Demand for Health Care

1. Demand for Health Care

2. Production Function for Health Health = H(medical care, other inputs, time)

3. Health Status Measurements Mortality: probability of death Morbidity: probability of illness/disability Quality of life: QALY

4. Top 10 Causes of Death

5. Work Days Lost and Activity Impairments, 1996

6. Health Status Determinants Health = H(medical care, other inputs, time) Income and education Environmental and lifestyle factors Diet, exercise, sexual behavior, substance abuse, violence Genetic factors The role of public health Immunization, clean air/water, food handling

7. Demand for Medical Care Demand Function Health status: acute/chronic care Demographic characteristics: age, gender, population Economic standing Physician factors

8. Effect of Insurance on Demand

9. Physician Induced Demand S & D may not be independent due to principal-agent problem Graphical story Empirical evidence is mixed Fuchs and Kramer (1986): # of physicians and fees are positively correlated Reinhardt (1985): physicians migrate to high fee areas

10. Estimating Demand Problem Set #8 Price elasticity of demand E = %?Q %?P Income elasticity of demand E = %?Q %?M

11. Select Studies on Elasticity of Demand

12. RAND Experiment: 1974-82 Randomly assigned 2,000 non-elderly families to insurance plans differing in 2 characteristics: Coinsurance rate: 0, 25%, 50%, 95% Annual spending cap of $1,000 Examined 2 measures: Health spending Health outcomes

13. RAND Experiment Spending Research question: How did assignment to groups affect spending?

16. RAND Experiment Spending Research question: How did assignment to groups affect spending? Economic lesson: increase the price and reduce the amount consumed

17. RAND Experiment Health Outcomes Study question: How did assignment to groups affect outcomes? For average person – no substantial health benefits from free care Exception: poor and chronically ill did better with free care (hypertension, vision, dental care)

18. RAND Experiment Conclusions Instead of free for all care: Targeted benefits for chronic conditions Exempt low-income from cost sharing Study changed policy debate Cost sharing limits demand without substantially harming health

19. Market for Health Insurance

23. Types of insurance Social insurance Medicare Medicaid Indemnity insurance Provides reimbursement for expenditures or loss of income Premiums (price) reflects expected loss (cost)

24. Insurance Theory People prefer to avoid risky outcomes May be willing to pay to avoid risky outcomes

25. Expected Utility Theory

26. Expected Utility Theory

27. Determinants of HI Demand Price of insurance In the previous example, the consumer will forego health insurance if the premium is greater than $5,000. Degree of Risk Aversion Greater risk aversion increases the demand for health insurance. Income Larger income losses due to illness will increase the demand for health insurance. Probability of Illness Consumers demand less insurance for events most likely to occur (e.g. dental visits). Consumers demand less insurance for events least likely to occur. Consumers more likely to insure against random events.

28. Health Insurance and Market Failure Income tax treatment Information problems Moral hazard Adverse selection Free riders

29. Tax Subsidy Employer-paid health insurance is exempt from federal, state, and Social Security taxes Employee will prefer to purchase insurance through work, rather than on his own.

30. Example: Cost of insurance when income is $1,000 per week and income tax rate is 28% Employee Purchased Income $1,000 28% tax <280> after tax 720 insurance <50> net pay 670 Employer Purchased Income $1,000 insurance <50> subtotal 950 28% tax <266> net pay 684

31. Problem Set 2 #15

32. Adverse Selection Occurs because one party to a contract has more information than the other Too many high risk users contaminate the risk pool; drives premiums up Creates incentives for low risk users to drop out

33. Moral Hazard Occurs when one party to a contract cannot monitor the other party’s performance Insured people engage in more risky behavior Insured people are likely to spend more on health care

34. Insurers’ Response to Market Failure Response to overspending: Deductibles Coinsurance Response to adverse selection: Require physical exams No preexisting conditions will be covered

35. Health Insurance Experiment

36. Efficient Pooling? Experience rating Community rating Cream skimming Self-insurance

38. Managed Care

39. Sicko (2007)

40. Managed Care Contractual arrangements that integrate financing and delivery of medical care Prepaid health plans (Prospective payment) Limited benefits Risk-sharing arrangements

41. History of Managed Care Kaiser Permanente Largest non-profit HMO 8.7 members 156,000 employees 13,700 physicians 37 medical centers 400 medical offices HMO Act (1973) Subsidies to non-profit groups to start HMOs

