eco question

Health Economics ECON 5860 PROF. KURT LAVETTI

Predictions of the Grossman model

The Grossman model helps explain why we observe:

1. Better health among the educated 2. Declining health among the aging

Depreciation of health  Recall:

Ht = H ( (1- γ)Ht-1, TtH, Mt )  Depreciation γ is not

constant  γ increases with age  As γ increases, costs

(r + γ) increase and it takes more resources to maintain same level of health

As a result of increasing depreciation γ over time, optimal health H* also declines over time!

Optimal death in the Grossman model

 Because of rising depreciation, there are better investments in the market than the individual’s health

 H* eventually reaches Hmin

 Why would anyone choose Hmin?  How is Hmin utility-

maximizing?

Question:

 Does this mean the level of health spending should decrease as people get older?

Age and the derived demand for medical care (or health inputs)

H

Health Inputs (Medical Care)

HYoung HOld

• Not necessarily: suppose the efficiency of investment also falls as people age

• Then the elderly may have a lower stock of H, but a higher demand for medical care • Model can be

easily adapted to fit reality

Health PFOld

Health PFYoung

Conclusion

 Is health something that happens to us or is chosen?  Grossman model says it is chosen

 In fact, we even choose when we die  While that may seem far-fetched, Grossman model

a useful tool for understanding the roles and tradeoffs of health

HEALTH BEHAVIOR AND ECONOMIC MODELS OF ADDICTION

Health Behavior • Many factors that affect health and the

demand for healthcare are based on behaviors or choices that people make

• When/why should policies be implemented to intervene in people’s decision-making?

• What types of economic policies can be used to alter behavior?

Rationales for Public Intervention

• To the extent that the government pays for healthcare, they may care about reducing medical costs driven by behaviors • Taxing negative behaviors • Rewarding positive behaviors • Regulatory restrictions (eg banning advertisement of

cigarettes) • Policymakers may also be concerned about

behavioral decisions for paternalistic reasons • Alter behavior if they believe people are making decisions

based on incorrect information • Anti-smoking ads, cigarette label warnings, requiring warnings on

alcohol about risk of drinking while pregnant, 4 loko ban, etc. • Can potentially make people better off in cases of

addiction, or information barriers

Background Motivation

Source: Cawley and Ruhm (2012)

Background Motivation

Source: Cawley and Ruhm (2012)

Economic Models of Addiction

• Whether or not there are paternalistic reasons for intervening in cases of addiction could depend on what causes addiction

• Imperfectly Rational Addiction Models • Myopic Addiction Models • Rational Addiction

• Time-inconsistent preferences that cause short-sightedness • Right now I really want to quit smoking, but my tomorrow-

self doesn’t agree with my today-self • My 1:00 am self thinks that I should set the alarm clock for

7:00 am, but my 7:00 am self thinks I should set it for 9:00

• In behavioral economics, this is called beta- delta discounting (Laibson 1997)

𝑈𝑈𝑡𝑡 = 𝑢𝑢 𝐶𝐶𝑡𝑡 + β � 𝑛𝑛=1

𝑇𝑇−𝑛𝑛

𝛿𝛿𝑡𝑡𝑢𝑢 𝐶𝐶𝑡𝑡+𝑛𝑛

Imperfectly Rational Addiction Models

𝑈𝑈𝑡𝑡 = 𝑢𝑢 𝐶𝐶𝑡𝑡 + β � 𝑛𝑛=1

𝑇𝑇−𝑛𝑛

𝛿𝛿𝑡𝑡𝑢𝑢 𝐶𝐶𝑡𝑡+𝑛𝑛

• Discount utility tomorrow at rate βδ • Discount utility between future period t and period t+1 at the

rate δ • Standard economic models assume β=1, but what if β<1?

• You have a distinct preference for consumption now, even beyond basic time preferences

Imperfectly Rational Addiction Models

• Assumes that people don’t make decisions “correctly” • Wrong information about facts

• Eg Prior to the 1950s many people didn’t know that cigarettes were bad

• Cognitive limits • If the (hypothetical) utility maximization problem is just too

complicated to solve

• Subjective probability biases: people perceive the risk of very rare events to be much higher than they actually are, and the risk of very common events to be lower than they actually are

Myopic Addiction Models

• What if people become addicted for perfectly logical, rational reasons?

• Three general characteristics of addiction: • Reinforcement: the more you’re done something in the past, the

more you want to do it now

• Tolerance: the effect of consuming something now is lower if you’ve had a lot of it in the past

• Withdrawl: there’s a utility cost if you stop right now

Model of Rational Addiction

Characteristics of Addiction

Source: Cawley and Ruhm (2012)

• Based on these 3 characteristics, consider a “stock of addictive capital” S, such that the more addicted you are, the larger S is

• Suppose that whenever S is higher, you want to consume more • Consumers maximize utility over an additive good C, other

consumption goods Y, and addictive capital S U(C(t),Y(t),S(t))

• The stock of addictive capital depreciates over time at the rate δ

S(t)-S(t-1)=C(t)-δS(t)

• The rational addiction model assumes that consumers are forward looking, and anticipate the effect of consumption on their addictive capital S.

