Health, Medical Care, andMedical Spending

Health, Medical Care, andMedical SpendingHealth EconomicsProfessor Vivian HoFall 2009These slides summarize material in Santerre & Neun: Health Economics, Theories Insights and Industry Studies, Southwestern Cengate 20101 Can we apply the tools of managerial economics to health care?2OutlineAn economic model of utility, health, and medical careMeasuring health statusEmpirical evidence on health productionHealth care expenditures3A Basic Economic ModelHealth as a consumer durable good: Utility = U (X, Health)X represents “other goods and services”H is a stock -- every action will affect healthOn its own or combined with other goods and services, the stock of H generates a flow of services that yield satisfaction=utility4A Basic Economic Model (cont.)Medical care is not homogeneous and differs in:Structural quality (e.g. facilities and labor)Process quality (e.g. waiting time, case mgmt.)Outcome quality (e.g. patient satisfaction, mortality)Therefore medical services are often difficult to quantify5A Basic Economic Model (cont.)Health=H(Profile, Medical Care, Lifestyle, Socioeconomic Status, Environment)If an individual has a heart attack, then overall health decreases, regardless of the amount of medical care consumedThe total product curve for medical care shifts downAs a person ages, both health and the marginal product of medical care are likely to fallThe total product curve shifts down and flattens out6MEASURING HEALTHImportant for all health care managers todayInsurers and consumers are demanding  costs AND  quality7HEALTH OVER THE LIFE CYCLETIMEHEALTHBIRTHHminAppendicitisAuto CrashCancer (radiation therapy)Cancer complications8HEALTH OVER THE LIFE CYCLEIndividuals make choices about health (make tradeoffs) which maximize U over timeRelatively high value for the futureLow discount ratee.g. Low-fat diet and exercise to avoid heart diseaseRelatively low value for the futureHigh discount ratee.g. Smoking, excess drinking, drug abuse9DISCOUNTINGRequired when costs are incurred in the futureWhy? Individuals have a positive value of time preferenceIf r = 10%, then $100 invested today yields $110 next yearSpending $100 one year from now is “cheaper” than spending $100 today10 CHOICESSpend $100todayInvest $100 = $90.91 (1 + .10)andhave $9.09 left overDISCOUNTING1112If costs occur over multiple time periods, we must calculate the present discounted value (PDV) of these costs:PDV =ΣTt = 01(1 + r)tCOSTSt Example: A project requires: $100 in year 1 $ 75 in year 2 $ 50 in year 3PDV = $100 + $ + $ = $209.50 75(1 + .10)50(1 + .10)2DISCOUNTING13 If we discount costs, we must also discount benefitsAssume r = 10%$990Spend $990to save 1 year of lifetodayInvest $900 tosave 1 year of lifenext yearandhave $90 left tospend this yearDISCOUNTING14 Appropriate discount rate? The medical literature has settled on 5% for comparative reasons Discounting is not an adjustment for inflationCOSTYOLS=ΣΣCOSTYOLS1(1 + r)t1(1 + r)tDISCOUNTING15 Consider an intervention which costs $100 and saves 10 years of life Also assume r = 10%Why we discount cost AND benefitsOption 1: Spend $100 today: = = 10CE10010Option 2: Invest for 1 year → $110, saves 11 YOL. If we discount costs to present value, but don’t discount YOL:CE=10011= 9111 If we discount both costs and benefits:CE== 10110111(1 + .10)1(1 + .10)16MORTALITYAlive vs. Dead Advantages: Disadvantages: 17MORTALITY MEASURES 1950 1970 1980 1990 20001. Crude death rate 963.8 945.3 878.3 863.8 873.6 (per 100,000)2. Age-adjusted death rate 1446.0 1222.6 1039.1 938.7 869.03. Age-specific death rate 15-24 128.1 127.7 115.4 99.2 81.5 65-74 4067.7 3582.7 2994.9 2648.6 2432.94. Infant mortality 29.2 20.0 12.6 9.2 6.9 Neo-natal 20.5 15.1 8.5 5.8 4.6 Postneonatal 8.7 4.9 4.1 3.4 2.35. Life Expectancy 68.2 70.8 73.7 75.4 76.9 (at birth) 18MORTALITY MEASURESLife expectancy NOT a prediction of how long people live76.9 is a summary of age-specific death rates in 2000“If those born in 2000 experienced age-specific death rates prevailing in 2000, on average they would live to be 76.919MORBIDITYThe relative incidence of disease Advantages:Captures quality of life Disadvantages:Difficult to measureDifficult to aggregate when patient has >1 problem20MORBIDITYAcute diseasee.g. appendicitis, pneumonia, gun shot woundsChronic diseasee.g. arthritis, diabetes, asthmaIncidenceoccurrence of new cases in any particular yearPrevalencenew and ongoing cases in any particular year Heart disease is more prevalent, but its incidence is declining21MEASURING MORBIDITYDistinguish between symptom and diseasee.g. high blood pressure vs. strokeDisabilities are also a sign of morbiditySubjective measures - i.e. self-rated health“Is your health