Week 1: Introduction to USA/UK/Singapore Health systems
"Your true value depends entirely on what you are compared with"
- Bob Wells
Health care often involves a third party, unlike some markets, as there is a high and unpredictable variance of spending that opens the door to risk mitigation (more later). It is also special in that many may feel that it is an entitlement (especially when the health defect is inborn/unavoidable).
Different countries have different approaches to health care. The USA has a universal system called
Medicare for all citizens over 65 years old, which is a collective
"pay-as-you-go" fund to which workers make a fixed percentage-of-salary contribution (the demographic shift of the USA, and technology [more later], presents a
financial time bomb this way, though).
Medicaid is available for the needy. Those who are in neither category usually have employer plans (that are lost if they leave the firm or the firm goes bust), or go uninsured. Health care takes up over 15% of GDP (in 2003)
The United Kingdom has a National Health Service that covers everyone, and they own most medical facilities and employ most medical staff. In this way, they sidestep the problems of private insurance (more later). The flip side is the higher taxes to fund the system, long waiting times, and lack of incentive (since doctors are paid a fixed salary or by number of patients, and hospitals get a fixed budget). A possible philosophical concern is whether it is right for a state to enforce what is effectively the subsidy of people with poor health (which may partly be their own fault) by the healthy. N.B. A couple of weeks ago, they began paying
people to lose weight... Health care is about 8% of GDP.
Singapore has upheld individual responsibility with
Medisave, which may be augmented with
Medishield, with
Medifund as the safety net of last resort for those without other means to pay (the 3Ms). 80% of hospital beds are private, while 80% of primary care is by private doctors. Health care is just 4-5% of GDP.
Examination comments: Some memorization of facts to begin with
Week 2: Economic Efficiency/Cost-Benefit Analysis (CBA)
"I suppose that I shall have to die beyond my means"
- Oscar Wilde
Markets may not be economically efficient when there are
externalities (an entity's actions affect others as well - may be positive as with streetlights outside a private home, or negative as with secondhand smoke) or
asymmetric information (where one party knows more than another). In these cases, another agency (often the government) might then step in and calculate the costs and benefits to determine if they should take up the responsibility. Again, making good assumptions for these values is an art in itself, since with the right values you can draw whatever conclusion you want. Practice examples usually involve two jobs where all other factors other than mortality risk are equal, and thus in theory the willingness to pay for a statistical life is just the difference in pay between the two jobs (normalized for working population size) divided by (normalized) difference in lives lost. In general CBA involves discounted present value (i.e. payments later are worth less than payments now due to interest rate [Question: How to assume fixed interest rate in reality? Government bonds?] - covered in Financial Economics).
Introduces the
Standard Gamble method (partly invented by a pioneer of Computer Science, John von Neumann) of measuring preferences, which is just comparing a
"guaranteed" outcome (e.g. living on with an inconvenient disease) to a gamble (e.g. going for an operation to cure that disease, but which has a small chance of death). Used with Quality-Adjusted Life Years, which just assigns a value from zero (equivalent to death) to one (perfect health) to each year of life. N.B. As minimum quality of life is associated with death, under this system there is no call for
euthanasia (as recently appeared in the news). In reality an extension to negative quality of life is probably not impossible under certain unhappy conditions (e.g. incurable intense pain).
Examination comments: Can add, subtract, multiply, divide, take the exponential? Good to go. Just keep in mind what to compare with what (especially with WTP for statistical life)
Week 3: Production and Demand for Health (Capital)
"Quit worrying about your health. It'll go away"
- Robert Orben
Health like almost all goods is subject to
diminishing returns (e.g. visiting the doctor ten times a day is probably not that much better than once). Historically, declines in mortality [McKeown, Fuchs] were mostly due to
preventive measures: availability of clean water and better nutrition, improved environments (think smokestacks of old), and basic public health (mass vaccinations) - thus the
"epidemiological transition" (big word!), as infectious (air/waterborne) diseases became less widespread.
Curative medicine, or fixing diseases only after they appear, was the least important (and most expensive) factor. Indeed mortality nowadays is dependant on health care spending, but it takes relatively high spending for small differences [Hadley, 1982]. Smoking/drinking has a weak negative effect (see also Utah vs Nevada example), educational levels some positive effect, and income next to no effect (!)
The
RAND study [1970s] is a rare controlled trial in the social sciences (bankrolled by the US government) which provided randomly selected participants with different levels of health insurance
co-insurance (i.e. at a 95% rate, the insurance company pays 95% of any treatment while the insured foots the remaining 5%, of which more later). Findings indicate reduced spending by those who had to foot more of their own bills, but no significant mortality differences between the groups for most people, implying that low levels of co-insurance lead to overusage of health services. N.B. Example
dissenting argument as counterbalance. [Bunker, Frazier, Mosteller, 1994?] estimated that current effective medical interventions add about five years of life expectancy (compared to a ~30 year increase over the last century)
Examination comments: Revise (arc) elasticities
Week 4: Demand and Supply of Health Insurance
"Life is a risk"
- Diane Von Furstenberg
The
Grossman model [1972] states that:
- People want health and not really health care (which is a derived demand)
- Health can be thought of as a form of capital since it lasts over time
- Health is valued both for itself [consumption motive] and because it can lead to increased income (e.g. having to take fewer days off work) [investment motive]
Then health capital in a period t+1, H
t+1 = H
t(1 - d
t) + I
t(M,T
H) where d
t is the depreciation of existing capital in the previous period (an outflow) while I
t(M,T
H) is the additional investment in health capital in the previous period, which depends on medical care M and time taken T
H. N.B. in this model health capital is determined period-by-period. Then the maximization of consumer welfare B can be found, if the function of B as a consequence of other purchases (
not health care), time spent on leisure, and health capital H is known (since H reduces time lost to illness, the time saved can be allocated to work for more income [investment motive] or leisure [consumption motive? or should there be a H multiplier]).
