ECON4615 Health Economics Spring 2005 Teachers: Tor Iversen (TI) – - 7 lectures/2 seminars Kari Eika (KE) – - 7 lectures/4 seminars Information about health economics research at UiO:

Course outline Lectures: 1.IntroductionTI: Health systemsTI: Demand for health and health servicesTI: 1.02, KE: 8.02, Demand for health insurance KE: 1.03, Distributional considerations KE: Health service provision Characteristics of demand and supply of health care KE: 5.04, Private physician practice TI: 19.04, HospitalsTI: 3.05, Seminars: 1.Health systems, prevention and cureKE: Demand for health and health servicesKE: 3.03, Demand for health insuranceKE: Equity/Health service provisionKE: Health service provisionTI: 28.04, Compulsory term paper: Questions available: Deadline for submission: 8.04 Examination: 30 May 9:00-12:00

Some reasons for economists’ interest in the health sector 1.Substantial and growing sector of the economy

Source: NOU 2003:1

Source: OECD 2001

Source: NOU 2003:1 2001: full-time equivalents per year growth: full-time equivalents

Development in technical efficiency and cost efficiency in Norwegian hospitals (1992 = 100). Source: Samdata Somatikk SINTEF Helse Rapport 1/04.

2. We need information of whether resources are properly used Do all health services have a positive impact on health? Are there services where the costs exceed the willingness to pay? –Insurance implies low co-payment and few incentives for patients to balance expected effect against social costs In public systems with global budgets: Are there services not being provided even if willingness to pay exceeds costs. Do organization, financing and payment systems influence to what extent health policy goals are expected to be fulfilled?

3.Markets imperfections may prevent social efficiency from being achieved External effects –Positive external effects of vaccination against infectious disease Patients have inferior information about the quality of health services: experience goods Irreversibility Asymmetric information related to health insurance –The insurer has imperfect information of health risks: Adverse selection –The insurer has imperfect information on preventive efforts: Ex ante moral hazard –The insurer has imperfect information of necessary treatment: Ex post moral hazard

4. Public sector allocation has its own challenges The government as a single provider of compulsory insurance What kind of health services should be provided by the public sector? What kind of patients should have priority? –The most severly ill? –Those for whom treatment has the greatest health effect? –Those with greatest health effect per krone used?

Prioritizing services and groups of patients according to explicit goals The importance of the content of the criteria for priority-setting Consider an example

Alternative rules (criteria) for making priorities: A: Priority according to the seriousness (prospects without the treatment) of the disease Prioritize according to increasing survival without treatment B: Priority according to treatment effect Prioritize according to difference in survival with treatment and without treatment, such that the group with the greatest difference is given first priority. C: Maximize total health within the resource constraint Prioritize according to increasing cost per saved life, such that the group with lowest cost per saved life is given first priority. D: Priority according to the seriousness of the disease constrained by an upper limit on cost per saved life. E: Maximize total health constrained by a lower limit on the seriousness of disease

The importance of criteria for prioritizing the three treatments

Some implications: Optimal priority-setting depends on the aims that the health sector is expected to pursue It is possible to obtain a considerable total health gain by prioritizing treatments with modest effect given that they are sufficiently inexpensive Criteria C and E is at a disadvantage for patients who, because of some reason, do not manage to get much health out of the health services The cost of treatment relative to other treatments should not influence priority according to criteria A and B. The introduction of cost saving technologies should influence priorities according to criterion C (and possibly D and E), but not according to criteria A and B Cost- benefit analysis are relevant for priority decisions only according to criteria C, D and E Hence, if you are in favor of criteria A or B, it is inconsistent simultaneously to argue that cost-benefit analysis should have an increased role as a means to allocating resources within the health sector Economic incentives should have no effect on priorities according to criteria A and B

In recent legislation in many countries it is stated that there should be a reasonable relation between the potential health effect of a treatment and its cost. But what is a reasonable relation? How should the effect of a treatment be documented? How should health effects be valuated allowing for comparison between groups of patients? Some treatments save life while others mainly improves quality of life Calculation of costs in missing or non existent markets and prices

Further questions: What is the optimal level of patient copayment for health services? Should copayments be differentiated across services? Does type of payment system have any effect on decisions made by health service providers? How do health service providers respond to the characteristics of the health care market? What is the optimal payment system for health service providers? How should provision of health services be organized? How should insurance be organized? Public or private? Compulsory or voluntary?

Important tasks for economists in planning and managing the health care sector Hospitals, regional health enterprises, municipality and county level of government, ministry of health, ministry of finance, medicine agency, pharmaceutical industry, national and international organizations Analysis of costs and benefits of specific diagnostics and treatments To give advice concerning institutional setups: organization and payment system Economics still controversial in the health sector – professional self governance has been the tradition. Physicians know best. A strong tendency in the direction of economic thinking having a more influential role in the managing of the health sector

About the reading list 1.Introduction OECD, Health at a glance – OECD indicators 2003 (OECD, Paris). OECD, Towards high-performing health systems (OECD, Paris). 2.Health systems Cutler, D.,2002. Equality, efficiency and market fundamentals: The dynamics of international medical-care reform. Journal of Economic Literature 40, Kornai, J. and Eggleston, K., Welfare, choice and solidarity in transition (Cambridge University Press, Cambridge) Demand for health and health services Grossmann, M., 2000, The Human Capital Model. In A. J. Culyer and J.P. Newhouse, eds., Handbook of Health Economics (Elsevier Science B.V., Amsterdam) Hey, J. D. and M. S. Patel, 1983, Prevention and cure? Or: Is an ounce of prevention better than a pound of cure? Journal of Health Economics 2, Health insurance Rees R, 1989, Uncertainty, information and insurance, in J. D. Hey, ed., Current Issues in Microeconomics (Palgrave Macmillan, London). Arrow, K. E., 1963, Uncertainty and the welfare economics of medical care, American Economic Review 53, 941 ‑ 973.

5.Distributional considerations Williams, A., Cookson, R., Equity in Health. In A.J.Culyer and J.P. Newhouse (ed.): Handbook of Health Economics, Volume 1B (Elsevier Science, Amsterdam) Health service provision Biørn, E., Hagen, T. P., Iversen, T., Magnussen, J., The Effect of Activity- Based Financing on Hospital Efficiency: A Panel Data Analysis of DEA Efficiency Scores 1992–2000. Health Care Management Science 6, 271–283. Chalkley, M., Malcomson, J. M., Government purchasing of health services. In A.J.Culyer and J.P. Newhouse (ed.): Handbook of Health Economics Volume 1A, (Elsevier Science, Amsterdam) Eika, K Low Quality-effective Demand, Memorandum 36/2003. Department of Economics, University of Oslo. Iversen, T., The effects of a patient shortage on general practitioners’ future income and list of patients. Journal of Health Economics 23, McGuire, T. G., Physician agency. In A. J. Culyer and J. P. Newhouse: Handbook of Health Economics, Volume 1A (Elsevier Science, Amsterdam) Norwegian speaking students will find useful information about the Norwegian health care system in: NOU:2003:1. Behovsbasert finansiering av spesialisthelsetjenesten (Statens forvaltningstjeneste, Oslo).