excellent/good/fair/poor?”Problem: 1970-80, # of people with high blood pressure declined. But % of people reporting restricted activity due to HTN doubled!Depends on what you want to do - e.g. astronaut, airline pilot, or professor?22MEASURING MORBIDITYHow far do we go in classifying “medical” problems?e.g. cosmetic surgeryBeware of phrases in contracts or policy statements such as “providing all medical care” or “basic needs”23LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED 15-24 (2000)CAUSE OF DEATH DEATHS Unintential injuries 14,113Homicide 4,939Suicide 3,994 TOTAL “Violent Deaths” 23,046 85% Cancer 1,713Heart Disease 1,031Congenital anomalies 441All other nonviolent causes 757 TOTAL “Nonviolent Deaths” 3,942 15% 24LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED 65+ (2000)CAUSE OF DEATH DEATHS Heart disease 593,707Cancer 392,366Cerebrovascular Disease 148,045 (Stroke)Chronic Lower Respiratory Disease 106,375Pneumonia and Influenza 58,557Diabetes mellitus 52,414Alzheimer’s disease 48,993Kidney disease 31,225Unintentional Injuries 31,05025Empirical Evidence on Health Prod’nHadley (1982) a 10% ↑ in medical care $ per capita →↓mortality rate by only 1.5%Auster et al. (1969) 10% ↑ in medical services →↓age-adjusted mortality rate by 1%Enthoven (1980) “flat-of-the-curve” medicine26LIFESTYLE cigarette smoking 10% →  mortality: blacks whites men 45-64 2.3% 1.4% women 45-64 1.1% 1.1% (Hadley, 1982)A one-pack-a-day smoker incurs 10.9 more sick days every six months than a comparable non-smoker (Leigh and Fries, 1992)Not smoking, regular exercise, moderate/no use of alcohol, 7-8 hours of sleep per day, proper weight, eating breakfast, and no snacking leads to 28% lower mortality for men, 43% lower for women (Breslow and Enstrom, 1980)27OTHER FACTORS AFFECTING HEALTHEducationOne more year of schooling →↓prob of dying w/in 10 years by 3.6% (Lleras-Muney 2001)IncomePeople w/o high school educ & income <$10k were 2-3 x’s more likely to have functional limitations and poorer self-rated health28Sturm, Health Affairs 2002OTHER FACTORS AFFECTING HEALTH29Determinants of Infant HealthCorman and Grossman, 198530Determinants of Infant HealthCorman and Grossman, 1985Selected Regression Results,Neonatal Mortality RatesWhitesBlacks% HS Educated -0.037 -0.056Newborn Intensive Care Hospitals/1000 -44.196 -86.196Abortion Providers/1000 -3.198 -16.83831Determinants of Infant HealthDoes more schooling and the availability of more providers improve infant health?Is the marginal productivity of more providers greater for blacks or whites?32Determinants of Infant HealthWhy might the marginal productivities for blacks and whites differ?The regressions have poor controls for income,health status, preferences, etc. which may be correlated with schooling and the availability of providersIf the marginal productivity for most factors is greater for blacks then whites, why isn’t the overall neonatal mortality rate lower for blacks than whites?33Marginal Productivity of Provider Services for Infant Health(1-mortality rate)%Medical CareBlacksWhites34Marginal Productivity of Provider Services for Infant Health (cont.)For any given level of provider services, marginal productivity may be higher for blacks than whitesHowever, the level of services may be higher for whites than blacksKnowing the shape of the total product curve is not enough. You must also know where you are on it35Health in the 50 StatesOne measure of health status in the population in the # of deaths (per 100,000 residents) from heart diseaseSuppose we have data on deaths from heart disease and other population characteristics by stateSee Excel SpreadsheetWhat factors might explain death from HD?Why?36Health in the 50 States37Health in the 50 States38Health in the 50 States39Health in the 50 States40Health in the 50 States41Health in the 50 StatesWhich of the previous variables would you include in the multivariate regression for the determinants of death from heart disease?Smoking?Overweight/Obese?Binge Drinking?Household Income?High School Graduation Rate?42Health in the 50 StatesWhich of the variables are statistically significant at the 95% confidence level?Suppose the fraction of residents who are obese/overweight were reduced by 0.10.How much would death rates from heart disease fall?Suppose that you could obtain data on a different variable that may explain heart disease death rates, but isn’t in this data set.What would it be?43ConclusionsIn an economic model, medical care and other goods and services are combined to produce health, which yields utility to the consumerThe production of health can be measured in a variety of waysBoth higher health care expenditures and other factors are improving health status over time44