Economics 330 Economics of Health Care Dr. Greg Delemeester Spring 2010 National Health Care Expenditures Year Total Spending (in billions) Percent change Percent of GDP Per capita spending $ 13 -- 4.5 $ 82 8.8 5.2 10.5 7.2 13.0 9.1 1,100 10.9 12.3 2,814 1,353 5.9 13.6 4,789 1,982 7.9 15.7 6,701 2,113 6.7 15.8 7,071 2,240 5.6 15.9 7,423 2,339 4.3 16.2 7,681 Source: http://www.cms.hhs.gov/NationalHealthExpendData/
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Transcript Economics 330 Economics of Health Care Dr. Greg Delemeester Spring 2010 National Health Care Expenditures Year Total Spending (in billions) Percent change Percent of GDP Per capita spending $ 13 -- 4.5 $ 82 8.8 5.2 10.5 7.2 13.0 9.1 1,100 10.9 12.3 2,814 1,353 5.9 13.6 4,789 1,982 7.9 15.7 6,701 2,113 6.7 15.8 7,071 2,240 5.6 15.9 7,423 2,339 4.3 16.2 7,681 Source: http://www.cms.hhs.gov/NationalHealthExpendData/
Economics 330
Economics of Health Care
Dr. 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
Year
Out of
pocket
Public Spending
Private
Insurance
Federal
State
1960
$ 12.9
$ 5.9
$ 2.0
$ 2.9
1970
24.9
14.0
14.4
7.8
1980
58.1
61.2
62.3
23.9
1990
136.1
204.7
172.8
63.5
2000
192.6
402.8
369.8
117.1
2005
247.5
599.8
562.3
176.9
2006
254.9
634.6
620.1
178.7
2007
270.3
665.0
661.3
188.7
2008
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
Private vs Public Spending
on Personal Health Care Expenditures
90%
80%
70%
% of PHCE
60%
50%
Private
Public
40%
30%
20%
10%
0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Spending as % of Personal Health Care Expenditues
60%
50%
% of PHCE
40%
Out of pocket
Health Ins
30%
Fed
State
20%
10%
0%
1960
1970
1980
1990
2000
2010
Changes in Hospital Usage
Short-Stay Community Hospital Characteristics, United States
Category
1970
1980
1990
2000
Beds
4.17
4.38
3.73
2.93
(per 1,000 population)
Admissions
144.0
159.6
125.4
117.6
(per 1,000 population)
Average length of stay
7.7
7.6
7.2
5.8
(days)
Outpatient visits
657.2
893.2
1,211.6 1,882.8
(per 1,000 population)
Outpatient visits per
4.6
5.6
9.7
15.8
admission
Percent occupancy
78.0
75.4
66.8
63.9
Source: Health United States, various years.
2003
2.79
2004
--
2005
2.71
119.4
119.3
118.9
5.7
5.6
5.6
1,933.4
1,943.7
1,972.0
16.2
16.3
16.6
66.2
--
67.3
Changes in Medical Care Delivery
Shift from private to public financing
Shift to 3rd party financing
Changes in hospital usage and pricing
Deregulation and growth in managed care
Payment Structure
Traditional 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 Goals
Access 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 Insurance
Year
Number
Percent
Number
Percent
1999
161.2
68.3
38.5
16.1
2000
160.8
67.1
41.4
17.0
2001
162.4
67.0
40.3
16.4
2002
159.4
65.3
41.7
16.8
2003
157.5
64.4
41.6
16.5
2004
159.5
64.0
42.1
16.6
2005
160.1
63.6
42.1
16.4
2006
155.8
61.5
43.9
17.0
2007
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 Goals
Access 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 Fundamentals
Optimization
Marginal Analysis
Supply and Demand
Equilibrium
What are the likely consequences of the
following events in the U.S market for cosmetic
surgery?
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
Economic Fundamentals
Optimization
Marginal Analysis
Supply and Demand
Equilibrium
Elasticity
Welfare analysis
Effects of government intervention
Suppose the market for lasik eye surgery can be
described by the following equations:
Qd = 5100 – 6P
Qs = - 400 + 5P
a)
b)
c)
d)
Solve for the market equilibrium price and quantity.
Calculate consumer and producer surplus.
Calculate the elasticity of demand at the equilibrium.
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?
