Health economics - all Flashcards
(131 cards)
1
Q
What is health stock?
A
Is genetic and has to be maintained by the lifestyle and can be restored by access to health services.
2
Q
What is health economics?
A
Is a key to interpret it and the various phenomena related with the maintanance
3
Q
Health economics relies on three concepts, which one?
A
Resources
Uncertainty
Role of Governments
4
Q
Resources
A
They are limited. We need to understand how many resources are required to maintain individual and collective health, and how to allocate them.
5
Q
What are the drivers of healthcare expenditures?
A
Demand side: changes in the concept of health, from being related to the absence of a disease to involving the whole individual well-being.
Supply-side: Supplier induced demand, asymmetric information between patients and providers
6
Q
Uncertainty
A
Unable to predict the shocks that might happen to one health in the future.
The unpredictability is the reason why people are risk adverse and want to be covered by a good health insurance.
7
Q
Government intervention
A
is required to have the Pareto equilibrium. There is a strong externality and the existence of Moral Hazard and Adverse Selection phenomena
8
Q
Role of Governments
A
is different in each state because there are different ways to fund and regulate the health care system
9
Q
Health is a merit good.
A
A merit good improves the wellbeing and productivity of the community and it should be safeguarded and supported by the Government even in countries where the healthcare system is private by prevention, regulation and public services for the most vulnerables.
10
Q
Role of Governments in merit goods
A
The Government replaces the individuals’ decision making process because there isn’t the assumption of rational consumer and no consumer sovereignty
11
Q
How we can buy/sell health?
A
It is impossible to do it directly but we pass through an agent, the physician.
12
Q
Relationship of imperfect agency
A
Is a cause of asymmetric information as the physician knows more and an induce the demand for treatment. (Supplier Induced Demand)
13
Q
Efficiency v. Equity
A
The healthcare sector is full of market failures and can’t reach the Pareto equilibrium alone.
In all industrialised countries health protection is regulated by the state.
If the State prioritises efficiency, liberal style, or equity, egalitarian.
There is a trade-off between efficiency and equity.
14
Q
Which type of public regulation is required for “health” as a merit good?
A
- Regulating access to healthcare services, for example, using copayment;
-Supervising the functioning of the insurance market
-Integrating private insurance with other public interventions for the most vulnerable, ex. Obamacare
-Direct production of healthcare services by the public sector, ex. National Healthcare Services
15
Q
Since health depends on individuals’ conditions rather than on the efficiency of the sector what impact on it?
A
Work, consumption, lifestyle choices. In fact the government intervenes regulating these conditions by safeguarding work places, promoting a healthy lifestyle or by controlling food contamination or air pollution
16
Q
The health status depends on which factors?
A
Environmental and Behavioural that are influenced by socioeconomic status, the richer have a better diet, live in adequate houses and go on holidays more often, meanwhile the more educated know that some factors impact health.
Another factor is the Healthcare services provided by the State.
17
Q
What would be the demand for healthcare?
A
If everyone obeys their doctors the demand should be inelastic (horizontal line), which is generally for lifesaving treatments, otherwise, it is downward sloping.
18
Q
Unlike most types of goods, deriving
a demand curve for health care is quite
simple
A
FALSE
Just as with any good, deriving a demand curve for health care is difficult because it requires information about how the same population would react to different prices.
This requires either parallel universes or, more realistically, a randomised experiment.
19
Q
The RAND study was useful for measuring process elasticity because it randomly assigned insurance plans to participants as opposed to letting them choose
A
TRUE
Randomization ensured that the groups facing different prices were statistically equivalent. That meant that any difference in demand between groups was attributable to price, not some other characteristic.
20
Q
The Oregon Medicaid Experiment is not
truly “randomised” because the lottery
winners did not all end up with insurance,
and some lottery losers did end up with
insurance.
A
FALSE
Although is a controlled experiment OREGON used randomisation to assign participants to different groups and the lottery winners were more likely to have a health insurance
21
Q
The RAND HIE found that people assigned to the free health plan had the same rate of hospitalisation as people assigned to the cost-sharing plans.
A
FALSE
The people assigned to the free plan visited the hospital more frequently and were more likely to visit the ER.
22
Q
In the RAND HIE, the arc elasticity of
demand for inpatient care was larger
(in absolute value) then the arc elasticity
of demand for outpatient care
A
FALSE
That result would imply that people are more price sensitive when it comes to more urgent health care. Instead, the arc elasticity of demand for impatient care was smaller in absolute value.
23
Q
Unlike the usual measure of elasticity, an arc elasticity can be calculated from just one price-quantity data point
A
FALSE
Any measure of elasticity requires data from at least two price levels in order to measure responsiveness to price.
24
Q
Both the RAND and Oregon studies find
that demand for health care is approximately unit elastic, that is e ≈ −1.
A
FALSE
The RAND HIE finds that demand for health care is very
inelastic, with arc elasticities around 0.2.
25
In the RAND HIE, being assigned more
generous insurance did not generally
improve participants’ health outcomes,
except among certain subgroups.
TRUE
The RAND HIE finds that generous insurance only provides small health improvements to healthy people. High-risk participants (like those who were smokers or had high blood pressure) did receive substantial health benefits from more generous insurance
26
To date, no major health insurance
experiment has studied the impact of
uninsurance, just different levels of
insurance
FALSE
The Oregon Medicaid Experiment studied the impact of
uninsurance
27
Results from the Oregon Medicaid
Experiment suggest that having health
insurance has a positive impact on health
status.
