6th Edition HEALTH ECONOMICS Theory, Insights, and Industry Studies Rexford E. Santerre Professor of Finance and Healthcare Manasement Department of Finance School of Business University of Connecticut Stephen P, Neun Vice President for Academic Affairs i Antioch University New England C 267265 f <? SOUTH-WESTERN Q«* CENGAGE Learning- Australia Brazil Japan Korea. Mexico Singapore Spain United Kingdom United States
PART 1 BASIC HEALTH CARE ECONOMIC TOOLS AND INSTITUTIONS CHAPTER 1 Introduction v 3 What Is Health Economics? 4 The Four Basic Questions 4 Production and Allocative Efficiency and the Production Possibilities Curve S The Distribution Question 7 Implications of the Four Basic Questions 8 Taking the Pulse of the Health Economy Medical Care Costs 9 9 Uses of Medical Funds Sources of Medical Funds 10 11 Amount of Medical Care Spending Medical Care Access 12 14 Medical Care Quality IS A Note on the Relation between System Structure and Performance A Brief Note on the Patient Protection and Affordable 16 Care Act of 2010 18 18 19 20 APPENDIX 1 Economic Models and Empirical Testins 21 Economic Models 21 Positive versus Normative Analysis 24 Empirical Testing Association versus Causation 25 28 31 1 31 33 CHAPTER 2 Health and Medical Care: An Economic Perspective 35 What Is Health? 36 Why Good Health? Utility Analysis 36 What Is Medical Care? The Production of Good Health 39 40 Empirical Evidence on the Production of Health in the United States 47 The Determinants of Health among Nonelderly Adults The Determinants of Health among Children 47 50 The Determinants of Health among the Elderly The Role of Public Health: An Historical Approach 51 52 The 10 Major Causes of Death in the United States in 2010 Empirical Evidence on the Production of Health: A 53 55 Implications of the Patient Protection and Affordable Care Act (PPACA) of 2010 55 56 " 56 58 58
Xli Contents APPENDIX 2 Demand for Health Capital Grossman's Model of the Demand for Health Pure Investment Version of the Grossman Model Shifts in Equilibrium Applications of the Grossman Model CHAPTER 3 Cost and Benefit Evaluation Methods Cost Identification Analysis Cost-Benefit Analysis The Practical Side of Using Cost-Benefit Analysis to Make, Health Care Decisions Discounting The Value of Life An Application of Cost-Benefit Analysis Should College Students Be Vaccinated? The Costs and Benefits of New Medical Technologies Cost-Effectiveness Analysis By the Numbers: Cost-Effectiveness and Cost-Utility Analysis An Application of Cost-Effectiveness Analysis: Autologous Blood Donations Are They Cost Effective? Implications of the Patient Protection and Affordable Care Act (PPACA) of 2010 Regarding Cost and Benefit Evaluation Methods CHAPTER 4 Health Care Systems and Institutions Elements of a Health Care System The Role and Financing Methods of Third-Party Payers.' Risk Management, Reimbursement, and Consumer Cost Sharing The Production of Medical Services Institutional Differences between For-Profit and Not-For-Profit Health Care Providers Why Are Not-For-Profit Health Care Providers So Prevalent? Production of Health Care in the Four Systems Physician Choice and Referral Practices The Four National Health Care Systems Summarized An Overview of the U.S. Health Care System Financing of Health Care in the United States Reimbursement for Health Care in the United States Production of Health Services and Provider Choice in the United States CHAPTER 5 The Demand for Medical Care The Demand for Medical Care and the Law of Demand The Utility-Maximizing Rule The Law of Demand Other Economic Demand-Side Factors The Relationship between Health Insurance and the Demand for Medical Care Moral Hazard 61 62 66 69 75 79 80 80 83 84 85 88 89 91 93 94 95 98 99 100 102 102 104 104 107 108 110 112 115 116 117 117 118 118 120 120 121 121 122 123 123 123 125 126 127 127 129 131 135
Contents xiii Noneconomic Determinants of the Demand for Medical Care 135 The Market Demand for Medical Care 137 The Fuzzy Demand Curve 138 Elasticities 139 Own-Price Elasticity of Demand 139 Other Types of Elasticity 142 Empirical Estimation 142 Own-Price, Income, Cross-Price, and Time-Cost Elasticity Estimates The Impact of Insurance on the Demand for Medical Care 143 145 The Impact of Noneconomic Factors on the Demand for Medical Services 147 of 2010 Relating to the Demand for Health Care 148 149 149 151 CHAPTER 6 The Demand for Medical Insurance: Traditional and Manased Care Coverage Introduction 155 156 The Conventional Theory of the Demand for Private Health Insurance 157 Deriving the Demand for Private Health Insurance 160 Factors Affecting the Quantity Demanded of Health Insurance 163 Nyman's Access Theory of the Demand for Private Health Insurance 167 Conventional Insurance Theory according