Final Reminders - Health Care

Final Reminders – Health Care Atul Gawande, “Cost Conundrum: What a Texas Town Can Teach Us About Health Care,” Fee-for-Service (FFS) Model « Payment system where providers are reimbursed ( 報銷 ) for each service they perform, such as tests, procedures, or office visits « This system can lead to a higher volume of care provided, as there is a direct financial incentive to increase the quantity of services « However, this does not necessarily correlate with improved patient outcomes and can lead to unnecessary care and higher overall health care costs Supply-Induced Demand « Supply-induced demand occurs when the availability of medical services increases, leading to higher utilization of those services, regardless of the patient's actual need « In health care, this can manifest when there is an abundance of facilities and technology, which can encourage providers to recommend more services to patients, driving up costs Defensive Medicine F Practice of recommending tests or treatments not necessarily based on the patient's best interests but to protect against potential malpractice claims F This practice can contribute to higher health care costs due to the additional, and possibly unnecessary , medical procedures being performed Variation in Practice Patterns « There is substantial variation in how medicine is practiced in different regions, which is often not associated with differences in patient populations or health outcomes « Gawande's article shows that McAllen has particularly high costs without corresponding improvements in patient health, suggesting that local practice patterns play a significant role in driving up spending Incentives and Profit Motives « The economic incentives for health care providers can significantly impact their behaviour « Gawande points out that when providers stand to profit from the volume of services they provide, there can be a tendency toward overutilization « This is especially prevalent in systems where doctors have ownership interests in hospitals or outpatient facilities Role of Medicare « Medicare spending is used as a barometer for health care costs in an area « In McAllen, Gawande notes, Medicare spending was among the highest in the nation « The Medicare system largely follows the FFS model, which may unintentionally encourage providers to offer more services , thus driving up costs Potential Solutions and Alternative Models P Gawande discusses alternative care models, such as those employed by the Mayo Clinic,

that prioritize coordinated, efficient care over volume P These models often use salaried physicians and emphasize team-based care , which can lead to lower costs and better patient outcomes Quality of Care vs. Cost P The relationship between the cost of care and the quality of outcomes is complex P Higher spending does not necessarily result in better health outcomes, as seen in McAllen P Gawande highlights that more cost-effective care can often be provided with a focus on quality and efficiency rather than simply increasing the volume of services Economies of Scale P Economies of scale typically suggest that as the volume of a service increases , the cost per unit of that service decreases P However, in health care, Gawande finds that this principle does not always apply P In McAllen, higher volumes of service led to higher, not lower, per capita costs, suggesting that the unique dynamics of health care economics can defy traditional economic models Impact of Health Care Reform P While Gawande's article predates the Affordable Care Act (ACA), it contemplates how health care reforms could impact costs P Reforms that focus on payment models rewarding value and quality of care, rather than volume P Could potentially address the issues observed in McAllen and lead to more sustainable health care economics Ethical Considerations Q The article raises ethical questions about the fee-for-service model, where financial incentives might lead to care that is not in the best interest of the patient Q This underscores the conflict between economic incentives and the ethical responsibility of health care providers to provide appropriate care The Role of Government 6 Gawande suggests that government intervention, through policy changes and adjustments to reimbursement structures , could encourage more cost-effective health care practices Conclusion Q Gawande's examination of McAllen, Texas, demonstrates that the health care cost conundrum is multifaceted and deeply rooted in the economic incentives embedded within the health care system Q The article suggests that a shift towards value-based care models, with a focus on coordinated care and system-wide efficiency , is necessary to address the unsustainable trajectory of health care costs