TRUE
Lottery winners in the Oregon Medicaid Experiment were not
more likely to survive than lottery losers, but they had better
self-reported physical health and mental health
28
What is the RAND HIE experiment?
The first randomised experiment study on a large scale.
It randomly assigned 2000 families from 6 US cities to different insurance coverage plans with varying groups of copayment tracking the quantity of healthcare demanded at each price.
Healthcare changed since 1980 and the results might not be actual.
29
Oregon Medicaid Experiment
Compared to two groups of low-income adults. Medicaid lottery winners with a chance to apply for public health insurance through Medicaid and have lower Out of pocket access prices, vs lottery losers that might have bought private insurance.
The issue of the experiment is the selection bias because were studied only poor people and winners have to apply to get coverage.
30
How are the results of the studies?
price changes affect the demand for healthcare, which is downward sloping, the elasticity decreases when the conditions are more severe and we require hospital visits.
31
Three types of results:
Outpatient care, medical care that doesn't involve an overnight hospital stay, inpatient care: requires an overnight stay and ER care
RAND HIE:
- Outpatient: as the copayment increases the number of episodes decreases for both acute and chronic conditions
- Inpatient: the demand decreases as the price increases but less than for outpatient care.
- ER: who has the highest copayment plan is less likely to buy ER care, however, there are some people that use it for conditions that don't require imminent access because they don't have a GP, ex: immigrants.
OREGON:
-Outpatient people with at least 1 visit and the absolute number of visits within 6 months are higher for lottery winners
For both inpatient and er there isn't a significant difference.
32
Elasticity
- Punctual elasticity: the ratio between the % change in quantity demanded and the % change in price depending on the direction of calculation of the initial point.
To be more precise we use arc elasticity:
ϵ = Δ𝑄/(𝑄1+𝑄2)/Δ𝑃/(𝑃1+𝑃2)
Healthcare has an inelastic demand when compared to other goods but it is still decreasing.
If the access is linked to personal income the demand for rich people is more inelastic.
33
Does it mean that high prices cause damage for health?
We have to observe the mortality rate:
-RAND HIE there is no difference between different groups but the high-risk participants have higher mortality rate.
-OREGON there is no evidence because it studied only low income people.
34
Health utility function
Two elements:
-consumption effects, the health increases direct utility, you feel better when you are healthier
-investment effects, the health increases the number of days available to participate in market and non-market activities.
35
Grossman assumption
Individuals maximise utility function depending on health (H) and a composite good (X) that provides direct satisfaction but doesn't affect health: U=U(X,H)
36
Investment function
Assumption: each individual has a stock of health that evolves according to
Δ𝐻 = 𝐻 rate at which health 𝑡+1 − 𝐻𝑡 = 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛 ℎ𝑒𝑎𝑙𝑡ℎ − δ𝐻.
δ(0,1), the natural rate of health deterioration over time, it is an increasing function of age because ageing influences the accumulation of the individual health stock.
Individuals invest their health in period t increasing the probability of good health in the next period (t+1) and the number of healthy days, the time available for market and non-market activities.
The investment in health is based on the production function: Investment=f(medical and healthcare inputs, time spent on improving health, individual behaviours, education, income)=f(M, TH, Λ,E,I)
37
Time
T=365=Time improving health+ Time-consuming other goods+Time lost on illness (negative utility) + Time working, it provides indirect utility giving the income for enjoying leisure time and other goods= TH+TB+TL+TW
TL and TH are exogenous.
The trade-off between TB and TW, going from S to 0 we add days of work.
Constraint is the possible allocation and the slope is given by the wage rate.
The indifference curve is the individual preference for allocating time between work and leisure.
38
Individual behaviours
it can be healthy increasing the investment function and the stock of health capital or unhealthy which decreases it.
39
Education
is exogenous. Schooling helps choose healthier lifestyles and increases information about healthcare
40
Optimal choice of investment
To obtain the optimal level of health, the marginal cost of investing H= to marginal benefits.
Health will be demanded till the rate of return on health investment= marginal cost of health capital.
MC of health capital= opportunity cost+ rate of which health depreciates= rate of interest on other investments + rate of depreciation of health= r+δ
MB/ MEI= rate of return on health investment= wage rate*rate of return of healthy days= W*G
Diminishing the MR between health investment and health because the level of health capital increases and is difficult to generate health from inputs.
41
Optimal choice of investment
- Ageing, the depreciation increases with age, MC rise and D of Health Capital falls, the optimal level of health stock decreases with age.
- Wage doesn't affect the cost of capital, depreciation doesn't change. more income will increase the returns obtained from health days, shifting the MEI curve up because benefits of health are greater for higher income, optimal health stock increases with level of wages.
- Education same effect of wages. Higher education means for the same investment needed less inputs, MEI curve shifts up. Optimal health stock increases with education.
42
Application of the Grossman model
Absolute income has a positive effect on 3 variables of health. Involves greater access to health g/s and greater access to material goods.
43
What is the relative position
the way an individual sees himself relative to others. It has a high and statical significant impact.
44
What undermines can undermine mental and physical health?
Anxiety, insecurity, low self-esteem, social isolation and lack of control over work
45
What is health?
Is a matter of position in the social hierarchy, it becomes a concept of relative rather than absolute deprivation.
Deprivation at an early age impacts negatively health in 2/3 cases.
46
On what policies should focus?
Reducing social inequalities through income equalisation, can improve health indices and reduce health inequalities.
