or physician will induce demand to maintain the target income

87 Supplier-Induced Demand The target income model of SID Supply increase Price increase P m S 0 S 1 P 1 P 0 E 0 E 2 D 1 D 0 Q 0 Q 2 M

88 Supplier-Induced Demand The target income model of SID The major evidence for target income hypothesis is that physician/population ratios are positively related to physician fees The extent of the demand the physician can create and the price that will be established are based upon what target income the physician desires The target income is determined by the local income distribution, particularly with respect to the income of other physicians and professionals

89 Supplier-Induced Demand SID under profit maximization model P m P 2 MC2 P 1 MC1 D 2 D 1 Q 1 Q 2 M MR 2 MR 1

90 Supplier-Induced Demand Roemer & Shain show that increasing supply of hospital bed create demand for hospital beds. Why?

91 Explanation 1: Supplier-Induced Demand (1) The existing of bed shortage Designed P 0,S 0 represents supply of beds,utilization is Q 0 Under the price of P 0, the excessive demand is from Q 3 to Q 0. If bed supply from S 0 to S 1,then S 1 to S 2,and to S 3,hospital utilization increase from Q 0 to Q 3. P m P 0 S 0 S 1 S 2 S 3 D Q 0 Q 1 Q 2 Q 3 M

92 Supplier-Induced Demand (2) Expected expanding demand S 0 & D 0 represents original supply and demand,q 0 represents hospital utilization. If hospital beds increase to S1, hospital service utilization increase to Q1,this leads to create a new demand D1. P m S 0 S 1 D 0 Q 0 Q 1 D 1 M

93 Explanation 2 Supplier-Induced Demand Physician increase admissions to increase hospital profits. Any other explanation?

94 Supplier-Induced Demand The identification problem of SID In the empirical work, the SID effect cannot be econometrically identified It is hard to distinguish between patient s demand and physician s induced demand

95 Chapter 7 Health Insurance Health Insurance Provide a way to diversify financial risks associated with illness The theory of demand for health insurance An individual wishes to maximize his or her utility if there are certain events, individual maximizes his or her certainty utility if there are uncertain events, individual maximizes his or her expected utility

96 Health Insurance Expected utility =probability of illness utility of wealth with illness + probability of healthy utility of wealth with healthy Example, assume John has $20,000 annual income, no saving and borrowing With 95% probability, he will be healthy. When he is healthy, his health care expenditure is 0 and his wealth is $20,000 with 5% probability, he will be sick. When he is sick, his health care expenditure is $10,000 and his wealth is reduced to $10,000.

97 Health Insurance Two alternative courses of action He can purchase insurance and incur a small loss in the form of the insurance premium He can self-insure small possibility of a large loss if the illness occurs large possibility that the medical loss will not occur Question: which choice provides him with a higher level of utility?

98 Health Insurance If John would buy health insurance Insurance premium= expected health care expenditure =95% 0 + 5% 10,000 =500 His wealth =20, =19500 His certainty utility=??? If John wouldn't buy health insurance his wealth could be $20,000 or $10,000 his expected utility=???

99 Health Insurance John s utility of wealth if he would buy insurance, his certainty utility= U (wealth=19500)=178 if he wouldn't buy insurance,his expected utility= 5% U(w=10,000) + 95% U(w=20,000) =5% % 180 = 176 John s certainty utility is greater than the expected utility He will be better off if he buys insurance uncertainty leads to a loss of utility

100 Health Insurance Pure premium expected health expenditure Loading cost administrative and other costs associated with underwriting an insurance policy Maximum premium the maximum amount the person would be willing to pay as long as his expected utility is not greater than his certainty utility

101 How Insurance Affects a Demand Curve for Health Care p m Deamdn without insurance Demand with 50% copayment m

102 Moral Hazard Moral hazard problem individuals would take care of themselves less if they had insurance since insurance lowers the price of medical care to individuals, they will consume more health care than if they had to pay the entire price themselves. The moral hazard problem depend on the price elasticity of demand The more elastic demand, the more the moral hazard problem the more inelastic demand, the less the moral hazard problem

103 Moral Hazard P m Demand P m Demand P 1 B P 1 B C 0 Q 1 Q 0 Q 1 Q 2 Q

104 Moral Hazard Insurance coverage policy more complete coverage for more inelastic services less coverage for more elastic services use the price elasticity of demand to set up insurance coverage policy is a way to limit moral hazard problem

105 Moral Hazard Coinsurance and deductible another ways to limit moral hazard problem reduce welfare loss HMOs a way to limit moral hazard problem physicians have incentive to reduce consumer s consumption on health care

106 Moral Hazard Welfare effect of the co-payment P m P 0 A Demand with 100%copayment B Deamdn with 50% copayment P 0 C 0 M 0 M 1 M

107 Deductible Moral Hazard

108 HMOs HMOs a form of health care organization in which the function of insurance and provision of health care are combined Advantages reduce the quantity and intensity of care substitute lower cost care for higher cost care have economies of scale and scope use cost-control measures use cost-effective preventive care reduce administrative cost Disadvantages limited choices, need a referral for specialist under-provide care

109 Discussion How to reform the health insurance system? Hong Kong case Medical savings accounts--china model HMOs--US case 30 Bath plan Thailand case

110 Chapter 8 Role of Government Government Intervention in Health Care Sector

111 Economic Rationale for Government Intervention Market failure The inability of a health care market to achieve allocative efficiency Public goods Externality Monopoly

112 Public Goods A good or service each unit of which is consumed by everyone and from which no one can be excluded Free rider Private good Rivalry: if you consume the health service by one more unit, someone else has to consume one unit less Excludability: you can exclude others from using it Example of public good National Defense System, Street light Information, technology

113 Public Goods P P A +P B MC=AC P B MSB P A D B =MB B D A =MB A 0 M E M

114 Externality A cost or a benefit arising from an economic transaction that falls on a third party and that is not taken into account by those who undertake the transaction Positive externality-external benefit Government should subsidize external benefit Negative externality-external cost Government should tax external cost

115 Externality P B S=MPC P 1 P 0 P 2 A C 补贴 MSB=MPB+MEB MPB MEB 0 M M M

116 Externality Negative externality P MC=MEC+MPC P 2 P 1 P 0 C B A tax S=MPC MEC D M 0 0 M 1 M

117 Monopoly A single supplier ( or few suppliers) controls the entire market Health care goods and services Hospital Pharmaceutical product Price control

118 Government Intervention in Health Care Market Provide public health service and essential service Preventive and control disease Immunization and maternal care Water safety Public health education Medical R & D Provide medical service Public hospital Support to the private hospital Re-distribution Provide medical aid and care to the vulnerable through general tax

119 Government Intervention in Health Care Market Regulation and governance Price control License Quality and quantity control Anti-monopoly Resource planning Health act

120 Thank you!