P TB can have devastating economic consequences for patients and their families, often driving them into poverty due to the costs of treatment and loss of income. Health economics considers both the direct out-of-pocket expenses and the indirect costs such as lost earning potential Global Health Initiatives Q International initiative s, such as the Global Fund to Fight AIDS, Tuberculosis, and Malaria, play a critical role in financing TB control efforts Q Health economics analyses the impact of such initiatives on reducing the burden of TB in different regions Health Insurance and TB Care P The role of health insurance in covering TB treatment can influence health outcomes and financial stability for patients P In countries with limited insurance coverage, the economic burden falls heavily on patients, while universal health coverage can alleviate these costs Public Health vs. Individual Approaches Q Health economics evaluates the balance between public health approaches, which focus on population-level interventions, and individual patient-centered care Q The spread of TB is a public health concern, and strategies that address it at the community level can be more cost-effective in the long run Health Systems Strengthening P Strengthening health systems is crucial for effective TB control P This includes investments in infrastructure, human resources, and health information systems P Health economics helps to identify the most efficient ways to strengthen health systems for better TB outcomes Socioeconomic Determinants of Health P The interaction between TB and socioeconomic status is significant P Poverty can increase the risk of contracting TB and can also result from the costs associated with the disease Economic Growth and Health Ø Health is a fundamental component of economic development. A healthy workforce is more productive, which is essential for economic growth Ø The article mentions TB's impact on the productive age group (15-45 years), highlighting the direct connection between controlling the disease and the prospects for India's economic development International Collaboration and Knowledge Sharing Q Health economics can evaluate how different countries or regions can learn from each

other's successes and failures in TB control, leading to more cost-effective global strategies The Role of Innovation P Economic analysis often focuses on the role of innovation in TB treatment and diagnosis, such as the development of new drugs , vaccines, or diagnostic tools P Health economics assesses the costs of developing these innovations versus the potential long-term savings and health benefits Conclusion F The disease's significant global burden necessitates careful economic consideration to ensure that limited resources are used in the most effective way to both treat individuals and prevent the spread of the disease Q Addressing TB effectively requires a comprehensive approach that combines medical treatment with broader socioeconomic interventions Q Health economics provides a framework to evaluate the costs and benefits of various strategies, aiming to reduce the burden of TB while making the best use of available resources James R. Chelius and John F. Burton, Jr., (1995), ‘Workers’ Compensation Benefits and Costs: Who Actually Pays for Workers’ Compensation?’, in Workers’ Compensation Yearbook 1. The Economic Burden of Workers' Compensation « The document begins with a discussion of the financial impact of workers' compensation on employers in the United States, highlighting that the costs exceeded $60 billion in 1991 and represented 2.646 percent of payroll « This introduces the concept of economic burden, which in health economics refers to the total cost society bears due to the presence of a health-related issue, in this case, workplace injuries and illnesses covered by workers' compensation insurance 2. Incidence of Costs in Health Economics « The document raises the question of who ultimately bears the cost of workers' compensation—employers, consumers, or workers themselves « This touches on the concept of incidence of costs or cost-shifting in health economics, which examines how the financial burden of healthcare (including insurance programs) is distributed among different entities in the economy 2. Employers' Role in Funding Workers' Compensation A This aligns with the concept of employer-financed healthcare, where companies either purchase insurance for their employees or self-insure, this is part of the broader discussion on funding mechanisms in health economics 4. Pass-Through Economics O The document suggests that employers may pass the costs of workers' compensation to consumers through higher product prices

and the overall structure of health systems Malcolm Gladwell, “The Risk Pool: What’s behind Ireland’s Economic Miracle – and G.M.’s financial Crisis,” Pension Plans and Economic Security « Gladwell discusses the idea of pension plans and their importance in providing economic security to workers « This is a fundamental concept in health economics as pensions are a form of long-term savings that ensure financial security for individuals when they are no longer able to work due to old age or disability Diversification of Risk P The proposal for a regional pension plan suggests the diversification of risk. By pooling resources across many small employers , the risk of any single company failing and being unable to pay out pensions is mitigated P This is a key principle in insurance and is widely used in health economics to manage the financial risk associated with unpredictable health events Company vs. Collective Responsibility P The tension between company-provided pensions and a more collective approach reflects differing views on who should bear the responsibility for health and retirement benefits P This debate is central to health economics, as it pertains to whether healthcare should be provided by employers, the government, or a mix of both Private Pension System Crisis: F The mention of the private pension system crisis relates to the sustainability of health economics systems F The crisis demonstrates what can happen when private entities are unable to fulfil their financial obligations for healthcare and pensions, leading to a potential need for government intervention Comparative Health Systems P Gladwell compares the generosity of the United States' benefits with those of other industrialized countries, highlighting the role of government and large groups in providing insurance P This comparison is a key area of study in health economics, focusing on the efficiency, equity, and performance of different health system models Dependency Ratios P Dependency ratios, which compare the number of people who are not of working age to those who are, are important in health economics because they impact the financial viability of health systems P A high dependency ratio can indicate a greater burden on the working population to support the young and old, which can strain public resources for healthcare and pensions

