M1-Activity-320

1

WHY HEALTH ECONOMICS?

Learning Objectives

After reading this chapter, students will be able to

• describe the value of economics for managers,

• identify major challenges for healthcare managers,

• find current information about health outcomes, and

• distinguish between positive and normative economics.

Key Concepts

• Economics helps managers focus on key issues.

• Economics helps managers understand goal-oriented decision making.

• Economics helps managers understand strategic decision making.

• Economics gives managers a framework for understanding costs.

• Economics gives managers a framework for understanding market demand.

• Economics gives managers a framework for assessing profitability.

• Economics helps managers understand risk and uncertainty.

• Economics helps managers understand insurance.

• Economics helps managers understand information asymmetries.

• Economics helps managers deal with rapid change.

1.1 Why Health Economics?

Why should working healthcare managers study economics? This simple question is really two questions. Why is economics valuable for managers? What special challenges do healthcare managers face? These questions motivate this book.

Why is economics valuable for managers? There are six reasons. We will briefly touch on each of them to highlight the themes we will develop in later chapters.

1. Economics helps managers focus on key issues. Economics helps managers wade through the deluge of information they confront and identify the data they need.

2. Economics outlines strategies for realizing goals given the available resources. A primary task of economics is to explore carefully the implications of rational decision making.

3. Economics gives managers ground rules for strategic decision making. When rivals are not only competing against them but watching what they do, managers must be prepared to think strategically.

4. Economics gives managers a framework for making sense of  costs . Managers need to understand costs because good decisions are unlikely to be made without this understanding.

5. Economics gives managers a framework for thinking about value. The benefits of the goods and services that successful organizations provide to customers exceed the costs of producing those goods and services. Good management decisions require an understanding of how customers perceive value.

6. Most importantly, economics sensitizes managers to fundamental ideas that affect the operations of every organization. Effective management begins with the recognition that consumers are sensitive to price differences, that organizations compete to advance the interests of their stakeholders, and that success comes from providing value to customers.

1.2 Economics as a Map for Decision Making

Economics provides a map for decision making. Maps do two things. They highlight key features and suppress unimportant features. To drive from Des Moines, Iowa, to Dallas, Texas, you need to know how the major highways connect. You do not want to know the name and location of each street in each town you pass through. Of course, what is important and what is unimportant depend on the task at hand. If you want to drive from West 116th Street and Ridgeview Road in Olathe, Kansas, to the Truman homestead in Independence, Missouri, a map that describes only the interstate highway system will be of limited value to you. You need to know which map is the right tool for your situation.

Using a map takes knowledge and skill. You need to know what information you need, or you may choose the wrong map and be swamped in extraneous data or lost without key facts. Having the right map is no guarantee that you can use it, however. You need to practice to be able to use a map quickly and effectively.

Like a map, economics highlights some issues and suppresses others. For example, it tells managers to focus on  marginal  or incremental costs , which makes understanding and managing costs much simpler, but economics has little to say about the belief systems that motivate consumer behavior. If you are seeking to make therapeutic regimens easier to adhere to by making them more consistent with consumers’ belief systems, economics is not a helpful map. If, on the other hand, you want to decide whether setting up an urgent care clinic is financially feasible, economics helps you focus on how your project will change revenues and costs.

Economics also gives managers a framework for understanding rational decision making.  Rational decision making  involves making choices that further one's goals given the resources available. Whether those goals include maximizing profits, securing the health of the indigent, or other objectives, the framework is much the same. It entails looking at benefits and costs to realize the largest net benefit. (We will explore this question further in  section 1.5 .)

Managers must understand costs and be able to explain costs to others. Confusion about costs is common, so confusion in decision making is also common. Confusion about benefits is even more widespread than confusion about costs. As a result, management decisions in healthcare often leave much to be desired.

Economists typically speak about economics at a theoretical level, using “perfectly competitive markets” (which are, for the most part, mythical social structures) as a model; as a result, application of economics can be difficult for managers competing in real-world markets. Yet, economics offers concrete guidance about pricing, contracting, and other quandaries that managers face. Economics also offers a framework for evaluating the strategic choices managers must make. Many healthcare organizations have rivals, so good decisions must take into account what the competition is doing. Will being the first to enter a market give your organization an advantage, or will it give your rivals a low-cost way of seeing what works and what does not? Will buying primary care practices bring you increased market share or buyer's remorse? Knowing economics will not make these choices easy, but it can give managers a plan for sorting through the issues.

1.3 Special Challenges for Healthcare Managers

What special challenges do healthcare managers face? Healthcare managers face five issues more than other managers do:

1. The central roles of risk and uncertainty

2. The complexities created by insurance

3. The perils produced by information asymmetries

4. The problems posed by not-for-profit organizations

5. The rapid and confusing course of technical and institutional change

Let us look at each of these challenges in more depth.

1.3.1 Risk and Uncertainty

Risk and uncertainty are defining features of healthcare markets and healthcare organizations. Both the incidence of illness and the effectiveness of medical care should be described in terms of probabilities. For example, the right therapy, provided the right way, usually carries some risk of failure. A proportion of patients will experience harmful side effects, and a proportion of patients will not benefit. As a result, management of costs and quality presents difficult challenges. Has a provider produced bad outcomes because he was unlucky and had to treat an extremely sick panel of patients, or because he encountered a panel of patients for whom standard therapies were ineffective? Did his colleagues let him down? Or was he incompetent, sloppy, or lazy? The reason is not always evident.

1.3.2 Insurance

Because risk and uncertainty are inherent in healthcare, most consumers have health insurance, and healthcare organizations have to contend with the management problems insurance presents. First, insurance creates confusion about who the customer is. Customers use the products, but insurance plans often pay most of the bill. Moreover, most people with private medical insurance receive coverage through their employer (in large part because the tax system makes this arrangement advantageous). Although economists generally agree that employees ultimately pay for insurance via wage reductions, most employees do not know the costs of their insurance alternatives (and unless they are changing jobs, they have limited interest in finding out). As a result of this situation, employees remain unaware of the true costs of care and are not eager to balance cost and value. If insurance is footing the bill, most patients choose the best, most expensive treatment—a choice they might not make if they were paying the full cost.