Income inequality causes chronic anxiety, insecurity, low self-esteem and social isolation provoking a lack of control over work with negative effects on mental health.
Blunt differences between social classes to reduce insecurities from whom might feel excluded from social life.
47
What could be the policy implications?
Fewer wages differentials
Better social housing conditions
Less unemployment
More incentives for education to low-income students.
48
In real live investments in health can creat long-lasting benefits but it isn't shown in the Grossman Model
FALSE
One of the central features of the model is that health is partially an investment good. If someone invest in his health today it will be higher today and in the future.
49
In the Grossman model the marginal efficiency of investment (MEI) in healthcare declines as health gets better
TRUE
If someone is very unhealthy has major dividends from a small improvement in health, but if he is in health has little benefit.
50
Aging shifts the MEI in the health curve inward
FALSE
As ageing occurs the depreciation rate of health increases. The result is moving along the marginal efficiency of the investment curve upward: worse optimal health.
51
One hour of exercise always produces a return on health stock which is more than one hour
FALSE
This could be true when health deteriorates after a negative shock, when health reaches a certain level an hour spent exercising generates less than an hour of additional productive time, due to decreasing marginal returns of input.
52
People who drop out of high school can produce more health than college grads because they have more free time to invest in health production.
FALSE
More education shifts out the marginal efficiency of the investment curve. Better-educated people have more information on the correct behaviours to keep the stock of health and produce a higher stock of health.
53
What is one of the risks factors that can affect our health?
Smoking. It is the largest preventable health risk in Europea and the most significant cause of premature death.
In the last decades the prevalence of smokers has declined and it is higher among men than women. The rate is higher for people with lower level of education.
54
Roger theory
Normally each innovation is adopted in the first stage by men that are richer in society.
Four stages of the trajectory in the diffusion of innovation:
1. Early adopters: men in higher socioeconomic groups are more open to innovation, with no acknowledgement of the damage of smoking. Women are excluded for cultural reasons
2. Early majority. Smoking is more common and more equally distributed. Death due to smoke arises but awareness is low and policies are weak.
3. Smoking behaviour declines for men and peaks for women. The decline is among higher-income and more educated groups remaining quite constant for the rest of the population. Later majority s among the lower economic groups.
Severe increase in mortality due to smoking and there is a large acknowledgement of the risks, control policies are starting to bere more applied by governments
4. Smoking is perceived as an older innovation and is a habit for lower socioeconomic groups. laggards, who adopted it later. In the smoking epidemy women lag men by one or two decades due to gender heterogeneity.
If a country is more developed the higher in the stages will be.
55
Diffusion of the smoking habit in Italy. Is it consistent with predictions of the tobacco epidemic model, considering the separate effect of gender, age and birth cohort?
The analysis is focused on the concept of generations that share common socio, political, historical and economic backgrounds that lead generations to have similar values, beliefs and lifestyles. Study on late adolescence and early adulthood because is when people start smoking.
56
Why the smoking epidemic started later?
Because Italy was relatively poorer and introduced anti-smoking policies earlier in terms of the stage of smoking diffusion, in line with other EU countries in the 70s.
The view of smoking as a harmful habit differed substantially between younger and older generations.
57
What are the different generations in Italy?
1. Silent Generation, people born between 1926-1954, entered their adolescence in the 50s and 60s and there were no anti-smoking policies, the growth of cigarette use was an indicator of economic well-being and modernism.
Smoking was almost a male habit and strong social taboos and religious reasons prevented women from smoking as the first stage.
2. Baby boomer 1, people born between 1946 and 1955, grew up in a period where smoking was a mass behaviour and prevalence was low among women, the second stage
3. Baby boomers 2, people born between 1956 and 1965, were adolescents and young adults when there were the first policies against tobacco smoking. In 1972 there was a banning of advertising, in 1975 there was a regulation about smoking in public places and it was banned in public transport. In the 80s the smoking habit declined among men but increased among females because was a symbol of freedom and emancipation. Women in higher socioeconomic classes were emancipated earlier and more.
4. X Generation, people born between 1966 and 1980, grew up in a period of tobacco control measures.
58
What was the reason for using the age-period-cohort approach?
To estimate a separate regression equation for each educational level both compulsory and voluntary.
Smoking prevalence (dummy, 1 if current smokers, 0 otherwise) = ⲁAge + βGenerations (Silent as reference category) + γRegion (Lombardy reference) + 𝛆
For both education classes males of baby boomers 1 had a higher risk than the Silent generation while for baby boomers 2 and x generation, it was lower. For women in compulsory education, the risk was higher for baby boomers and x generation and for voluntary higher education the risk was higher only for baby boomers 1 and lower for x generation.
59
What are the policy implications?
They deal with the sustainability of NHS due to Baby boomers being the largest generation in the country and they are the ones that smoke more, which causes the increased risk of developing chronic health conditions.
Least healthy men: baby boomer 1 living in the south and being less educated.
Least healthy women: baby boomers 2 living in the north and that are less educated.
Based on Rogers' theory smoking prevalence will decline but the burden of smoking-related diseases for baby boomers will increase.
60
What is the SID?
The supplier-induced demand is the increase in the quantity of services requested induced by the supply side due to information asymmetry between providers of care and patients.
Is widespread in the health sector because patients are unaware of their real need and trust the physician to choose the number and type of access. Is possible because in the healthcare sector is impossible to find excess of supply.
61
What kind of relationship is the one patient/doctor?
