MECS 551-1 Health Economics PhD Course Professor David Dranove MECS 551-1 is the first of a two-quarter sequence in Health Economics. Health Economics applies microeconomics to further the understanding of healthcare institutions, regulators, and markets. In the first part of the course, students will learn basic institutional details and discuss seminal papers by Arrow and Weisbrod. The remainder of the course examines medical innovators, patients, providers, and insurers. For each research topic area, we will begin by discussing early contributions and move forward through time. For those topics that will be reprised in MECS 551-2, we will save the most recent work, including current working papers, for the second quarter course. During the quarter, students will begin work on an original empirical research project. (Students will learn about the vast amount of data available at Kellogg.) Students will present their papers in the Winter Quarter MECS 551-2. A note about grading: Grades will be based on the following: Student presentations of assigned research papers (30 percent) Class participation, especially during student presentations (20 percent) Research proposal (10 percent) Final exam (40 percent) A note about student presentations: All students, including auditors, must present research papers. Students taking the course for credit will present at least two papers (depending on enrollments.) Auditors will present one paper. Presentations will last 45-60 minutes. Students should present papers as if they were giving a job market talk. This means that students must provide motivation for the paper, including a description of prior work, and explain the contribution of the paper to the literature. A note about the research proposal: Students must submit a 3-5 page research proposal and give a short (~30 minute) presentation on the last day of class. I have moved the final class from 11/ 28 to 12/5 to allow more time for proposal development. I encourage all students to meet with me during the quarter to discuss their ideas for the proposal. 1
Course Outline Note: Papers denoted by an asterix (*) are to be presented by students. All papers, including recommended readings, are available through the Canvas course site. On rare occasion, the published version is not available. In these cases, I posted working papers. Part One: Healthcare Institutions (September 19-26) 1) The Value Chain Required Reading: Arrow, K. 1963, Uncertainty and the Welfare Economics of Medical Care American Economic Review, 53(5): 941-73 2) The Innovation Sector 3) The Provider Sector Required Reading: Donabedian, A. 1988, The Quality of Care: How Can It Be Assessed? Journal of the American Medical Association 260(12): 1743-48. Recommended Reading: Miller, D. et al. 2011, Large Variations in Medicare Payments for Surgery Highlight Savings Potential from Bundled Payment Programs Health Affairs 30(11): 2107-15. 4) The Insurance Sector Required Reading: Kaiser Family Foundation, 2016, Employer Health Benefits: 2016 Summary of Findings 5) Pharmaceuticals Required Reading: Weisbrod, B. 1991, The Health Care Quadrilemma Journal of Economic Literature 29(June): 523-52 Recommended Reading: 2
DiMasi, J., Grabowski, H. and R. Hansen, 2016, Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs Journal of Health Economics 47:20-33. 5) Data available for research at NU (Limbrock) Part Two: The Economics of Medical Innovation (September 26-October 10) 1) Evidence on incentives for R&D Acemoglu, D. and J. Linn, 2004, Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry Quarterly Journal of Economics, 119(3): 1049-90. *Finkelstein, A., 2004, Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry Quarterly Journal of Economics 119)2): 527-64. Dranove, D. Garthwaite, C., and M. Hermosilla, 2014, Pharmaceutical Profits and the Social Value of Innovation NBER Working Paper No. 20212. Henderson, R. and I. Cockburn, 1994, Measuring Competence? Exploring Firm Effects in Pharmaceutical Research Strategic Management Journal 15(S1): 63-84 Peltzman, S., 1973, An Evaluation of Consumer Protection Legislation: The 1962 Drug Amendments Journal of Political Economy 81(5): 1049-91 Ward, M. and D. Dranove, 1995, The Vertical Chain of Research and Development in the Pharmaceutical Industry Economic Inquiry 33(1): 70-87. Blume-Kohout, M. and N. Sood, 2013, Market Size and Innovation: Effects of Medicare Part D on Pharmaceutical Research and Development Journal of Public Economics, 97: 327-36. 2) Is Medical Technology Worth the Cost? Cutler, D. and M. McClellan, 2001, Is Technological Change in Medicine Worth It? Health Affairs, 20(5): 11-29. *Almond, D. et al., (2010), Estimating Marginal Returns to Medical Care Quarterly Journal of Economics, 125(2): 591-634 3