Demographic Changes and Economic Growth 6 The case of Ireland's economic growth following demographic changes, with a falling birth rate leading to a lower dependency ratio, showcases the impact of demographics on health economics 6 The proportion of working-age individuals relative to dependents can influence a country's ability to provide health services and fund public health programs Birth Rates and Economic Policy ° The lifting of restrictions on contraception in Ireland, which led to a lower birth rate , speaks to the intersection of health policy and economic policy ° Family planning can have major implications for health economics, affecting workforce size, dependency ratios, and the sustainability of health and social systems Economic Impact of Health and Pension Benefits ° The discussion also touches on the economic impact of health and pension benefits on companies, which is a critical issue in health economics ° The costs associated with providing these benefits can influence corporate decision- making and can have broader implications for the labor market and economy Lecture 5 – Consumer Choice and Demand Composite good: represents all other goods Max U(OG, visits) subject to P OG *OG+ P v *visits =Y « Solution obtained by differentiating: U(OG,visits)+ λ(Y - P OG *OG+ P v *visits) Consumer’s equilibrium analysis: Slope of indifference curve = marginal rate of substitution = price ratio ࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵? = % ࠵?ℎ࠵?࠵?࠵?࠵? ࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? % ࠵?ℎ࠵?࠵?࠵?࠵? ࠵?࠵? ࠵?࠵?࠵?࠵?࠵? Income elasticity >0: normal good Greater than 0 and less than or equal to 1: necessity >1: luxury good

Social discount rate is net of inflation (?) Impacts that result in redistribution of income should be ignored, as they are indirect Lecture 7 – Asymmetric Information and Agency Adverse selection, a phenomenon in which insurance attracts patients who are likely to use services at a higher-than-average rate, results from asymmetric information because potential beneficiaries have better information than the insurer about their health status and their expected demand for health care Akerlof’s Lemon Principle Q Due to the potential consequences of receiving poor-quality care (which can be as severe as life-threatening complications or death), patients are often risk-averse Q As a result, they may be willing to pay a premium for services that they perceive as being of higher quality or that come with better reputations, even if they can't directly assess the quality Q Leaving only the lemons behind Lecture 8 – Imperfect Information Supplier induced demand as an example of an agency problem ° Patient (principal) relies on the healthcare provider (agent) for information and recommendations on treatments ° If the healthcare provider stands to benefit financially from more treatments (e.g., through fee-for-service payment structures), they may have an incentive to overprescribe treatments, tests, or procedures, inducing demand that may not be medically necessary Small area variation: historical practices and institutional behaviors shape current decision- making and operational modes Capitation: receives payment per patient per unit of time Q Healthcare providers receive a set amount of money per patient for a defined period of time, regardless of how many times the patient is seen or how extensive the services provided are Target Income Hypothesis

