Econ 306 First Half

Front 1

what is health economics?

Back 1

health economics as a discipline can be defined as the application of theories, tools and concepts of economics to the topics of health and health care

Front 2

Special demand and supply characteristics:

Back 2

-uncertainty

-demand for health care is derived for health

-asymmetric information

-consequences of health care choices can be catastrophic or life-threatening

-externalies, physical and psychic (caring/altuism)

-Price discrimination by suppliers (with market power)

Front 3

Economics approach to the allocation of health care=supply and demand analysis

Back 3

**Main idea is that the individual is best judge of his/her own preference;

-but what about people who are unconscious/insane/in shock/children

Front 4

What are the implications of these special characteristics for how health care is funded & organised?

Back 4

-not all technologies (drugs, devices, procedures) can be provided

-Not all patients can be treated

we must prioritize, so we can decide what drugs, devices and procedures to buy and also what patients to treat.

Front 5

the 3 levels of prioritization and decision making

Back 5

Macro= government

Meso=District health boards/ministry of health

Micro=Clinicians

Front 6

1) Macro

Back 6

decisions are made about where to spend public money and how much money should to various votes,

e.g. social welfare, environment, education.

Decisions are also made at this level about overall proirities for vote health

Front 7

2) Meso

Back 7

Working within the resources provided and the priorities that are set/at the macro level, descisions are made about what mix of disability support should be funded

e.g. quit smoking programs, elective surgery

Front 8

3) Micro

Back 8

Working within the funding provided to services and intervention at meso level clinicians decide which people receive what services

Front 9

Positive VS Normative Economic analysis

Back 9

Positive= Value-free; predictive; descriptive. "what is" positive statements: "true and false"

e.g. demand curves

Normative= value based judgement "what ought to be" fairness/equality issues "good" or "bad"

e.g. paying people for their kidneys would increase market supply.

Front 10

positive and negative defintions of:

WHAT IS HEALTH

Back 10

Positive= A state of complete physical, mental and social well being

negative= based on mortality (death rates) morality (sickness) rates & disabilities

perfect health=absence of all these things

Front 11

A relationship between education and health:

Back 11

better health -> better education

better education -> better health

Michael Grossman argues that good health requires ‘know how’ which is gained through education

Front 12

after 1750 the population grew significantly, why?

Back 12

-main cause of death was infectious diseases and doomsday predications

these deaths were reduced through:

1.Public health measures –i.e., immunisation of populations, quarantines, water supplies, sewerage systems, sanitation, food & handling standards

2.Nutrition –e.g., intro of corn & potatoes –and better housing (improve ability to resist diseases)

Front 13

Why is health valued by individuals?

why do we demand health

Back 13

H (stock) is a consumption good

H (stock) is a production good (a durable good)

----> affects the amount of healthy time available for leisure

health capital (like human capital e.g. education)

Front 14

The wagstaff model

Back 14

Three basic components to model the demands for H and HC respectively:

1.Indifference curves (tastes / preferences for health)

2.Health production function

3.Budget constraint(income and prices)

Front 15

According to the wagstaff model:

the demand for healthcare derives from:

Back 15

-tastes/preferences

-income

-price of healthcare (health inputs)

-price of other things (consumption)

-education

-exogenous health state (well or sick)

-ageing

Front 16

14Things the Wagstaff (1986) model ignores but that are also likely to be important determinants of HC demand

Back 16

1.Many different types of health care ...substitutes or complements?

2.Different qualities of HC

3.Time and travel costs (on top of “out-of-pocket” prices)

4.What definition of consumer income? ...transitory vs. permanent

5.Role of ‘non-economic’ factors: demographics ...

