Demand for Health Care Production Function for Health Health = H(medical care, other inputs, time) Health Status H H2 H1 Iatrogenic disease M1 M2 M3 Medical Care Spending.
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Demand for Health Care Production Function for Health Health = H(medical care, other inputs, time) Health Status H H2 H1 Iatrogenic disease M1 M2 M3 Medical Care Spending Health Status Measurements Mortality: probability of death Morbidity: probability of illness/disability Quality of life: QALY Top 10 Causes of Death Measured in 1000s Cause of Death 1980 Cause of Death Number Percent 1989.8 100.0 1. Heart disease 761.1 38.3 2. Malignant neoplasms 416.5 20.9 3. Cerebrovascular diseases 170.2 4. Unintentional injuries 2006 Number Percent 2,426.3 100.0 1. Heart disease 631.6 26.0 2. Malignant neoplasms 559.9 23.1 8.6 3. Cerebrovascular diseases 137.1 5.7 105.7 5.3 4. Chronic lower respiratory diseases 124.6 5.1 5. Chronic obstructive pulmonary diseases 56.0 2.8 5. Unintentional injuries 121.6 5.0 6. Pneumonia and influenza 54.6 2.7 6.Diabetes mellitus 72.5 3.0 7. Diabetes mellitus 34.9 1.8 7. Alzheimer’s disease 72.4 3.0 8. Chronic liver disease and cirrhosis 30.6 1.5 8. Pneumonia and influenza 56.3 2.3 9. Atherosclerosis 29.5 1.5 9. Nephritis 45.3 1.9 10. Suicide 26.9 1.4 10. Septicemia 34.2 1.4 All Causes All Causes Work Days Lost and Activity Impairments, 1996 Condition Acute Respiratory Infection Arthropathies Asthma Back Problems Cardiac Dysrythmias Cerebrovascular Disease Chronic Obstructive Pulmonary Disease Congestive Heart Failure Diabetes Hypertension Ischemic Heart Disease Mood Disorders Motor Vehicle Accidents Peripheral Vascular Disorders Respiratory Malignancies Source: Druss et al., 2002. Work Days Lost (Millions) 69.2 67.2 31.4 83.0 7.2 8.2 57.5 1.1 27.5 12.0 21.8 78.2 70.0 12.8 2.5 Rank 4 5 7 1 12 13 6 15 8 11 9 2 3 10 14 Activity Impairments (Thousands) 1,949.6 3,070.5 690.4 1,380.9 528.7 1,084.1 889.3 494.6 1,954.0 544.3 638.3 1,400.9 808.6 591.4 121.5 Rank 3 1 9 5 13 6 7 14 2 12 10 4 8 11 15 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 Demand for Medical Care Demand Function QMC = M(P; HS, DC, ES, PF) Health status: acute/chronic care Demographic characteristics: Economic standing Physician factors $ Q age, gender, population Effect of Insurance on Demand Price D100% D50% D0% P0 ½ P0 Q0 Q1 Q2 Medical Care Physician Induced Demand S & D may not be independent due to principalagent 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 Estimating Demand Problem Set #8 Price elasticity of demand E = %ΔQ %ΔP Income elasticity of demand E = %ΔQ %ΔM Select Studies on Elasticity of Demand Study Price Elasticities Davis and Russell (1972) Rosett and Huang (1973) Newhouse and Phelps (1976) Manning et al. (1987) Wedig (1988) Newhouse et al. (1993) Eichner (1998) Income Elasticities Rossett and Huang (1973) Newhouse (1977) Parkin, McGuire, and Yule (1987) Gerdtham and Jonsson (1991) Moore, Newman, and Fheili (1992) Murray, Govindaraj, and Musgrove (1994) Dependent Variable Elasticity Outpatient Visits Hospital Admissions Hospital and Physician Spending Hospital Length of Stay Physicians’ Office Visits Overall Spending Hospital Care Preventive Care Level of Care Medical Care Medical Care -1.00 -0.32 to -0.46 -0.35 to -1.50 -0.06 to -0.29 -0.08 to -0.10 -0.22 -0.14 -0.43 -0.16 to -0.23 -0.22 -0.62 to –0.75 Household Medical Spending Per Capita Medical Spending Per Capita Medical Spending Per Capita Medical Spending Short-Run Per Capita Spending Long-Run Per Capita Spending Total Health Expenditures 0.25 to 0.45 1.15 to 1.31 0.80 to 1.57 1.24 to 1.43 0.31 to 0.86 1.12 to 3.22 1.43 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 RAND Experiment Spending Research question: How did assignment to groups affect spending? Data from Manning WG et al. 1987. “Health insurance and the demand for medical care: Evidence from a randomized experiment.” American Economic Review, 77(3):251-277. RAND Experiment Spending Research question: How did assignment to groups affect spending? Economic lesson: