Economics 330Economics of Health

CareDr. Greg Delemeester

Spring 2010

National Health Care Expenditures

Year Total Spending (in billions)

Percent change

Percent of GDP

Per capita spending

1950 $ 13 -- 4.5 $ 82

1960 28 8.8 5.2 148

1970 75 10.5 7.2 356

1980 254 13.0 9.1 1,100

1990 714 10.9 12.3 2,814

2000 1,353 5.9 13.6 4,789

2005 1,982 7.9 15.7 6,701

2006 2,113 6.7 15.8 7,071

2007 2,240 5.6 15.9 7,423

2008 2,339 4.3 16.2 7,681

Source: http://www.cms.hhs.gov/NationalHealthExpendData/

Why do Americans spend so much on medical care? Aaron (1991)

Expansion of 3rd party payment system Aging of the population Expanded medical malpractice litigation Increased use of medical technology

Other factors Physician-induced demand Entry restrictions Predominance of not-for-profit providers

Personal Health Care Expenditures

(in billions of dollars)Private Spending Public Spending

Year Out of pocket

Private Insurance

Federal State

1960 $ 12.9 $ 5.9 $ 2.0 $ 2.91970 24.9 14.0 14.4 7.81980 58.1 61.2 62.3 23.91990 136.1 204.7 172.8 63.52000 192.6 402.8 369.8 117.12005 247.5 599.8 562.3 176.92006 254.9 634.6 620.1 178.72007 270.3 665.0 661.3 188.72008 277.8 691.2 718.0 189.8

Source: http://www.cms.hhs.gov/NationalHealthExpendData/

2008 National Health Care Dollar…

…Where it Came From …Where it Went

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Private vs Public Spending on Personal Health Care Expenditures

PrivatePublic

% o

f PH

CE

1960 1970 1980 1990 2000 20100%

10%

20%

30%

40%

50%

60%

Spending as % of Personal Health Care Expenditues

Out of pocketHealth InsFedState%

of

PHCE

Changes in Hospital UsageShort-Stay Community Hospital Characteristics, United States Category 1970 1980 1990 2000 2003 2004 2005 Beds (per 1,000 population)

4.17 4.38 3.73 2.93 2.79 -- 2.71

Admissions (per 1,000 population)

144.0 159.6 125.4 117.6 119.4 119.3 118.9

Average length of stay (days)

7.7 7.6 7.2 5.8 5.7 5.6 5.6

Outpatient visits (per 1,000 population)

657.2 893.2 1,211.6 1,882.8 1,933.4 1,943.7 1,972.0

Outpatient visits per admission

4.6 5.6 9.7 15.8 16.2 16.3 16.6

Percent occupancy 78.0 75.4 66.8 63.9 66.2 -- 67.3 Source: Health United States, various years.

Changes in Medical Care DeliveryShift from private to public financingShift to 3rd party financingChanges in hospital usage and pricingDeregulation and growth in managed care

Payment StructureTraditional fee structure

Fee for service Retrospective payment Incentive to overspend

Managed care Capitation and risk sharing Prospective payment Incentive to limit care

Health Care As a Commodity Demand is irregular Asymmetric information problems Widespread uncertainty Reliance on not-for-profit providers Insurance as the primary means of payment

Health System GoalsAccess to care

Who’s covered? What’s covered?

Quality of care

Cost of care

Private Health Insurance Coverage

(under age 65, numbered in millions)

With Health Insurance* Without Health InsuranceYear Number Percent Number Percent1999 161.2 68.3 38.5 16.12000 160.8 67.1 41.4 17.02001 162.4 67.0 40.3 16.42002 159.4 65.3 41.7 16.82003 157.5 64.4 41.6 16.52004 159.5 64.0 42.1 16.62005 160.1 63.6 42.1 16.42006 155.8 61.5 43.9 17.02007 157.9 61.6 43.3 16.6

* Employer-based. Source: Health, United States, 2008, http://www.cdc.gov/nchs/hus/updatedtables.htm, Table 138 and 140.