to Nyman 168 A Simple Exposition of the Nyman Model 171 Insights and Policy Implications of the Nyman Model 173 The Health Insurance Product: Traditional versus Managed Care Insurance Financial Incentives and Management Strategies Facing 174 Consumers/Patients 176 Financial Incentives and Management Strategies Facing Health Care Providers 177 Consumer-Directed Health Care Plans The Regulation of MCOs 179 180 Provisions of the Patient Protection and Affordable Care Act of 2010 Relating to the Demand for Health Insurance 182 184 185 186 186 CHAPTER 7 Medical Care Production and Costs The Short-Run Production Function of the Representative Medical Firm 189 190 Marginal and Average Products 192 Elasticity of Input Substitution 195 A Production Function for Hospital Admissions 196 Short-Run Cost Theory of the Representative Medical Firm The Short-Run Cost Curves of the Representative Medical Firm 197 198 Short-Run Per-Unit Costs of Production Factors Affecting the Position of the Short-Run Cost Curves 200 203 Estimating a Short-Run Cost Function for Hospital Services The Cost-Minimizing Input Choice 205 206 Long-Run Costs of Production Long-Run Cost Curves 208 208 Shifts in the Long-Run Average Cost Curve Long-Run Cost Minimization and the Indivisibility of Fixed Inputs 210 210 Additional Production and Cost Concepts Neoclassical Cost Theory and the Production of Medical Services 212 213
Contents Integrated Delivery Systems 213 of 2010 Relating to Medical Care Production and Costs 217 218 218 220 220 CHAPTER 8 Structure, Conduct, Performance, and Market Analysis 223 Structure, Conduct, and Performance Paradigm 224 Is a Perfectly Competitive Market Relevant to Medical Care? 226 A Model of Supply and Demand 227 Comparative Static Analysis 229. A Note on Long-Run Entry and Exit in a Perfectly Competitive Market 231 Using Supply and Demand to Explain Rising Health Care Costs 232 The Monopoly Model of Market Behavior and Performance 233 Monopoly versus Perfect Competition 233 Barriers to Entry 235 The Buyer Side of the Market 237 Monopolistic Competition and Product Differentiation 238 Procompetitive and Anticompetitive Aspects of Product Differentiation 239 Oligopoly 241 Collusive Oligopoly Competitive Oligopoly 242 243 Collusive or Competitive Oligopoly?. 243 Oligopolistic Behavior in Medical Care Markets ' Defining the Relevant Market, Measuring Concentration, and 244 Identifying Market Power 246 The Relevant Product and Geographical Markets 246 Measuring Market Concentration 248 Identifying Market Power 250 252 : 253 256 256 PART 2 THE ROLE OF GOVERNMENT 257 CHAPTER 9 Government, Health, and Medical Care 259 Economic Reasons for Government Intervention 260 Types of Government Intervention 262 Public Goods 262 Externalities 263 Regulations Antitrust Laws 268 275 Public Enterprise 283 The Redistribution Function of Government 284 of 2010 Relating to Government, Health and Medical Care 289 291 291 292 293 CHAPTER 10 Government as Health Insurer 295 Why Does the Government Produce Health Insurance? - 296 The Medicaid Program 297 The Financing and Cost of Medicaid 298
Contents XV Do Differences in the Medicaid Program Make a Difference? 298 The State Children's Health Insurance Program (SCHIP) 300 Are the Medicaid and State Children's Health Insurance Programs "Crowding Out" Private Health Insurance? 301 The Medicare Program The Financing and Cost of Medicare 302 302 Medicare Program Reforms 304 Competitive and Market Power Elements in Medicare 309 Implications of the Patient Protection and Affordable Care Act (PPACA) of 2010 for Medicare, Medicaid and SCHIP 312 314 314 315 315 PART 3 INDUSTRY STUDIES 319 CHAPTER 11 The Private Health Insurance Industry 321 A Brief History of the Private Health Insurance Industry 322 The Structure of the Private Health Insurance Industry 323 Number, Types, and Size Distribution of Health Insurers 323 Barriers to Entry, 324 Consumer Information The Conduct of the Private Health Insurance Industry 326 327 The Dominant Insurer Pricing Model ' Do Health Insurers Possess Monopoly (or Market) Power? 327 331 Managed Care Organizations and Insurance Premiums 332 Do Health Insurers Possess Monopsony Power? 334 Rating of Premiums, Adverse Selection, and Risk Selection 337 Guaranteed Renewability in the Individual Health Insurance Market 341 The Performance of the Private Health Insurance Industry 342 The Price of Private Health Insurance in the United States 343 Output of Private Health Insurance in the United States 348 Profitability in the Private Health Insurance Industry 354 of 2010 Relating to the Health Insurance Industry ' 355 356 357 \ 359 359 CHAPTER 12 The Physician Services Industry The Structure of the Physician Services Industry 363 364 The Number of Physicians in the United States. Distribution of Primary Care and Specialty Care Physicians 364 in the United States 366 Mode of Practice 368 Buyers of Physician Services and Methods of Remuneration Reimbursement Practices of Managed Care Buyers 368 of Physician Services Barriers to Entry 369 369 Production, Costs, and Economies of Scale of the Structure of the Market for Physician Services 371 372 The Conduct of the Physician Services Industry 372 The Supplier-Induced Demand Hypothesis 373 McGuire's Quantity-Setting Model The Impact of Alternative Compensation Schemes 376 on Physician Behavior 378 Geographical Variations in the Utilization of Physician Services 380