Competitive Market Model
Many buyers/sellers
Homogeneous product
No entry barriers
Perfect information
$
MC
ATC
Profit max rule: P = MC
AVC
P1
MR1
LR Equil: π = 0
q1
quantity
Market Failures
Market Power
Monopoly
Restricted entry (AMA, CON)
EOS
Monopsony
Externalities
Communicable diseases/immunizations
Uninsured and cost shifting
Public goods
Free-riders
R&D
Imperfections in Medical Markets
Imperfect/Asymmetric information
Agency problem (induced demand)
Adverse selection
Moral hazard
Third-party payers
Hospitals:
3¢ per $1
Physicians: 20¢ per $1
Dealing with Market Failure
Collective 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-Offs
The value of a medical intervention
The inclusion of a drug on the formulary
Paying for an experimental procedure
Investing in new technology
Is it worth it? How do we measure value to insure
we get value for spending?
Options for colorectal cancer screening
Fecal blood test
($20)
Sigmoidoscopy
($150 - $300)
Barium enema
($250 - $500)
Virtual Colonoscopy
($500 - $900)
Colonoscopy
($800 - $1200)
Is it worth the
extra money?
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 billion
Cost of treating coexisting conditions: $208 billion
Lost productivity: $36 billion
Role in analysis – increased awareness
$306 billion
Cost-Benefit Analysis
Benefits
today
Costs
Net PV =
time
Bt
B1
B2
C0
1
2
(1 r ) (1 r )
(1 r )t
The higher the discount rate, r, the lower the PV
Cost-Benefit Criterion
If net benefit stream is positive, project is acceptable
n
NPV
t 1
Bt Ct
t
(1 r )
If ratio is greater than one, project is acceptable
n
B/C
t 1
n
Bt
Ct
/
t
t
(1 r ) t 1 (1 r )
Examples
Clarke (1998): mobile mammographic screening and travel cost method
Ginsberg and Lev (1997): riluzole and ALS
Challenges of Cost-Benefit Analysis
Valuing benefits
How do you place a value on a human life?
Willingness-to-pay approach
wealth
life expectancy
current health status
possibility of substituting current consumption for future
consumption
Choosing a discount rate
Cost-Effectiveness Analysis
Measures health benefit by health outcome, not the
dollar value of life
Using 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 Screening
The 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
CB C A
ICER
EB E A
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.
ICER Curve: 2 Treatments
Effectiveness
Large ICER = flat slope
B
EB
EA
ICER
A
CA
CB
CB C A
EB E A
Cost
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?
1,093,000 467,000
ICER
$782,500
27.6 26.8
ICER Curve: Multiple Treatments
Effectiveness
“flat of the curve”
G
F
D
B
A
E
C
Treatments C and E are dominated
Cost
Measuring Costs
Direct – associated with use of resources
Medical
Non-medical
Indirect – related to lost productivity
Intangible – associated with pain and suffering, grief,
anxiety, and disfigurement
Measuring Effectiveness
Improvements in Health
Surrogate measures stated in terms of clinical efficacy
Blood pressure, cholesterol levels, bone mass density, or
tumor size
Intermediate 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
Problem Set 1: #16
Survival Measures
Improved Life Expectancy Due to Clinical Treatment
Life expectancy = area under survival function
Survival
probability
100%
LE w/o treatment = ½(1.00-0.0)6.5
A
B
90%
77%
= 3.25 yrs
Gain in LE during trial = ½(.90-.77)1.5 = 0.0975 yrs
Gain in LE after trial = ½(.90-.77)5
= 0.325 yrs
Total Gain in LE
= 0.4225 yrs
C
Survival function for
treatment group
Survival function for
control group
D
1.5
6.5
Time (years)
Quality of Life Measures: QALY
Quality-Adjusted Life Year
Measured on a preference scale anchored by
death (0) and perfect health (1)
Calculating a QALY
Utility
Normal 55-yr old male has LE of 25 more yrs
Diabetic 55-yr old male has LE of 15 more yrs
U(H1)
x = healthy years
t = chronic health years
U(HD)
6
15
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
Time (years)
Decision Trees
Handout
Mortality Rate
Life Expectancy for
Survivors
Initial Treatment Cost
Follow up cost, year 1
Annual follow up costs,
all subsequent years
Treatment A
2%
20 years
Treatment B
5%
10 years
$10,000
$5,000
$1,000
$3,000
$1,000
$500