Introduction to Health Economics

1. Introduction to Health Economics Tom Rice Department of Health Policy and Management UCLA Fielding School of Public Health May 4, 2017

2. Topics BASICS • The economic problem and traditional solution: markets • Problems of applying traditional model to health • Behavioral economics ISSUES • Cost containment • Physician payment • Moral hazard • Economic evaluation • Cross-national comparisons on access, quality, and costs

3. The Economic Problem* • Resources are scarce in relation to human wants • These resources have alternative uses • Different people want different things * Victor Fuchs, Who Shall Live?

4. Markets as a Solution • A well-functioning market can help assure that: • Goods and services go to those who value them the most • Firms produce only those things people want, and with the fewest resources expended • Mechanisms for doing so: • Use of markets results in prices equating demand and supply • Information is available to people can make their best possible choices

5. Problems in Applying Markets to Health Care Market • Virtues of markets depend on many assumptions, including: • Demand: • Consumers know what’s best for themselves, and make rational choices to enhance their well-being • They have sufficient information to make good choices – and understand that information • There are no externalities • Supply: • Firms maximize profits • Suppliers cannot influence consumers • There is sufficient competition among suppliers • Equity and Justice • The distribution of wealth is approved of by society • If assumptions not met, there is role for government

6. Behavioral Economics • What it isn’t: economic incentives influence behavior • If we reduce the price of a service, people will use more of it • If we pay physicians a salary, they will provide fewer unnecessary services than under fee-for-service • What it is: deviations from classical economic assumptions that…

7. CLASSICAL ECONOMIC ASSUMPTIONS People are hyper-rational. They always make the right decision to enhance their well being. They have no trouble sifting through all available information to make that decision. They come into the world with a firm set of immutable preferences

8. Why do people… • Engage in behaviors and activities that they know harm their health? • Not take their prescription medications? • Not sign up for nearly free health benefits for which they are eligible? • Stick with health plans that are inferior to other options available? And what can we do about it?

9. Applications to Health and Health Care • Behavioral economics lends itself to health care: • Consumers lack or can’t comprehend information • Many choices; a wrong one can have big consequences • People appear to make choices counter to their long-run interests • Richard Frank: “If one examines the salient economic institutions of the health sector, one might expect that sector to be a breeding ground for applying behavioral economics.”

10. Organ Donation • Traditional theory: People will weight benefits (helping strangers) with costs (wishes of family; religion) • How choice is framed wouldn’t matter • Reality: willingness to donate varies by how decision framed re. opt-in vs. opt-out • 100% in Austria; 12% in Germany • 86% in Sweden, 4% in Denmark • 79% in Montana, 1% in Vermont

11. Obesity • Traditional theory: growth in obesity is a rational choice; as price of food and in particular, junk food have fallen, people consume more • Zimmerman: “Obesity is not a rational choice”; people are not maximizing their utility with fixed preferences • Instead, food producers advertise to change people’s tastes or improve “product placement”

12. Obesity (cont.) • Experiments: • Have people’s contribute to a fund, which would be re-funded if they met weight loss goals • Enter people into a lottery if they meet weight loss goals • School cafeterias: • Put fruits rather than fatty snack near cash register in school cafeteria, and salad bars in the middle of the room • Giving children a choice of vegetables • Requiring sweets to be paid for in cash rather than lunch card • Grocery stores: put duct tape across top of shopping cart, with sign saying produce should go in front of tape

13. Tobacco Use • Traditional theory: raise taxes, provide information about perils of smoking, regulate second-hand smoke • Idea’s from the UK’s “nudge unit” • Encourage people to sign pre-commitment contracts (and put up their own money) to quit smoking and rebate the money back if they do • Encourage use of e-cigarettes

14. Cost Containment

15. FRAMEWORK J E = Σ Pj x Qj (FFS) j=1 J E = Σ CJ x Nj (Capitation) j=1 E = total health expenditures P = unit price for services Q = quantity/utilization of services C = cost/person/year N = number of persons J = index representing each payer

