EHHC, 2023
Week 1 - Production of Health
Learning Goals
1. Explain how population health has changed and will change.
2. Identify determinants of population health and explain how they work
○ Economic development & nutrition
○ Public health infrastructure
○ Healthcare & medical technology
○ Macroeconomic conditions
○ Behavior
○ Demography
3. Explain the two-sided relationship between income and health at the individual and the
aggregate level
4. Explain the relevance of economics to understanding population health and its consequences
○ Health is important component of welfare
○ Health determines economic potential
○ Production of health is a resource allocation problem
○ Health is determined by behavior that economics seeks to understand
VIDEO LECTURE 1 - POPULATION HEALTH
Measuring health
● Length of life (how long does a population on average live)
○ Life expectancy
○ Survival = prob that you survive a given year
○ Mortality = share of a population that dies in a given year
● Quality of life
○ Health or well-being score
○ Morbidity
Or, combinations; healthy life expectancy, disability-adjusted life expectancy
Puzzle 1: why does health change over time?
Life expectancy has doubled: from 40 years to 80 years (did not increase linearly)
● Why did life expectancy increase? And why is it not higher now?
● Are there limits to life expectancy? (Oeppen and Vaipel, 2002)
○ In other countries, life expectancy is even higher than in the NL.
○ It appears that with every point in time there is a limit to life
expectancy, because there is a front-runner country and for that specific country, usually
the life expectancy curve flattens off. Once it flattens off, another country will take over
the frontrunner position. The maximum life expectancy in the world kept on increasing
○ Hypothesis: there appears to be no limit to life expectancy
Puzzle 2: why does health differ between countries?
● Each dot represents a country: the magnitude of the dot represents the
size of the population and the color represents the income
● Before 30K: the higher the income (more to the right), usually the
higher the life expectancy
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● After 30K: life expectancy flattens off → why does income matter so much?
○ Why does it seem to matter more among poor than richer countries?
○ Even among rich countries, there are still differences in life expectancy.
How can we explain this and how can we improve it?
■ E.g., life expectancy is higher in Greece than in Germany. Greece
is poorer
Puzzle 3: why does health differ within countries?
● People are grouped by their poverty (1 is the richest 10% and 10 the poorest 10%)
● For each of these groups, they looked at the mortality rate (in three different years)
○ 1. The mortality rate has become lower both for men and for women and for all incomes
○ 2. In 1996 mortality rates for men are much higher than for women, and men have
benefited much more in terms of reducing mortality
■ There was much more to gain, but why was it higher initially?
■ It did not drop all the way, the green dot for the men is still above the dot for
women. The richest men have higher mortality than poorest women
■ Big difference between men and women. Even if they have the same income
○ 3. Even though the mortality rate went down for all the 20 groups, the lines are still
upwards sloping, so the poorer the decile, the higher the mortality rate
■ How can we solve inequality in the mortality rate?
● This graphs splits up the total life expectancy in healthy life expectancy and
life expectancy with health problems
● The poor do not only live fewer years but also have a larger number of years
lived in poor health
VIDEO LECTURE 2 - WHY ECONOMICS OF POPULATION HEALTH (NOT ON EXAM)
What is economics = we have goals and need resources to achieve these goals. Desires are infinite (we
always want more) but resources are scarce
● Economics: how do we decide which resources are used to achieve these goals?
What do economists mean by a model
● A model is a simplified version of (some part of) the world
○ This simplification is done through assumptions = simplify some parts of the world
○ Some aspects are omitted to highlight others
● Models used in this course have a few core elements
○ A decision maker (or many): a person who needs to decide about the level of health
○ A set of resources (usually time and money)
○ A set of alternative allocations: the choice problem
● People are assumed to make optimal decisions → assuming:
○ Set preferences: utility function (people get utility from a number of things and how
much utility is determined by their utility function)
○ Choice rules: utility maximization (people aim to maximize utility)
○ Full information
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A good model?
● Does it matter if these assumptions are realistic? → it does not matter whether a model is realistic
because the model is a simplification of the world, but you should evaluate it based on whether it
helps to understand part of the world
● Careful modeling means understanding the core elements, explicit assumptions, and their
consequences
● Think of a model as a map: part of the world, but very simplified to highlight one topic
Ceteris paribus
● Ceteris paribus: holding everything else constant
● Simplifying assumption, like other assumptions
○ Allows us to not worry about all other things that may happen
○ Focus on one relationship
VIDEO LECTURE 3 - DETERMINANTS OF HEALTH
Main questions:
1. Why does not everyone achieve full health?
2. Why is there no standard recipe for maximizing health?
Health production function (example of economic model)
Assumptions
- A1: health (h) is not given, but produced
- A2: production is at the level of an individual i, hi (health level of person i)
- A3: health is produced using a number of factors, we can influence some of these factors and
medical care (m) is one of these:
hi = f(m, other factors)
- A4: utility maximization under constraints and utility is a function of health
→ produce health as efficiently as possible
Diminishing marginal returns to healthcare
● Health is a function of medical care and some other things
● If we go to the right, higher level of medical care, also more health
● The first two units of medical care (from 0 to m2) generate an increase in health from h0 to h2
● The increase from h2 to h4 (at unit m4), however, is much smaller than the initial increase for the
first two units of medical care (= diminishing marginal returns to medical care)
The role of other factors
● There are two health production functions
● The other factors might shift the health production function up or down
● E.g., age is one of these factors that might lead to a
higher or lower initial level/starting point of the health
production function
○ Old = lower starting point
○ Young = higher starting point
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Two changes in medical treatment
1. Improved medical treatment
2. More medical treatment
Improved medical treatment
● Improved medical treatment means that the effectiveness of treatment
(effectiveness of one unit of m) increases the impact on your health level.
● So, the marginal benefit goes up: larger impact of one unit of M on H
● Possibly at all levels of M
○ The production function shifts out (becomes more steep)
○ Higher level of H attainable at any level of M
More medical treatment
● The health production function remains the same
● But it shifts towards a higher level of M: e.g., M2 → M4
● It leads to a higher level of H
SO: both more medical treatment and improved medical treatment might have
contributed to a higher health level in the population
The healthcare production function also illustrates the role of other factors
● Persons B’s production function is much steeper than person A
● If both receive more treatment: shift towards higher level of M
○ B achieves higher level of H than A, the difference in health
for these two persons then increases as well → there is a
difference in effectiveness
● Are we concerned about this health difference or should we be happy
with the fact that both have an increased level of health?
○ Give more to B because B benefits more?
○ Give more to A to make the gap smaller?
● Health production function: trade-off between efficiency and equity
Summary
● Health is not a given, but produced
● Healthcare is important as a production factor for health
● There are also other determinants (not focus on healthcare alone)
● Determinants interact: effectiveness of healthcare is influenced by these other factors
● Models help to understand the impact of variation, between persons/countries and over time
Implications for policy
● Individual health production functions add up to population health production function
● Healthcare should only be evaluated on its impact on health or well-being (healthcare is not a
goal on itself but a means to produce health)
● Health policy should be about both healthcare and these other factors
○ These other factors matter and influence the effectiveness of healthcare