XVi Contents The Impact of Utilization Review on the Physician Services Market 382 Medical Negligence and Malpractice Insurance 383 The Performance of the Physician Services Industry 386 Expenditures on Physician Services 386 The Physician Services Price Inflation Rate 387 The Utilization of Physician Services 388 Physician Income 388 of 2010 Relating to the Physician Services Market 389 391 391 392 392 CHAPTER 13 The Hospital Services Industry 397 The Structure of the Hospital Services Industry 398 Market Concentration within the Hospital Services Industry Barriers to Entry 398 399 Buyers of Hospital Services Type of Product 401 402 of the Structure of the Hospital Services Industry 405 The Conduct of the Hospital Services Industry 406 Pricing Behavior of Not-For-Profit Hospitals 406 Market Concentration and Hospital Behavior 412 Hospital Ownership and Hospital Behavior 414 Managed Care Buyers and Hospital Behavior ' 416 Price Regulations and Hospital Behavior 418 Cost Shifting Behavior 419 of the Conduct of the Hospital Services Market 421 The Performance of the Hospital Services Industry 422 The Growth in Hospital Expenditures 422 The Hospital Services Price Inflation Rate 423 Do Hospitals Provide Flat-of-the-Curve or Ineffective Medicine? 425 Hospital Profit Margins 427 of 2010 Relating to the Hospital Services Industry 428, 429 429 431 431 CHAPTER 14 The Pharmaceutical Industry 437 The Structure of the Pharmaceutical Industry 438 Number and Size Distribution of Sellers The Buyer Side of the Pharmaceutical Market 438 439 Barriers to Entry. 443 Consumer Information and the Role of the FDA The Structure of the Pharmaceutical Industry: A 445 446 The Conduct of the Pharmaceutical Industry 447 Pricing Behavior 447 Promotion of Pharmaceutical Products 448 Product Innovation 450 The Conduct of the Pharmaceutical Industry: A 453 The Performance of the Pharmaceutical Industry 453 The Relative Price Inflation Rate of Pharmaceutical Products 454 Output of New Pharmaceutical Products 455 Profits in the Pharmaceutical Industry 456 The Performance of the Pharmaceutical Industry: A 458
Contents xvii of 2010 Relating to the Pharmaceutical Industry 458 ' 459 460 461 461 CHAPTER 15 The Lons-Term Care Industry The Structure of the Long-Term Care Services Industry 465 466 The Need for Long-Term Care 466 Structure of Informal Care Providers Structure of the Nursing Home Care Industry 467 468 Structure of the Home Health Care Industry 471 The Structure of the Long-Term Care Industry: A The Conduct of the Long-Term Care Industry 473 473 The Dual Market Model of Nursing Home Pricing 473 The Effect of Alternative Payment Methods 476 Scale Economies with Respect to Quality 477 Ownership and Conduct 478 Market Concentration and Nursing Home Conduct Conduct of the Long-Term Care Industry: A 481 483 The Performance of the Long-Term Care Industry 484 Expenditures on Long-Term Care, 485 Formal Expenditures on Long-Term Care Private Insurance for Long-Term Care 485 487 Prices for Nursing Home Services 489 The Utilization of Long-Term Care Facilities 489 What Do the Demographics Tell Us about the Future of Long-Term Care? 492 Implications of the Patient Protection and Affordable Care Act (PPACA) of 2010 Regarding the Long-Term Care Industry 493 493 494 496 496 PART 4 HEALTH CARE SYSTEM REFORM 499 CHAPTER i 16 Health Care System Reform 501 * The Overall Performance of the U.S. Health Care System: An International Comparison Why Is There So Much Disagreement Concerning How 502 Health Care System Reform Should Be Designed? An Overview of Health Insurance Reform in the United States 506 508 Models of Health Insurance Reform ' 508 Managed Competition 510 National Health Insurance (NHI) 512 Medical Savings Accounts (MSAs) Individual Mandates 513 515 Attempts at State Health Care and Insurance Reform 515 Hawaii: The Case of an Employer Mandate 516 Maryland: The Case of Hospital Rate Regulation 517 Massachusetts: The Case of Individual Health Insurance Mandates 518 Vermont: The Single-Payer Health Care System 518 An Overview of the Patient Protection and Affordable Care Act (PPACA) of 2010 519 520 521 521 522