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Economics 387. Lecture 1 Introduction to Health Economics Tianxu Chen. The course. Class Meets : Tue,Wed,Thu 9:30-12:00 Class location : B41 Psychology Office Hours : Wed 1:00-2:30, or by appointment Office location : 429 Economics E-mail : Text materials.

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economics 387

Economics 387

Lecture 1

Introduction to Health Economics

Tianxu Chen

the course
The course
  • Class Meets: Tue,Wed,Thu 9:30-12:00
  • Class location: B41 Psychology
  • Office Hours:Wed 1:00-2:30, or by appointment
  • Office location: 429 Economics
  • E-mail:
text materials
Text materials

The text materials will be:

The Economics of Health and Health Care, by Sherman Folland, Allen C. Goodman, and Miron Stano (Seventh Edition)

exams and grading
Exams and Grading
  • There will be one in-class mid-term exams and a final exam. The mid-term exams will be:

Thursday, July 19th – 30% of course grade

  • The final exam will be hold on the last day of this class: Thursday, August 9th. It will be worth 50% of the course grade.
other assignments
Other assignments

20% of your grade

  • These will include one presentation in class and two short writing assignments.
  • You are encouraged to choose any paper already on the reading list.
  • Each presentation is supposed to total 15 minutes. Often  this means that less than the full paper will be presented. You can choose to be selective in what you present, focusing on only the theory, or the specification, or the econometrics.
presentation papers
Presentation Papers

Ellis and McGuire, 1986, Provider Payment under Prospective Payment Journal of Health Economics.

Shen and Melnick, 2005, Is Managed Care Still An Effective Cost Containment Device?

Ruhm, Chris, 2005, Healthy Living in Hard Times, Journal of Health Economics, 24(2005) 341-363

Ellis, Randall P. and Michelle M. Miller, 2008,“Provider Payment Methods and Incentives” in Heggenhougen, Kris (ed.) “Encyclopedia of Public Health”

presentation papers1
Presentation Papers
  • Case, Anne, Angela Fertig, and Christine Paxson. The Lasting Impact of Childhood Health and Circumstance, Journal of Health Economics, 2005, v. 24, pp. 365-389.
  • Merideth Rosenthal et al. 2006 Pay for Performance in Commercial HMOs. New England Journal of Medicine
  • Ellis, Randall P. and McGuire, Thomas G. (2007) “Predictability and predictiveness in health care spending” Journal of Health Economics. 26:25–48.
presentation papers2
Presentation Papers
  • Miller, Amalia R., and Catherine E. Tucker. 2011. “Can Health Care Information Technology Save Babies?” Journal of Political Economy, 119(2): 289-324.
  • Abaluck, Jason, and Jonathan Gruber. 2011. “Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program.” American Economic Review, 101(4): 1180–1210.
  • French, E. and Jones, J. B. 2011. “The Effects of Health Insurance and Self-Insurance on Retirement Behavior.” Econometrica, 79: 693–732.
  • What is Health Economics?
  • The Relevance of Health Economics
  • Economic Methods
  • Does Economics Apply to Health and Health Care?
  • Is Health Care Different?
  • Conclusions
what is health economics
  • Health economics is defined by who health economisits are, and what they do!
who are the health economists
Who are the Health Economists?
  • 96% hold academic doctorate degrees, nearly ¾ in economics
  • 64% work in a university setting, 15% for nonprofit organizations and 12% for government, mainly federal
  • Only 24% of health economists hold appointments in economics departments, 26% in schools of public health, 18% in schools of medicine
relevance of health economics
Relevance of Health Economics
  • The health care sector is big, and is getting bigger.
  • not only has health care grown absolutely, it has grown relative to everything else.
figure 1 1 u s health expenditure shares 1960 2020
Figure 1-1 U.S. Health Expenditure Shares, 1960 – 2020

Source: Centers for Medicare and Medicaid Services:, accessed August 8, 2011.

features of economic analysis
Features of Economic Analysis
  • Scarcity of societal resources
  • Assumption of rational decision making
  • Concept of marginal analysis
  • Use of economic models
still another cause for concern
Still another cause for concern
  • Problems that people have getting insured?
  • Only the U.S. and South Africa, among advanced countries, do not have some form of universal health coverage.
origins physician shortage
Origins -- Physician Shortage

Health economics has evolved from applied work in more general economics. An example

