Summary Health Economics
Vrije Universiteit Amsterdam
E_EBE3_HEC
Anna Jobse
All exam material as described in the syllabus.
ISBN: 9781137029966
+ various papers
,Table of Contents
WEEK 1........................................................................................................................................................... 3
CHAPTER 1: WHY HEALTH ECONOMICS? ..................................................................................................................... 3
CHAPTER 2: DEMAND FOR HEALTH CARE..................................................................................................................... 3
CHAPTER 7: DEMAND FOR INSURANCE ........................................................................................................................ 5
CHAPTER 8: ADVERSE SELECTION: AKERHOF’S MARKET FOR LEMONS ............................................................................... 7
Tutorial week 1 ............................................................................................................................................ 10
WEEK 2......................................................................................................................................................... 10
CHAPTER 15: THE HEALTH POLICY CONUNDRUM ........................................................................................................ 10
PAPER: SCHAFFNER CHAPTER 22: PUBLIC HEALTH, HEALTH CARE AND HEALTH INSURANCE ................................................ 13
PAPER: HOW TO DO (OR NOT TO DO)...A BENEFIT INCIDENCE ANALYSIS ............................................................................ 16
Tutorial week 2 ............................................................................................................................................ 18
WEEK 3......................................................................................................................................................... 19
CHAPTER 11: MORAL HAZARD ................................................................................................................................ 19
CHAPTER 4: SOCIOECONOMIC DISPARITIES IN HEALTH.................................................................................................. 26
PAPER: BROKEN DOWN BY WORK AND SEX: HOW OUR HEALTH DECLINES. IN ANALYSES IN THE ECONOMICS OF AGING. (CASE &
DEATON, 2005) ................................................................................................................................................... 29
Tutorial week 3 ............................................................................................................................................ 30
WEEK 4......................................................................................................................................................... 30
CHAPTER 20: THE ECONOMICS OF HEALTH EXTERNALITIES............................................................................................ 30
CHAPTER 21: ECONOMIC EPIDEMIOLOGY .................................................................................................................. 32
CHAPTER 24: TIME INCONSISTENCY AND HEALTH ........................................................................................................ 35
PAPER: HEALTH BEHAVIOR IN DEVELOPING COUNTRIES. (DUPAS) .................................................................................... 38
PAPER: THE ECONOMICS OF HIV/AIDS IN LOW-INCOME COUNTRIES: THE CASE FOR PREVENTION. (CANNING, 2006) .............. 40
Tutorial week 4 ............................................................................................................................................ 42
WEEK 5......................................................................................................................................................... 43
CHAPTER 19: POPULATION AGING AND THE FUTURE OF HEALTH POLICY ......................................................................... 43
CHAPTER 24: TIME INCONSISTENCY AND HEALTH ........................................................................................................ 44
PAPER: CHRONIC DISEASES IN DEVELOPING COUNTRIES. (NUGENT) ................................................................................. 44
PAPER: POVERTY, DEPRESSION, AND ANXIETY: CAUSAL EVIDENCE AND MECHANISMS. (RIDLEY ET AL.) .................................. 45
PAPER: POVERTY IMPEDES COGNITIVE FUNCTION. (MANI ET AL) ..................................................................................... 47
PAPER: ON THE PSYCHOLOGY OF POVERTY. (HAUSHOFER & FEHR) ................................................................................. 47
Tutorial week 5 ............................................................................................................................................ 48
WEEK 6......................................................................................................................................................... 49
CHAPTER 4: SOCIAL DISPARITIES IN HEALTH ............................................................................................................... 49
CHAPTER 22: OBESITY ........................................................................................................................................... 49
Tutorial week 6 ............................................................................................................................................ 51
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,Week 1
Chapter 1: Why Health Economics?
The United States (US) had a GDP of $14 trillion in 2008, in which $1 out of every $6 spent was spent
on health care. In 1960, this was only $1 out of every $20, indicating a trend.
Basic economic theory concludes that any competitive market in the absence of externalities and
asymmetric information, will produce an efficient outcome where there is no way to make anyone
better off without making someone else worse off. Arrow argued that health is different because of
uncertainty. People cannot predict whether they will need an emergency heart surgery next year.
This uncertainty motivates individuals to insure themselves.
Insurance markets are peculiar because they feature information asymmetries between buyers and
sellers. Adverse selection and moral hazard arise from this. Additionally, health care markets are rife
with externalities, as it is important for you to know whether your neighbor or co-worker has had flu
shots. The fact that other people’s choices affect you (and the other way around), can undermine the
efficient functioning of markets.
The pressure on governments to finance the costs of health care will grow in the coming decades.
Increasing life expectancies and aging populations will place enormous stress on public health
insurance systems, which have the paying responsibility. Therefore, health care will be an ever-
growing item on governments’ balance sheets.
