Introduction to Health Economics
Tom Rice
Department of Health Policy and Management
UCLA Fielding School of Public Health
May 4, 2017
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
The Economic Problem*
(1) Resources are scarce in relation to human
wants
(2) These resources have alternative uses
(3) Different people want different things
* Victor Fuchs, Who Shall Live?
3
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
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
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-forservice
• What it is: deviations from classical economic
assumptions that…
6
CLASSICAL ECONOMIC ASSUMPTIONS
1) People are hyper-rational. They always make
the right decision to enhance their well
being.
2) They have no trouble sifting through all
available information to make that decision.
3) They come into the world with a firm set of
immutable preferences
7
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?
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 longrun 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.”
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
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”
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
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
Cost Containment
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
15
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
16
Physician Payment
“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
“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 timeconsuming 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
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?
Moral Hazard
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
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 lifesaving services
• Patient cost sharing is regressive
Alternatives
Supply-side policies offer an alternative to
rationing on ability to pay. Examples:
• Incentive reimbursement
• Utilization management
• Supply and technology controls
• Global budgets
Economic Evaluation
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
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
Cross-National Comparisons
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.
Total Health Expenditure per Capita
and GDP per Capita,
US and Selected Countries, 2008
$8,000
Per Capita Health Spending
USA
$7,000
$6,000
$5,000
Belgium
$4,000
France
$3,000
Italy
$2,000
Austria
Germany
Spain
Switzerland
Canada
Norway
Netherlands
U.K.
Japan
Australia
Sweden
$1,000
$0
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
$55,000
$60,000
$65,000
GDP Per Capita
Source: Organisation for Economic Co-operation and Development (2010), "OECD Health Data", OECD Health Statistics (database). doi: 10.1787/data-00350en (Accessed on 14 February 2011).
Notes: Data from Australia and Japan are 2007 data. Figures for Belgium, Canada, Netherlands, Norway and Switzerland, are OECD estimates.
Diagnostic Imaging Prices, 2013
Dollars ($US)
MRI
Dollars ($US)
Notes: US refers to the commercial average. MRI refers to magnetic resonance imaging;
CT refers to computed tomography.
Source: International Federation of Health Plans, 2013 Comparative Price Report.
CT Scan (abdomen)
32
Physician Fee for Hip Replacement, 2008
Adjusted for Differences in Cost of Living
Private payers
Public payers
Dollars ($US)
Dollars ($US)
Source: M. J. Laugesen and S. A. Glied, “Higher Fees Paid to U.S. Physicians Drive Higher Spending
for Physician Services Compared to Other Countries,” Health Affairs, Sept. 2011 30(9):1647–56.
THE
COMMONWEALTH
FUND
33
Physician Incomes, 2008
Adjusted for Differences in Cost of Living
Dollars ($US)
Orthopedic surgeons
Primary care doctors
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.
THE
COMMONWEALTH
FUND
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).
Obesity (BMI>30) Prevalence Among Adult Population, 2011
35
Percent
Measured
Self-reported
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.
* 2010.
** 2009.
Source: OECD Health Data 2013.
THE
COMMONWEALTH
FUND
ACCESS
36
Percentage of Population Covered Under Public
Programs, 2011
(Source: OECD Health Data, 2013)
120
100
80
60
40
20
0
AUS
CAN
FRA
GER
JAP
NETH
SWIT
UK
US
Percentage of Population Uninsured, 2007
(Source: OECD Health Data, 2008)
18%
16%
16%
14%
Percent
12%
10%
8%
6%
4%
2%
2%
1%
0%
0%
AUS
CAN
0%
0%
GER
NETH
UK
US
Country
38
Cost-Related Access Problems in the Past Year
Percent
AUS
CAN
FR
GER
NETH
NZ
NOR
SWE
SWIZ
UK
US
Did not fill
prescription or
skipped doses
16
15
11
14
8
12
7
7
9
4
30
Had a medical
problem but did
not visit doctor
17
7
10
12
7
18
8
6
11
7
29
Skipped test,
treatment, or
follow-up
19
7
9
13
8
15
7
4
11
4
31
Yes to at least
one of the above
30
20
19
22
15
26
14
11
18
11
42
Source: 2011 Commonwealth Fund International Health Policy Survey of Sicker Adults in Eleven Countries.
39
When Calling Regular Doctor with a Question,
Always or Often Hear Back on the Same Day
Percent
40
Source: 2013 Commonwealth Fund International Health Policy Survey in Eleven Countries.
Access to Doctor or Nurse When Sick or Needed Care
Same-day or next-day
appointment
Waited six days or more
for appointment
Percent
Note: Question asked differently in Switzerland.
41
Source: 2013 Commonwealth Fund International Health Policy Survey in Eleven Countries.
41
Wait Times for Specialist Appointment
Less than four weeks
Percent
Base: Needed
to see specialist in the past two years.
42
Source: 2013 Commonwealth Fund International Health Policy Survey in Eleven Countries.
Two months or more
42
QUALITY
43
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.
U.S. Lags Other Countries: Mortality Amenable to Health Care
Deaths per 100,000 population*
1997–98
150
2006–07
134
127
116
115
109
99
100
89
88
120
113
106
97
97
88
81
76
50
96
57
55
61
60
61
64
66
74
67
76
79
78
77
80
83
d
De
nm
Un
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ite
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d
Ki
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do
Un
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St
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Ze
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Ne
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Ir e
ec
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Gr
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m
an
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d
Ge
r
Fi
nl
an
No
rw
ay
Ne
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la
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s
Au
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Sw
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Ja
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It a
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Au
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Fr
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0
* 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
Percent reported:
AUS
CAN
FR
GER
NETH
NZ
NOR
SWE
SWIZ
UK
US
Wrong medication
or dose
4
5
6
8
6
7
8
5
2
2
8
Medical mistake in
treatment
10
11
6
8
11
13
17
11
4
4
11
Incorrect
diagnostic/
lab test results*
4
5
3
2
6
5
4
3
3
2
5
Delays in
abnormal
test results*
7
11
3
5
5
8
10
9
5
4
10
Any medical,
medication, or
lab errors
19
21
13
16
20
22
25
20
9
8
22
* 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.
Readmitted to Hospital or Went to ER
from Complications During Recovery
Base: Adults with any chronic condition who were hospitalized
Percent
40
20
17
18
17
11
7
9
11
10
NZ
UK
0
AUS
CAN
FR
GER
NETH
Data collection: Harris Interactive, Inc.
Source: 2008 Commonwealth Fund International Health Policy Survey of Sicker Adults.
US
47
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.
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.