6.Role of HC providers in consumer demand (i.e. ‘principal-agent’problem): ‘supplier-induced demand’(SID) hypothesis (next week)

7.Most HC is subsidised or free to consumers ...i.e.public or private health ‘insurance’

Front 17

main types of insurance/subsidies

Back 17

1. Coinsurance = the consumer pays x% (e.g. 25%)of the market price and the insurer/govt pays the rest

2.Front-end deductible= (an excess) the consumer pats the first X$ and the govt pays the rest

3.Rear-end deductible= the insurer/govt pays the 1st Z$ and the consumer pays the rest

Front 18

Why do most governments intervene in HC markets?

through:

- providing (owning)

- financing

- regulating

Back 18

-where markets fail, government intervention may increase efficiency (but can in fact make things worse i.e. govt failure)

Requires:

-fully informed buyers and sellers

-no externalities or public goods

-perfect competition (no market power)

Front 19

The first fundamental theorm of welfare economics:

Back 19

-resources allocations generated as a general equilibrium of a perfectly competitive economy are economically efficent (Pareto Optimal)

Front 20

Pareto Optimal

Back 20

millions of self-interested individuals & firms, interacting in markets, act as if they are led by an "individual hand" to socially desirable outcome

Front 21

Normative theory of Government intervention

Back 21

govts should intervene (finance/provide/regulate) because of market failures in HC markets arising from key characteristics of H and HC

-risk and uncertainty; and insurance market failures

-externalities

-asymmetric information

and because suppliers have market power (i.e not competitive, price-takers)

Front 22

Positive theories of government intervention

Back 22

Why is the government envolved, in contradiction to the public interest theory

arose from 2 observations (overall)

-regulation: was often extended to industries that otherwise could be competitive

-there appeared to be a consistent desire by firms to enter regulated industries -> regulation in firms interest (not the public)

Front 23

why does regulation exist?

Back 23

regulation arises because of firms desire to use regulatory processes as a protective device i.e. to shield firms from competition (so they could earn supernormal profits)

Front 24

private HC markets often fail because:

1.natural monopolies

2.moral hazard

3.adverse selection

Back 24

1. Natural monopolies

-with respect to administration costs, one large insurance company with market power (nationalization)

2. Moral hazard

-HC insurance changes incentives

2 types of moral hazards

-less care taken to avoid ill health (take more risks)

-Consume more HC when ill/injured

------>>> DWLs and reluctance by people to be insured (because of high premuims)

3. Adverse selection

-the market for lemons problem:

Buyers of insurance know more about their risks than sellers know

>low risk buyers cannot buy cheap insurance

>high risk consumers can only get expensive insurance

Front 25

possible solution to overcome adverse selection

Back 25

experience rating- a form or price discrimination --> i.e. tailoring premiums to risk profiles/history

Front 26

Suppler induced demand

Back 26

arises from observation that:

-increasing supply of doctors is associated with increased quantity of HC consumption and higher prices

-Areas with lots of doctors do not have lower priced health care.

Front 27

demand for health insurance arises from:

Back 27

1. uncertanity (risk) with respect to incidence of illness/injury

2. illness/injury has financial implications (health care costs/loss of earnings)

Front 28

Micro economic theory for the demand of insurance:

Back 28

-risk averisty (also neutral and "love")

-risk premium

-expected utility premium

-certainty equivalent

-insurance "loading"

Front 29

loading:

Back 29

insurance companies also have overheads, admin costs and profits (loading) so they always charge more than acruarily fair premium (AFP)

Front 30

what can an insurer do when faced with high risk consumers

Back 30

1. get more info, charge according to risk

2. force low risk people to stay in the scheme

3. keep high risk people out

4. offer no-claims bonus

Front 31

conclusion of moral hazard

Back 31

for the individual, it becomes a trade-off between the benefits (utility) from avoiding risk when insured and the DWL from consuming more health care when insured (that must be paid for by insurance premium) ...

Front 32

Production uncertainty

Back 32

medicine is more of an art than an exact science

Front 33

suppliers choose the most effective treatments, and often without regard to costs

Back 33

because of insurance or govt