Part I: Basic Economics Tools

1. Part I: Basic Economics Tools Introduction Microeconomic Tools for Health Economics Statistical Tools for Health Economics Economic Efficiency and Cost Benefit Analysis

2. Chapter I Introduction • The Relevance of Health Economics • The size of the contributions of the health sector to the overall economy • The national policy concerns resulting from the importance many people attach to the economic problems they face in pursuing and maintaining health • Many health issues that have a substantial economic elements

3. The size and scope of the health economy • Health care spending has grown rapidly in absolute and relative terms. It accounts for over one-seven of the GDP in the USA. See Figure 1-1 • Three possibilities to explain this figure(1) More service (2) higher quality service (3)relative expensive • Health care spending in other countries(1) the health care share of GDP in the US is approximately twice as large as that in the UK => Is care costlier, higher quality or more simply being consumed in the US?

4. The size of the health economy is also reflected through other measurements(1) the number of jobs in the health care sector (Table 1-3A: 10 percent of the labor force; almost 42 percent of them worked in hospitals)(2)The amount of capital investmentThe number of nursing home beds increased from about 1.3 million in 1976 to 1.8 million in 2002

5. Time spent obtaining and providing health care represents a key “unpriced” input factor in the health economy • The importance attached to economic problems of health care delivery are reflected by various way such as NHE (national health care expenditures), Growth in NHE, NHE per capital, NHE/GDP share. • Nominal vs real expenditure? NHE per capita rose by 40 times from 1960 to 2003. After deflating by CPI, the real expenditure were just 6.38 times

6. There are significant policy concerns not only with the growth of spending but also with access and quality • Access: 45 million people in the US lack insurance • Quality: increases in quality of care contributes to spending increases. • The Economic side to other health issues: The choice of a health care treatment seems purely medical to many people, but physicians are also increasingly sensitive to the economic side of the patient-physician relationship

7. Economic methods and example of analysis • Health economics is the study of the allocation of resources to and within the health economy. • Features of Economic Analysis • Scarcity of society resources • Assumption of rational decision making • Concept of marginal analysis • Use of Economic models

8. Two features of health economics • 1 The interdisciplinary nature of heath resources. Economics must knows how health care is delivered. This information comes from health care providers, as well as other disciplines, such as public health, sociology and psychology. • 2. The second features concerns the institutions in the health care system.

9. Does Economics Apply to Health care? • Are health care resources scarce? • Are health care consumers rational? • Do they calculate optimally at the margin? The emergency medical need does not fit in the these economic analysis. An example: Does price matter? (Figure 1.2) The negative sloping curve means that people consuming more care as the care becoming less costly to the consumer in terms of dollars paid out-of-pocket

10. Is health care different? • Health care services and the health economy possess a unique set of distinguishing features . The uniqueness of health care are the prevalence of uncertainty or insurance coverage. • Arrow (1963) stressed the prevalence of uncertainty in health care on both demand and supply sides. Consumers are uncertain their health status. Physicians cannot predict the treatment outcome with certainty. This uncertainty might lead to the result that insurance markets for various risks would often fail to arise. These factors suggested a role for government.

11. Prominence of insurance: In 1960, 48 percent was paid by third-party payers. In 2003, almost 86 percent was paid. • Problem of information: asymmertric information exist between physicians and patients. • Large role of nonprofit firms • Restriction on competition • Role of equity and need: people need health care regardless of whether they can afford it. • Government subsidies and public provision: Medicare and Medicaid

12. New challenges to Health economists • The changing impact of managed care: FFS (point-for-service). Managed care has profoundly influenced the US health system. Analysts use economic models to predict its impact on health care spending. • The demographic increases in older Americans who need more care • Costly medical technology: Technological change through procedures, and new drugs, provides potential improvement in health care, but also possibilities of increasing costs.