Recommended Reading: Viscusi, K., 2013, Using Data from the Census of Fatal Occupational Injuries to Estimate the Value of a Statistical Life Monthly Labor Review 3) Medical Practice Variations Wennberg, J., Fisher, E. and J. Skinner, 2002, Geography and the Debate over Medicare Reform Health Affairs W96-114. Chandra, A., and D. Staiger, 2007, Productivity Spillovers in Health Care: Evidence from the Treatment of Heart Attacks Journal of Political Economy 115(1): 103-140. *Finkelstein, A., M. Gentzkow, and H. Williams (2016), Sources of Geographic Variation in Healthcare: Evidence from Patient Migration Quarterly Journal of Economics, 131(4): 1681-1726 Cutler, D. et al., 2017, Physician Beliefs and Patient Preferences NBER Working Paper 19320. Epstein, A., and S. Nicholson, S., 2009, The Formation and Evolution of Physician Treatment Styles: An Application to Cesarean Sections Journal of Health Economics 28(6): 1126-40. Part Three: Demand (October 10) *Manning, W. et al., 1987. Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment. American Economic Review, pp.251-277. Aron-Dine, A., L. Einav, and A. Finkelstein, 2013, The RAND Health Insurance Experiment, Three Decades Later Journal of Economic Perspectives 27(1): 197-22 Finkelstein, A. et al., 2012, The Oregon Health Insurance Experiment: Evidence from the First Year Quarterly Journal of Economics 127(3): 1057-1106. 4
Cherkin, D.C., Grothaus, L. and Wagner, E.H., 1989. The effect of office visit copayments on utilization in a health maintenance organization, Medical Care, pp.669-679. Selby, J.V., Fireman, B.H. and Swain, B.E., 1996. Effect of a copayment on use of the emergency department in a health maintenance organization, New England Journal of Medicine, 334(10): 635-642. Chandra, A., Gruber, J. and R. McKnight, 2007, Patient Cost-Sharing, Hospitalization Offsets, and the Design of Health Insurance for the Elderly NBER Working Paper 12972. Kowalski, A., 2016, Censored Quantile Instrumental Variable Estimates of the Price Elasticity of Expenditure on Medical Care Journal of Business & Economic Statistics, 34(1) 107-17. Part Four: The Economics of the Provider Sector (October 17-31) Supplier Induced Demand Fuchs, V., 1978 The Supply of Surgeons and the Demand for Operations Journal of Human Resources 13 (Supplement): 35-56. *Gruber, J. and M. Owings, 1996, Physician Financial Incentives and Cesarean Section Delivery RAND Journal of Economics 27(1): 99-123. Evans, R. 1974, Supplier-Induced Demand: Some Empirical Evidence and Implications. In: Perlman M. (eds) The Economics of Health and Medical Care. International Economic Association Series. Palgrave Macmillan, London Cromwell, J. and Mitchell, J.B., 1986. Physician-induced demand for surgery. Journal of Health Economics, 5(4): 293-313. Dranove, D., 1988, Demand Inducement and the Physician-Patient Relationship Economic Inquiry 26: 281-98. McGuire, T. and M. Pauly, 1991. Physician Response to Fee Changes with Multiple Payers Journal of Health Economics 10(4): 385-410. Dranove, D. and Wehner, P., 1994. Physician-induced demand for childbirths. Journal of Health Economics, 13(1):61-73. 5
Traditional Studies of Incentives Required Readings *Gaynor, M. and Gertler, P., 1995. Moral hazard and risk spreading in partnerships. The RAND Journal of Economics, pp.591-613 Recommended Reading: Epstein, A., Ketchum, J. and S. Nicholson, 2010, Specialization and Matching in Professional Services Firms RAND Journal of Economics Disclosure Dranove, D. et al., Is More Information Better? The Effects of Report Cards on health Care Providers Journal of Political Economy, 111(3): 555-88. Dranove, D. and A. Sfekas, 2008, Start Spreading the News: A Structural Estimate of the Effects of New York Hospital Report Cards Journal of Health Economics 27(5): 1201-7. *Cutler, D., Huckman, R. and MB