It is an imperfect agency where the doctor should act in the patient's interest but at the same time, it acts in its own interest to maximise income, free time and reputation.
62
What describes the McGuire and Pauly model?
It describes physicians as utility maximisers and they have utility from income and leisure and disutility from inducements: the effort to induce patients to buy more care than necessary, forcing them to work more.
Inducements has also indirect utility because increase income and there is a trade-off between income and leisure time.
Cost-benefits analysis compares the disutility of induced unity with the utility of income given by extra visits.
63
The utility function of physicians
U = U (π, L, I) = U(net income, leisure time, degree of inducement)
64
Trade-off income-leisure
on x= available time of leisure and working
on y = income, generated by working.
Wage= slope of budget constraint curve, the higher wage will steep the income line.
Issue:U = max U (π, L) subject to π=w(tot time available - L)
In the graph K is the point of max free time, no income, meanwhile D is the point of max work time. From K every hour of work subtracted from leisure time increases the income.
In the graph, A, B and C are the optimal choice for doctors for each level of wage, the path of connection first increases and then bends back: backwards-bending labour supply curve.
When w is high the doctor has a certain L without inducing, meanwhile, if it's low it can benefit from a demand induction.
in AB the substitution effect is more dominant and the risk of inducement is higher, for BC the income effect is more dominant.
65
Trade-off income-induction
Physician problem: max U= U(π, I) subject to π=m(Q0+I)=mQ0+ mI.
m= unity price for each service and the profit rate.
Q0= quantity of services provided in the absence of induction
I= induced services
Equilibrium= tangency of the net income line and indifference curve (E).
Lower profit rate due to increasing competition, income line will go down and becomes flatter.
Physicians could decide to increase their inducement of demand, income with m and no inducement will be higher than m' and inducement.
66
Caesarean section delivery case study
Discussion between Gruber and Owings on the declining fertility increases the income pressure on obstetricians and gynaecologists leading to substitute normal childbirth for caesarean which is more reimbursed.
The result of the study shows that a decline in the fertility rate is associated with an increase in the caesarean delivery rate, which is correlated with previous caesarean deliveries.
It is much more likely in large hospitals. Cesareans are also somewhat more likely
at for-profit hospitals, and much less likely at government hospitals, than at non-profit.
67
Caesarean section delivery case study
Discussion between Gruber and Owings on the declining fertility increases the income pressure on obstetricians and gynaecologists leading to substitute normal childbirth for caesarean which is more reimbursed.
The result of the study shows that a decline in the fertility rate is associated with an increase in the caesarean delivery rate, which is correlated with previous caesarean deliveries.
It is much more likely in large hospitals. Cesareans are also somewhat more likely
at for-profit hospitals, and much less likely at government hospitals, than at non-profit.
68
How are costs for health?
They are uncertain and for some diseases, there is a low probability of contracting them, however, the distribution of adverse events is random.
Possibility to have catastrophic expenses and lose a big share of income.
This is the reason why individuals that are risk adverse take about insurances.
69
What is the principle of insurance policies?
Risk pooling. Risk is shared among a group of people.
The reduction of variability on the income of the insured works if:
- the # of insured people is large enough, following the law of large numbers, and individuals are equally exposed to risk, there is homogenous probability.
- the probability of adverse events is defined
- expenses must be clearly defined over time
- loss has to be accidental and unprovoked, with no fraud.
People decide to buy health insurance because this is a type of choice under uncertainty, related to the concept of imperfect information.
70
What is the probability of getting sick?
0IS
71
What is the expected value?
E(X) of a random variable is given by the sum of all possible outcomes weighted by their probability of happening.
E(I)=p(Is)+(1-p)(Ih)
The higher the probability of getting sick means lower the expected value of income.
72
What is the expected value?
E(X) of a random variable is given by the sum of all possible outcomes weighted by their probability of happening.
E(I)=p(Is)+(1-p)(Ih)
The higher the probability of getting sick means the lower the expected value of income.
73
When a person is risk-averse?
If for the same expected value he prefers a certain event even if the uncertain event could lead to higher earnings in the event of a win, because the expected utility will be higher than the uncertain one.
It depends on the functional specification of the utility of income, square root is an indicator of risk aversion because the function is concave, the neutral function is linear and the utility of E(X)= E(Y).
A risk lover will have a convex function.
74
What is the expected utility of a random event?
E(U,(X)). It is the sum of the utilities of each of the possible outcomes weighed by the probability of occurrence.
If a person is risk-averse will probably choose B over A if E(U(B))>E(U(A))
The functional form of the utility depends on individuals' risk attitudes.
U(I)= √I, the individual is risk averse
75
On what depends the choice of buying insurance?
It depends on the premium that has to be paid and on how much the premium decreases the original income.
The fair premium also known as the entrance prize is defined as the sum that leaves the player indifferent whether participating or not in a gain base on the expected value, that equalised the possible outcomes, wins=losses.
Risk-averse individuals want to pay more than the fair premium because their choices aren't based on expected value but on expected utility.
76
What do we know
At level S we are certain of getting sick, P=1, meanwhile at H we know that we are healthy, P=0.
We know both the expected value of income and expected utility in both cases and at S and H we have certainty.
Under uncertainty, we have a straight line that connects S and H, a linear function of probability and calculates the expected value of income for each probability of disease. SH curve is the expected utility coming from knowing the possible income: person risk-averse the utility will be higher than the expected value under uncertainty. The utility of certain income is always greater than the utility of uncertain income: U(E(I))>E(U(I))
77
The experiment to track the decision of each individual in choosing insurance in uncertainty
The variables are different insurance packages, health depreciation rate and switching costs.
