Chapter 2: Health, Medical Care, and Medical Spending Chapter 2: Health, Medical Care, and Medical Spending

 Can we apply the tools of managerial economics to health care?

Outline l An economic model of utility, health, and medical care. l Measuring health status. l Empirical evidence on health production. l Health care expenditures.

A Basic Economic Model l Health as a consumer durable good:  Utility = U (X, Health) l X represents “other goods and services.” l H is a stock -- every action will affect health. l On its own or combined with other goods and services, the stock of H generates a flow of services that yield satisfaction=utility.

A Basic Economic Model (cont.) l Marginal Utility  The increase in utility resulting from a given increase in health. MU H =  U/  H l Law of diminishing marginal utility  Each incremental improvement in health generates smaller and smaller additions to total utility.

Utility Health H0H0 H1H1 H2H2 H3H3 U0U0 U1U1 U2U2 U3U3 Total Utility The Total Utility Curve for Health

Marginal Utility Health The Marginal Utility Curve for Health MU

A Basic Economic Model (cont.) Production of health:  H = g (Medical care, other stuff) l Marginal productivity  The increase in health resulting from a given increase in medical care (q). MP q =  H/  q Law of diminishing marginal productivity Health increases at a decreasing rate with respect to additional amounts of medical care.

Medical Care Health Marginal Increase in Health Total Product MP The Total and Marginal Product of Medical Care

A Basic Economic Model (cont.) l 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) l Therefore medical services are often difficult to quantify.

A Basic Economic Model (cont.) Health=H(Profile, Medical Care, Lifestyle, Socioeconomic Status, Environment) l If an individual has a heart attack, then overall health decreases, regardless of the amount of medical care consumed.  The total product curve for medical care shifts down. l As a person ages, both health and the marginal product of medical care are likely to fall.  The total product curve shifts down and flattens out.

A Shift in the Total Product Curve for Medical Care Health Medical Care TP 0 TP 1

MEASURING HEALTH l Important for all health care managers today.  Insurers and consumers are demanding  costs AND  quality.

HEALTH OVER THE LIFE CYCLE TIME HEALTH BIRTH H min Appendicitis Auto Crash Cancer (radiation therapy) Cancer complications

HEALTH OVER THE LIFE CYCLE l Individuals make choices about health (make tradeoffs) which maximize U over time. l Relatively high value for the future þ Low discount rate l e.g. Low-fat diet and exercise to avoid heart disease. l Relatively low value for the future þ High discount rate l e.g. Smoking, excess drinking, drug abuse.

MORTALITY l Alive vs. Dead  Advantages: l  Disadvantages: l

MORTALITY MEASURES Crude death rate (per 100,000) 2. Age-adjusted death rate Age-specific death rate Infant mortality Neo-natal Postneonatal Life Expectancy (at birth)(1998)

MORTALITY MEASURES l Life expectancy NOT a prediction of how long people live.  76.7 is a summary of age-specific death rates in  “If those born in 1998 experienced age- specific death rates prevailing in 1998, on average they would live to be 76.7”

MORBIDITY l The relative incidence of disease  Advantages: l Captures quality of life.  Disadvantages: l Difficult to measure l Difficult to aggregate when patient has >1 problem.

MORBIDITY l Acute disease  e.g. appendicitis, pneumonia, gun shot wounds l Chronic disease  e.g. arthritis, diabetes, asthma l Incidence  occurrence of new cases in any particular year l Prevalence  new and ongoing cases in any particular year v Heart disease is more prevalent, but its incidence is declining.

MEASURING MORBIDITY l Distinguish between symptom and disease.  e.g. high blood pressure vs. stroke l Disabilities are also a sign of morbidity. l Subjective measures - i.e. self-rated health.  “Is your health excellent/good/fair/poor?”  Problem: , # 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?

MEASURING MORBIDITY l How far do we go in classifying “medical” problems? l e.g. cosmetic surgery vBeware of phrases in contracts or policy statements such as “providing all medical care” or “basic needs.”

LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED (1998) CAUSE OF DEATH DEATHS Unintential injuries 13,349 Homicide and legal intervention 5,506 Suicide 4,135 TOTAL “Violent Deaths” 22,990 75% Cancer 1,699 Heart Disease 1,057 HIV 194 All other nonviolent causes 4,687 TOTAL “Nonviolent Deaths” 7,637 25%

LEADING CAUSES AND NUMBER OF DEATHS, PERSONS AGED 65+ (1998) CAUSE OF DEATH DEATHS Heart disease605,373 Cancer384,186 Cerebrovascular Disease139,144 (Stroke) Chronic Obstructive Lung Disease 97,896 Pneumonia and Influenza 82,989 Diabetes mellitus 48,974 Unintentional injuries 32,9752% Nephritis 22,640

Empirical Evidence on Health Prod’n l Bunker et. al. (1995) estimated the increases in LE due to 26 preventive & curative medical services.  13 preventive services raised LE by 1.5 years.  13 curative treatments raised LE by yrs. on average for the entire U.S. l Given that LE rose from 62.9 to 75.4 yrs. (~12 yrs.) b/w 1940 & 1990, medical care had a significant impact on health.

LIFESTYLE l  cigarette smoking 10%   mortality: blackswhites men % 1.4% women % 1.1% (Hadley, 1982) l A one-pack-a-day smoker incurs 10.9 more sick days every six months than a comparable non-smoker. (Leigh and Fries, 1992) l 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)

OTHER FACTORS AFFECTING HEALTH l Environmental factors  e.g. air pollution, water quality, climate, occupational hazards  Empirical studies inconclusive, but may be due to lack of good data.

OTHER FACTORS AFFECTING HEALTH l Socioeconomic status  Education strongly correlated with health. l May help in “direct” production of health. l Or, may reflect high preference for future (low discount rate)  Income l Strong correlation with health in U.S. from mid 1700’s to mid 1900’s l Less relation between income and health since, maybe because most important public health problems are already solved –e.g. Adequate nutrition, sanitation l Higher income may increase “bad” habits –e.g. Smoking, excess drinking, reckless driving

Determinants of Infant Health Corman and Grossman, 1985

Determinants of Infant Health Corman and Grossman, 1985 Selected Regression Results, Neonatal Mortality Rates WhitesBlacks % HS Educated Newborn Intensive Care Hospitals/ Abortion Providers/

Determinants of Infant Health l Does more schooling and the availability of more providers improve infant health? l Is the marginal productivity of more providers greater for blacks or whites?

Determinants of Infant Health l Why 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 providers. l If 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?

Marginal Productivity of Provider Services for Infant Health (1-mortality rate)% Medical Care Blacks Whites

Marginal Productivity of Provider Services for Infant Health (cont.) l For any given level of provider services, marginal productivity may be higher for blacks than whites. l However, the level of services may be higher for whites than blacks.  Knowing the shape of the total product curve is not enough. You must also know where you are on it.

Conclusions l In an economic model, medical care and other goods and services are combined to produce health, which yields utility to the consumer. l The production of health can be measured in a variety of ways. l Both higher health care expenditures and other factors are improving health status over time.