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9/25/22, 5:01 PM Quiz Transcript

https://media.capella.edu/CourseMedia/BHA4112/FlexPath/economicElementsInHealthCare/transcript.asp 1/9

TRANSCRIPT

Economic Elements in Healthcare

Determining the Allocation of Resources for Two Programs Using the Health Production Function The purpose of a production function is to analyze inputs (i.e., funding and

resources) and outputs (i.e., improved health) to identify the least costly

combination of inputs to achieve the desired output.

This media piece shows how the health production function can help healthcare

leaders make resource allocation decisions to help achieve economically ef�cient

objectives of healthcare services programs.

In Detroit, there are two state-funded healthcare services programs with the goal

of reducing diabetes prevalence rates in obese individuals with low income living

in impoverished areas within the city. The State of Michigan has funding available

to make two payments one month apart, and would like to choose only one of

these programs in which to invest funding for the program’s expansion. The state

wishes to make the most economically ef�cient decision to improve the health of

the most people in need.

Program 1: “Bariatricity Detroit” is a large program with a strategic objective to

establish additional Bariatric Surgery Centers in selected hospitals for obese

9/25/22, 5:01 PM Quiz Transcript

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establish additional Bariatric Surgery Centers in selected hospitals for obese

patients with diabetes to undergo bariatric weight loss surgeries.

Program 2: “Healthy Lifestyles Detroit” is a small program with a strategic

objective to increase education and coaching focused on healthy eating, lifestyle

and behavioral change and increased physical activities for low-income, obese

individuals with diabetes.

The �rst step in using a Health Production Function is to de�ne inputs and

outputs:

Question 1 of 7

What are the desired outputs (or objective) to be achieved for each program? For the state? This question has not yet been answered.

Outputs (or objectives) are the results, or goals, you are trying to achieve. Looking

at the case study, the following are generally what each program and the state of

Michigan are trying to achieve.

Program 1 objective = Establish additional Bariatric Surgery Centers in

selected hospitals to provide weight loss surgery to obese individuals with

diabetes.

Program 2 = Increase education and coaching focused on healthy eating,

lifestyle and behavioral change and increased physical activities for low-

income, obese individuals with diabetes.

State program goals = Reduce diabetes rates in obese individuals with low

income living in impoverished areas within the city. Make the most

economically ef�cient decision to help the most people in need.

Question 2 of 7

What are the possible inputs needed for establishing Bariatric Surgery Centers? This question has not yet been answered.

Inputs are the resources that are needed to operate a given program or service.

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Some example of inputs that would be required to establish and operate the

Bariatric Surgery Center for Program 1 would be:

Funding

Hospital Staf�ng

Licensing of the added facilities

Surgical suite costs

Bariatric surgeon costs

Question 3 of 7

What are the possible inputs needed for establishing Bariatric Surgery Centers? This question has not yet been answered.

Again, inputs are the resources needed to operate a program or service. Some of

the resources needed to increase the capacity of Program 2 are:

Funding

Education materials

Behavioral coaches

The second step in using a Health Production Function is to de�ne the relationship

between the output (goal or objective) to be achieved and the inputs (i.e., funding

and resources) are available to work towards achieving each program’s de�ned

objectives.

9/25/22, 5:01 PM Quiz Transcript

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A1A2 A3 A4

Q1

Q2

Q3 Q4

(A 3 +

$ 30

0, 00

0)

(A 1 +

$ 10

0, 00

0)

(Q1 + 20 individuals helped)

(Q3 + 30 individuals helped)

Healthy Lifestyles Det roit Bariatricity Det roit

Program Expenditu res

H ea

lth O

ut pu

t

This diagram shows that the relationship between a program’s inputs and outputs

is curvilinear. When a program is relatively small, additional inputs devoted to that

program (A1 and A2) are likely to result in relatively large increases in the

program’s output. As additional resources are allocated to that program, the total

output will continue to increase, but at a more gradual rate. If a program is

relatively large, additional inputs devoted to that program (A3 and A4) are likely

9/25/22, 5:01 PM Quiz Transcript

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relatively large, additional inputs devoted to that program (A3 and A4) are likely

to result in small increases in the program’s output (Q3 and Q4). Finally, increases

in output for both programs will become negligible even though the program’s

inputs may continue to increase.

According to the Health Production Function, there is a law of diminishing returns

to consider when making funding allocation decisions. Funding is referred to as a

�xed input, because the state can only provide funding of the same amount two

times.

Question 4 of 7

In the example health production curve, consider A1/Q1 and A2/Q2 to be the Healthy Lifestyle Detroit Program and A3/Q3 and A4/Q4 to be Bariatricity Detroit. For the two programs in Detroit, how does the Health Production Function and the law of diminishing returns work? This question has not yet been answered.

There is no single right answer for this, but below are a number of points to

consider when analyzing the graph, the health production function, and law of

diminishing returns.