Too many alternatives increase the probability of switching to another company and the presence of switching costs, individuals change less insurance improving the quality of choice.
If there is a gradual depreciation, individuals stay in their insurance plans too long.
The game of the experiment is composed of 35 periods and in each period participants have a certain income and they can lose points due to adverse events. At the beginning a policy is chosen.
6 possible events for each adverse event the probability, cost, possible copayment and consequences are specified.
78
Results presentation
Risk aversion, using a procedure of choices and payoff it was possible to evaluate the different degrees of the risk attitude:
-18% risk neutral
-19% risk lovers
-63% risk aversion
Quality of choice, choosing the best strategy having at least 4 options, a gradual profile and higher switching costs, the individuals are far from optimal strategy.
Switching behaviour, who take the time to obtain info about price make better choices.
79
Conclusions of the experiment
Positive effects given by the presence of multiple policies are counterbalanced by three negative effects:
- Search costs
- change costs
- the lower quality of choice
Switching costs decrease the probability of switching, they don't decrease the search for information. The quality of the choice is not affected.
A sudden health shock increases the probability of changing policies and increasing payoffs
80
What are the policy implications?
Is better to keep few policies, switching costs can have a positive effect and insurers can have an average profile and offer attractive premiums for personal profile.
81
Insurance industry definitions
* Premium Coverage: people buy insurance policies, they typically pay premiums for a given amount of coverage should the event occur.
* Coinsurance and Copayment: they require that when events occur, the insured person shares the loss through copayments.
Coinsurance refers to the percentage paid by the insured.
Copayment refers to the amount paid by the insured (such as a fixed payment for a prescription).
* Deductible: due to many policies, the insured must pay some amount of the health care cost in
the form of a deductible, irrespective of coinsurance.
82
What kind of care for the elderly there are?
There are two kinds, formal and informal, which are given by families by adult children, more often daughters.
The elderly and "very elderly" are increasing in the Italian demographic scenario meanwhile the active population is decreasing. The ratio between elderly parents and adult children caregivers is shrinking, with fewer caregivers for each parent: increasing pressure on the care of the elderly.
83
What is the relationship between informal caregiving and mental distress among Italians between 35-59 years old, focusing on gender effect and parenthood responsibilities?
The sandwich generation is individuals who care for at least one dependent child and one or more ageing relatives.
The selection of caregivers' status is not random but it can be caused by better or poorer individual health conditions.
84
What issue could arise?
Issue of endogeneity.
Propensity Score Matching overcomes the issue creating 2 samples showing the same observable characteristic and differing only in the status of caregivers
85
How is performed the model?
3 staps:
1. Probit explores the conditional probability of assigning a particular treatment v. non-treatment giving a vector of observed covariates. Caregiver v. non-caregiver.
2. matching procedures, radius and kernel matching run between the 2 groups to find a statical twin for each caregiver.
3. Probit run with the outcome variable, dummy: 1 if the individual is depressed 0 otherwise
86
What are the results of the model?
No significant results for the full sample, but if we restrict the sample we have two different results:
1. sample is restricted to female caregivers they have less probability of being depressed if compared to non-caregivers and that might be due to the effect of rewards and satisfaction feelings.
2. sample restricted to sandwich carers are more likely to be depressed with a gender effect significant for women.
87
What are the policy implications?
More flexibility in labour times and provision of temporary work leaves for intensive family needs. Increase in long-term services and financial help for kids' care.
88
What is the difference between health and other goods?
In the traditional theory of demand, we assume that consumers are fully informed about prices, and quality and information are easily accessible to everyone. This is complete information: the consumer is sovereign and rational and the market reaches alone the Pareto Equilibrium.
In the health sector, there is information asymmetry and incomplete information, the market cannot reach the Pareto Equilibrium alone.
89
Who defined information asymmetry and how?
Akerlof defined it as a situation in which the information about the variables can influence the choice on the market that is not uniformly distributed among agents.
Agent relationship takes place when the principal turns to the agent, which is someone with more info, to make a rational choice on the market.
The doctor-patient relationship is a type of imperfect agency.
90
What is caused by information asymmetry?
It causes:
-Imperfect agency
-SID phenomenon
-Moral hazard
-Adverse selection
Moral hazard and adverse selection drive to market fauilures because the choice of individuals doesen't lead to he efficient allocation of resources and causes welfare loss
91
When happens Moral Hazard?
When one of the parties after stipulating a contract can act in a way that harms interests of other parties since the latter couldn't forsee the actons of the first.
Possibility of pursuing a hidden action.
92
In the specific case of insurance policies to what refers moral hazard?
To the possibility for the insured to spend a bigger amount on health services that he wouldn't do if there wasn't a third party involved (the insurer). This behaviour could cause bankruptcy for the insurance company
93
In the specific case of insurance policies to what refers moral hazard?
To the possibility for the insured to spend a bigger amount on health services that he wouldn't do if there wasn't a third party involved (the insurer). This behaviour could cause bankruptcy for the insurance company.
94
Moral hazard graphs
Equilibrium: the consumer can choose to buy m1 or m3. If the consumer is insured he would pay the copayment rate, making the final price going low and the quantity consumed increase to m2 or m4
We have a welfare loss, however, if the demand is more elastic the welfare loss will be higher.
