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VU Master Health Sciences: Advanced Health Economics - Summary lectures + compulsory literature

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Course
Advanced Health Economics

Institution
Vrije Universiteit Amsterdam (VU)

Everything you need to know for the exam Advanced Health Economics of the master Health Sciences on the VU. A summary of the lecturers and its objectives, including images + summary of the compulsory literature with images. In the summary of only the last lecture (medical workforce) also Dutch la...

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Uploaded on November 7, 2022
File latest updated on November 22, 2022
Number of pages 60
Written in 2021/2022
Type Summary

health economics
health care expenditure
spending growth
efficiency and equity
pareto efficiency
measuring equity
gini coefficient
concentration curve
nee
first and second theorem of welfare economics

Institution
Vrije Universiteit Amsterdam (VU)
Education
Health Sciences
Course
Advanced Health Economics

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1. Health care (HC) expenditure
The student can:
- Explain why HC expenditure is important.
- Differentiate factors that drive expenditure growth (spending growth).
- Discuss possible policy options to bend the cost curve.

Lecture: HC expenditure
Consequences spending growth, budget competes with:
- Private expenditure
- Public expenditure (social security, education)
- Increases labor costs (increasing HC exp  increases premiums  labor union claims up)
- Premiums are mostly solidarity which might get less support
 Some argue that it’s not a problem: health most important good of all

- GDP = gross domestic product or GDP is a measure of the size and health of a country’s economy
over a period of time (usually one quarter or one year). Also used to compare the size of different
economies at a different point in time.

When trading off budgets
- Economists use marginal utility (utility for the last euro spend)
- Marginal utility (MU) = this is the added satisfaction that a consumer gets from having one more
unit of a good or service.
- The concept of MU is used by economists to determine how much of an item consumer are willing
to purchase.
- Evidence shows extra investment is cost effective
- But is this the way to evaluate marginal utility?
 Is it possible to rank health care by value?

Bending the cost curve
1. Reduce volume
- Reduce coverage/increase co-payment
- Remove a particular treatment from the insurance package people have to pay for it themselves
(they will stop asking for that treatment).
- Pay a share of the overall fees. People will be more cost aware. Maybe they will consider the
treatment not necessary.
2. Reduce price (price caps)
- Trying to maximize the prices
- This is the max price you can charge for a particular treatment
3. Increase efficiency
- Market incentives, managed competition
- Introduce market incentives and increase the level of competition that would be desirable for the
societal perspective
- Organize competition that still leads to societal desirable outcomes

Reduce coverage/increase co-payments
Could reduce demand due to reduction moral hazard:
Moral hazard = lack of incentive to guard against risk where one is protected from its consequences, e.g.
by insurance.
- If you get everything paid for (insured) you might request more hc than you would if you had to pay
for it. Might request more expensive hc than you would if you had to pay for it.
- You might ask for hc that is not as valuable that might not be worth the euros in costs.

, - You want people to be cost aware and not be unnecessary expensive.
However:
- Would increase inequity in access  richer population pay more co-payments than poorer
populations
- Extend of effect could be different in the Netherlands

Increase efficiency
Theory driven:
- Payment reform  different incentive in the contracts
- Accountable Care Organizations (ACO)
Like an intergration of an insurance company and hc provider
Mostly hc provider
- Theory may not work in practice
Evidence based:
- Learning from comparing hc systems

Where does this leaves us?
- Yes, hc expenditure may hurt employment and purchasing power
- Yes, the same hc value may be delivered for (a lot) less
- No, we don’t know how to get there exactly, but budgets have proven value

Whose interest to keep expenditure growth down?
1. Providers interest groups
2. Professionals
3. Patient interest groups
4. Insurance interest groups
5. Insurance companies
6. Department of Health
7. Department of Finance

For exam
1. Why is hc expenditure important?
HC expenditure can be a treat to the country’s expenses. You have to make trade off in what sector
you want to spend how much money.
2. How high are hc expenditures
Higher than the median income growth.
3. What factors explain the expenditures?
Income
Population age structure and epidemiological needs
Technological progress and variation in medical practices
Health system characteristics
4. What drives the growth?
Aging
New technologies
Baumol’s disease
5. What drives the differences?
Prices
o As a country becomes more expensive, it becomes less competitive. You probably want to
spend less.
o Prices of care activities are higher and differ between countries.
o If a country spends more because they care more:

,  equal rights for men and woman  taking away the care for the family from the woman,
they do not have to sacrifice their own dreams and wishes
6. Are we getting value for money?
Not really. Getting healthy again and getting older involves other disease like heart diseases, strokes
and cancer.
7. How can we bend the cost curve and cut costs?
Reduce volume, reduce price, increase efficiency

Literature: Chapter one: HC spending growth
- High HC spending growth has been a feature of HC systems in all developed countries.
- Usually spending growth exceeds income growth.

Consequences spending growth
1. Without cutting other public programs it would require an increase in taxes (households/individuals
financing HC).
2. Variability of health insurance, because insurance coverage for non-elderly will decline.

Spending growth vs spending level
- Spending growth = uitgavengroei
- Spending level = uitgavenniveau

THEORETICAL SPENDING LEVEL AND SPENDING GROWTH
At time t the level of spending (St) = the product of a vector of unit prices (Pt), and the associated
quantities (Qt).
- Prices/quantities determined by interaction among patients, providers, payers (insurance) and
government.

Given an equilibrium at time t, spending growth requires some variable that causes the equilibrium
spending level to change.
- Prices/quantities don’t change if exogenous factors don’t change (population composition).
- After a new equilibrium spending growth would cease.
 But spending growth in HC keeps growing, which implies at least 1 continually changing variable.
 Variables that correlate with spending level are not necessarily related to spending growth.

Example
A proportion of primary care physicians is negatively correlated with its spending level at a point in time,
but not correlated with the rate of spending growth. The rate of spending growth in a market is not
systematically related to the spending level in the market.

Technology and spending growth
- Primary determinant of spending growth could be development, adoption and diffusion of new
medical technology.
- New medical technology = new products/procedures/practices related to new knowledge about
disease/diagnostic treatment technologies that change the medical goods/services that are used.

DIFFERENT INNOVATIONS
1. Product innovation (pharmaceutical)
2. Equipment innovation (advanced membrane for dialysis)
3. Knowledge innovation (antibiotics rather than surgery)
4. Process innovation (knowledge leading to lower production costs)

CONSEQUENCES NEW INNOVATIONS

, - Changing cost/price/effectiveness/side effects of care.
- Influencing demand (and use) of services.
- Lowering cost/price leading to decrease in spending.
 persistent spending growth in all developed countries implies that in medicine
product/knowledge innovation cost have been increasing and dominated process innovation
- Rising use of particular services and others decreasing.
- Changes in both complementary and substitute services.

- Substitute = a product/service that consumers see as essentially the same to another product.
- Complementary services = a service that comes with a product for support. The use of
complementary services will increase with use of a new technology/knowledge.

Innovation creates complementary by:
1. Improving health outcomes and making treatment more attractive.
- More expensive treatment, where people would otherwise (without the innovation) managed their
symptoms for less costs/outside the HC system.
- Increasing office visits/diagnostic testing associated with the procedure, causing expenditure to
grow.
2. Extending life expectancy because of incremental services.
 consuming additional health care services over a now longer life.

Models of spending growth
Spending growth depending on:
1. New technologies
2. Insurance type
3. Disease/health status

NEW TECHNOLOGIES
Evidence suggests medical technology appears to be a prime driver of HC spending growth.
- Depending on the rate of adoption and diffusion of medical technology.

Technology driven models for spending growth
- Focus on changes Production Possibility Frontier (PPF) associated with shifts along the frontier or
even movements from an inefficient point in the interior of the PPF to a point closer to or on the
PPF.
- Endogenous or exogenous nature of technological change refers to its source.
- Exogenous growth = growth by technology progress independent of economic factors.
- Endogenous growth = growth generated within a system as direct result of internal processes.
(influenced by parameters of demand for HC).