In addition, insurance makes even simple transactions complex. Most transactions involve at least three parties (the patient, the insurer, and the provider), and many involve more. To add to the confusion, most providers deal with a wide array of insurance plans and face blizzards of disparate claim forms and payment systems. Increasing numbers of insurance plans have negotiated individual payment systems and rates, so many healthcare providers look wistfully at industries that simply bill customers to obtain revenues. The complexity of insurance transactions also increases opportunity for error and fraud. In fact, both are fairly common.

Despite this bewildering array of insurance plans, many providers still rely on a few plans for their revenue (a circumstance most managers seek to avoid). For example, most hospitals receive at least a third of their revenue from Medicare. As a result, changes in Medicare regulations or payment methods can profoundly alter a healthcare organization's prospects. Overnight, changes to reimbursement terms may transform a market that is profitable for everyone to one in which only the strongest, best-led, best-positioned organizations can survive.

1.3.3 Information Asymmetries

Information asymmetries are common in healthcare markets and create a number of problems. An  information asymmetry  occurs when one party in a transaction has less information than the other party. In this situation, the party with more information has an opportunity to take advantage of the party with less information. Recognizing a disadvantage, the party with less information may become skeptical of the other party's motivation and decline a recommendation that would have been beneficial. For example, physicians and other healthcare providers usually understand patients’ medical options better than patients do. Unaware of their choices, patients may accept recommendations for therapies that are not cost-effective or, recognizing their vulnerability to physicians’ self-serving advice, may resist recommendations made in their best interest.

From a manager's perspective, asymmetric information means that providers have a great deal of autonomy in recommending therapies. Because providers’ recommendations largely define the operations of insurance plans, hospitals, and group practices, managers need to ensure that providers do not have incentives to use their superior information to their advantage. Conversely, in certain situations, patients have the upper hand and are likely to forecast their healthcare use more accurately than insurers. Patients know whether they want to start a family, whether they seek medical attention whenever they feel ill, or whether they have symptoms that indicate a potential condition. As a result, health plans are vulnerable to adverse selection, meaning that high-risk consumers are more likely to seek insurance whereas healthier individuals are more likely to go without.

1.3.4 Not-for-Profit Organizations

Most not-for-profit organizations have worthy goals that their managers take seriously, but these organizations can create problems for healthcare managers as well. For example, not-for-profit organizations usually have multiple stakeholders. Multiple stakeholders mean multiple goals, so organizations become much harder to manage, and managers’ performance becomes harder to assess. The potential for managers to put their own needs before their stakeholders’ needs exists in all organizations but is more difficult to detect in not-for-profit organizations because they do not have a simple bottom line. In addition, not-for-profit organizations may be harder to run well. They operate amid a web of regulations designed to prevent them from being used as tax avoidance schemes. These regulations make setting up incentive-based compensation systems for managers, employees, and contractors (the most important of whom are physicians) more difficult. Further, when a project is not successful, not-for-profit organizations have greater difficulty putting the resources invested in the failed idea to other uses. For example, the trustees of a not-for-profit organization may have to get approval from a court to sell or repurpose its assets. Because of these special circumstances, managers of not-for-profit organizations can always claim that substandard performance reflects their more complex environment.

1.3.5 Technological and Institutional Change

This fifth challenge makes the others pale in comparison. The healthcare system is in a state of flux. Virtually every part of the healthcare sector is reinventing itself, and no one seems to know where the healthcare system is headed. Leadership is difficult to provide if you do not know where you are going. Because change presents a pervasive test for healthcare managers, we will examine it in greater detail.

1.4 Turmoil in the Healthcare System

Why is the healthcare system of the United States in such turmoil? One explanation is common to the entire developed world: rapid technical change. The pace of medical research and development is breathtaking, and the public's desire for better therapies is manifest. These demands challenge healthcare managers to regularly lead their organizations into unmapped territory. To make matters worse, changes in technology or changes in insurance can quickly affect healthcare markets. In healthcare, as in every other sector of the economy, new technologies can create winners and losers. For example, between 2000 and 2007, Medicare payments to ambulatory surgery centers more than doubled. Medicare changed its policy, and growth slowed down (Medicare Payment Advisory Commission 2018). What appears profitable today may not be profitable tomorrow if technology, competition, rates, or regulations change significantly.

The Affordable Care Act (ACA) has resulted in a wave of innovations by providers, insurers, employers, and governments. (See  chapter 6  for more detail.) Which of these innovations will succeed is not clear. In addition, some healthcare organizations will thrive in the environment of the ACA, and some will fail. The passage of the ACA appears to have been transformative, but its repeal might not undo the changes it led to.

1.4.1 The Pressure to Reduce Costs

The economics of high healthcare costs is far simpler than the politics of high healthcare costs. To reduce costs, managers must reallocate resources from low-productivity uses to high-productivity uses, increase productivity wherever feasible, and reduce prices paid to suppliers and sectors that have excess supply. They also must recognize that cost cutting is politically difficult. Reallocating resources and increasing productivity will cost some people their jobs. Reducing prices will lower some people's incomes. These steps are difficult for any government to take, and many of those who will be affected (physicians, nurses, and hospital employees) are politically well organized.

CASE 1.1

Why Is the Pressure to Reduce Healthcare Costs So Strong?

The United States spends far more than other wealthy industrial countries but has poorer outcomes. Spending per person is more than double the spending per person in Canada, France, and the United Kingdom (see  exhibit 1.1 ). Differences this large should be reflected in the outcomes of care.

However, of the six countries listed in  exhibit 1.2 , the United States has the shortest life expectancy at birth. In part, this difference is because the United States invests relatively little in improving the  social determinants of health  and reducing inequality. Adler, Glymour, and Fielding (2016) note that the life expectancy of 40-year-old men at the bottom of the income distribution is 14.6 years shorter than for men in the top of the income distribution. Greater spending should not produce these results.

Discussion Questions

• Why is spending so much more than other countries a problem?

• What can Americans not buy because of high spending on healthcare?

• What factors other than healthcare affect population health?

• Does this evidence suggest that the American healthcare system is not efficient?

• What are the most important social determinants of health?

1.4.2 The Fragmentation of Healthcare Payments

The fragmented payment system compounds the political problem. Most Americans see only a fraction of their total spending. A typical American pays for care through a mixture of direct payments for care; payroll deductions for insurance premiums; lower wages; higher prices for goods and services; and higher federal, state, and local taxes. Because so much of the payment system is hidden, few can effectively track healthcare costs. The exceptions, notably employers who write checks for the entire cost of insurance policies and the trustees of the Medicare system, understand the need to reduce costs.