95
What can be the possible implication for moral hazard?
To impose a higher copayment when the demand is more elastic.
96
On what we base the knowledge of adverse selection?
On Akerlof's market of lemons.
n used cars are present in the market so the consumers can know only the average quality formulated on the information on the average price they would like to pay. On the other hand sellers, who know the value of their cars, could refuse to sell their cars if quality is over average and they will leave the market, leaving ony junk.
When sellers leave the market the average quality will decrease untill there will be no cars left.
In this example the market will stop to exist when there is asymmetric information and if there also is incomplete information neither buyers or sellers know the quality of cars and both parts rely on average quality and their reserve price, this will keep the market working.
97
What are the assumptions of Akerlof's model?
There is an anctioneer, a homogenous formula for the price of used cars and acerage quality is given
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The Akerlof's model can be applied to the insurance market to explain its failure.
How is the situation in the health insurance market?
There is an asymmetry between patiens that know their helath status and health costs and isnurers, who cannot be aware of hidden diseases and rsk factors for all patients.
The average insurance preium is applied and it is based on the observable information of the client. It will drive low risk individuals out of the market attracting higher risks ones.
Might leading to failre of insurance companies that might decide to rise the premium on averege risk of who remains untill there are no more patients.
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We have to observe two types of systems, what could happen?
In the Beveridge system there is a redistributiin of resources from the healthier that have low risk to the sickest that have high risk, meanwhile in the private insurance market there is no collective will to reallocate resources so two phenomena could happen:
1. welfare loss for low risk patients that will leave the market
2. Failure of the insurance market
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What can insurance companies do to avoid failure?
Shape premiums on the risk associated to labour status ad apply clauses on previous conditions expenses that will not be covered.
Insurer could also apply the risk selection strategy: create insurance plans that attract low risk individuals: cherry picking or cream skimming because:
-includes a fixed number of specialist visits
-doesn't include certain types of drugs thhata are commo for individuals having rare diseases or ontological treatments.
-provides services used by healthy individuals
-provides low quality services for specific treatments
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Why cream skimming isn't efficient?
The equity of access is denied especially for peole who are really in need and insurers don't activate this practice because it would easily fail due to covering for treatments for people with high risk.
Cream skimming causes welfare loss for the society and brings problems of inequality.
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Based on the paper: adverse selection in a Voluntary Rural Mutual Health Care and health insurance scheme in China
What are the two strategies to reduce the risk of adverse selection?
The state provides partial individual subsidies for households insured, reducing the probability of insurance for high risk.
The whole family must be insured and there are different levels of health, the risk pooling is happening inside.
Final aim: verify if insurance is financed by the state and can be economically sustainable.
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We have to focus on the enrolment status: insured v. non-insured.
Based on the household enrollment status all individuals can be divided into:
four groups:
-insured in a fully enrolled household
-uninsured in a non-enrolled household
-insured in a partially enrolled household
-uninsured in a partially non-enrolled household
Adverse selection in a family partially ensured only high-risk people will get insured.
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Results of the RMHC phenomena
Older people, especially males and less educated and large families are more likely to get insured and those who opted for insurance had higher expenses, especially in partially enrolled households.
The policy implication is to exclude all partially enrolled families from insurance and oblige all members to have one.
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Definition of Public health
In every country, healthcare expenditure aims to preserve public health and is important that the production process creates health and is effective in improving the health of the population.
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Since the health market doesn't reach the Pareto equilibrium alone we need public intervention because:
-Efficiency reasons, avoid market failures:
*Information issues like imperfect informational symmetric information creating SID and imperfect agency relationships, moral hazard where patients seek additional medical treatment in the presence of a third payer, and adverse selection where there is pooled risk in insurance problem only individuals with risk above average will get insurance.
Uncertainty, the individual doesn't optimise their choices and needs of insurance.
*Positive and negative externalities
*Healthcare goods and services are not homogenous
*Strong entry barriers
-Equity reasons:
*in health care access can be horizontal so equal access for equal needs or vertical so different access for different needs
*in benefitting the same level of health
The choice depends on if we a state prefer Efficiency or Equity and whether it would be more liberal or equalitarian.
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Italian Healthcare system: social security system until 1974
Sickness funds were born in 1939 under the risk pooling principle and health risk was associated with the type of jobs.
The assistance of sickness funds was financial and healthcare assistance financed by social contributions and partly by taxes and public debt.
Hospitals were remunerated by contracts on daily fees.
Provinces and municipalities derived resources from taxes and public debt.
Provinces had responsibility for preventive services
The municipality dealt with basic assistance for people without social insurance.
Provinces and municipalities paid the General Practitioners and hospital access for poor people.
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Law 386/75
In the mid-60s mutual assistance entered a deep financial crisis because of the extension of new categories of workers and families without increasing correctly the contribution base.
To control health expenditure the financing of hospital care passed under the Regions' responsibility, provinces controlled extra-hospital services and municipalities covered prevention expenditure.
FNAO, national fund for hospital assistance, established to finance hospital expenditure
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Reform of 1978
The onset of NHS was based on the UK one.
Main features:
-Inclusivity, full coverage of the population and before was only for families of workers
-Full treatment provided
-Equity of access and uniformity of services supplied in all areas of the country.
