LECTURE 4: HEALTH CARE AND HEALTH STATUS

Reading: FGS, Ch.5, 24 and DR, Ch.2

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What is Health Economics? • Uses tools both from neoclassical economics (supply

and demand, marginalism) and institutional

economics (attitudes, patterns, customs) to understand

the nature of resource allocation in the health care

sector

• Questions include the mix of alternative services;

opportunity cost; equity in distribution; means/ends

relationships; allocative and productive efficiency

(production possibilities curve, Pareto optimality);

incentives

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What is Health Policy?

• Often concerned with recommendations to government, eg

equity/distribution, the national interest

• Government budget; politics of allocation

• Rationing by individual willingness and ability to pay (market)

does not always satisfy social consensus on access.

• Mixed health economy: 76% of funds spent on health in were

private in US in 1960, 53% in 2010.

• Private insurance, social insurance, out-of-pocket

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What Is Good Health?

• Good health is ‘a state of complete physical, mental and social well-being

and not merely the absence of disease’ -World Health Organisation • ‘To me this statement is meaningless as a working definition; it is a

statement of an unattainable perfection of body, mind and soul. There is even something unhealthy about the perfection of the absolute…. In scientific terms, we do not know where health begins and disease ends. The lines that we draw are arbitrary ones and largely fashioned by the culture in which we live.’

-Richard Titmuss • ‘The majority of people do not have totally healthy or unhealthy lifestyles:

most are mixed.’ -Mildred Blaxter

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Indicators of Health

• There is no single aggregative index. ‘Utils’ are a

fictitious measure of utility in microeconomics. Only

an equivalent fiction – ‘hels’ – would provide single

cardinal value for health.

• As result, economists use discrete indicators, all

different, depending on the purpose for which they

are being used.

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Indicators 1: Mortality

Data on death-rates (per 10,000 population) are used very commonly for four reasons.

1. Unambiguous

2. Centrally collected

3. Flexible: can be by racial group, gender, area of residence, occupation, perinatal, neonatal, infant, age group, etc

4. Provide information on illness as well

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Indicators 2: Morbidity • Data on illness is difficult to collect. Illness itself is difficult to

conceptualise. What, exactly, is physical, mental or social underperformance?

• Multiple sources of data: doctors, hospitals, insurers, ministries, government surveys, private surveys. Each is incomplete and therefore problematic.

• What is the link between self-reported symptoms and medically-diagnosed disease?

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Indicators 2: Morbidity (continued) • Labelling: cross-class and cross-cultural

• The sociological dimension (roles, expectations, customs). What is a necessity for one patient is a luxury for another.

• The personal dimension: there is a need to collect information on subjective as well as objective indicators. The patient must have an input as well as the professional. Can there be a good measure of ordinal and/or cardinal utility?

• QALYs and surveys of perceptions. Quantity versus quality. Subjective dimension.

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Health Care Inputs • Inputs are often used as a proxy for outcomes. Because most

people assume that more means better, it is hard for politicians

to resist public opinion.

• Most are services, not goods; heterogeneous; cannot be stored

• There is both a narrow and a broad definition of health care

inputs. A list that is too long is useless but a list that is too

short conceals many of the most important influences on

health.

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Inputs 1: Medical Care • Labour and capital: doctors, nurses, physiotherapists,

lab. assistants, beds, scanners (‘per 10, 000 of population’), national or catchment-area

• Pharmaceuticals

• Utilisation of the inputs: flow, not stock

• The measure of quality: inputs, success-rates, professional opinion

• The share of medical care in the government’s budget and/or the GDP

• Inter-temporal comparisons: education, income

• Inter-country comparisons

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Inputs 2: Care beyond Medicine • Household expenditure out-of-pocket on non-

prescription drugs, latex gloves, appliances, ‘fringe

therapies’, even higher rents in less-polluted areas.

• Diet: cauliflower, broccoli, beer, chocolate

• Marital status and family: married men, married

women, the never-married, the divorced, separated,

widowed.