If the state allocated funding amounts A1 and A2 to the smaller program 2,

“Healthy Lifestyles Detroit,” this would result in large changes to health outputs

Q1 and Q2, speci�cally, larger decreases in the rates of diabetes in low income,

obese individuals.

If the state allocated funding amounts A3 and A4 to the larger program 1,

“Bariatricity Detroit,” this would result in small changes to health outputs Q3 and

Q4, speci�cally, smaller decreases in the rates of diabetes in obese individuals. Of

note, Bariatricity Detroit is not designed for low-income, obese individuals, but

rather, for individuals with insurance that will provide coverage for weight loss

surgeries.

At this point, the health production function shows that the most economically

ef�cient decision for the state would be to provide funding to the smaller program

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which would have larger health outputs; that is, a larger decrease in diabetes

rates in low-income, obese individuals.

The �nal step in using a Health Production Function is to consider variable inputs

(inputs that change depending on the level of production) and marginal outputs

(the additional outputs produced by adding a unit of input) for each of the

programs.

A1A2 A3 A4

Q1

Q2

Q3 Q4

(A 3 +

$ 30

0, 00

0)

(A 1 +

$ 10

0, 00

0)

(Q1 + 20 individuals helped)

(Q3 + 30 individuals helped)

Healthy Lifestyles Det roit Bariatricity Det roit

Program Expenditu res

H ea

lth O

ut pu

t

Question 5 of 7

Of your previously de�ned inputs, which would be considered variable inputs for each of the two programs and why?

9/25/22, 5:01 PM Quiz Transcript

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programs and why? This question has not yet been answered.

Variable Inputs

The two programs that the state can choose to provide funding for are very

different in terms of their approaches and the costs associated with program

expansion. Aside from funding, which is a �xed input, there are variable inputs for

each program. Variable inputs must be considered because they add to the total

inputs needed to achieve desired program objectives.

For Bariatricity Detroit, the larger program, aside from funding which is a �xed

input, the possible inputs that were de�ned - hospital staf�ng, licensing of the

added facilities, surgical suite costs, bariatric surgeon costs – are variable. For

example, costs related to hospital staf�ng of a bariatric surgery center depend on

how many staff are already available in the hospital and how many new staff

need to be hired.

For Healthy Lifestyles Detroit, the smaller program, aside from funding which is a

�xed input, the variable inputs de�ned were educational materials and behavioral

coaches.

Question 6 of 7

When the costs of increasing a program’s size are not equal, the comparison cannot simply be made between the changes in output of the two programs. The relevant criterion for allocating resources to programs having different bene�ts and costs is to select those programs whose marginal bene�t per dollar spent is greatest (Feldstein, 2012).

How might marginal outputs be important in your comparison of Bariatricity Detroit and Healthy Lifestyles Detroit from an economic and

9/25/22, 5:01 PM Quiz Transcript

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Healthy Lifestyles Detroit from an economic and output ef�ciency point of view? Consider the health production curve from the previous question to help give some more context to your response. This question has not yet been answered.

Marginal Outputs

For Bariatricity Detroit, assume that an expansion of this program would result in

a decrease in diabetes prevalence by 30 obese individuals. The marginal cost of

achieving that increased bene�t is $300,000.

In comparison, an expansion in Healthy Lifestyles Detroit yields, as a marginal

bene�t, a decrease in diabetes prevalence by 20 low income, obese individuals at

a marginal cost of $100,000.

Dividing the marginal cost by the marginal bene�t (MC/MB) yields a cost of

$10,000 per individual patient the Bariatricity Detroit program and $5,000 per

individual patient in Healthy Lifestyles Detroit.

It is clear from such an analysis that the state should allocate funding to expand

Healthy Lifestyles Detroit.

Conclusion

Question 7 of 7

When making a decision about allocating funding and resources, what are the steps you should be taking and the types of information you should be considering to drive and justify your choices? This question has not yet been answered.

There is no single correct answer to this question however one process for

9/25/22, 5:01 PM Quiz Transcript

https://media.capella.edu/CourseMedia/BHA4112/FlexPath/economicElementsInHealthCare/transcript.asp 9/9

There is no single correct answer to this question, however, one process for

making these types of economic and programmatic decisions could be outlined as

follows:

First, de�ne and consider important aspects of the outputs and the inputs. These

might include:

speci�c population group whose health is to be affected

goals of stakeholders

objectives of programs

desired outcomes and/or results

costs associated with each program

variable and �xed inputs needed to expand each program

Next, de�ne the relationship between inputs and outputs for each program. Keep

in mind that:

the relationship is curvilinear

there is a law of diminishing returns

the smaller program will have larger outputs initially

the larger program will have smaller outputs initially

Third, marginal effect on health of each of the programs should be empirically

estimated.

And last, to use the decision rule that resources should be allocated to those

programs whose marginal bene�t per dollar spent is greatest.

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