-Centralisation in financing by the government but decentralisation for expenditure based on the Regions causing a rise in expenditure because of the lack of a budget constraint imposed by the government on the regions
-Third level of government creation of Local Health Unities that are responsible for the allocation of the expenditure between different providers except the hospital paid by the regions
Planning is important because the government should establish a clear budgeting report through a 3 years National Healthcare Planning: some regions had regional plans between 1982 and 1983 but the first PSN was only in 1994.
The organisation on 3 levels: central, regional and Local Health Units a new fund substituted the FNAO the National Healthcare Fund where all resources converged.
Resources were collected by the NHF and distributed to regions and allocated funds to USL. The central government rules and regulates the healthcare sector planning and defining health policies managing the budget for NHS, transferring resources to regions and monitoring regional activity.
This made the regions rise its deficit because of the delay in the budget definition but doesn't allow them to plan resources clearly and plan the healthcare expenditure the central government underestimated healthcare needs. Deficits were covered ex-post by Government
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Due to the reason stated the NHS reformed to introduce competition criteria and promote managerialism
By introducing laws 502/92 and 517/93 the LHU were transformed into a public for-profit firm to favour the separation between purchaser and providers of care.
The main hospitals become independent and were transformed in pubic for-profit companies having contract with LHU for number and kind of services and the competition among them and with private hospitals.
Social contributions were directly dropped into regional funds starting the process of fiscal federalism
Introduction of copayment as direct source of funding
Introduction of Diagnosis Related Groups as perspective payment in hospitals.
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DRG system
it was introduced in 1995 in order to classify hospital activity according to the resources used for every type of admission with a tariff associated with every kind of treatment.
Aim: reduce hospital expenses and improve effectiveness by introducing transparency in hospital activities and reducing the average length of stay, introducing better control and planning of admissions and enhancing competition between hospitals.
Cons: the average tariff penalises hospitals with higher number of patients in severe conditions and hospitals could decide to skim by age and general conditions, this way patients could be discharged earlier before the complete recovery
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Corporatization and Quasi Market
Process of increasing competition: quasi-market it has developed through different steps:
- separation between purchaser and provider of care
-many private providers accredited and they compete with public providers on quality of services.
Difference in the quality of hospital care between regions: southern regions there are little to no specialised private hospitals, and cross borders mobility for hospital admissions.
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How is structured the Lombardy model?
it has all features of a quasi-market and there is a separation between purchasers and providers, competitions between public and private hospitals and providers in the presence of a third-party payer and the patients have a free choice between providers.
The structure is:
-the region raises and manages funds for healthcare plan activities and cooperates with LHUs, monitoring the delivery of minimum levels set by the central government.
- LHUs manage health care on terror through smaller units called districts and contract volume and typology of services with providers.
-Providers compete with the same rules both public, no profit and private that are accredited.
Lombardy has great merits but there are some distortions linked to DRG tariffs because cream skimming is carried exclusively by private providers and there is evidence suggesting that patients discharged with complications are readmitted by public hospitals.
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Fiscal federalism
implemented with Decree 56/00 in which the main change was that there weren't governments that catch resources but regions with regional taxation and the abolition of the national health fund through the implementation of the New National Equalization fund based on VAT that transfers funds from richer regions to poorer ones.
During the first year, the regions spent more than they could afford beginning with the Central Government paying ex-posts and perpetrating the practice of underfunding to control health spending.
Changes in 2006-2007 due to the agreement state-regions of 2005 that obliged regions with structural deficits to start economic plans based on cost-cutting
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There are different types of health systems based on three types of insurance
Private and voluntary insurance like the US system, Social insurance as the Bismarkian model and Government insurance as Beveridge model.
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What are the different aims of the modern healthcare system pursued depending on the type of healthcare system?
-Principles of welfare as an extension of coverage to the whole population and Equity in health care access of the ability to pay.
-Liberal principles as patients' free choice and the autonomy of the exercise of profession by physicians
-Allocative efficiency
-Control of health expenditure
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What we need to analyse the private or public component of the healthcare system?
We have to distinguish between types of financing and provision of services:
-Financing:
1. Public as funded by taxes
2. Social as based on social contribution
3. Private: patients pay out of pocket or subscribe a health insurance
-Provision:
1. Private
2. Public
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Ownership of services and financing
Public financing
Public ownership: NHS, LHU and Public pharmacies
Social ownership: Ambulatory of INAM
Voluntary ownership: No profit providers accredited
Private ownership: general practitioners and private accredited hospitals
Social financing
Social ownership: sickness funds and social security system as Bismarkian
Voluntary financing:
Voluntary ownership: some foundations in US
Private financing:
Public ownership: public hospitals admitting private patients.
Voluntary ownership: no-profit hospitals admitting private patients
Private ownership: US healthcare system
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How is characterised the Us model?
It is market-oriented and is characterised by the government's determination to set the system under the liberal model with a marginal intervention by the state.
The main features of the model are:
- multiple insurance companies
-citizen's freedom to choice
-heterogeneity of insurance packages and associated premium
The prevention is financed and managed by the state because it has the characteristics of a public good and we cannot exclude people that cannot pay from benefitting it.
The preferences are not revealed and the market doesn't reach a price regulating their distribution and State replaces the market in financing and there are substantial positive externalities such as vaccination.
The providers of care are privately owned and financial risk is assumed by insurance companies the risk over the last 30 years has changed so consequently have change the insurance settings.
Managed care programs are more widespread and their main feature is to rely on a limited number of general practitioners focusing on the gate-keeper role, choosing the patients to pass to a higher level of care or not, because the insurance covers only the direction of the GP and the profits are divided with the practitioners.