6 Desired income level they aim to achieve, which influences their behavior in terms of the volume and type of services they provide 6 Once this income target is reached, the hypothesis posits that physicians may be less motivated to increase their workload or patient throughput because the marginal utility of additional income decreases after their target is met Evans/Benchmark/ Disutility of Inducements Model: physicians’ problem is to max U=U(p,l) Q Subject to physician’s profit line: mQ 0 +ml Q Q 0 : This is the quantity of services provided without any inducement Equilibrium will occur marginal rate of substitution equals the profit rate Graph: physician’s response to reduced profit rate Ø Flatter profit line indicates a lower profit rate per additional unit of service (lower m). Ø When the profit rate per service decreases, the physician must provide more services to achieve the same level of income as before (assuming costs remain constant), which means that the additional income gained from each additional service (ml) is now less Ø Mathematically, if the profit rate (m) is reduced, for any given quantity of inducement- driven services (l), the increase in income (ml) will be smaller Income effect Decreased Income: If the profit rate per induced service decreases, and physicians do not increase the volume of services to compensate, their overall income from inducements will drop. This loss in income makes each dollar more valuable to the physician. Inducement Becomes More Desirable: Despite the lower profit rate, the physician might be inclined to provide more induced services in an effort to maintain their previous income level. From this perspective, even though each additional service is less profitable, the need to sustain income might lead the physician to increase the service volume.

Payroll tax: increase in cost of using labor inputs à decrease in labor demand Supply Curve Shifts Down « Compensation Package Increase: Health insurance effectively increases the total compensation package for the workers « While it adds a cost $z for the employer, for the employees, it's a part of their salary package « Higher Net Wage Equivalent: The provision of health insurance can be seen as increasing the net wage equivalent that workers receive. If workers value the health insurance at its cost $z, then the supply of labor at any given monetary wage rate increases because the total compensation (wage plus the value of health insurance) is higher « Shift of Supply Curve: In the labor supply curve, which shows the relationship between the wage rate and the quantity of labor supplied, the addition of health insurance at cost $z effectively reduces the wage rate that workers are willing to accept. This is because part of their compensation is now coming in the form of health insurance benefits rather than cash wages. Therefore, the labor supply curve shifts downward by the amount $z Demand for Labor Curve Shifts Left P Increased Cost of Hiring: From the employer's perspective, providing health insurance increases the total cost of hiring an employee. Even if the cash wages do not change, the total cost now includes the additional cost $z for the health insurance P Reduced Marginal Product Value: Employers hire workers up to the point where the value of the marginal product of labor equals the marginal cost of hiring (wage rate plus any additional costs like health insurance). With the extra cost $z, the marginal cost of hiring increases, which means the value of the marginal product of labor must increase for additional hiring to occur P Leftward Shift of Demand Curve: Since the value of the marginal product of labor is unlikely to change just because health insurance is provided, the demand curve for labor shifts to the left. This is because, at any given wage rate, the cost of hiring an additional worker is now higher by $z

Supply Curve Shifts Upward by an Amount Less Than $z Q Workers may value the insurance provided at less than its cost $z$. If workers do not fully appreciate the value of the insurance or if it doesn't meet their specific needs, they might not be willing to reduce their cash wage demands by the full amount of $z$. This misalignment in valuation can cause the supply curve to shift up slightly Lecture 10 – Managed Care Overconsumption: beyond MB=MC Organized delivery system: association with an insurance product MCO steering: send enrollees to providers in the network Prospective à Concurrent à Retrospective Gatekeeper NOT Gatekeeper Provider network Health maintenance organization Preferred provider organization NOT Provider Network Point-of-service Fee-for-service PPO contracts with physicians rarely involve capitation Benefits of managed care: decrease in prices, decrease in price discrimination Supply curve is horizontal: MC=AC Graph a market with elastic demand: Each firm will supply whatever quantity is demanded at the market price—provided that this price covers the marginal cost of production. Since the price does not change with the quantity

Estimate of social discount rate: ࠵? = ࠵?࠵? ! + (1 − ࠵?)࠵? ! where a= (change in I)/(change in C+I) and (1-a)=(change in C)/(change in C+I) Highly investment-oriented economy: change in C is close to 0, a is close to 1 F s=r z Market equilibrium with distortions S: supply of funds Increase in taxes: decrease investment demand and supply of funds r z : marginal return on investment before taxes = opportunity cost of forgone investment p z : marginal return on savings after taxes i: government’s real long-term borrowing rate ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? " ࠵? ࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵? − ࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵? = ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵? − ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵? Project financed only by tax: ࠵? = ࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵? ࠵?࠵?࠵? Interest payment and transfers between borrowers and lenders: NOT in calculation of project valuation Depreciation allowances: tax purposes