1.5 What Does Economics Study?

What does economics study? Economics analyzes the allocation of  scarce resources . Although this answer appears straightforward, several definitions are needed to make this sentence understandable. Resources include anything useful in consumption or production. From the perspective of a manager, resources include the flow of services from supplies or equipment the organization owns and the flow of services from employees, buildings, or other entities the organization hires. A resource is scarce if it has alternative uses, which might include another use in the organization or use by another person or organization. Most issues that managers deal with involve scarce resources, so economics is potentially useful for nearly all of them.

Economics focuses on rational behavior—that is, it focuses on individuals’ efforts to best realize their goals, given their resources. Because time and energy spent in collecting and analyzing information are scarce resources (i.e., the time and energy have other uses), complete rationality is irrational. Everyone uses shortcuts and rules to make certain choices, and doing so is rational, even though better decisions are theoretically possible.

Much of economics is positive.  Positive economics  uses objective analysis and evidence to answer questions about individuals, organizations, and societies. Positive economics might describe the state of healthcare, for example, in terms of hospital occupancy rates over a certain period. Positive economics also proposes hypotheses and assesses how consistent the evidence is with them. For example, one might examine whether the evidence supports the conjecture that reductions in direct consumer payments for medical care (measured as a share of spending) have been a major contributing factor in the rapid growth of healthcare spending per person. Although values do not directly enter the realm of positive economics, they do shape the questions economists ask (or do not ask) and how they interpret the evidence.

Normative economics  often addresses public policy issues, but not always. The manager of a healthcare organization who can identify additional services or additional features that customers are willing to pay for is demonstrating normative economics. Likewise, the manager who can identify features or services that customers do not value is also demonstrating normative economics.

Normative economics takes two forms. In one, citizens use the tools of economics to answer public policy questions. Usually these questions involve ethical and value judgments (which economics cannot supply) as well as factual judgments (which economics can support or refute). A question such as “Should Medicare eliminate deductibles?” involves balancing benefits and harms. Economic analysis can help assess the facts that underlie the benefits and harms but cannot provide an answer. The second form of normative economics is the basis for this book's content. This form tells us how to analyze what we should do, given the circumstances that we face. In this part of normative analysis, market transactions indicate value. For example, we may believe that a drug is overpriced, but we must treat that price as a part of the environment and react appropriately if no one will sell it for less. Most managers find themselves in such an environment.

To best realize our goals within the constraints we face, we can use the explicit guidance economics gives us:

1. First, identify plausible alternatives. Breakthroughs usually occur when someone realizes there is an alternative to the way things have always been done.

2. Second, consider modifying the standard choice (e.g., charging a slightly higher price, using a little more of a nurse practitioner's time).

3. Next, pick the best choice by determining the level at which its marginal benefit equals its marginal cost. (We will explain these terms shortly.)

4. Finally, examine whether the total benefits of this activity exceed the total cost.

Skilled managers routinely perform this sort of analysis. For example, a profit-seeking organization might conclude that a clinic's profits would be as large as possible if it hired three physicians and two nurse practitioners but that the clinic's profits still would be unacceptably low if it did. Profits would fall even further if it increased or decreased the number of physicians and nurse practitioners, so the profit-seeking organization would choose to close the clinic.

Let us define some terms to make this discussion clearer. Cost, as noted previously, is the value of a resource in its next best use. For example, the cost of a plot of land for a medical office would be the most another user would pay for it, not what it sold for 20 years ago. The next best use of that land might be for housing, for a park, for a store, or for some other use. Usually the next best use of a resource is someone else's use of it, so a resource's cost is the amount we would be paid when we sell it or the price we have to pay to buy it. Benefit is the value we place on a desired outcome. We describe this value in terms of our willingness to trade one desired outcome for another. Often, but not always, our willingness to pay money for an outcome is a convenient measure of value. A marginal or an incremental amount is the increased cost we incur from using more of a resource or the increased benefit we realize from a greater outcome. So, if a 16-ounce iced tea costs $1.49 and a 24-ounce iced tea costs $2.29, the incremental cost of the larger size is ($2.29 − $1.49) ÷ (24 − 16), or 10 cents per ounce. A rational consumer might

1. conclude that the incremental benefit of the larger iced tea exceeds its incremental cost and buy the larger size;

2. conclude that the incremental cost of the larger iced tea exceeds its incremental benefit and buy the smaller size; or

3. conclude that the total benefit of both sizes was less than their total cost and buy neither.

Remember, however, that rational decisions are defined by the goals that underpin them. A consumer with a train to catch might buy an expensive small drink at the station to save time.

CASE 1.2

Why Does the United States Spend So Much More?

Case 1.1  noted that the United States spends far more per person on medical care than other wealthy countries. Is that because Americans are wealthier, because they have worse habits, or because they use more services?

Income is a possible explanation. Income per capita is higher in the United States than in the other five countries discussed in  case 1.2  (World Bank 2017). This extra income could result in Americans’ using more services or paying higher prices. Part of the answer, it turns out, is that Americans pay higher prices. Americans use fewer pharmaceuticals, make fewer physician visits, and spend less time in hospitals but spend more on each of these items than residents of other countries do (OECD 2017).

Higher prices for inputs, such as pharmaceuticals, hospital services, and physician services, help drive higher spending in the United States. For example, the average amount private insurers pay hospitals and physicians for knee replacement surgery is $28,184 in the United States and $20,132 in Switzerland, whereas the National Health Service pays an average of $18,451 in the United Kingdom (International Federation of Health Plans 2016). Prices in the United States are 40 percent higher than prices in Switzerland and 53 percent higher than prices in the United Kingdom. Similarly, Harvoni, a drug used to treat hepatitis C, costs $32,114 in the United States versus $22,554 in Switzerland and $16,861 in the United Kingdom's National Health Service (International Federation of Health Plans 2016). Prices for Harvoni in the United States are 42 percent higher than in Switzerland and 90 percent higher than in the United Kingdom. Most governments negotiate input prices, but in the United States private insurers with limited leverage negotiate prices. Governments in the United States do negotiate physician and hospital prices for Medicare and Medicaid, but not pharmaceutical prices.

The United States also has a more intensive mix of services. Compared with the average European country, the United States uses 88 percent more  MRI (magnetic resonance imaging) scans  per person, 76 percent more  CT (computed tomography) scans , and 15 percent more  cesarean sections  (OECD 2017). In addition, the physician workforce has far fewer primary care physicians than in other wealthy countries. Although primary care physicians are well paid by international standards, earning an average of $217,000, this average salary is more than 40 percent less than specialists earn (Grisham 2017).