Greater demands  greater returns for innovation  more innovation (especially more cost-increasing
innovation).

Technical advances tend to increase spending:
- Technologies have higher prices than current services.
- They induce greater utilization, or both.

Interaction insurance and new technologies
- In absence insurance, technological advances would never be adopted.
- Insurance that subsidizes consumer from the full price, allowing firms to charge more than they
would without insurance.

, - This encourages innovation and implies that some technology not adopted in absence of insurance
will be adopted.

INSURANCE TYPE
- Evidence indicates spending growth is slower in market with more managed care (HMOs).
- HMO plan provides care through a network of care providers (physicians, hospitals, etc.) in a
particular geographic area.
- Hospital cost and growth decreased following introduction of selective contracting.
- Selective contracting = contracts with preferred provider organization  patient can choose any
doctor/hospital but ay have lower out-of-pocket expenses with preferred providers.

DISEASE/HEALTH STATUS
- Spending growth not uniform across diseases.
- Growth overall health expenditure outpaced than growth of mental health expenditure.

Spending growth can be divided into
1. Population growth
2. Increase disease prevalence
3. Increase spending per case

- Self-reported health status seems to be improved during time (reflecting better treatment
conditions).
- Introduction medication over period encouraged treatment.
 increase in treated prevalence is consistent with technology driving spending growth.
- Treatment intensity has increased more rapidly for patients with less disease burden.

Bending the cost curve
1. Reduce volume
- Reduce coverage/increase co-payment  reduction moral hazard
- But: would increase inequity in access

2. Reduce price (price caps)
- HC systems with and without budgets
- Effective but may harm efficiency

3. Increase efficiency
- Market incentives
- Managed competition
 theory driven, may not work in practice

CONCLUSION
- Technology identified as primary driver spending growth, reasonable to expect clinical benefits
associated with higher spending.
- Increase share of GDP devoted to HC.
Growth in health spending rationale response to growth of income per person.
- Increase life expectancy due to medical advances.
Most medical care related to quality of life instead of life expectancy.
- Rate of HC spending growth can’t exceed income growth ongoing.
- Unknown what financing system should look like (what mix regulatory and market forces should be
used to slow spending growth).

, 2. Efficiency and equity
The student can:
- Explain conditions of perfect competition
- Explain, apply, differentiate the first and second theorem of welfare economics
- Assess the (Dutch) health care market in terms of competition
- Explain the relation between competition and quality of care

- Equity and efficiency in HC system fundamental issues.
Important aspects:
- Economics efficiency
- Departures of many HC markets from the competitive model
- Role of equity concerns
- Issues of social justice

Chapter 17: Equity, efficiency and
need
Efficiency concerns  high costs in hc
Equity concerns  barriers faced in obtaining hc by many people, certainly including the uninsured
- Americans favour competitive market solutions to hc system problems.
- Others willing to use government interventions (social insurance programs) to address hc equity
problems.

Efficiency and competitive markets
- Edgeworth box for exchange = context to explain economic efficiency such as the First and Second
fundamental theorem of welfare economics. It shows the efficient choices available to society in
allocating resources among people.
- The first theorem of welfare economics = shows that competitive markets under certain conditions
are economically efficient.
- The second theorem = shows that a society can achieve any desired economically efficient outcome
by competitive markets by making appropriate endowments (allocation of goods).

THE CONCEPT OF PARETO EFFICIENCY (OPTIMALITY)
- Pareto/economically efficient = when it’s impossible to improve any person’s situation without
hurting someone else.
- Pareto efficiency also implies no possible further exchanges that could improve anyone’s situation.

Edgeworth box using a hypothetical two-person economy and shows exchanges between these people 
provides context in which to make the idea of Pareto efficiency clear.

Example
Person A and B inhabit a desert island, forming a two-person economy. Two goods are available:
- Food (F), available in fixed total amount F0.
- Medicine (M), available in fixed total amount M0.

- Indifference curve =
- UAB = indifference curve person A, UBB = indifference curve person B
- A’s preference map/indifference curves is illustrated in the southwest corner and are constrained
by amounts M0 and F0.

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