Introduction to Health Economics

Dr. Katherine Sauer Metropolitan State College of Denver Health Economics

Outline: I. What is Health Economics? II. The Relevance of Health Economics III. Economic Methods of Analysis IV. Does Economics Really Apply to Health Care? V. Is health care so different that it needs its own branch of economics?

I. What is Health Economics?

Health economics is the study of how (scarce) resources are allocated to and within the health economy.

Who are the health economists? - 96% hold Ph.D.s, nearly in economics - 64% work in a university setting (24% in econ departments, 26% in public health, 18% in med schools) - 15% work for nonprofit organizations and -12% work for government (mostly federal)

What do health economists do? 50% study the behavior of individuals 34% study the behavior of firms 50% study government policies 48% study health insurance 50% study outcomes research 31% study other issues

II. The Relevance of Health Economics

Health Spending in the US

National Health Expenditures (NHE)

Source: Centers for Medicare and Medicaid Services , Offices of the Actuary: Data from the National Health Statistics Group http://www.cms.hhs.gov/NationalHealthExpendData/

Health Care Spending as a share of GDP

Source: OECD Health Data 2008

In a share calculation, general inflation is cancelled out. Why has the health care share been increasing?

Per Capita Expenditures on Health Care

Spending per capita in PPP dollars

Source: OECD Health Data 2008

Health Care and the Labor Force (2007)

Source: BLS.gov

Capital Investment

Source: OECD Health Data 2008

III. Economic Methods of Analysis A. Features of Economic Analysis - Scarcity of societal resources - Assumption of rational decision making - Concept of marginal analysis - Use of economic models

B. An Example (1975) Milton Friedman and Simon Kuznets (both later Nobel laureates) studied the so-called physician shortage of the 1930s. - physicians earned 32 % per year more than dentists - training costs were 17 % higher - attributed part of the higher returns on investment to barriers to entry into the medical profession

IV. Does Economics Really Apply to Health Care?

Are health care consumers rational? Do they calculate optimally at the margin? Does price matter?

The coinsurance rate is the percent that the patient pays out of pocket. As the coinsurance rate falls, people are paying less out of pocket. What is the impact on utilizing services?

V. Is health care so different that it needs its own branch of economics? distinctive features of the health sector: - presence and extent of uncertainty - prominence of insurance - information asymmetry - role of nonprofit firms - restrictions on competition - role of equity and need - government subsidies and public provision