  • In early 1940s Milton Friedman and Simon Kuznets, looked at the so-called physician shortage of the 1930s.
  • These shortages are often defined through the health care sector, by positing a technological ratio (e.g. x physicians per capita), then calculating the number of physicians necessary, and comparing it to the number available.
physician shortage
Physician shortage
  • FK discovered that physicians, at the time, were earning about 32% more than dentists, while their training costs were about 17% higher. What would we expect to see over some adjustment period ???
  • Answer: Entry into the physician market. Friedman and Kuznets attributed long-term high returns to barriers to entry into the medical profession through licensure, and education.
does economics apply to health care does price matter
  • The curve shown is similar to an economist's demand curve in that it shows people consuming more care as the care becomes less costly in terms of dollars paid out-of-pocket. More importantly, the curve demonstrates that economic incentives do matter. Those facing higher prices demand less care.
  • Figure 1-2 Demand Response of Ambulatory Mental Health and Medical Care in the RAND Health Insurance Experiment

Source: Keeler, Manning, and Wells (1980) for mental health care; Keeler and Rolph (1988)

for medical care.

is health care different
Is Health Care Different?
  • Presence and Extent of Uncertainty
  • Prominence of Insurance
  • Problems of Information
  • Large Role of Nonprofit Firms
  • Restrictions on Competition
  • Role of Equity and Need
  • Government Subsidies and Public Provision
does economics apply to health and health care
Does Economics Apply to Health and Health Care?

1. Uncertainty

  • Most analysis that we do in economics ignores the possibility of uncertainty. Where does this occur?
    • Patient status - How healthy are we? Will we need treatment?
    • Efficacy of treatment - Do we need it? Will it work?
does economics apply to health and health care1
Does Economics Apply to Health and Health Care?
  • 2. Prominence of Insurance

Perhaps no other sector features insurance so prominently. In 1960 about 56 percent of all personal health care expenditures were paid out-of-pocket; 44 percent by third party payers and/or government. By 1990, over 76 percent paid by third party payers.

does economics apply to health and health care2
Does Economics Apply to Health and Health Care?
  • 2. Prominence of Insurance
  • Availability of insurance. Who has it? Who doesn't?
  • Effect of insurance on technology. Does insurance impact which kinds of treatments are given, and which aren't?
does economics apply to health and health care3
Does Economics Apply to Health and Health Care?
  • 3. Information
  • Lots of economic analysis assumes perfect information on the parts of buyers and sellers. This is "symmetric" information. Both parties have it.
  • Sometimes neither party has the information. e.g. Neither the gynecologist nor her patient may recognize early stages of cervical cancer without a Pap smear.
does economics apply to health and health care4
Does Economics Apply to Health and Health Care?
  • Sometimes, physician knows more about disease, and must act as an agent for the patient. Some feel that this can lead to the recommendation of too much, or even unnecessary care.
  • How informed are patients? Sometimes, patient knows he is not healthy, but can hide it from insurer. This can lead to breakdowns in the insurance markets.
does economics apply to health and health care5
Does Economics Apply to Health and Health Care?

4. Role of Non-Profit Firms

  • Unlike most other economic analysis, there is an important role for non-profit firms in the industry. How does this work out in economic models in which profits are maximized?
does economics apply to health and health care6
Does Economics Apply to Health and Health Care?

5. RestrictionsonCompetition

  • There are many. These include:
    • Licensure requirements for providers
    • Restrictions on advertising
    • Standards which frown on price competition
does economics apply to health and health care7
Does Economics Apply to Health and Health Care?

6. Need and Equity

  • Finally, the health care sector engenders considerable discussion of the role of need, as well as many equity concerns.
  • The whole debate about National Health Care policy is a manifestation of this concern.
does economics apply to health and health care8
Does Economics Apply to Health and Health Care?

7. Government Subsidies and Public Provision

  • The greatest strengths of economics and economists are a framework of systematic theory, an array of concepts and questions that are particularly relevant to the choices facing policy makers, and skill in drawing inferences from imperfect data. . . . Economists’ framework of systematic theory facilitates the transfer of knowledge drawn from other fields of study to the health field.

Health economists have also inherited from economics a set of concepts and questions that have proven to be particularly relevant to the policy problems that have emerged in health during the past three decades. Scarcity, substitution, incentives, marginal analysis, and the like were ‘‘just what the doctor ordered,” although in many cases the ‘‘patient’’ found the medicine bitter and failed to follow the prescribed advice. (Fuchs, 2000, p. 148)

what next
What Next??
  • Some tools !!!
    • For Economics analysis -- Chapter 2