increase the price and reduce the amount consumed 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) 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 Market for Health Insurance Types of insurance Social insurance Medicare Medicaid Indemnity insurance Provides reimbursement for expenditures or loss of income Premiums (price) reflects expected loss (cost) Hospitalization Physician services Major medical Dental Disability income protection Long-term care Insurance Theory People prefer to avoid risky outcomes May be willing to pay to avoid risky outcomes Expected Utility Theory Assumes diminishing marginal utility of income Utility Utility when healthy Expected Utility without insurance U 90 86 PH = probability of being healthy PS = probability of being sick PH + PS = 1 E(U) = PHU($40,000) + PSU($20,000) = PH•90 + PS•70 Let PS = .20 70 Utility when sick $20 $36 $40 Medical illness costs $20,000 E(U) = (.80)90 + (.20)70 = 86 E(Y) = (.80)(40,000) + (.20)(20,000) = $36,000 Income (thousands) Expected Utility Theory Utility from a certain income of $35,000 Utility U 90 86 Paying $5,000 to insurer leaves consumer with 86 utils, which equals E(U) without insurance. 70 Loading fee $20 Expected medical costs $35 $36 $40 Income (thousands) Determinants of HI Demand 1) Price of insurance • In the previous example, the consumer will forego health insurance if the premium is greater than $5,000. 2) Degree of Risk Aversion • Greater risk aversion increases the demand for health insurance. 3) Income • Larger income losses due to illness will increase the demand for health insurance. 4) 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. Health Insurance and Market Failure Income tax treatment Information problems Moral hazard Adverse selection Free riders 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. Example: Cost of insurance when income is $1,000 per week and income tax rate is 28% $50 weekly insurance premium Employee Purchased Employer Purchased Income 28% tax after tax insurance net pay Income insurance subtotal 28% tax net pay $1,000 <280> 720 <50> 670 $1,000 <50> 950 <266> 684 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 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 The Peltzman Effect Insurers’ Response to Market Failure Response to overspending: Deductibles Coinsurance Response to adverse selection: Require physical exams No preexisting conditions will be covered Efficient Pooling? Experience rating Community rating Cream skimming Self-insurance Managed Care Managed Care Contractual arrangements that integrate financing and delivery of medical care Prepaid health plans (Prospective payment) Limited benefits Risk-sharing arrangements 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) Sidney Garfield and Henry Kaiser Subsidies to non-profit groups to start HMOs HMO Enrollment, 1970-2006 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 Percentage of American Workers in Managed Care 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 “gatekeeper” 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 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 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 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) 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 Market for Health Care Professionals Physicians Nurses Dentists Labor Market Theory Competitive Model Hiring Rule: MRP = w Imperfectly Competitive Model Barriers to entry Imperfect information Third-party payment S1 Wage W1 D1 = MRP1 L1 Physicians Human Capital Model Medical degree as an investment $ Med Degree Benefits BA Degree Foregone Income Age Direct Cost Human Capital Model Investment Rule: invest if PV of Net Benefits > 0 Bt Ct NB t t 1 (1 r ) n Can solve for internal rate of return for which NB = 0 Mincer Earnings Equation: lnY = β0 + β1S + β2X + ε Estimated Rates of Return Primary Care Physicians Dentists 15.9% 20.7% Medical Specialists Lawyers Business 20.9% 25.4% 29.0% Source: Weeks, Wallace, Wallace, and Welch. “A Comparison of the Educational Costs and Incomes of