Utility and Health Lecture 2 Asst. Prof. Dr. İlker Daştan HEALTH ECONOMICS

1. How Health Economics? How does health produce utility? (Next: What affects health (lifestyle and medical care choices) ?) Services delivered in health care markets are not “goods,” they do not provide direct utility ▫They may even have “bad” side effects Health as an economic good: stock (or capital) of health generates happiness/utility ▫Derived demand for medical care ▫Grossman, M., 1972, On the Concept of Health Capital and the Demand for Health, Journal of Political Economy 80 (2): 223–255

Demand for Health Health is like a durable good ▫Life starts with an inherent stock of health  Different for each individual Utility = U(X, H) ▫H is stock of health, X is other goods ▫Health leads to utility Utility from X or H increases in a decreasing manner Utility from other goods increases with health Utility from health increases with other goods Indifference curves may be drawn identifying different combinations of health and other goods with same utility

Production of Health Individual himself produces health using medical care (health produces utility) The demand for the final product (health) leads to derived demand for medical care to produce health Production function: ▫H = g(m)  Where m is medical care – broadly defined  Generally: g’(m) > 0 and g’’(m) < 0 Benefits of medical care decrease with usage ▫May even become negative

2. The Production of Health H = g(m, D) ▫Where D is disease  Impact of medical care depends on disease: disease and medical care interact to determine health production Disease I: Health at mid-level, medical care provides some help (e.g. allergies, asthma) Disease II: Worst health but medical care restores health to a better level than DI (e.g. a broken leg) Disease III: A small health shock but medical care can’t do much either (e.g. common cold)

Characteristics of Medical Care Marginal productivity of medical care falls, while average productivity can be high Medical care is not a homogeneous activity ▫Thousands of medical procedures, diseases, and injuries  Current Procedural Terminology System  International Classification of Diseases Medical care generally does not change ultimate outcome, but speeds the “cure” ▫Or slows death: AIDS, some forms of cancer, or Alzheimer’s disease Outcomes of medical care is uncertain Life style also matters

3. Health Through the Life Cycle Aging: wearing/depreciation of the health stock Life expectancy increased ▫Public Health improvements ▫Medical care improvements Typical plot of health stock (Figure 2.4): ▫Decreasing trend with occasional troughs and recoveries, until H min Aggregate annual death rate per 100,000 persons (29 between ages 1-4 and 13,000 over 85) ▫Technical change reduced these rates for most ages (for ages 15-24, it’s mostly not technical change but reduction in drunk driving and improvement in vehicle safety) Heart attack (28.5%) and cancer (22.8%) comprise more than 50% of deaths in the US (2002 data)

A Model of Consumption and Health “You are what you eat” “As you sow, so shall ye reap” Smoking, alcohol consumption, use of drugs, diet composition (high cholesterol foods), nature of sexual activities, amount of exercise H = g(X BAD, X GOOD, m) g’(X BAD ) 0, g’(m)>0 U’(X BAD ) > 0 These choices dominate a person’s health far more than the medical care system

A Model of Consumption and Health Between ages (causes that comprise more than 75% ) (1999 data): ▫Vehicle crashes ▫Other accidents ▫Homicide ▫Suicide Black males aged 15-24: death rate from homicide alone exceeds all causes of white males (1997 data) So medical care system is ineffective in such issues

A Model of Consumption and Health Ages 65 and over, major causes of death ▫Heart disease (smoking ) ▫Cancer ▫Stroke ▫Lung disease (tobacco) In mid-ages, it’s a mix Epidemiological data shows systematically increased risk with lifestyle choices ▫Smoking one or more packs causes 2.5 times the risk of a fatal heart attack, similar data for high blood pressure (salt, alcohol, stress), cholesterol (diet), no exercise Tobacco, diet/activity patterns and alcohol account for 3/8 of all deaths in the US (1990) Compare Nevada and Utah

More on lifestyle Causes of obesity (economics predicts these) Technology -> Increase in marginal productivity of workers, calories spent decline (2/3 of increase in BMI since 1960s, (Lakdawalla and Philipson, 2002) ) ▫Increased value of time increases the opportunity cost of exercise, encourages shift to fast food (with more women in workforce, time becomes more valuable, less home-cooking)  Budget for restaurant meals was 1/3 of food budget in 1970s, recently became ½  Larger portions were introduced starting from 1970s, obesity increases closely track these

Obesity Technology -> Increase in agricultural productivity and mass production and marketing of food (1/3) Density of restaurants per capita explain obesity the most (Chou et al. 2002) ▫Number of fast-food restaurants per capita doubled between 1970 and 1990, full service restaurants increased by 35%

Obesity Linked to transportation ▫Courtemache (2007) shows higher gasoline prices cause weight loss  $1/gallon increase reduces 16,000 fatalities per year and saves $17 bn in health care costs (400 mn/d gallons are consumed -- $145 bn spent annually) Coggon et al. (2001) estimate that ¼ of all knee surgeries could be eliminated but for BMI under 25 in England

Obesity Obesity has strong effects on various forms of morbidity (Figure 2.7) Obese people spend 40% more on health care Obesity-related spending account for 10% of all health care spending Obese receive less wages, especially women (Cawley, 2004; Dastan, 2010)

Tobacco –why smoke? Stigler and Becker (1977) ▫de gustibus non est disputandum ▫Rational individuals choose to be addicted now and quit later in life Lack of information ▫Decreases with education  From ~30% to ~8% (college) ▫<3% for physicians  Even health workers’ consumption decreases with education

Alcohol Patterns and intensity matter for constant consumption Heavy drinking: ▫Liver cirrhosis ▫Some cancers ▫Heart disease ▫D&D Type of alcohol matters ▫Study on Danish adults (Gronbaek et al., 2000):

Types of alcohol Heavy drinking (more than 21 drink per week) of beer and distilled spirits increases mortality from all causes and specifically ▫Cancers (double the risk) ▫Mixed results re: Coronary Heart Disease Wine reduces all-cause deaths by about 20%, even for heavy drinkers, heart disease by 50% ▫Red wine is better than white wine due to procyanadin in red wine (also in chocolate, cranberry juice, pomegranates) General alcohol use increases with education ▫People with higher education tend to consume healthier alcohol (Klatsky et al. 1990)

Alcohol and lifetime income Moderate consumption may increase lifetime income (Hamilton and Hamilton, 1997), heavy consumption decreases (Dastan, 2010) ▫Through labor force participation, not wage (Mullahy and Sindelar, 1993) Income increases access to a healthier life as well as to restaurants! ▫Moreover, better health means higher productivity and income

Education Could it be that both education and healthier lifestyle choices could depend on something more fundamental: ▫Time preference differences  Economics stops here