Health System GoalsAccess to care

Who’s covered? What’s covered?

Quality of care Medical outcomes Medical efficacy

Cost of care Who pays? How much?

Review of Economic

Methodology

Economic FundamentalsOptimizationMarginal AnalysisSupply and Demand

Equilibrium

1) Health insurance coverage is expanded to cover all elective procedures, such as tummy tucks, nose jobs, and liposuction

2) The FDA (Food and Drug Administration) takes all silicone-based implants off the market fearing a connection with certain connective-tissue diseases

3) Personal finance companies start a nationwide lending program for cosmetic procedures not covered by health insurance

4) Medical malpractice insurance premiums increase for plastic surgeons

5) Medical schools announce that residents in plastic surgery can be licensed after only five years instead of the current seven years

What are the likely consequences of the following events in the U.S market for cosmetic surgery?

OptimizationMarginal AnalysisSupply and Demand

Equilibrium Elasticity Welfare analysis Effects of government intervention

Economic Fundamentals

Suppose the market for lasik eye surgery can be described by the following equations: Qd = 5100 – 6P Qs = - 400 + 5Pa) Solve for the market equilibrium price and quantity.b) Calculate consumer and producer surplus.c) Calculate the elasticity of demand at the equilibrium.d) Suppose the government imposes an excise tax of $100

per surgery on eye surgeons. What is the new equilibrium price and quantity? What happens to social welfare?

Many buyers/sellers Homogeneous product No entry barriers Perfect information

Competitive Market Model

MC

quantity

$

q1

P1

ATC

MR1

AVCProfit max rule: P = MC

LR Equil: π = 0

Market Failures Market Power

MonopolyRestricted entry (AMA, CON)EOS

Monopsony

Externalities Communicable diseases/immunizations Uninsured and cost shifting

Public goods Free-riders R&D

Imperfect/Asymmetric information Agency problem (induced demand) Adverse selection Moral hazard

Third-party payers

Imperfections in Medical Markets

Hospitals: 3¢ per $1Physicians: 20¢ per $1

Dealing with Market FailureCollective provision

Medicare Medicaid

Government regulation Price controls Entry restrictions FDA

Tax Policy Tax exemptions

Government Failure?

Economic Evaluation in Health Care

The Inevitability of Trade-OffsThe value of a medical interventionThe inclusion of a drug on the formularyPaying for an experimental procedureInvesting in new technology

Is it worth it? How do we measure value to insure we get value for spending?

Options for colorectal cancer screening

Is it worth the extra money?

Fecal blood test($20)

Sigmoidoscopy ($150 - $300)

Barium enema($250 - $500)

Virtual Colonoscopy ($500 - $900)

Colonoscopy($800 - $1200)

Types of Economic Evaluation Cost of illness studies Cost-benefit analyses Cost-effectiveness studies

Cost of Illness Studies What does it cost? Burden of 5 chronic conditions in US (Druss et al., 2001)

Mood disorders, diabetes, heart disease, asthma, and hypertension Direct cost of treatment: $62 billionCost of treating coexisting conditions: $208 billionLost productivity: $36 billion

Role in analysis – increased awareness

$306 billion

Cost-Benefit Analysis

Net PV =

timeCosts

Benefitstoday

tt

rB

rB

rBC

)1()1()1( 22

11

0

The higher the discount rate, r, the lower the PV

Cost-Benefit Criterion If net benefit stream is positive, project is acceptable

If ratio is greater than one, project is acceptable

Examples Clarke (1998): mobile mammographic screening and travel cost method Ginsberg and Lev (1997): riluzole and ALS

tt

n

tt

tn

t rC

rBCB

)1(/

)1(/

11

ttt

n

t rCBNPV)1(1

Challenges of Cost-Benefit AnalysisValuing benefits

How do you place a value on a human life? Willingness-to-pay approach

wealth life expectancy current health statuspossibility of substituting current consumption for future

consumption Choosing a discount rate

Cost-Effectiveness AnalysisMeasures health benefit by health outcome, not the

dollar value of lifeUsing the decision makers’ approach

Maximize the level of health for a given population subject to a budget constraint

Practical guide for choosing between programs or treatment options when budgets are limited

Cervical Cancer ScreeningThe medical evidence is clear: Cervical cancer screening

saves lives. Much of the focus of cost-effectiveness research addresses issues concerning the appropriate screening interval.