• Childhood health stock: family income before child is

born (elimination of poverty?), healthier parents have

healthier children

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Care beyond Medicine -continued • Infrastructure: roads, refrigeration, drinking water, elimination

of malaria, development of polio vaccine

• Business investment in occupational safety/wellness programmes

• Economic growth itself: public finance, living standards. Income has a positive effect on health. It does so as well via education.

• In US: one more year of schooling increases life expectancy by 0.18 to 0.6 years/decreases the probability of dying within 10 years by 3.6%.

• Insurance involves double-counting and is not recorded as an input in the statistics. Nonetheless it does make possible more doctor-visits and preventive medicine/lowers mortality due to injury or disease

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Health Care Bads 1 • Example of smoking in Singapore: 25% (18% in 2004) among

young men, 7%-9% among young women, double that in

Malay community, despite bans on advertising since 1971/arts

and sports sponsorship from 2010, compulsory counselling for

under-age smokers .

• Smokers have above-average rates (2-3 more days in UK) of

absenteeism: it costs the UK economy £1.4 billion.

Time/productivity is also lost through smoking breaks and

cigarette-related fires. Expected life-years of male smokers 2

years less.

• Also: alcohol, smoking, pollution/environment, risky

lifestyles. In some studies: relative deprivation/greater

inequality. Advertising.

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Health Care Bads 2 • Overweight or obese: one third of American children (13% of

children in LDCs); 78 million Americans are obese

• 2.1 billion people in the world (857 million in 1980): nearly

one-third of world population, one quarter of children

• China: 46 m,, India 30m.

• Also very poor countries, eg half the population of Tonga ;

half the women in Libya and Samoa

• Excess weight is estimated to have caused 3.4 million deaths

in 2010 (UN figures based on data from 188 countries)

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Inputs 3: Regulation

• ‘The mother of liberty has in fact been law’ (Tawney)

• Date-stamping of food products, compulsory seat belts, minimum age for smoking and drinking

• Taxation: cigarettes and alcohol. Pigou (social costs and benefits) or paternalism?

• Subsidies: weight-loss clinics?

• Pollution

• Education/information-dissemination/health promotion boards

• Advertising: the threat from disinformation

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The Empirical Studies

• The correlation between care inputs and data on

death-rates: Cochrane, McKeown, Newhouse and

Friedlander, RAND,

• Comparative data: Maxwell

• WHO: the ranking scheme lacks a subjective

dimension

• Iatrogenesis and negative returns: Ivan Illich

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Investment in Fixed Capital • Efficiency in microeconomics has a number of

dimensions . None is very easy to apply in real-world

studies.

• The equivalent of a factory in industrial economics is,

in health economics, the hospital.

• Inpatient stays in most countries are the largest and

most expensive element in total health spending. One

reason is the high level of capitalisation.

• There are three topics to consider in evaluating the

economic efficiency of a treatment centre.

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Efficiency 1: Property rights • The alternative modes of ownership: local government, central

government, for-profit, cooperative, doctor, charity, insurance company, Veterans Administration (US), university (combined with teaching/research), etc.

• Is there a correlation between ownership and the objectives of the hospital?

• There are four reasons why not-for-profit hospitals dominate the hospital sector: these include the patient’s mistrust of gain-seeking/overcharging, subsidies in the public sector, patient’s satisfaction with the status quo and the doctors’ professional ethic. Even for-profit hospitals provide free care/write off bad debt because they are a ‘physicians’ cooperative’ or for image.

• It is not clear what link there is between ownership, objectives and efficiency. It is a problem in the behavioural theory of the firm: doctors, bureaucrats/managers, owners, etc.

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Efficiency 2: Incentives

• Remuneration: as with doctors there are three modes of

payment. (a) fee for service; (b) annual capitation per patient

(the HMO model in the hospital sector); (c) annual

allocation/budget.

• Competition: affects productive use of inputs. Intensity of

rivalry influenced by product differentiation (eg full or limited

product line), local monopoly (difficult to define relevant

product market), cartels, information at the disposal of

consumers, potential competition (barriers to new entry), point

on the learning curve.

