Applying Economic concepts to Health care spending
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week1_summary_revised_HMGT435.pptxUMUC HMGT 435
Week 1: Economics and Health Economics
1
Important Economic Principles
Scarcity of Resources vs. Unlimited Wants and Needs
Opportunity Cost and Marginal Principal
Normative vs. Positive Analysis
Macroeconomic vs. Microeconomic
Key Drivers of Healthcare Spending Next 10 Years
Course Outline
Key Learning Objective
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Economics: Study of the behavior of economic agents – individuals, firms, governments and other organizations – when confronted with scarcity of resources.
Two Important Economic Concepts That Govern Economic Behavior:
Scarcity of Resources Amidst Unlimited Wants
OUR MATERIAL WANTS ARE UNLIMITED AND INSATIABLE
ECONOMIC RESOURCES ARE LIMITED AND SCARCE
BUT………..
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Resources also called “Factors of Production”
The Factors of Production in Healthcare Are:
Labor- Doctors, nurses, administrative staff, etc.
Physical capital – Hospitals, doctor’s offices, medical technology, etc.
Natural Resources and Raw Materials – land for the capital to be built, energy sources (oil and gas), raw materials for pharmaceuticals
Entrepreneurship – scientists who develop cures for cancer, drug companies who develop new drugs.
Scarce Resources in Healthcare
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Key Trade-offs Must be Made and Economics Helps Explain these Trade-offs
How much of healthcare should be consumed and by whom? (e.g. Demand)
What products in healthcare should be produced and how much? (e.g. Supply)
How do you produce these products? (Market Structure and Nature of Regulations)
Balancing Unlimited Wants with Scarcity of Resources in Healthcare
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Two important economic concepts can be used when evaluating economic trade-offs
Opportunity cost
Marginal Principle
These two economic concepts are important when evaluating the economic implication of spending economic resources on one thing (e.g. healthcare) vs. another (e.g. defense or education)
Evaluating Economic Trade-offs
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Choosing factors of production for a given purpose (e.g. more healthcare) lose the ability to use for something else (e.g. more education or more defense)
Opportunity cost of committing resources to produce a good or service is the benefits forgone from those same resources not being used in “next best alternative.”
Economic Cost = Explicit cost + Implicit Cost
Explicit cost: actual monetary payments for products/services or inputs to production
Implicit cost: opportunity cost (benefits forgone from not using resources for next best alternative)
Opportunity Cost
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Compare the marginal cost(MC) versus marginal benefit(MB) of a decision.
Marginal Principle:
Increase the level of activity as long as the marginal benefit (MB) exceeds the marginal cost (MC).
The optimal level of spending chosen is when the MB = MC.
Example:
Spending a lot of resources to develop a vaccine that may not result in a large marginal benefit.
Marginal Principle
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Positive Analysis and the Way of Economic Thinking:
“What is” or “What will be”
Investigating the relationship between economic variables
Measuring efficiency of a procedure or its effectiveness on achieving a goal is an example of positive analysis in health care
Normative Analysis---Not the Economic Way of thinking
“What ought to be”
“Desirability” of alternative outcomes
Ethical and fairness arguments often fall under normative analysis
Positive Economic Analysis
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Microeconomics
Focuses on decision-making of individuals and businesses
Examples: pricing decisions, nature of markets, and wage determination.
Macroeconomics
Study of the nation’s economy as a whole
Includes issues of changes in overall prices (inflation), unemployment, and economic growth (as measured by GDP)
Microeconomics vs. Macroeconomics
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National Health Expenditures
Please be sure to review:
Using this information, answer the following questions:
Understand the difference between Sources of Financing (e.g. private insurance, Medicare, Medicaid) vs. health care sector (e.g. hospital, physicians, etc.)
Which sectors are growing the fastest? What is the predominant source of financing?
What sector comprises the largest share of total spending in dollars?
What factors will lead to an increase in health care spending over the next 10 years?
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In “General” Economic Markets:
PRICES of goods and services are important determinants of Supply and Demand and help temper unlimited wants against scarcity of resources
The income of individuals and the wealth of the nation also determine demand for goods and services
Generally, markets are “perfectly competitive” meaning information is readily available about quality of products and value
Prices and Income Important to Balance Demand and Supply
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Patients Do Not Behave the Same Way as Consumers
They cannot “test” the product before consuming it
Difficult for patients to obtain information about what medical care is appropriate for their condition – medical knowledge is complex
Interdependencies between consumer actions (e.g. vaccinations impact public health)
Existence of insurance reduces sensitivity of demand to price changes
Discuss in more detail in Week 1 and Week 2
Why Healthcare Demand is Different
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Doctors/Medical Providers Do Not Behave in the Same Way as Other Firms
Entry into the industry is restricted by medical licensing
Advertising and overt competition are generally absent in medical markets (this has been changing recently with drug ads)
Advice given by physicians is supposed to be completely divorced from self-interest
Goals of providers may differ than profit maximization (instead more towards social and ethical factors)
Doctors can price discriminate and charge different fees for different patients
DISCUSS IN MORE DETAIL IN WEEK’s 4, 5 and 6
Why Health Care Supply is Different
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Week 2: The Demand for Health Care
Week 3: The Demand for Health Insurance
Week 4: The Supply of Health Care in Competitive Markets
Week 5: The Supply of Health Care in Noncompetitive Markets
Week 6: Role of Government Regulation: Market Failures, Price Controls, Licensing
Week 7: Comparative Effectiveness (Cost-Benefit analysis)
Week 8: Health Economics and Affordable Care Act
HMGT 435 Course Overview
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