16. Selected Cost Containment Strategies • Strategies Aimed at Controlling Quantity • Utilization Management • Practice Guidelines and Comparative Effectiveness Research • Technology Controls • Patient Cost Sharing • Strategies Aimed at Controlling Prices • Physician Fee Controls • Strategies Aimed at Controlling Expenditures • Hospital Global Budgets • National and Sub-National Budgeting • Capitation/HMOs

17. Physician Payment

18. “There are many mechanisms for paying physicians; some are good and some are bad. The three worst are fee-for-service, capitation, and salary.”* Robinson, JC, Milbank Quarterly 79(2001): 149

19. “Fee-for-service rewards the provision of inappropriate services, the fraudulent upcoding of visits and procedures, and the churning of ‘ping pong’ referrals among specialists. Capitation rewards the denial of appropriate services, the dumping of the chronically ill, and a narrow scope of practice that refers out every time-consuming patient. Salary undermines productivity, condones on-the-job leisure, and fosters a bureaucratic mentality in which every procedure is someone else’s problem.”* *Robinson, JC, Milbank Quarterly 79(2001): 149

20. Hybrid Payment Methods • Pay for performance • Modifying FFS by rewarding judicious use of resources • Modifying capitation by rewarding quality • Modifying salary by rewarding productivity • Concerns about P4P • Can we measure performance adequately? • Are current risk-adjustment procedures good enough? • Are the procedures we are rewarding the best measures of true quality, or just the easiest to collect? • Might we be crowding out altruistic behavior?

21. Moral Hazard

22. Key Concepts • Moral hazard: the notion that people will be more likely to engage in risky activities if they are protected against the cost • In health economics: having health insurance makes it more likely to use services, especially those that convey little value • Traditional policy remedy: deductibles, coinsurance, copayments

23. Concerns about Policies to Counteract Moral Hazard • Evidence shows that when people have to pay more, they use less of everything – including goods and services that are critical such as complying with prescription drugs • Price can be a deterrent to receiving life-saving services • Patient cost sharing is regressive

24. Alternatives Supply-side policies offer an alternative to rationing on ability to pay. Examples: • Incentive reimbursement • Utilization management • Supply and technology controls • Global budgets

25. Economic Evaluation

26. Key Terminology • Cost effectiveness analysis: comparing benefits in health units (e.g., diseases prevented, number of visit increases) to program costs • Cost utility analysis: comparing benefits expressed in quality-adjusted life years to program costs • Cost benefit analysis: comparing monetary benefits to program costs

27. Application: NICE • National Instituter for Health and Care Excellence, in England • Evaluates technologies and drugs for inclusion in the National Health Service • Can be included in NHS if cost does not exceed ₤20,000 - ₤30,000 per quality adjusted life year saved

28. Cross-National Comparisons

29. Exhibit 1. Health Care Spending as a Percentage of GDP, 1980–2013 Percent * 2012. Notes: GDP refers to gross domestic product. Dutch and Swiss data are for current spending only, and exclude spending on capital formation of health care providers. Source: OECD Health Data 2015.

30. Source: Organisation for Economic Co-operation and Development (2010), "OECD Health Data", OECD Health Statistics (database).doi: 10.1787/data-00350-en(Accessed on 14 February 2011). Notes: Data from Australia and Japan are 2007 data. Figures for Belgium, Canada, Netherlands, Norway and Switzerland, are OECD estimates.

31. Diagnostic Imaging Prices, 2013 MRI CT Scan (abdomen) Dollars ($US) Dollars ($US) Notes: US refers to the commercial average. MRI refers to magnetic resonance imaging; CT refers to computed tomography. Source: International Federation of Health Plans, 2013 Comparative Price Report.

32. Physician Fee for Hip Replacement, 2008Adjusted for Differences in Cost of Living Private payers Public payers Dollars ($US) Dollars ($US) THE COMMONWEALTH FUND Source: M. J. Laugesen and S. A. Glied, “Higher Fees Paid to U.S. Physicians Drive Higher Spending for Physician Services Compared to Other Countries,” Health Affairs,Sept. 2011 30(9):1647–56.

