Health Management Assignment 1

Chapter 1

Introduction

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What is Health Economics?

• Study of health economics
• Application of various microeconomics tools to health issues and problems
• Goal of health economics
• Promote a better understanding of the economic aspects of health care problems
• So that corrective health policies can be designed and proposed

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What is Health Economics?

• Health economics
• Broad range of concepts, theories, and topics
• . . . studies the supply and demand of health care resources and the impact of health care resources on a population.
• The Mosby Medical Encyclopedia (1992, p. 361)
• Is defined in terms of determination and allocation of health care resources

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Health Care Resources

• Medical supplies
• Pharmaceutical goods, latex rubber gloves, bed linens
• Personnel
• Physicians, lab assistants
• Capital inputs
• Nursing home and hospital facilities
• Diagnostic and therapeutic equipment
• Other items that provide medical care services

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Health Care Resources

• Trade-offs are inevitable
• Resources are limited or scarce at a given point in time
• Wants are limitless
• Society must make a number of fundamental but crucial choices
• Scarcity
• Each society must make important decisions regarding the consumption, production, and distribution of goods and services

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The Four Basic Questions

What mix of nonmedical and medical goods and services should be produced in the macroeconomy?

What mix of medical goods and services should be produced in the health economy?

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The Four Basic Questions

What specific health care resources should be used to produce the chosen medical goods and services?

Who should receive the medical goods and services that are produced?

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The Four Basic Questions

• Allocative efficiency answers the first 2
• Choose the best way to allocate resources to different consumption uses
• Production efficiency answers the 3rd
• Choose the best mix of inputs to produce the maximum output

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Production & Allocative Efficiency

• Production possibilities curve (PPC)
• Illustrates production and allocative efficiency
• An economic model that depicts the various combinations of any two goods or services that can be produced efficiently given:
• Stock of resources
• Technology
• Various institutional arrangements

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A point outside the PPC, such as G, is not yet attainable but can be reached with an increase in resources or through institutional or technological changes that improve productivity.

The PPC shows the trade-off between any two goods given a fixed stock of resources and technology.

Any point on the PPC, such as points A through E, reflects efficiency because units of one good must be given up to receive more of the other.

A point in the interior, such as F, reflects inefficiency because more of one good can be attained without necessarily reducing the other.

Figure 1.1 - Production Possibilities Curve for Maternity and Nursing Home Services

Quantity of

maternity

services

(M)

Quantity of nursing home services (N)

B

E

G

A

MF

MC

MD

NF

NC

ND

F

C

D

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Production Possibilities Curve

• Point C
• Medical resources are fully utilized
• MC units of maternity care services
• NC units of nursing home services
• Point D
• Medical resources are fully utilized
• MD units of maternity care services
• ND units of nursing home services

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Production Possibilities Curve

• Movement from point C to point D
• One more unit of nursing home services ND–NC
• (MC – MD)units of maternity care services are given up to receive the additional unit of nursing home services
• Medical inputs must be reallocated from the maternity care services market to the nursing home services market
• Opportunity cost of producing an additional unit of nursing home services
• Forgone units of maternity care services, MC – MD

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Production Possibilities Curve

• Opportunity cost
• Value of the next best alternative that is given up
• Law of increasing opportunity cost
• Explains the bowed-out shape of the PPC
• Opportunity cost increases with a movement along the curve
• Because of imperfect substitutability of resources

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Production Possibilities Curve

• Point F - Underutilization of resources
• Inefficient
• In the interior of the PPC
• More units of one medical service can be produced without decreasing the amount of the other medical service
• Point B on the PPC

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Production Possibilities Curve

• Point G
• Outside the current PPC
• Attainable in the future if:
• Stock of health care resources increases
• A new, productivity-enhancing technology is discovered
• Various economic, political, or legal arrangements change and improve productive relationships
• PPC shifts out and passes through a point like G

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Production Possibilities Curve

• Production efficiency
• Attained when the health economy operates at any point on the PPC
• Allocative efficiency
• Attained when society chooses the best or most preferred point on the PPC

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The Distribution Question

• The fourth question
• Deals with distributive justice or equity
• Is the distribution of services equitable, or fair, to everyone involved?
• Two ways of distributing output:
• Pure market system
• Perfect egalitarian system

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Pure Market System

• Goods and services - distributed based on each person’s willingness and ability to pay because:
• People face an incentive to earn income
• To better afford goods and services
• Tend to work hard and save for present and future consumption
• Efficient allocation of resources
• Economy operates on the PPC

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Pure Market System

• Price
• Rationing mechanism
• Differences in ability to pay
• Some have consciously chosen to work harder and save more than others
• Some people have less income because of unfortunate life circumstances
• People without sufficient incomes
• Face a financial barrier to obtaining goods and services

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Pure Market System

• Given income disparities
• Some people may be denied access to needed goods and services
• Pure market system
• Viewed as inherently unfair by many
• In terms of distribution of important goods and services such as health care

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Perfect Egalitarian System

• A central committee
• Ensures everyone receives an equal share of goods and services
• Everyone has access to the same goods and services without regard to income status or willingness to pay
• An incentive may exist for people to choose to work and save less
• Inefficient allocation of resources
• Economy may operate inside the PPC