To understand the higher prices and more intensive service mix in the United States, one needs to understand the unique history of American health insurance. Blue Cross was started by hospitals in 1929 to bolster sagging hospital revenues, and Blue Shield was started by physicians in 1939 (Rothman 2017). Both were designed to limit price competition, and neither covered primary care services. Although health insurance is changing rapidly now, for many years the models set up by Blue Cross and Blue Shield persisted.

For the most part, Americans do not have worse habits than the citizens of other wealthy countries. Americans smoke and drink less than average (OECD 2017). Americans are much more likely to be obese than average, which contributes to high blood pressure, high cholesterol, diabetes, and a host of other complications. Increases in obesity have increased costs by hundreds of billions of dollars (Biener, Cawley, and Meyerhoefer 2017).

Discussion Questions

• Why are prices so much higher in the United States?

• Why is the intensity of care higher in the United States?

• Should Medicare negotiate drug prices?

• Why does the history of health insurance matter?

• How does obesity increase costs?

1.6 Conclusion

Why should healthcare managers study economics? To be better managers. Economics offers a framework that can help all managers simplify and improve their management decisions. It is especially valuable to clinicians who assume leadership roles in healthcare organizations. Managers are routinely overwhelmed with information, yet they often lack the key facts that they need to make good decisions. Economics offers a map that makes focusing on essential information easier.

Exercises

1.1 Why is the idea that value depends on consumers’ preferences radical?

1.2 Mechanics usually have better information about how to fix automobiles than their customers do. What problems does this advantage create? Can mechanics or their customers do anything to limit these problems?

1.3 A mandatory health insurance plan costs $4,000. One worker earns $24,500 in employment income and $500 in investment income. Another worker earns $48,000 in employment income and $2,000 in investment income. A third worker earns $68,000 in employment income and $7,000 in investment income. A premium-based system would cost each worker $4,000. A wage tax–based system would cost each worker 8.5 percent of wages. An income tax–based system would cost each worker 8 percent of income. For each worker, calculate the cost of the insurance as a share of total income.

E = Employment income

I = Investment income

P = Premium cost of insurance

Premium as a percentage of income = P/(E + I)

W = Wage tax cost of insurance = 0.085 × E

Wage tax cost as a percentage of income = W/(E + I)

T = Income tax cost of insurance = 0.080 × (E + I)

Income tax cost as a percentage of income = T/(E + I)

1.4 Which of the plans in  exercise 1.3  would impose the larger burden on those with incomes under $25,000: a mandatory insurance plan financed via premiums, via the income tax, or via a payroll tax?

1.5 Which of the plans in  exercise 1.3  would be fairest?

1.6 Which of the preceding questions can you answer using positive economics? For which of the preceding questions must you use normative economics?

1.7 The following table shows data for Australia, the United Kingdom, and the United States.

a. How did life expectancy at birth change between 2010 and 2015?

b. How did expenditure per person change between 2010 and 2015?

c. What conclusions do you draw from these data?

d. If you were the “manager” of the healthcare system in the United States, what would be a sensible response to data like these?

References

Adler, N. E., M. M. Glymour, and J. Fielding. 2016. “Addressing Social Determinants of Health and Health Inequalities.” JAMA 316 (16): 1641–42.

Biener, A., J. Cawley, and C. Meyerhoefer. 2017. “The High and Rising Costs of Obesity to the US Health Care System.” Journal of General Internal Medicine 32 (Suppl. 1): 6–8.

Grisham, S. 2017. “Medscape Physician Compensation Report 2017.” Medscape. Published April 5.  www.medscape.com/slideshow/compensation-2017-overview-6008547 .

International Federation of Health Plans. 2016. 2015 Comparative Price Report. Accessed October 4, 2018.  https://fortunedotcom.files.wordpress.com/2018/04/66c7d-2015comparativepricereport09-09-16.pdf .

Medicare Payment Advisory Commission. 2018. “Ambulatory Surgical Center Services.” Published March.  www.medpac.gov/docs/default-source/reports/mar18_medpac_ch5_sec.pdf .

Organisation for Economic Co-operation and Development (OECD). 2017. “OECD Health Statistics 2017.” Accessed August 16, 2018.  www.oecd.org/els/health-systems/health-statistics.htm .

Rothman, L. 2017. “The American Health Care System Has Lots of Problems. Here's When They Started.” Time. Published July 13.  http://time.com/4837864/healthcare-history-beginning-obamacare-ahca/ .

World Bank. 2017. “GDP per Capita (Current US$).” Accessed August 16, 2018.  https://data.worldbank.org/indicator/NY.GDP.PCAP.CD .

CHAPTER

2

AN OVERVIEW OF THE US HEALTHCARE SYSTEM

Learning Objectives

After reading this chapter, students will be able to

• apply marginal analysis to a simple economic problem,

• articulate the input and output views of healthcare products,

• find current national and international information about healthcare,

• compare the US healthcare system to those in other countries, and

• identify major trends in healthcare.

Key Concepts

• Healthcare products are inputs into health.

• Healthcare products are also outputs of the healthcare sector.

• The usefulness of healthcare products varies widely.

• Marginal analysis helps managers focus on the right questions.

• Life expectancies have increased sharply in the United States in recent years.

• Other wealthy countries have seen larger health gains with smaller cost increases.

• The healthcare sector is changing radically in response to technology and policy changes.

2.1 Input and Output Views of Healthcare

This chapter describes the healthcare system of the United States from an economic point of view and introduces tools of economic analysis. It looks at the system from two perspectives. The first perspective, called the input view, emphasizes healthcare's contribution to the public's well-being. The second perspective, called the output view, emphasizes the goods and services the healthcare sector produces. In the language of economics, an  input  is a good or service used in the production of another good or service, and an  output  is the good or service that emerges from a production process. Products (goods and services are considered products) are commonly both inputs and outputs. For example, a surgical tool is an input into a surgery and an output of a surgical tool company. Similarly, the surgery itself can be considered an output of the surgical team or an input into the health of the patient.

2.1.1 The Input View

The input view of the healthcare system stresses the usefulness of healthcare products. From this perspective, healthcare products are neither good nor bad; they are simply tools used to improve and maintain health. The input view is important because it focuses our attention on alternative ways of achieving our goals, and healthcare products are only one of many inputs into health. Others, such as exercise, diet, and rest, are alternative ways to improve or maintain health. From this perspective, a switch from medical therapies for high blood pressure to meditation or exercise would be based on the following question: Which is the least expensive way to get the result I want? This apparently simple question can be difficult to answer.