Model of Rational Addiction

Equilibrium in the Rational Addiction Model

• Predictions from this model: • Consumption at any point in time is related to current prices and

past prices (because past prices determine current addictive stock)

• Current consumption depends on anticipated future prices

• Permanent price changes have larger effects than temporary ones

• Long-run price elasticity of demand > short-run price elasticity of demand • The size of the difference increases with addictiveness

Rational Addiction Model

Policy Interventions: Excise Tax

Effect of excise tax on consumption depends on the relative size of the elasticity of demand to the elasticity of supply

Policy Interventions: Excise Tax

Source: Cawley and Ruhm (2012)

Policy Interventions: Excise Tax

Source: Cawley and Ruhm (2012)

• Practice Questions: • What would happen in the model if an addictive substance

becomes “more addictive”?

• What happens if the rate of depreciation of addictive capital decreases (so that it takes longer for addictive cravings to dissipate)?

• What might happen if two different addictive goods are partial substitutes (eg. prescription opioids and heroin) and the price of one good increases?

Rational Addiction Model

THE SUPPLY SIDE OF HEALTHCARE MARKETS

PHYSICIAN LABOR MARKETS

Setup: Popular Conception of Physician Labor Markets

 Common view that there is a shortage of doctors and nurses in the US

 What is a shortage?  Shortage is a perception that the quantity outcome in the

market is lower than it “should be”

 How can you tell if there’s a shortage?  Several possible indications could be that a patient has to

wait “too long” for an appointment to see a doctor  May have to drive “too far” to see a doctor

28

Geographic Disparities 29

Entire county is Primary Care Shortage Area (PCSA) Part of county is a PCSA Not a PCSA

Center for Medicare and Medicaid Services (CMS) has Provider Incentive Payments to encourage doctors to move to shortage areas

Physician Shortages: Examples 30

Source: htt //h lth i t h d / t /i /t

Labor Shortages 31

S

D=MRP

q

W

W1

q1S q1D

shortage

• A shortage means that at a given price, the quantity supplied doesn’t equal the quantity demanded

Labor Shortages

 Shortages cannot exist in the long run in an efficient market with free entry

32

S

D=MRP

W2

q

W

q2

W1

q1S q1D

shortage

Adjust wages

Dynamics of Supply Shortages

 In the short-run shortages could occur if it takes time for supply to react to a change in demand  Training physicians and nurses takes a long time

33

D1

q

W

q1

S1

W1

Dynamics of Supply Shortages

 Suppose there is an unexpected shock to demand  In the short-run supply can’t respond  There must also be something restricting wages from rising to

w2, creating a short-run shortage

34

D1

q

W

W2

q1 q2

S1

W1

D2

“Shortage” caused by combination of: 1. Unexpected demand shock 2. Inability for supply to respond

quickly 3. Something preventing

market prices from adjusting to competitive equilibrium price

Dynamics of Supply Shortages

 Eventually in the long-run supply adjusts to eliminate the shortage without increasing prices

35

S2

D1

q

W

W2

q1 q2

S1

W1

q3

D2

One Policy Solution: Increase Wages 36

• Why are there “too few” doctors? • Is it really because wages are too low? • US graduates plateau, but fraction of new MDs that are foreign-

trained doubled (21% to 45%) during the 1990s

Source: census.gov

One Policy Solution: Increase Wages 37

• Are wages really the problem though? • If there is a “shortage” in orthopedists, should the government intervene

to increase salaries above $413,000 per year to incentivize more orthopedics students?

Source: Medscape Compensation Report 2014

One Policy Solution: Increase Wages 38

• An international perspective on physician salaries in the US

Policy Question: 39

Entire county is Primary Care Shortage Area (PCSA)

Part of county is a PCSA

Not a PCSA

Suppose we want to set policies to fix the geographic disparities in physician supply • What is an

example of a policy that could achieve this goal?

• How should we measure shortage areas?

• What kinds of statistics should we use?

The Trouble with “Shortages” 40

Source: Scheffler 2008

• Wait times (number of days required to wait in advance of appointment) are often highest in areas where there are more physicians

• In Boston the wait times to see a doctor are twice as long as the national average

• Should policymakers intervene to fix this shortage?

• What if you then find out that Boston has 7 times more cardiologists per person than Detroit, and 5 times more than San Diego. Is there still a “shortage”.

Alternative Policy Tool: Recruit Foreign Medical Graduates

 Important providers of care in the U.S.  Nursing

 Physicians (particularly primary care)

 Typically must pass U.S. exams  Ethical/development questions

41

42

43Non-Physician Healthcare Labor

• The supply of nurses and physician assistants relative to the number of doctors has remained fairly constant

• Average salaries of nurses and assistants have changed similarly to physician salaries

• Nurses earn about 33% of physicians, PAs earn about 37%

• Some states have begun allowing nurses and PAs to treat patients and prescribe drugs in effort to reduce shortages

• Stange (2012) finds that allowing more autonomy for NPs and PAs has no effect on utilization, access, prices, or use of preventative care

To Understand the Problem, Start at the Beginning: The Training of Physicians

Medical school

 Entry into med school is competitive and selective worldwide

 In the US, on average only 50% of applicants are accepted into at least one school

 Length of medical school varies across country

 US & Canada applicants must first get a bachelor’s degree

 European applicants go directly from high school

 Medical school can be very expensive

 US: $140k -- $225k for four years

 European medical training often heavily subsidized

Residency

 In addition to classroom work, physicians-in-training must also gain hospital experience  Residency is a period of 3+ years on-the-job training

following medical school

 In order to specialize in a specific type of medicine, often must complete multiple residencies requiring a total of 3-10 years (in addition to 4 years of medical school)

Physician Earnings, and the Rate of Return to Specializing 47

• Although completing training in a specialty area takes a long time, is this the only reason why earnings are so much higher among specialists?

Source: Medscape Compensation Report 2014