42. HMO Enrollment, 1970-2006

43. Types of Managed Care Plans Health maintenance organizations (HMO) Group model Staff model Network model Preferred provider organizations (PPO) Similar to network model except enrollees can go outside network Point-of-Service plans (POS) Hybrid of HMO and PPO

44. Percentage of American Workers in Managed Care

45. Managed Care Cost Savings: Theory Selection of providers gatekeepers Cost sharing arrangements Capitation for general practitioners Risk-sharing contracts Bonuses Withholdings Practice guidelines and utilization review “evidence-based” medicine plans Pre-authorization Second-opinions Hospitalists

46. Managed Care Cost Savings: Evidence RAND (Manning et al,. 1984): per capita costs 28% lower under HMO due to fewer hospital admissions and shorter stays Miller and Luft (1994, 1997): HMO cost savings of 10-15% due to shorter hospital stays, fewer tests, less costly procedures Glied (1999): overall evidence inconclusive since managed care attracts healthier enrollees

47. Managed Care Quality: Evidence Miller and Luft (1997) and Robinson (2000): found mixed evidence on overall quality differences Ware et al. (1996), Robinson (2000), and Hellinger (1998): poorer outcomes among members of vulnerable subpopulations—sick, elderly, poor

48. John Q (2001)

49. Managed Care and Its Public Image Considerable economic success Cultural and political failure Patient/Provider Backlash Patient rights Humana law suit cost-based criteria rather than medical-need

50. The Future of Managed Care Patients – Model too restrictive Employers – Concerned over litigation prospects, disgruntled employees Payers – Discovered cost control is unpopular and dangerous to corporate survivability Providers – Risk sharing is risky. Balking at dual role of agent of patient (associated concern with quality) and agent of society (associated concern with costs)

51. A New Direction Consumer driven health care – build on tradition of individual autonomy and cost conscious consumers Complementary medicine Informed consent Expanding use of Internet Direct-to-consumer advertising Employer desire to get out of the health care business Public distrust for government-run programs

52. Market for Health Care Professionals Physicians Nurses Dentists

53. Labor Market Theory Competitive Model Hiring Rule: MRP = w Imperfectly Competitive Model Barriers to entry Imperfect information Third-party payment

54. Human Capital Model Medical degree as an investment

55. Human Capital Model Investment Rule: invest if PV of Net Benefits > 0

56. Estimated Rates of Return

57. Market for Physician Services Education Requirements 4 years Med school + intern + residency 126 medical schools in United States enrolling 70,000 students Graduating 16,000 per year 25% are International Medical Graduates Long training times mean inelastic labor supply Licensing and Certification

58. Active Physicians in the U.S.

60. Specialty and Geographic Distribution Primary care vs. specialty care 50% target? Urban vs. rural Pennsylvania: Pittsburgh-Philadelphia: 25% of population, but 50% of physicians

61. The Business of Being a Physician Physician Compensation

62. Medical Practice Incomes of Physicians

63. The Business of Being a Physician Physician Compensation Pricing physician services Price Discrimination UCR fees Medicare RVS

64. Pricing Physicians’ Services

65. The Business of Being a Physician Physician Compensation Pricing physician services Organization of physicians’ practices EOS: group practice 1965: 10% 1991: 33% Treatment variations across regions

66. Models of Physician Behavior Monopolistic competitor Output rule: MR = MC (and set P off of Demand) Price discrimination Output rule: MRA = MRB = MC Imperfect agent Physician-induced demand

67. Controlling Physician Behavior Do physicians respond to incentives? Reduced FFS: increased follow-ups? Unbundling? Clinical rules: more referrals? Empirical evidence Randomized trials (RAND experiment) Same disease studies (Epstein, Begg, and McNeil, 1986) Same physician studies (Welch, Hillman, and Pauly, 1990) physicians used more services in fee-for-service plans than prepaid plans

69. The Market for Nursing Services

70. The Market for Dental Services

73. A critical assumption in the model of demand and supply is the independence of demand and supply curves. If the two are not independent, a shift in the supply curve can lead to a shift in the demand curve referred to as supply-side economics supplier-induced demand supply shocks ceteris paribus

74. The top ten causes of death in the United States in 2006 included all of the following but heart disease cancer accidents AIDS

75. If health care spending is already on the flat-of-the-curve, it may not be possible to buy improved health status by increasing spending. In this situation, the best way to improve health status may be to increase the availability of government health insurance invest in biotechnology to determine the genetic factors that improve health improve life-style decisions by reducing smoking, alcohol consumption, and drug use improve access to medical care