Welfare economics knows two sides, normative and positive issues. Normative issues are ideas about
how the world should be, as some people feel health should be a fundamental human right and
others find it a matter the government should not intervene in. These are philosophical questions
that no amount of economic analysis can resolve. Positive issues are different ideas of how the world
actually is. One role of health economics is to determine positive facts. Does patent protection spur
innovation? Does a tax on saturated fat make people healthier? These types of questions need
economic reasoning.
Chapter 2: Demand for Health Care
When a demand curve is downward sloping, it is said to be price-elastic. This means that people will
demand more or less of a good as the price changes. When the demand curve is a vertical line, it is
said to be price-inelastic. The price does not affect the quantity demanded. This lies at the heart of
health economics, as people are price sensitive to health care and therefore demand is elastic. This
makes it an economic problem rather than a medical one. People have budget constraints, different
life expectancies and qualities of life which leads them to value health differently. Determining the
right amount of care is an economic trade-off which balances the marginal costs against the marginal
benefits.
Especially in countries where health care is not free or where people are not eligible for subsidized
health insurance, people must decide how much they want to spend on health care (US). Evidence
suggests that people who face different prices or have different abilities to pay for health care
receive unequal amounts of health care.
Randomized experiment = a study that assigns treatments randomly to different groups of study
participants. A randomized controlled experiment includes a control group which is randomly
chosen and receives either no treatment, a placebo treatment, or the usual treatment they would
have received if not enrolled in the trial. Such studies provide the most persuasive evidence on
questions of causality in the social sciences and medicine.
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, The RAND Health Insurance Experiment (HIE) and the Oregon Medicaid Experiment are two
influential randomized experiments of health care demand. Especially the RAND experiment is
groundbreaking, as it led to the realization of a downward-sloping demand curve rather than a
vertical one. Two thousand American families from six American cities were assigned to one of the
several insurance plans for several years. The cost-sharing rates were free (0%), 25%, 50% and 95%.
These plans had different copayment rates, the fraction of the medical bill for which the patient is
responsible. A cost-sharing plan is one with a positive copayment rate, so that costs are shared
between the insurer and the insured.
However, this experiment was conducted in 1980 and much has changed since then. The results may
not be applicable to health care of today. However, the Oregon experiment found a downward
sloping demand too (2011). It compared two groups of low-income adults, one won the lottery to
apply to health insurance through Medicaid, and the other did not have such opportunity.
Oregon included exclusively low-income population; RAND used a nationally representative
population. RAND used direct randomization; Oregon relied on a randomized scheme. Oregon
included an uninsured group; RAND did not.
Outpatient care or ambulatory care is any interaction with a doctor or other medical care
professional that does not involve an overnight stay. Typically, more severe cases will require
overnight stays for patient monitoring and recovery, so outpatient cases tend to be less complex.
Inpatient care is any interaction with a doctor or other medical care professional that involves an
overnight stay at a hospital.
Results. RAND reports large effects and show that demand curves for these outpatient care services
are downward-sloping. E.g., people assigned to the 95% plan has 36% fewer episodes of outpatient
care than those in the free plan. Even more striking is that the chronic ill and acute conditions had
similar downward-sloping demand curves (respectively 34% and 37% fewer).The Oregon experiment
shows similar results, as lottery winners had 36% more visits and were 24% more likely to have an
outpatient visit.
Regarding inpatient care, the Oregon results of more inpatient care by lottery winners were
not statistically significant. We cannot conclude price-sensitivity of inpatient care demand. However,
the RAND experiment does find a downward-sloping demand curve. Members of the 95% copayment
group were 24% less likely to have inpatient care than members of the free care plan. Still, the
demand for inpatient care is not as sensitive to price as outpatient care. The China Rural Health
Insurance Experiment (CRHIE), conducted by RAND researchers, finds similar patterns, especially to
outpatient care.
Intuitively we would say the more severe a condition is, the less price-sensitive. We would expect an
inelastic demand for life threatening conditions, but evidence suggests that this demand curve is
downward-sloping too! While Oregon had no statistically significant results, the RAND participants
were sensitive to price. Research has indicated that not all emergency room visits require the
emergency room, as people tend to overestimate their condition, or they have nowhere else to go.
Most Americans become eligible to Medicaid when they turn 65. The number of planned hospital
admissions per patient jumps by 15% from age 64-65. This reflects a pent-up-demand, a
phenomenon where individuals who know they will soon have insurance access delay costly
procedures. By contrast, unplanned hospital admissions increase by 2.5% at that age.
Also, for pediatric care (care for children) parents are price-sensitive. This pattern does not seem to
extent to children older than 6.
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