Exam 1 Flashcards
(26 cards)
- Evaluate this statement: “The U.S. has the largest per capita medical expenditures in the world, but we are also healthier for it”. Use evidence from class to support your answer.
We do have the highest per capita medical expenditures, but we are not healthier for it. The slide we looked at on the first day of class showed that the U.S. has a lower life expectancy, higher obesity rates, and a higher percentage of individuals with chronic conditions than the rest of the developed world.
a. Show what would happen if a person in a developing country who has had to breathe polluted air all his life now has clean air to breathe. Explain why you made the change(s) (e.g., if you shifted the curve, changed the slope, etc. tell me why)
- Start where the slope is fairly steep, since this is an undeveloped country
- Shift upward: drinking clean water increases health, absent medical care
- Slope gets steeper: medical care will yield higher returns on someone who is healthier (breathing clean air) than someone who is not
b. Show what happens when an individual gets a vaccine that brings them significant returns to health. Explain why you made the change(s).
- Start where the slope is steep, because there are significant returns to health (steep slope)
- Movement along the curve: a vaccine is consumption of medical care.
c. A new laser makes hip replacement more successful, slightly decreasing the likelihood
of subsequent bacterial infections. Show what happens before and after this
technological change and explain your change(s).
- Start where slope is still upward sloping, but fairly flat (slightly decreasing bacterial infections).
- Slope gets steeper. Medical care will yield higher returns to H with the new knee technology.
Note: no shift here. H won’t get higher if you don’t use the medical care (get a knee
replacement)
- Describe the RAND health study, and its two general findings.
- The demand curve for medical care is downward sloping, that is, increasing
coinsurance rates decrease the use of medical care. - Generally, higher coinsurance rates do not affect health.
a. Why was this study so important? What contributions does it make to public policy?
It was the first (and still only one of a few) true experiments in health economics.
It is important for public policy because one can use the argument that going to the doctor does not increase health. This evidence can be used to argue against universal health care.
b. Looking back, how might we reconcile the RHIE result of no effects of coinsurance on health with more recent papers that show a correlation? Explain.
The RHIE didn’t break the sample into subgroups of chronically-ill patients. The analysis grouped all patients into one group: those who went to the doctor when they didn’t need to (a cold) and those who didn’t go when they should have (diabetes patients). The two effects “washed each other out”. Subsequent studies have shown that for specific groups of patients with chronic conditions (diabetes, high blood pressure), not taking medicine as they should has had a significant effect on their health.
- Draw the utility function with respect to health. As health increases, why does the marginal utility for health increase, but at a decreasing rate?
At low levels of health, any increases will give you a lot of utility (think being bed ridden, and then you get better and can work again). But as you become quite healthy, you are just fine-tuning your health and those later gains don’t give you as much satisfaction.
- Where is the U.S. on the health production function? Explain, distinguishing between additional consumption of medical care and improved medical technology. Provide evidence from our reading.
Thonrton (2011) says that the U.S. is on the flat portion of the curve. He calls this “flat of the curve medicine”. This means that additional consumption of medical care (a movement along the curve) will not provide any additional returns to health. However, we have seen gains in life expectancy over the past 50 years in the U.S. He says the reason for these gains isn’t additional consumption of medical care, but rather increases in medical technology (which causes the production function to steepen and lie above the original function).
- Discuss the difference between fee for service (retrospective reimbursement) and capitation (prospective reimbursement). How might each effect health care costs (prices)?
Fee for service (retrospective reimbursement): doctor does the test, bills the insurance. Insurance reimburses for as many tests as doc orders. Incentivizes overtesting, which increases demand for health care, which increases the price and hence overall health care costs for society.
Capitation (prospective reimbursement): insurer gives doc a set amount per patient they will reimburse at the beginning of each pay cycle. Regardless of if that patient needs no additional tests or needs a lot, they only get that set payment (insurer says ‘on average’ it will balance out). Puts doc ‘on a budget’; they have to think about whether they need to give that test or not. Disincentivizes overtesting, lower overall health care costs.
- Discuss employer-sponsored insurance.
a. How did it come about?
WWII: wage freezes, employers offered health insurance to attract productive workers
b. What is one problem economists see with insurance tied to employment? (it is not as prevalent after the ACA went into effect). Explain the issue.
Job lock: individuals stay in jobs they may not be very good at just for the health insurance. For efficiency within the economy, economists would like the most productive worker for that job to be in that job (e.g., an accountant would be more productive at Deloitte than scooping ice cream at Baskin Robbins). But if a worker feels he/she must stay in an unproductive job just to have health insurance, this introduces inefficiency into the labor market. Much more prevalent before the ACA b/c insurers could deny coverage for pre-existing conditions, so if you left your job you couldn’t get an individual plan if you were sick.
c. What has the trend been for this type of coverage in the last decade or so? What are two reasons for this trend?
It’s been decreasing, because:
- Employers aren’t offering plans as often, too expensive (employers pay 65%-75% of premium)
- Employees aren’t taking the plans, even if offered, because they can’t afford even 25% of the premium.