The input view stresses that the usefulness of any resource depends on the problem at hand and other available resources. Whether the health of a particular patient or population will improve as a result of using more healthcare products depends on a number of factors, including the quality and quantity of healthcare products already being used, the quality and quantity of other health inputs, and the general well-being of the patient or population. For example, the effect of a drug on an otherwise healthy 30-year-old is likely to be different from its effect on an 85-year-old who is taking 11 other medications. Increasing access to medical care is not likely to be the best way to reduce infant mortality in a population that is malnourished and lacks access to safe drinking water, given the powerful effects of better food and water on health outcomes. What is the best way to use our resources, given that most preventable mortality is a result of risky behavior? Sometimes, more medical care is not the answer. All these examples illustrate that the usefulness of resources varies with the situation.

The economic perspective of  marginal analysis  challenges us to examine the effects of changes on what we do. Marginal analysis proposes questions such as these: How much healthier would this patient or population be if we increased use of this resource? How much unhealthier would this patient or population be if we reduced use of this resource? Most management decisions are made on the basis of marginal analysis, although the questions used to arrive at the decisions are often more concrete. For example, what costs would we incur if we increased the chicken pox immunization rate among three-year-olds from 78 to 85 percent, and how much would increasing immunization reduce the incidence of chicken pox among preschoolers?

Reasonable answers to these questions tell us the cost per case of chicken pox avoided, and we can use that information to decide whether we want to use our resources for this proposition. Managers who focus on healthcare products as outputs of their organizations ask the same types of questions, although they frame them differently: How much will profits rise if we increase the number of skilled nursing beds from 12 to 18? What costs would we incur if we added a nurse midwife to the practice, and how would this addition change patient outcomes and revenues? In any setting, marginal analysis helps managers focus on the right questions.

Exhibit 2.1  illustrates how variable the effects of medical interventions can be. The data indicate that spending $1 million on an intervention to reduce childhood obesity would save 1,292  life years , whereas spending $1 million on colonoscopies for 81-year-old African American men would save one life year.  Exhibit 2.1  also reminds us that effectiveness does not always determine what services are offered. Interventions to reduce childhood obesity are not common, but colonoscopies for 66-year-olds are.

We have to make some choices. Colonoscopies for 81-year-olds save only a few life years. However, this screening may allow children multiple happy years with a grandparent. We cannot avoid a decision about whether the benefits of this intervention are large enough to justify its substantial costs.

The input view also stresses that changes in technology or prices may affect the mix or amount of healthcare products citizens want to use. For example, lower surgery costs will increase the number of people who choose vision correction surgery rather than eyeglasses. Conversely, advances in pharmaceutical therapy for coronary artery disease might reduce the rate of bypass graft surgeries (and reduce the number of attendant hospital stays).

In the past, healthcare managers did not spend much time on the input view. They were charged with running healthcare organizations, so products that their organizations did not produce were of little interest. This perception is changing. Our collective rethinking of the role of health insurance makes the input view practical. For example, if offering instruction on meditation reduces healthcare use enough, the chief executive of an insurance plan, the medical director of a capitated healthcare organization (one in which payments are made per person, regardless of the services provided), or the benefits manager of a self-insured employer will find it an attractive option. Increasingly, healthcare managers must be prepared to evaluate a wide range of options.

2.1.2 The Output View

New ways of thinking do not always invalidate former perspectives. The output view of the healthcare sector is more relevant than ever. The importance of producing goods and services efficiently has increased. Those struggling with the rising cost of healthcare are increasingly purchasing care from low-cost producers. Currently, third parties (i.e., insurers, governments, employers) have difficulty distinguishing between care that is inexpensive because it is of inferior quality and care that is inexpensive because it is produced efficiently, but their ability to make this distinction is improving.

To succeed, managers must lead their organizations to become efficient producers that attract customers. In many organizations, this task will be formidable.

2.2 Health Outcomes

Americans often celebrate their healthcare system as “the best in the world.” While parts of the system are superb, the system as a whole needs improvement. As indicated in  chapter 1 , the American healthcare system incurs high costs and produces mediocre outcomes. Although the United States spends far more on healthcare per person than any other large, developed country, American life expectancy at birth ranks twenty-seventh among the 34 members of the Organisation for Economic Co-operation and Development (OECD). Only the Czech Republic, Poland, Estonia, the Slovak Republic, Hungary, Turkey, and Mexico trail the United States (OECD 2017). Given the political decision to subsidize healthcare resources for the elderly, life expectancy at age 65 might represent a fairer test. On this measure, the United States ranked twenty-first in 2015. The health of the American public is not the best in the world.

This caustic appraisal should not hide the fact that the health of Americans has improved dramatically. Between 2000 and 2015, life expectancy at birth rose from 76.7 years to 78.8 years, an increase of 2.1 years (OECD 2017). From one perspective, this increase in life expectancy reflects impressive performance. From another, it does not compare well to the performance of other industrialized countries. For example, French life expectancy at birth rose from 79.2 years in 2000 to 82.4 years in 2015, and costs increased less than half as much in France as in the United States (OECD 2017).

This conclusion rests on a simple marginal analysis in which we compare the change in spending to the change in life expectancy. What appears to be higher spending, however, might just be the effects of inflation. To avoid inaccuracies resulting from changes in the value of money, economists use two strategies. The simplest and most reliable strategy to report spending uses shares of national income, or gross domestic product (GDP). This examination of shares removes the effects of inflation (see  exhibit 2.2 ).

2.3 Outputs of the Healthcare System

In 2015, Americans spent $3.2 trillion on healthcare, meaning that it averaged $9,892 per person or 17.2 percent of the nation's output (see  exhibit 2.2 ). The French spent $4,530 per person or 11.0 percent of national income. In both countries, the share of national income spent on healthcare has risen, but the increase has been much larger in the United States. Why is how much we spend interesting? Is there anything wrong with spending that much? Why has spending been rising around the world? Why has it been rising faster in the United States?