D.M. Eddy (Screening for cervical cancer, Annals of Internal Medicine 113, 214-226, 1990) studied the issue and estimated that annual screening for a hypothetical cohort of 1,000 22-year-old women screened until age 75 would cost $1,093,000 and would save 27.6 life years. If screened every three years instead, the cost would be $467,000 and 26.8 life years would be saved.

Is annual screening cost effective?

Incremental Cost-Effectiveness Ratio

If CA > CB and EA < EB, B dominates.If CA < CB and EA > EB, A dominates.

If, however, CB > CA and EB > EA, choice is not obvious. Use CE.

AB

AB

EECCICER

ICER Curve: 2 Treatments

Cost

Effectiveness

A

B

CA CB

EA

EB

Large ICER = flat slope

AB

AB

EECCICER

Cervical Cancer Screening: Redux D.M. Eddy (Screening for cervical cancer, Annals of Internal

Medicine 113, 214-226, 1990) studied the issue and estimated that annual screening for a hypothetical cohort of 1,000 22-year-old women screened until age 75 would cost $1,093,000 and would save 27.6 life years. If screened every three years instead, the cost would be $467,000 and 26.8 life years would be saved.

What is the ICER?

500,782$8.266.27

000,467000,093,1

ICER

ICER Curve: Multiple Treatments

Cost

Effectiveness

A

B C

D

E

F G

Treatments C and E are dominated

“flat of the curve”

Measuring CostsDirect – associated with use of resources

Medical Non-medical

Indirect – related to lost productivityIntangible – associated with pain and suffering, grief,

anxiety, and disfigurement

Measuring Effectiveness

Surrogate measures stated in terms of clinical efficacy Blood pressure, cholesterol levels, bone mass density, or

tumor sizeIntermediate measures stated in terms of clinical

effectiveness Events (heart attack, stroke, cancer), scores on exams

Final outcomes measure economic effectiveness Events avoided, disease-free days, life-years saved,

quality-adjusted life years saved

Improvements in Health

Survival Measures

Time (years)

Survivalprobability

100%

90%

77%

A

B

C

D

1.5 6.5

Survival function for treatment group

Survival function for control group

Improved Life Expectancy Due to Clinical Treatment

Life expectancy = area under survival function

Gain in LE during trial = ½(.90-.77)1.5 = 0.0975 yrsGain in LE after trial = ½(.90-.77)5 = 0.325 yrs

Total Gain in LE = 0.4225 yrs

LE w/o treatment = ½(1.00-0.0)6.5 = 3.25 yrs

Problem Set 1: #16

Quality of Life Measures: QALYQuality-Adjusted Life Year

Measured on a preference scale anchored by death (0) and perfect health (1)

Calculating a QALY

Time (years)

Utility

6 15

U(H1)

U(HD)

Normal 55-yr old male has LE of 25 more yrs

Diabetic 55-yr old male has LE of 15 more yrs

Value of one year in chronic health state is x/t

Utility value of 15 years = 6/15 = 0.40

QALY of remaining 15 years = (.40)(15) = 6 years

x = healthy yearst = chronic health years

Decision TreesHandout

Treatment A Treatment BMortality Rate 2% 5%Life Expectancy for Survivors

20 years 10 yearsInitial Treatment Cost $10,000 $3,000Follow up cost, year 1 $5,000 $1,000Annual follow up costs, all subsequent years

$1,000 $500