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There are three types of structures on Managed Care but what is the more widespread?
It is the Health maintenance organisations that provide health care to a specific number of people that pay an insurance premium and have the role of insurers and producers to maintain low financial risk by investing in primary care.
Premiums are lower but the choice is limited and each patient has a GP who decides if and what second level of healthcare should the patient receive. Service is not refundable if not indicated by GP.
Prevention is promoted to reduce healthcare access.
Limited choice of available services but is unlikely to lose a patient because of switching costs.
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Before Obama reform
Historically insurance premiums were paid by employers.
Before the reform: not an obligation but more than 15% of the population was uninsured. Healthcare costs become a burden on companies' budgets, companies asked employees to pay a share of their premiums. work-related insurances drop.
The system was unfair because a share of the population was excluded from any services and by high level per capita spending.
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Principles of Obama reform
Health is a merit good and if neglected has bad repercussions on the whole economy because citizens cannot produce or consume and it has the characteristics of mixed goods giving positive externalities.
The insurance market causes distortions in efficiency and equity.
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Aim of Obama reform
Increasing access to healthcare services and control costs other than improving quality of care
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Characteristics of Obama's Reform
Firms that have more than 50 employees have to secure their workers, meanwhile, all other citizens receiving income must take out insurance coverage: in terms of adverse selection, the premium is established on the average risk for the entire population.
Companies cannot refuse insurance coverage for preexisting conditions and the parameters of inclusion in the Medicaid Program are spreading.
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Results of Obama's Reform
Expansion of the insurance coverage brought the percentage of uninsured citizens to the lowest levels in US history and we cannot talk about cost reduction.
However, the traits of the health systems are rooted in the liberal model which is not economically sustainable because the forecast on medicare is unsustainable as the ageing of the population progresses.
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Bismarkian model
is based on Social Security System, so is based on social insurance and it is funded by social contribution and managed by sickness funds.
It was linked to the working category and since WW2 has provided compulsory insurance for employees with income below a certain threshold and it was voluntary for those above.
2007: compulsory for everyone and it is not nationalised keeping the original characteristics.
Healthcare management by Sickness Funds that manage their resources alone.
Fundings are given through social contributions and are related to labour position, there is negotiation with providers and the system is decentralised.
Responsibility for healthcare coverage in charge is the Ministry of Work but prevention, hygiene and prophylaxis activities are conducted by the Ministry of Health.
Competition between providers, even doctors, is on quality with the risk of increasing prescriptions and spending which might increase SID.
Pro: more services supply, a better quality of services and the patients are free to choose.
Cons: less control over healthcare expenses and they are higher
In recent years the greater presence of the State n the decisions making and there is a greater homogeneity in Sickness Funds policies and equity in the distribution of resources.
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Beveridgian model
Full coverage model the main aim is to grant all citizens all the required health services from the cradle to the grave.
Redistribution of income through healthcare depends on access to services by various social classes depending on the need and the taxes are progressive to finance healthcare.
The management is centralised under the central government and hospitals are nationalised.
Healthcare governance is made only by central government and the funding happens through taxation there is no contracting with providers and it is a highly centralised system with 3 territorial levels.
Health expenditure is part of the state budget ad is important to plan precisely to avoid uncontrolled increases in healthcare expenditure. Health needs analysis important, parameters: age, gender and deprivation rates.
Limit spending is important to impose spending ceilings and tariff reductions.
Pro: equity of access and control over healthcare expenditure
Cons: lower quality of services and long waiting lists
1991: Thatcher's government reformed the NHS with a quasi-market model and the principle is to separate the Stata that finance the healthcare from providers of care
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Buchanan's model
compares the ability of public models to control
healthcare expenditure with respect to liberal models.
It provides more insight into the ability
of the Government to regulate the supply of health services in order to contain health expenditure.
Buchanan analyzes the increase in healthcare access within the NHS since its onset (1948).
Despite pessimistic forecasts, health spending grew in the period considered less than in the US, governed by the market.
He analyses focusing on the nature of both demands, driven by individual choices, and supply, driven by collective choices.
In the presence of a third payer, moral hazard behaviour provokes an excess of demand: individuals require goods and services to the point where the marginal utility of the last unit acquired becomes null.
This leads to excess demand compared to the optimal allocation guaranteed by
the presence of a price.
Collective choices undergo the budget constraint: cost opportunity.
In Public Choice, cost opportunity is represented by the forgone opportunity of investing in other possible projects.
The cost opportunity of full coverage is represented by higher taxes or the use of copayment, a very unpopular measure. Governments can act on the supply of health goods.
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Rationing demand by rationing supply
Inelastic supply for healthcare services can lead to deterioration in services and/or waiting lists ensuring spending control.
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Measures to control the rise in expenditure
Supply-side:
-Limits on expenses: balanced budgets, roof to expenses and tariff ceilings
-Limits on physical resources: number of beds, number of technologies and limited number of doctors
Demand-side:
-Copayment
-Info on healthy lifestyles
-Shortening social disparities
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Conclusions of Burchanan's Model
Changes are based on the experiences of other countries and there is a convergence of the systems towards a public-private mix, on one side warrants free access to services and on the other side maintains market mechanisms to guarantee greater efficiency at micro and macroeconomic level.
In most private systems the state is present regarding the tasks assigned to it, there also is a non-negligible component of public health expenditure in each system considered.
Prevention, hygiene and prophylaxis represent public goods with strong positive externalities staying in the responsibility of the state.