2.3.1 Why Is How Much We Spend on Healthcare Interesting?

The amount we spend on healthcare matters for two reasons. First, although healthcare claims an increasing share of national income worldwide, other industrialized countries have realized larger health gains while spending less than the United States. Second, the rising share of national income claimed by healthcare has prompted most governments and employers to question whether the benefits of this increased spending warrant it. If not, something is wrong with healthcare spending. If the benefits of healthcare spending are smaller than the benefits of using our resources in other ways, a shift would be in order. For example, would we be better off if we had spent less on educating new physicians and more on educating new teachers? The opportunity cost of producing a product consists of the other goods and services we cannot make instead. Stating that the benefits of healthcare are less than its costs does not imply that it is bad or worthless, only that it is worth less than some other use of our resources.

2.3.2 Why Is Healthcare Spending Rising More Slowly Than Anticipated?

Between 2010 and 2015, healthcare spending grew more slowly than forecast. Spending covered by private insurance, by Medicare, by Medicaid, and by other insurers came in below estimates (Holahan et al. 2017). Higher healthcare spending is driven by changes in prices and quantities, and we will explore both.

Prices for services covered by private insurance are set via negotiation and have historically risen much faster than other prices. But as  exhibit 2.3  shows, since the onset of the Great Recession of 2007–2009, medical prices have increased relatively slowly. Indeed, medical prices increased at a slower rate than prices in general during 2014 and 2015 (Keehan et al. 2017). This difference may be due to reductions in Medicare payments put in place by the Affordable Care Act (ACA), given that private insurers often base price negotiations on Medicare rates. In addition, the ACA created new insurance plans for those without access to employer-sponsored plans. Most of these plans were targeted at consumers with modest means and negotiated well-below-market prices with providers. The slowing of medical inflation may be due to low overall rates of inflation or to changes brought about by the ACA.

CASE 2.1

Comparing Health Outcomes in Adjoining Counties

Johnson County and Wyandotte County are adjacent counties in the Kansas City metropolitan area. Despite significant progress in recent years, the rate of premature death in Wyandotte County is more than double the rate in Johnson County (University of Wisconsin Population Health Institute 2018). What causes such large differences? Causes might include weaknesses in the primary care system or differences in health behaviors. The consensus is that diet and activity are the most important behaviors, tobacco use is second, and alcohol use makes a much smaller contribution (Institute of Medicine and National Research Council 2015).

How do these two counties compare? Even though the University of Kansas Health System is based in Wyandotte County, the county has far fewer primary care physicians and dentists per resident than average. Johnson County has far more primary care physicians and dentists per resident than average. Residents of Wyandotte County are 37 percent more likely to be obese (37% vs. 27%), 72 percent more likely to be physically inactive (31% vs. 18%), and 92 percent more likely to smoke (23% vs. 12%) but 25 percent less likely to drink excessively (15% vs. 20%) (University of Wisconsin Population Health Institute 2018).

Before labeling these as lifestyle differences, note that the economic circumstances are different in the two counties. Median household income is 48 percent lower in Wyandotte County (reflecting lower earnings and a higher proportion of single-parent households). The share without health insurance is 183 percent higher, and the share with a high school diploma is 19 percent lower. In addition, 23 percent of Wyandotte residents are African American and 29 percent are Hispanic, making it a much more diverse county (US Census Bureau 2018).

The government of Wyandotte County has launched a number of projects to improve the health of its citizens since 2009 (Healthy Communities Wyandotte 2016). Its 20-20-20 Movement seeks 20 new miles of trails, 20 miles of bikeways, and 20 miles of sidewalks by 2020. The Tobacco Free Wyandotte Action Team seeks to enhance resources for quitting tobacco, preventing young people from starting to use tobacco, and protecting residents from secondhand smoke. The Food Systems Action Team has promoted urban agriculture, farmers’ markets, community gardens, school-based gardens, summer meals for students, and nutrition education. Wyandotte County has also actively encouraged residents to sign up for insurance.

Discussion Questions

• What are the main inputs to health mentioned in this case?

• Are there important inputs to health that the case does not mention?

• What health behaviors should get priority?

• Is there evidence that reducing smoking improves health?

• Is there evidence that reducing obesity improves health?

• Does income play any role in improving health?

• How important is health insurance in improving health?

• Wyandotte County has relatively few primary care physicians. Should the number of primary care physicians be a priority?

• Can you find any evidence that improving primary care improves health?

• What role, if any, should private foundations play in improving health?

• What role, if any, should state governments play in improving health?

• What role, if any, should the federal government play in improving health?

• Which of these questions are examples of positive economics? Normative economics?

2.4 The Shifting Pattern of Healthcare Spending

With total revenues of more than a trillion dollars, hospitals claim nearly a third of total annual healthcare spending in the United States. What hospitals produce is changing, however. Since 1995, inpatient days have been slowly trending down, and outpatient visits have been trending up briskly (American Hospital Association 2016). Many hospitals now derive more revenue from outpatient care than from inpatient care. Hospitals’ share of total spending has risen by 2.0 percent since 2000, reflecting the continuing consolidation of services into health systems (Centers for Medicare & Medicaid Services [CMS] 2016). Rapid increases in prices and intensity (which we cannot separate at this point) explain most of this increase (Dieleman et al. 2017).

As  exhibit 2.4  shows, spending for physicians’ services claims nearly a fifth of total spending. The share has fallen since 2000 as a result of consolidation into systems and increasing spending on pharmaceuticals. Spending on pharmaceuticals (which does not include pharmaceuticals administered in hospitals and nursing homes) has risen sharply since 2000. This increase can be attributed to both the expected effects of public policy and some unexpected effects. Medicare Part D, the voluntary outpatient prescription drug benefit for people on Medicare, went into effect in 2006 and now provides coverage for nearly 41 million people. The ACA expanded Medicaid and established marketplace plans. Both forms of insurance provided coverage for pharmaceuticals and were designed to increase use of pharmaceuticals. What was not expected, but should have been, was that prices increased rapidly as well. As  chapter 7  will show, increasing insurance coverage results in increased sales and higher prices.

The overhead costs of health insurance represent the fourth largest component of spending. The American approach to health insurance, which emphasizes subsidies for private coverage, essentially ensures high costs of managing insurance. Having multiple small plans with distinct patterns of coverage guarantees high overhead rates. However, this total represents only part of the cost of running American health insurance. Hospitals, practices, and other organizations incur substantial costs of billing. Jiwani and colleagues (2014) estimate that 15 percent of total spending could be saved by insurance simplification, and this percentage may be an underestimate.