76. may be the result of physician-induced demand will cause overall spending on physicians’ services to increase will force physicians to limit the number of patients they see both a and b The diagram depicts the market for physicians’ services that is originally in equilibrium at point a, with demand and supply at D0 and S0. As physician supply increases from S0 to S1, a concurrent shift in demand moving from D0 to D1

77. Early in U.S. history health insurance was provided to cover income loss due disability or disease hospital expenses routine physicians’ services the catastrophic cost of medical care including hospitalization and physicians’ services all of the above

78. Social insurance: is the basis for most government redistribution programs is usually community-rated with premiums based on ability to pay is the basis of the provision of medical care to the poor, elderly, and other vulnerable population groups in the U.S. requires mandatory participation to be effective all of the above.

79. Analysts cite figures on the number of uninsured in the U.S. as low as 10 million and as high as 60 million. Which of the following is a true statement? The uninsured are all free riders Most of the uninsured have health problems and are not able to get private health insurance Most of the uninsured have some labor-force connection—either working or a dependent of someone who is working. The lack of health insurance means that the individual has virtually no access to medical care Once you lose your health insurance it is extremely difficult to get reinsured

80. A group of 100 people seek out an insurance company to underwrite health insurance for its members. If expected medical spending for the group is $150,000, what will the average premium be if the health insurance company estimates the premium adding net loading costs of 20 percent? $1200 $1500 $1800 $3000

81. A group of 100 people seek out an insurance company to underwrite health insurance for its members. If expected medical spending for the group is $150,000, what will the average premium be if the health insurance company estimates the premium adding net loading costs of 20 percent? Continuing from the question above, an additional 10 people join the group who have expected medical spending of $5,000 per person on average. The new premium will be approximately $1500 $2200 $2500 $4500

82. The U.S. government subsidizes the private provision of health insurance through employers. Benefits paid to employees are deductible as expenses by firms, but not recognized as taxable income by employees. Consider two employees, Ann and Bob, who both receive $12,000 in insurance benefits for their family. Ann earns $30,000 and pays 15% in taxes. Bob earns $75,000 and pays 25% in taxes. The tax subsidy to Bob is the same as the tax subsidy to Ann The tax subsidy to Bob is twice as large as the tax subsidy to Ann The tax subsidy to Bob is half as much as the tax subsidy to Ann The tax subsidy to Bob is $1,200 more than the subsidy to Ann The tax subsidy to Bob is $1,000 more than the subsidy to Ann

83. Sahar’s demand curve for chiropractic visits is characterized by Q = 10 – 0.2P. The following table shows her demand for services:Sahar responds only to her out of pocket payment when deciding how many office visits to make. Assume Sahar obtains insurance coverage which requires her to pay 20% of the price per visit. At a price of $50, how many office visits will Sahar make? 10 8 6 4 0

84. Managed care: establishes a system of retrospective payment determined ex ante combines the responsibilities of payer and provider of medical services attempts to shift a portion of the financial risk onto providers attempts to shift a portion of the financial risk onto patients Both b and c are correct

85. The health maintenance organization where the physicians are salaried employees of the HMO is called a group-model HMO a staff-model HMO a network-model HMO a direct-contract HMO

86. Most empirical studies show that the cost-savings provided by managed care are accomplished by better preventive care reducing the rate of hospitalization denying access to costly specialty care switching to generic drugs all of the above

87. The most important aspect of the change from fee-for-service to capitation is that physicians get their money quicker patients get faster service since physicians don’t have to worry about getting paid physicians make less money the most valuable patient is no longer the sickest, but the most healthy

88. Tuition and fees Books and incidentals The income foregone Room and board Pain and suffering What is the most significant cost of attending medical school?

89. The majority of physicians specialize in general/family practice There are twice as many generalists as there are specialists. There are twice as many specialists as there are generalists The specialty distribution in the U.S. is similar to that of the rest of the world Which of the following statements about the distribution of physicians among specialties is true in the United States?

90. Suppose the number of medical school graduates continues to increase over the next decade. Which of the following is true? Physicians’ salaries must fall Physicians’ salaries must rise Physicians’ salaries will fall only if the demand for medical services falls Physicians’ salaries will fall if the demand for medical services rises more than the supply of physicians rises Physicians’ salaries will rise if the demand for medical services rises more than the supply of physicians rises

91. An important element in estimating the present value of an investment is the calculation of the discount factor. The discount factor may be expressed as _______ where r is the discount rate and t is the number of years the investment is held. (1 + r)t (1 + n)r 1/(1 + r)t 1/(1 + n)r