Physicians and Other Professionals,” New England Journal of Medicine 330(18), 1994. Problem Set #30 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 Active Physicians in the U.S. Year 1960 1970 1980 1990 2000 2005 Active Physicians 247,257 310,845 435,545 559,988 737,504 801,742 Rate per 100,000 Residents 138 153 192 225 262 270 Primary Care Physicians 125,359 134,354 170,705 213,514 274,653 300,022 Primary Care as a Percent of Active 50.7 43.2 39.2 38.1 37.2 37.4 Source: Health, United States, 2007 with Chartbook on Trends in the Health of Americans, U.S. Department of Health and Human Services, 2007. Specialty and Geographic Distribution Primary care vs. specialty care 50% target? Urban vs. rural Pennsylvania: Pittsburgh-Philadelphia: 25% of population, but 50% of physicians The Business of Being a Physician Physician Compensation Medical Practice Incomes of Physicians 1995 2000 2002 2003 2004 2005 2006 $133,329 129,148 $147,232 145,121 $153,231 150,267 $156,902 152,478 $161,816 156,011 $168,111 160,729 $171,519 164,021 139,320 149,104 155,530 159,978 168,551 176,124 181,187 215,978 256,494 274,639 296,464 297,000 All specialists: Anesthesiology 240,666 280,353 306,964 323,491 325,999 Invasive Cardiology 337,000 365,894 385,000 410,272 427,815 Dermatology 176,948 213,876 269,238 285,692 308,855 Emergency Medicine 176,439 198,423 211,709 215,859 221,679 Gastroenterology 209,913 281,308 321,023 351,614 368,733 Obstetrics/Gynecology 215,000 223,007 233,061 237,191 247,348 Orthopedic Surgery 301,918 335,646 362,181 397,059 396,650 Psychiatry 132,477 156,486 163,144 162,572 182,799 Diagnostic Radiology 247,505 298,824 376,035 403,779 406,585 General Surgery 216,562 245,541 255,438 264,375 282,504 Source: Physician Compensation and Production Survey, 2006, Englewood, CO: Medical Group Management Association, 2006. 316,620 359,699 463,801 334,277 243,449 384,015 256,485 428,119 189,409 426,346 300,800 322,256 365,409 457,563 348,706 250,030 406,345 271,425 446,517 192,609 446,517 306,115 All primary care: Family Practice (without OB) Internal medicine The Business of Being a Physician Physician Compensation Pricing physician services Price Discrimination UCR fees Medicare RVS Pricing Physicians’ Services CPT code Description 2000 2005 2010 27130 Total hip replacement $1,423 $1,292 $1,375 33533 Single CABG 1,853 1,794 1,947 43239 Upper GI endoscopy 223 300 327 67210 Treatment of retinal lesion 599 560 628 92980 Insertion of coronary stent 979 772 818 93000 Electrocardiogram 26 24 20 99203 Office visit, new patient 83 90 98 99213 Office visit, established patient 44 49 66 99223 Initial hospital care 147 151 190 99292 Additional 30 minutes of critical care 90 108 117 Source: Centers for Medicare and Medicaid Services, Physician Fee Schedule Search, http://www.cms.hhs.gov/pfslookup. Accessed February 17, 2010 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 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 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 The Market for Nursing Services RN: AA or BA or 3-yr HD LPN: 12-14 month program $65,000 $40,000 Active RNs (thousands) RNs per 100,000 population Nursing Programs First-Year Enrollment Nursing Graduates 1970 750 368 1,340 1980 1,273 560 1,385 105,952 75,523 1990 1,790 714 1,470 108,580 66,088 2000* 2,190 778 688 103,999 32,543 2007* 2,468 819 709 180,127 56,446 43,103 * Baccalaureate program only. Source: Health, United States, 2009. Available at http://www.cdc.gov/nchs/hus.htm; Statistical Abstract of the United States 2010. Available at http://www.census.gov/compendia/statab/. The Market for Dental Services General Dentistry Orthodontists Oral Surgeons Dental Hygienists Dental Assistants $154,000 $194,000 $190,000 $ 67,000 $ 33,000 Active Dentists (thousands) Dentists per 100,000 population Dental Schools First-Year Enrollment Dental Graduates 1970 96.0 47 53 -- 3,749 1980 121.9 54 60 6,132 5,256 1990 147.5 59 58 3,979 4,233 2000 168.0 61 55 4,314 4,171 2007 -- -- 56 4,733 4,714 Source: Health, United States, 2009. Available at http://www.cdc.gov/nchs/hus.htm