Landrum, 2004, The Role of Information in Medical Markets: An Analysis of Publicly Reported Outcomes in Cardiac Surgery American Economic Review 94(2); 342-6. Spence, A.M., 1975. Monopoly, quality, and regulation. The Bell Journal of Economics, pp. 417-429. Dranove, David, and Ginger Zhe Jin. 2010, "Quality Disclosure and Certification: Theory and Practice." Journal of Economic Literature 48(4): 935-963. Dranove, David, and Mark A. Satterthwaite 1992, "Monopolistic Competition When Price and Quality Are Imperfectly Observable." The RAND Journal of Economics: 518-534. Romano, and Zhao, 2004, Do Well-Publicized Risk-Adjusted Outcomes Reports Affect Hospital Volumes? Medical Care 42(4): 367-77. Pope, D.G., 2009. Reacting to rankings: evidence from America's Best Hospitals. Journal of Health Economics, 28(6):1154-1165. Competition among providers 6
Robinson, J. and H. Luft, 1985, The Impact of Hospital Market Structure on Patient Volume, Average Length of Stay, and the Cost of Care Journal of Health Economics, 4: 333-56. Dranove, D., Shanley, M. and W. White, 1992, Price and Concentration in Hospital Markets: The Switch from Patient-driven to Payer-driven Competition Journal of Law and Economics, 36(April): 179-204. *Kessler, D. and M. McClellan, 2000, Is Hospital Competition Socially Wasteful? Quarterly Journal of Economics, 115(2): 577-615. Capps, C., Dranove, D. and M. Satterthwaite, 2003, Competition and Market Power in Option Demand Markets RAND Journal of Economics, 34(4): 737-63. Zwanziger, J. and Melnick, G.A., 1988. The Effects of Hospital Competition and the Medicare PPS Program on Hospital Cost Behavior in California. Journal of Health Economics, 7(4):.301-320. Dafny, L., 2009, Estimation and Identification of Merger Effects: An Application to Hospital Mergers. The Journal of Law and Economics, 52(3): pp.523-550. Lynk, W.J., 1995. Nonprofit Hospital Mergers and the Exercise of Market Power. The Journal of Law and Economics, 38(2):437-461. Elzinga, K.G. and Hogarty, T.F., 1998. The Problem of Geographic Market Delineation in Antimerger Suits. J. Reprints Antitrust L. & Econ., 28:.203+ Capps, C. and Dranove, D., 2004. Hospital Consolidation and Negotiated PPO Prices. Health Affairs, 23(2):175-181. Town, R. and Vistnes, G., 2001. Hospital competition in HMO networks. Journal of Health Economics, 20(5):733-753. Capps, C.S., Dranove, D., Greenstein, S. and Satterthwaite, M., 2002. Antitrust Policy and Hospital Mergers: Recommendations for a New Approach. The Antitrust Bulletin, 47(4):677-714. Tenn, S., 2011. The price effects of hospital mergers: a case study of the Sutter Summit transaction, International Journal of the Economics of Business, 18(1):65-82. 7
Part Five: The Economics of the Insurer Sector (November 7-14) Adverse selection Cutler, D. and S. Reber, 1998, Paying for Health Insurance: The Trade-off Between Competition and Adverse Selection Quarterly Journal of Economics 113(2): 433-66. *Einav, L.. Finkelstein, and Cullen, M., 2010, Estimating Welfare in Insurance Markets Using Variation in Prices Quarterly Journal of Economics 75(3); 877-921. Handel, B. 2013, Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts American Economic Review 103(7): 2643-82. Rothschild, M. and Stiglitz, J., 1976. Equilibrium in competitive insurance markets: An essay on the economics of imperfect information QJE, 90(4):629-649. Nicholson, S., Bundorf, K., Stein, R.M. and Polsky, D., 2004. The Magnitude and Nature of Risk Selection in Employer Sponsored Health Plans. Health Services Research, 39(6p1):1817-1838. Altman, D., Cutler, D.M. and Zeckhauser, R.J., 1998. Adverse selection and adverse retention. The American Economic Review, 88(2):122-126. Competition among insurers Dafny, L. 2010, Are Health Insurance Markets Competitive? American Economic Review 100(4): 1399-1431. *Dafny, L. Duggan, M. and S. Ramanarayanan, 2012 Paying a Premium on Your Premium, American Economic Review, 102(2): 1161-85. Wholey, D., Feldman, R. and Christianson, J.B., 1995. The effect of market structure on HMO premiums. Journal of Health Economics, 14(1): 81-105. Dranove, D., Gron, A. and Mazzeo, M.J., 2003. Differentiation and competition in HMO markets. The Journal of Industrial Economics, 51(4): 433-454. Part Six: Students present research proposals (December 5) Note Date! 8