Review of the Last Lecture

Review of the Last Lecture • began our discussion of information asymmetry in the healthcare market • Two aspects to the information asymmetry • i) HC providers more knowledgeable about HC • ii) HC providers more knowledgeable about HC => HS • Since the patient’s demand for HC is a derived demand (from demand for HS) HC provider can control the position of the demand curve => makes the demand curve endogenous • information asymmetry leads to market failure unless the healthcare provider is a perfect agent • continue with this discussion today

Policy Response to Information Asymmetry in the HC Market • Information asymmetry introduces a conflict of interest for the HC provider  self interest (income) •  patient’s interest • Policy response to info asymmetry certification by professional associations  assures quality and provides assurance higher price reflects higher quality. • Also avoid exploitation (professional ethics/discipline) /// • by definition  supplier-informed demand is the goal of the agency role

Consequence of Certification HC Providers • Certification (credentialing) of HC providers confers control over entry into the profession and over the behavior of the profession’s members. • Certification creates scope for exercising monopoly power by the professional organization that controls certification (restrict entry and limit competition among members) • Thus, certification to address market failure from information asymmetry may introduce another source of market failure => monopoly power

HC Provider as Perfect Agent • Information Asymmetry not a problem if provider is a perfect agent • Perfect agent  chooses for the patient what the patient would have chosen for him or herself if the patient had had the same medical knowledge as the provider  demand curve is where it should be • however, unlikely HC provider is a perfect agent • in real world  agency relationship is incomplete • Demand curve can be shifted by HC provider advice; i.e. demand is endogenous  normative and positive implications to be discussed later when we look at the theory of the practitioner firm ///

Evidence in Support of SID • price controls on physicians have often led to increased utilization per patient (boost income by increasing utilization if P fixed) • substantial variation in HC utilization across regions with similar populations but different DOC/POP ratios is often attributed to SID • empirical evidence that clinical decisions for a patient influenced by financial incentives for the doctor, e.g., • 1. Salaried GPs provide less care per patient than fee-for-service GPs • 2. HMOs have lower hospitalization rates than fee-for-service patients • 3. Monitoring, e.g. in Sask, in 1974 hysterectomy rate  by 1/3 when Drs, but not patients, informed that the procedure would be monitored. ///

Counter Argument to SID • if Drs. can induce demand, how come they don’t own the world? • i.e.  if physician behaviour isn’t constrained by autonomous consumer demand what does limit the P they can charge for a given Q, or the volume of services demanded at a given P (Diagram)? => will look at some possible answers when we look at theories of the practitioner firm ///

Alternative Explanations for the Link between Supply and Demand • Doc/Pop ratio (i.e.increased supply) less travel time and waiting time to see Dr.  own time price   demand shifts to the right, i.e., demand more HC at each price for HC since overall cost . • as Doc/Pop  Dr. takes more time with each patient  perceived quality of care  WTP   shifts demand to the right • End of our discussion of info asymmetry and market failure in the HC sector.///

Evaluating Healthcare Programs: Section VI of the Course outline • Will look at three methods of analyzing healthcare programs • - cost-benefit analysis • - cost-effectiveness analysis • - cost-utility analysis • discuss - how to conduct each type of analysis • - issues that need to be addressed in conducting the analysis • - strengths and weaknesses of each method of analysis ///

Cost-Benefit Analysis: CBA • CBA is a method for assessing the economic viability of a project. • A project generates a flow of: annual costs: C1, C2, C3, …,CT • annual benefits: B1, B2, B3, …,BT • the C’s and B’s must be expressed in dollars • in CBA these flows are expressed as present values of the costs and of the benefits => need a discount rate r • r is the rate at which we discount a dollar to be received(spent) one year from now, e.g., if r = 0.05 a dollar one year from now is worth 1/(1.05) = $0.952 today, a dollar two years from now is worth 1/(1.05)2 = $0.907, etc. • in general, the present value of a dollar of costs(benefits) incurred(received) n years from now is 1/(1+ r)n

The Present Value of the Benefits and of the Costs, and the NPV • compute the present value of the benefits (in $s): • PVB = B1/(1+r) + B2/(1+r)2 +…+ BT/(1+r)T • = t Bt/(1+r)t t = 1, …, T • compute the present value of the costs (in $s): • PVC = C1/(1+r) + C2/(1+r)2 +…+ CT/(1+r)T • = t Ct/(1+r)t t = 1, …, T • compute the net present value  NPV = PVB – PVC ///

The Net Present Value Criterion • if NPV > 0 project is economically feasible • if NPV = 0 indifferent • if NPV < 0 project is not economically feasible • if funds are limitless  implement all projects that are economically feasible • if funds are limited  implement the set of projects that maximizes NPV for the available funds. ///

Review of the Last Lecture