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Efficiency 3: The U-Shaped Cost Curve

The optimal size of the organisation minimises long-run

average cost and ensures that economies of scale are

secured/diminishing returns range avoided.

This result assumes constant technology/unchanged

production function

Since LRAC correlates cost with quantity, it is useful to

look at each coordinate in turn.

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Cost Curves: The Vertical Axis • Cost: Long-run or short-run? Historic cost or replacement

value? Implicit/explicit costs? Substitution of one (variable) input for another?

• Can manpower inflexibilities/traditional demarcations be seen as a fixed cost?

• Can comparisons be made between hospitals with different casemix? Do some hospitals have unusual circumstances (eg old buildings, polluted region, elderly patients)?

• How should the economist adjust for quality? If outcomes, would hospitals have an incentive to turn away the sick?

• Time-series: is it sensible to study single hospitals over time rather than studying a cross-section at a moment in time? This is clearly relevant to the lowest point on the LRAC. If we cannot make comparisons, how can we know which hospital is on the best-attainable production function?

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Cost Curves: The Horizontal Axis-1 • Quantity: What is the product that the hospital supplies?

Should it be outputs (‘cures’) or inputs (‘beds’, ‘occupied beds’, etc).

• Hospital is multiproduct firm, so may have economies of scope (=where joint cost of producing two outputs is less than the sum of the costs of producing the two outputs separately). System affiliation: division of labour within the network

• Private costs (eg travelling time of patients and doctors) should not be neglected.

• Economic concepts of sunk cost and excess capacity (including ‘conspicuous production’).

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Cost Curves: The Horizontal Axis-2

• The real-world evidence: does it support giant hospitals on a

single site or is it favourable to small local hospitals? There is

increasing returns range but also a range of constant long-run

average cost/proportionate increase in output before

decreasing returns to scale sets in.

• The topic is relevant in any discussion of public policy. If there

are major economies of scale, the State may have to limit entry

(such as the American technique of ‘certificate of need’) or

encourage mergers/takeovers (technical efficiency or

economic efficiency?)

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Health Capital • The individual’s stock of good health is a capital asset like any

other. Health delivers utility but (like education) it is also an investment good. Michael Grossman has shown how health status can be treated both as a consumer durable and as a long-lived capital asset that delivers a flow of more and better healthy days over time.

• The patient is both producer and consumer

• Diminishing marginal utility of good heath : addition to total health yields less satisfaction over time.

• Diminishing marginal product for increments of health care

• The asset-holder must therefore choose between short-run consumption and an investment decision that will deliver a long-term payoff.

• Initial stock of health differs from one person to another

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Diminishing Marginal Productivity

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C represents cost saving technology.

A New Intercept

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Health Care and Economic Growth

• Flat-of-the-curve: ‘The marginal contribution of medical care to health in developed countries is very small…. Medical intervention has a significant effect on outcome in only a small fraction of the cases seen by the average physician.’

-Victor Fuchs

• Dimiminishing marginal productivity: ‘Eliminating medical care services altogether could lead to a marked increase in mortality and morbidity rates, even though a further increase in medical services would show little effect.’

-Joseph Newhouse

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Investment in Health Some of the concepts from the theory of business

investment that are most relevant are:

• (1) complementary inputs: education shifts the TP curve up because an educated individual is a more efficient producer of health. Also income. But poor health conditions in childhood results in a less healthy adult/TP shifts down.

• (2) substitution: cure for prevention

• (3) uncertainty/risk

• (4) depreciation: with age, also rate accelerates: total product curve shifts downward and flattens out

• (5) rate of return

• (6) time preference/deferred gratification: some people assign more importance to the future

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Conclusion: The Value of Health Care

• Increments and totals

• Flat-of-the-curve medicine; diminishing marginal

productivity

• Historical evidence: McKeown

• Medical care in one estimate only prevents 10% of

premature death; lifestyle (overeating, drinking,

smoking, inactivity) is 40%; pollution 5%; genetic

predisposition 30%.

• The lessons for today’s LDCs

• Care versus cure?

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