33. Physician Incomes, 2008Adjusted for Differences in Cost of Living Dollars ($US) Orthopedic surgeons Primary care doctors THE COMMONWEALTH FUND Source: M. J. Laugesen and S. A. Glied, “Higher Fees Paid to U.S. Physicians Drive Higher Spending for Physician Services Compared to Other Countries,” Health Affairs,Sept. 2011 30(9):1647–56.

34. Cumulative Increases in Health Insurance Premiums, Workers’ Contributions to Premiums, Inflation, and Workers’ Earnings, 1999-2016 SOURCE: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2016. Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), 1999-2016; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, 1999-2016 (April to April).

35. Obesity (BMI>30) Prevalence Among Adult Population, 2011 Percent Self-reported Measured Note: Body-mass index (BMI) estimates based on national health interview surveys (self-reported data) are usually significantly lower than estimates based on actual measurements. THE COMMONWEALTH FUND * 2010. ** 2009. Source: OECD Health Data 2013.

36. ACCESS

37. Percentage of Population Covered Under Public Programs, 2011(Source: OECD Health Data, 2013)

38. 18% 16% 16% 14% 12% 10% Percent 8% 6% 4% 2% 2% 1% 0% 0% 0% 0% AUS CAN GER NETH UK US Country Percentage of Population Uninsured, 2007(Source: OECD Health Data, 2008)

39. Cost-Related Access Problems in the Past Year Source: 2011 Commonwealth Fund International Health Policy Survey of Sicker Adults in Eleven Countries.

40. When Calling Regular Doctor with a Question, Always or Often Hear Back on the Same Day Percent Source: 2013 Commonwealth Fund International Health Policy Survey in Eleven Countries.

41. Access to Doctor or Nurse When Sick or Needed Care 41 Same-day or next-day appointment Waited six days or morefor appointment Percent Note: Question asked differently in Switzerland. Source: 2013 Commonwealth Fund International Health Policy Survey in Eleven Countries.

42. Wait Times for Specialist Appointment 42 Less than four weeks Two months or more Percent Base: Needed to see specialist in the past two years.Source: 2013 Commonwealth Fund International Health Policy Survey in Eleven Countries.

43. QUALITY

44. Infant mortality is higher in the U.S. than in comparable countries Source: OECD (2013), "OECD Health Data: Health status: Health status indicators", OECD Health Statistics (database). doi: 10.1787/data-00349-en (Accessed on August 6, 2015). And National Vital Statistics System, National Center for Health Statistics, Centers for Disease Control and Prevention Notes: Comparable countries are defined as those with above median GDP and above median GDP per capita in at least one of the past 10 years. In cases where 2013 data were unavailable, data from the last available year are shown. 2013 data for the U.S. are from the National Vital Statistics System.

45. U.S. Lags Other Countries: Mortality Amenable to Health Care Deaths per 100,000 population* * Countries’ age-standardized death rates before age 75; including ischemic heart disease, diabetes, stroke, and bacterial infections. Analysis of World Health Organization mortality files and CDC mortality data for U.S. Source: Adapted from E. Nolte and M. McKee, “Variations in Amenable Mortality—Trends in 16 High-Income Nations,” Health Policy, published online Sept. 12, 2011.

46. Medical, Medication, or Lab Test Errors in Past Two Years * Base: Had blood test, x-rays, or other tests in past two years. Source: 2011 Commonwealth Fund International Health Policy Survey of Sicker Adults in Eleven Countries.

47. Readmitted to Hospital or Went to ERfrom Complications During Recovery Base: Adults with any chronic condition who were hospitalized Percent Data collection: Harris Interactive, Inc. Source: 2008 Commonwealth Fund International Health Policy Survey of Sicker Adults.

48. Breast Cancer Five-Year Relative Survival Rate, 2007–2012(or nearest period) Percent Note: UK and SWE data are from 2007–2012; NZ, NOR, NET, and DEN data are from 2006–2011; AUS data are from 2005–2010; US and GER data are from 2004–2009; CAN data are from 2003–2008; JPN data are from 2000–2005. Source: OECD Health Data 2014.

49. Cervical Cancer Screening Rates, 2012 Percent of women screened Note: UK, NZ, NOR, DEN, and AUS based on program data; all other countries based on survey data. * 2010. Source: OECD Health Data 2014.