- Describe the evolution of the health insurance plan, from the fee for service type after WWII to the present day.
Blue Cross implemented the first insurance plans in the 1930s. These were fee for service plans. FFS plans had no network, used fee for service (retrospective) reimbursement, & had moderate coinsurance rates.
- Draw the MEC model & use it for the following problems. The current optimal level of health is H1*.
a. Suppose a person becomes ill with Lupus, an autoimmune disease. Show what happens in the model, and explain your reasoning. Note: illness is another way the body “depreciates”.
If a person becomes ill with a disease, this affects the rate of depreciation of the body (ϒ). The body will appreciate at a faster rate, causing the (r +ϒ) curve to shift up, decreasing the optimal level of H, H. The H goes down because if you are ill to begin with, you have to invest in so much more health to bring yourself back up to your previous health status, that the costs of this outweigh the benefits (this is the same reasoning as to why elderly have lower H*s, b/c why put so much into your health if you’ve only got little time left?)
b. Suppose, instead, that a person has gone to college and earned a degree. Has their H* changed? If so, show on the graph and explain.
Yes, the MEC curve shifts to the right. This is because more educated people are more efficient investors of health - e.g., they get instructions from the doctor, they follow them better; they know the future benefits of eating well and exercising.
Point 1 of the Grossman Model
Part 1: Utility Function for H and Z (home goods)
Grossman said you could divide consumption into two types: H and Z, which is everything you could consume except health. You consume health by “feeling good” or “feeling bad”. You consume it then it is gone.
[see U function from #4]
Point 2 of the Grossman Model
Part 2: Marginal Effectiveness of Capital (MEC) curve
Health is also an investment. We invest in health now (eat right, exercise, etc.) in order to have a healthy foundation from which to work and consume Z in the future. So in addition to H as a consumption good as in Part 1, it is also a capital good. The MEC curve tells us what the optimal investment in Health (H*) should be, given a depreciation rate of the body (ϒ) and rate of return in the financial markets (r).
[see #10 for an MEC curve example]
Point 3 of the Grossman Model
Part 3: Production Function for Health
Grossman also took a more active perspective on health: we are our own producers of health, and there are things that we can change (lifestyle, amount of medical care) about our health. There are things that are beyond our control oftentimes (environment, genetics) as well, but all of these factors are ‘inputs’ into our health. Hence we can model the production of health, with these aforementioned factors as inputs and health (H) as the output. Because H itself is difficult to quantify, we use measurable variables like life expectancy & years of life added to represent health. Because there are so many inputs to health, and graphing a model of all of these as inputs would require a multi-dimensional computer model, we just look at the role medical care has in health. This is why we put it on the horizontal axis and then assume all other inputs are held constant:
[see #2 for various production functions for health]
HDHP
In 2004 George W. Bush passed legislation giving high deductible plans tax-favored status. These plans were meant to give patients ‘more skin in the game’ and avoid moral hazard by making them pay up-front for medical care until the insurance kicked in. To be considered a high deductible plan, individual plans had to have >=$1,350 deductible; $2,700 for a family. High deductible plans are the only plan type that can include a Health Savings Account (HSA). Workers can contribute to the account pre-tax, up to a certain limit, and the money in the account rolls over to the next year if not spent. This money is to be used for health care expenditures only. About 50% of firms in West Michigan also contribute to their employees HSA as an additional fringe benefit.
FFS
FFS remained the dominant type of plan until the beginning of the 1970s, when HMOs came into favor. In the 1960s, health care expenditures were starting to rise, and continued to rise into the 1970s. The narrow networks, capitation reimbursement, and gatekeepers were put into place to keep costs from rising further. HMOs were restrictive on the patient, however, premiums and copays were low. HMOs were a dominant form of health insurance until the late 1980s/early 1990s, when PPOs became popular. HMOs are known as “managed care extreme”.
PPO
Preferred Provider Organization (PPO)
o Came about as a reaction to strict HMO networks & “death panels”; 1980s
o Looser type of Managed Care
o FFS reimbursement
o Higher copays/coinsurance & deductibles
o No Gatekeeper
o Both In-Network & Out-of-Network physicians (higher coinsurance rate out)
o Current market share: 52%
o * restrictions: in between FFS & HMOs
HMO
o Kaiser Permanente is prototype
o Came about in 1973 in response to high health care costs of FFS plans
o “Managed Care Extreme”
o Low deductibles & copays
o Physicians, pharmacists, etc. are employed by the HMO & housed in same location
o Current-day HMOs are typically networks & not housed in the same location (IPAs)
o Current market share: 6%
o * Most restrictive type of plan
o Capitation – a reimbursement system where the doctor only gets a certain amount of money for an office visit and that money must be managed accordingly. Usually a budget for each visit
Fuchs hypothesis
both health & socioeconomic status (SES) are simultaneously caused by the willingness to delay gratification (patience)