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Mixed Systems

• Most countries
• Rely on central versus market distribution varying by degree across countries
• In the United States
• Many goods and services are distributed by:
• Market
• Government
• Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families, Medicaid programs

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Implications of the Four Questions

• Scarcity of economic resources
• Results in each society making hard choices concerning consumption and production activities
• Generally, societies wish to produce the best combination of goods and services
• By employing least-cost methods of production

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Implications of the Four Questions

• Trade-offs are inevitable
• Some amount of one good or service must be given up for the production and consumption of another good or service to increase
• Societies’ choices may involve sensitive trade-offs
• Young vs. old
• Prevention vs. treatment
• Men (prostate cancer) vs. women (breast cancer)

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Implications of the Four Questions

• Achieving equity
• Desirable goal
• Society seeks redistribution of income
• Redistribution of income – Taxation
• Creates a disincentive for efficiency
• Production inside the PPC
• Trade-off between equity and efficiency often exists

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Pulse of the Health Economy

• Health economy involves activities related to population health:
• Production and consumption of goods and services
• Distribution of those goods to consumers
• Performance indicators of medical care
• Costs
• Access
• Quality

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Medical Care Costs

• Represent the total opportunity costs when using various societal resources to produce medical care
• Centers for Medicare and Medicaid Services (CMS), United States
• Collects and reports data on the uses, sources, and costs of medical care
• Data yield important insights on the utilization of health care funds, their source, and the actual amount spent on medical care

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Figure 1.2 - Uses of Health Care Funds in the United States, 2010

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Sources of Medical Funds

• Funds spent on national health
• From the private sector
• 53% in 2010
• 76% in 1960
• Mid-1960s saw the introduction of:
• Public health insurance programs
• Medicare and Medicaid

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• Private insurance
• Has expanded its role as a source of funds
• Substituted greatly for out-of-pocket payments
• Reflects a greater number of individuals and more types of medical care covered
• Government funds
• Spent by Medicare and Medicaid
• Amount to less than half of all health care spending in the U.S.

Sources of Medical Funds

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Figure 1.3 - Sources of Health Care Funds in the United States, 2010

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Sources of Medical Funds

• Woolhandler and Himmelstein explain:
• CMS includes only direct purchasing of medical care (Medicare, Medicaid, and government-owned hospitals)
• CMS excludes public employee benefits
• Federal Employees Health Benefits Program
• Various state employee health insurance programs
• Employer-sponsored health insurance premiums are exempted from various federal, state, and city taxes

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Sources of Medical Funds

• Woolhandler and Himmelstein explain:
• Government - responsible for financing nearly 60 percent of all health care costs
• Direct spending of government = 45%
• Public employee benefits = 5 to 6%
• Tax subsidy for health insurance premiums = 9% or more

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Amount of Medical Care Spending

• Costs of health care are high and continually rising
• U. S. spent $2.6 trillion or $8,400 per person in 2010
• Compared to $26.9 billion and $141, respectively, in 1960
• Trade-offs may be involved
• High health care costs = Lower amounts of other goods produced and consumed

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Amount of Medical Care Spending

• Greater productive capacity, over time
• Productivity-improving technologies
• More labor and capital resources
• PPC has likely shifted out
• More of one good or service can be produced without sacrificing the others
• To control differences in the productive capacity
• Divide amount of health care spending by GDP

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Figure 1.4 - National Health Care Costs as a Percentage of GDP from 1960 to 2010

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Medical Care Access

• Does everyone have reasonable access to medical care on a timely basis?
• Timely access is often measured by percentage of individuals with health insurance
• Insurance provides access to high-cost, life-saving interventions, for a small premium
• Cost of catastrophic care – very high

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Medical Care Access

• The health insurance product
• Before the 1970s most people purchased only hospital insurance
• Today people purchase health insurance for other types of medical care
• Amount of medical care expenditures covered by insurance has increased over the years

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Figure 1.5 - Percentage of the U.S. Population without Health Insurance from 1940 to 2010

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Medical Care Quality

• Measure of medical care quality
• Infant mortality rate (IMR)
• Number of children below one year of age that died as a percentage of all live births in that same year
• IMR has improved significantly over time

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Figure 1.6 - Infant Mortality Rates in United States, 1960 to 2009

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System Structure & Performance

• System structure
• Ways in which various organizations are designed in terms of their size and scope
• Mix of market activities and government involvement
• Financing and reimbursement mechanisms
• Helps to establish the prevailing incentives in a health economy
• Influences how people, organizations, and government itself behave

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Structural Remedy

Conduct Remedy

Figure 1.7 - Structure, Performance, and Policy

Structure

• Organizations
• Markets
• Government (Laws, Regs)

Behavior of people

• Work
• Consumption
• Savings

Behavior of Organizations and Markets

• Pricing
• Production
• Investment

Behavior of government

• Pursue public or special interests

Performance

• Efficiency
• Equity

Public Policy

• Antitrust
• Regulation

(Social and Industrial)

• Taxes

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• The PPACA contains many provisions that should monumentally alter the financing, reimbursement, and delivery of health care in the U.S.
• At this time, it is unclear if the U.S. Supreme Court will uphold or invalidate this new health care reform legislation

Patient Protection and Affordable Care Act of 2010