2.5 Disruptive Change in the Healthcare System

For many years six trends were evident in the healthcare system of the United States. They were

• rapid technological change,

• the shrinking share of direct consumer payments,

• the rapid growth of the healthcare sector,

• the rapid growth of the outpatient sector,

• the slower growth of the inpatient sector, and

• the steady increase in the number of uninsured Americans.

Only three of these trends continue unabated: rapid technological change, the shrinking share of direct consumer payments, and slower growth of the inpatient sector.

Exhibit 2.5  depicts the steady decline in the share of direct consumer payments for healthcare. Broader and more complete insurance coverage explains this trend. While consumers ultimately pay all healthcare bills, increasingly they pay indirectly via taxes and premiums.

The most surprising development of recent years has been the slowing growth of the healthcare sector. Rapid expansion of the healthcare sector has been a feature of American life for most of this century, but its pace has clearly slowed. As  exhibit 2.2  showed, healthcare spending in 2000 claimed 12.5 percent of national income. By 2016, it had risen to 17.2 percent of national income. However, in contrast to the rapid expansion of previous years, the share plateaued between 2009 and 2013.

Why spending grew more slowly is not clear. Job loss during the Great Recession and changes in health insurance benefits played a role, but these factors explain only part of the slowdown. Costs per case appear to have decreased for some conditions (Dunn, Rittmueller, and Whitmire 2016), and the number of Medicare beneficiaries increased by 7 million (medical needs typically change little after age 65, and Medicare prices are lower than private prices). Forecasting what will happen during the next several years is difficult because the healthcare environment appears to have experienced two major shocks: the implementation of the ACA and the transformation of the health insurance industry.  Section 2.5.2  discusses the ACA, and  section 2.5.3  discusses the reconfiguration of the health insurance industry.

2.5.1 Rapid Technological Change

Technological change is pervasive in healthcare. Technological advancement makes transformation of the healthcare system possible, and policy changes are apt to make transformation desirable. Only luck will rescue management decisions that ignore technological change.

Monitoring of implantable cardioverter defibrillators illustrates the interaction of technological and policy change. Patients with an implantable cardioverter defibrillator—a small device used to treat irregular heartbeats—require regular follow-up visits to monitor their health and whether their device is working properly. The stakes are high. Untreated arrhythmia may be life threatening, and more than 2 percent of the population experience some arrhythmia. Although little scientific evidence exists, the professional consensus is that these patients should be seen two to four times per year even if no difficulties are evident. A recent evaluation of a home monitoring system concluded that it offered better quality at lower cost (Parahuleva et al. 2017). In volume-based payment environments—in which revenues depend on the number of visits—providers may not find remote home monitoring attractive. However, in value-based environments—in which reducing the number of visits reduces the workload without reducing revenue—providers, patients, and insurers may have a common interest in expanding remote monitoring. For reasons discussed more fully in  chapter 6 , public and private insurers are trying to move quickly to value-based models.

Other innovations could prove even more disruptive. For example, pharmacogenomics—the science of predicting differing responses to drugs based on genetic variations—could have profound effects. Even after individual factors such as age, weight, race, sex, diet, and other medications are taken into account, patients can respond differently to a drug. One patient may have the desired relief of symptoms, another may have no apparent response, and a third may have a life-threatening reaction. Obviously this difference matters a great deal to patients and practitioners. It also matters to managers. An adverse drug reaction is the fourth leading cause of death in the United States, and genetic testing to ensure that patients get safe, effective pharmaceuticals could reduce hospitalization rates by up to 30 percent (Drew 2016).

Like every sector of society, healthcare illustrates the struggle to take advantage of the information revolution and demonstrates the paradox of technological change. The essence of the information revolution is that the cost of performing a single calculation has dropped precipitously. As a result, many more calculations are possible, and spending on some types of information processing (e.g., computer games) has increased sharply as spending on other types of information processing (e.g., inventory management) has plummeted. Technological advances almost always make a process less expensive, yet spending may rise because volume increases dramatically.

The challenges of the information revolution are even greater in healthcare than in most sectors. Much of the output of the healthcare sector involves information processing, yet relatively few healthcare workers are highly skilled users of computerized information. In addition, healthcare organizations have lagged behind other service organizations in investing in computer hardware, software, and personnel.

The rapid pace of change in other areas intensifies these challenges. Healthcare's diagnostic and therapeutic outputs are changing even faster than the organizational structure of the sector, which itself is changing rapidly. In some areas (most notably imaging and laboratory services), technological change is tightly linked to the information processing revolution. In other areas, the links are much looser. For example, advances in information processing speed the development and assessment of new drugs, yet because pharmaceutical innovations can be extremely profitable, a powerful incentive for pharmaceutical innovation exists regardless of these advances.

2.5.2 Major Features of the Affordable Care Act

The ACA is a complex law with multiple provisions. This section briefly sketches some of its major provisions, focusing on ones that have the potential to reshape the healthcare sector.

1. The ACA incorporates several mechanisms for expanding insurance coverage. These mechanisms include new regulations, state and federal insurance marketplaces, subsidies for those with low incomes, and the option for states to expand Medicaid coverage for those with the lowest incomes.

2. The ACA incorporates several mechanisms for reducing Medicare spending. These mechanisms include penalties for higher-than-expected readmission rates, reductions in Medicare payments to hospitals with large numbers of uninsured patients, reductions in payments to Medicare Advantage plans (private health insurance plans for Medicare beneficiaries), and incentive payments for care of high quality or for significant improvements in quality.

3. The ACA authorizes a number of payment reform demonstrations. These programs include trials of accountable care organizations, bundled payments, medical homes, and  managed care  for beneficiaries who are eligible for Medicare and Medicaid.  Chapter 6  will explore these programs in depth.

Many years will pass before the full effects of the ACA are understood. This section briefly notes some ACA provisions that have the capacity to change incentives and about which there is some evidence.  Chapter 6  will explore these issues in more detail.

Narrow networks  are common in ACA marketplace plans (Polsky et al. 2016). The main motivation for narrow networks (which may be limited to a single system or may exclude just a few providers) is that some systems have been able to negotiate high prices—sometimes four or five times Medicare rates—with private insurers (Scheffler and Arnold 2017). The benefit to marketplace insurance customers is sharply lower premiums, often 15 to 20 percent lower than plans with larger networks. The penalty is that marketplace customers may have to use out-of-network providers (and pay much more) for some care.

Medicare penalties for higher-than-expected readmission rates clearly give hospitals an incentive to reduce readmissions. A 2 percent reduction in Medicare payments would have a significant effect on most hospitals’ revenues, so reducing readmissions will be a priority for most hospitals. Even though reducing readmissions will reduce hospital volumes, most hospitals have taken steps to reduce readmission rates. Although commonly interpreted as a measure of hospital quality, readmissions are clearly influenced by the quality of postdischarge care (Branowicki et al. 2017).

Bundled payments  already have been tested, but the ACA dramatically expands testing of this concept. As a part of the ACA, Medicare has launched bundled payment trials in more than 400 healthcare organizations. Termed the Bundled Payments for Care Improvement Initiative, these trials will explore whether paying lump sums for episodes of care will reduce healthcare costs without harming care. One model, which is being tested only in New Jersey, lets hospitals give physicians bonuses if they help the hospital reduce costs and improve quality. A second model puts hospital and post-acute services in a common bundle. A third model pays a flat fee for all post-acute care (skilled nursing, inpatient rehabilitation, long-term care hospital, or home health services). A fourth model covers all services provided during a hospital stay (hospital, physician, and other). A fifth model includes hospital, physician, other in-hospital services, and post-acute care for patients who have hip or knee replacement. The common denominator in all these bundled payment trials is that services become cost centers rather than revenue centers.

2.5.3 The Transformation of the Health Insurance Industry

The health insurance industry looks different than it did a few years ago. To begin with, its revenues will grow. Analysts forecast that industry revenues will double by 2025, with most of the growth coming from Medicare Advantage, Medicaid, and ACA marketplace plans (Finn et al. 2017).

Second, the industry's customers look different. Until fairly recently, most purchases were made by firms or governments. Americans had coverage through work, Medicare, or Medicaid. Typically just one plan was offered. Increasingly, though, individuals are making their own choices. Millions of Americans have chosen Medicare Advantage plans already, and millions more have chosen marketplace plans. Both options seem likely to grow, and insurers have begun rolling out private exchanges so that employees can choose their plans as well (Goth 2017).

Third, the basis for competition seems likely to change. The ACA has made avoiding risk more difficult and, with other regulations, has made pricing and quality easier for consumers to discern. Starting in 2007, individuals seeking Medicare Advantage plans could use summary ratings based on clinical quality, the experience of patients, and customer service. Customers are using these ratings in choosing plans, and ratings systems seem likely to spread.

Fourth, the structure of the industry has changed. The industry has already consolidated, and this process is likely to continue. If, as many predict, profit margins will drop, additional mergers and acquisitions seem likely. Indeed, one of the rationales for the proposed merger of CVS and Aetna was that providing more care in MinuteClinics (part of CVS) would allow Aetna to offer insurance with lower premiums (Pinsker 2017).

Fifth, the health insurance industry is increasingly using data to measure cost and quality. More and more, insurers use data to identify high-risk beneficiaries, estimate the cost of an entire episode of care, provide feedback to providers, and make judgments about which providers offer good value. Underlying insurers’ increasing willingness to create narrow networks and designate preferred providers of care is the conclusion that cost and quality are not highly correlated, so steering patients to low-cost providers can be a winning strategy (Ho and Sandy 2014).

Sixth, benefit designs have changed. The average  deductible  for an employment-based plan rose from $343 in 2007 to $1,221 in 2017 (Kaiser Family Foundation and Health Research & Educational Trust 2017). In addition, caps on  out-of-pocket payments  have become nearly universal.

In short, so many changes in health insurance have occurred that they are hard to track. Chapters  3  and  6  will explore them more fully.

2.6 Conclusion

During the 1980s, a consensus emerged that the US healthcare system needed to be redirected despite its many triumphs. Underlying this consensus was the recognition that costs were the highest in the world even though outcomes were not the best in the world.

How the healthcare system should change is much less clear. Managing under such circumstances is stressful, but an awareness of the trends presented in this chapter should identify a number of strategies (e.g., striving to be the low-cost producer) that make sense in almost any environment. These low-risk strategies, and ways to deal with risk and uncertainty, will be discussed in the next chapters.

Exercises

2.1 Identify a product that is one organization's output and another organization's input.

2.2 Can you think of any initiatives that reflect the input view of healthcare?

2.3 What is wrong with spending 17.2 percent of GDP on healthcare?

2.4 Americans spend more on smartphones than the citizens of other countries do, yet this type of spending is seldom described as a problem. Why is spending more on healthcare different?

2.5 Should reducing overhead costs associated with insurance be a priority?

2.6 US national health expenditure was $7,892 per person in 2008 and $10,364 in 2016. The Consumer Price Index had a value of 210.228 in 2008 and a value of 241.432 in 2016. In 2016 dollars, how much was spending in 2008?

2.7 Spending on pharmaceuticals rose from $253,080 in 2010 to $328,588 in 2016. Go to the inflation calculator ( http://cpiinflationcalculator.com/ ) and calculate 2010 spending in 2016 terms.

2.8 How did the state and local government share of national health expenditures change between 2010 and 2016? What accounts for this change? Go to the “Actuarial Studies” page on the CMS website ( www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/index.html ) to get data.

2.9 When was the last year that GDP grew faster than national health expenditure? Go to the CMS website ( www.cms.gov/Research-Statistics-Data-and-Systems/Research-Statistics-Data-and-Systems.html ) to get data.

2.10 Your accountants tell you that the cost to set up an immunization program at a preschool and immunize one child against polio is $400. The cost to immunize 20 more children is $460 more. What is the cost per child for the first child? What is the cost per child for these additional 20 children? What is the average cost per child? What concepts do these calculations illustrate?

2.11 Starting a mobile clinic costs $300,000. The additional cost of serving the first patient is $40. What is the average cost of serving the first patient?

2.12 Setting up nurse practitioner clinics to serve 20,000 newborns in Georgia would cost $6 million. This program would increase life expectancy at birth from 75.1 years to 75.3 years. How many life years would be gained? What is the cost per life year? Should this program be started?

2.13 A new treatment for cystic fibrosis costs $2 million. The life expectancy of 1,000 patients who were randomly assigned to the new treatment increased by 3.2 years. What is the cost per life year of the new treatment?

2.14 Why has the share of healthcare output produced by hospitals risen? Will this trend continue? Can you think of a policy or technology change that would reduce hospital use? Can you think of a policy or technology change that would increase hospital use? What implications do these changes have for the careers of healthcare managers?

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