N.B. health capital is constant when H
t(d
t) = I
t(M,T
H), i.e. investment each period balances the depreciation. A one-off change in either d
t or I
t should lead to a new stable equilibrium level of health capital eventually. Computations will probably get unnecessarily tedious with varying d
t, and I doubt such questions will appear.
Graphical analysis
for any single period consists of a downwards sloping marginal benefit
per unit curve (MEI) against a horizontal (constant) cost
per unit curve. Cost is represented as C(w,p)[r+d
t], where w is wages (which raises the implicit cost of spending time on healthcare rather than working) and p is the explicit cost of healthcare. r is the interest rate (since money not invested into health capital could have earned interest sitting in a bank). Essentially, the true cost of a unit of health capital is usually much lower than the full cost of production (as r+d
t should be relatively small), as most of the capital produced is not used up, but continues into future periods. Observe then if r is effectively zero (seems to be the reality these days) and d
t is very low, then health capital is effectively free - probably the model assumes a certain inborn level of health capital at birth (t=0).
Then from this model, since in general the MEI of older individuals is lower (as they expect a shorter time to enjoy their health capital, and do not forego income through poor health if retired), and the marginal cost is higher (since health capital depreciates more quickly for them), it can be predicted that older people should aim to reduce their stock of health capital relative to their youth. This meshes with the real-life observation that old people seem to
spend more on health, because their increased spending does not maintain their original high level of health capital due to their higher depreciation rate.
Examination comments: Revise dynamics of variable changes for the Grossman model.
Week 5: Asymmetric Information/Adverse Selection/Agency
"Scientia potentia est (For also knowledge itself is power)"
- Sir Francis Bacon
Benefits of insurance are not limited to health of course, and arise due to the
diminishing marginal utility of money - the intuition is that the happiness of getting a salary of $30000 instead of $20000 does not offset the sadness of getting only $10000 instead of $20000, or in other words an extra dollar is much more valuable to the poor than the rich. Thus most people are
risk averse in that they would much prefer, say, a guaranteed $1 million instead of a 50% chance of winning $2 million and a 50% chance of nothing, despite the expected value of both offers being equal. Indeed it would be understandable if someone took $100k and ran, instead of going for a 50% chance of $2 million.
The general idea behind insurance is that the overall losses for large numbers of people are predictable, especially if the occurance of losses is independent (perhaps not so in cases of epidemics, or large fires for property insurance, but I guess the statisticians at insurance companies know how to cover their backsides). Then firms can take advantage of these facts by collecting premiums from a lot of people, using some of these collected premiums to compensate those who randomly suffered losses, and keeping the rest as operating expenses/profits. The individuals also gain since they now have a higher expected utility, since even if their expected wealth may be reduced, the reduction in risk more than makes up for that. What's not to like?
A few problems: Major problem one is
moral hazard - let us say that a person's bicycle is fully insured against loss, by a firm that observes that a bicycle has a 1% chance of being stolen each year. Now, that person has a much lower incentive to be careful about taking care of his bicycle, such as bothering to lock it, since he gets a new bicycle if it gets stolen anyhow. Unsurprisingly the number of claims will be higher than the original estimation, and the insurance firm suffers losses from the increased payouts.
The solution is then to shift some of the pain of losses back to the insured. One way is through co-insurance (remember the RAND study from Week 2?), where the insurance company pays only an agreed percentage of the total loss. Then, the insured is more likely to take more responsibility to prevent losses (such as exercising more, in the domain of health care), if still not as much as when he did not have any insurance. Of course, part of the original welfare gains from risk elimination through full insurance are now lost. The optimal level of co-insurance can then be computed as a balance between these two considerations, again given the appropriate functions.
Other restrictions available to insurers are deductibles (the insured can't claim anything for small losses), limitations (e.g. maximum payouts or stop-loss, which cap the risk to the insurer), and of course adjustable premiums (which aren't specifically mentioned in the notes - perhaps not as applicable to health as opposed to say auto insurance?)
Major problem two is
asymmetric information (also heavily covered in Money and Banking I) - here's where the knowledge is power thing applies. Consider a world where both individuals and firms know the exact risks of getting ill for each individual - then firms would just tailor a policy to each individual depending on his risk level, and both sides gain from this agreement as explained above. Now consider a world where both individuals and firms know next to nothing about individual risks. No problem, if the aggregate risk of large numbers of people are known - firms just offer policies catered to the
average risk, and since individuals have no idea of their own susceptibility to disease they have no reason to decline coverage.
Trouble comes when one side knows something the other doesn't - in reality, individuals likely know more about their own medical conditions/potential than insurance firms. True, firms usually ask individuals to disclose some information (with penalties for lying, if discovered), but this probably doesn't cover everything. Remember that insurers who do not have distinguishing information must base their premiums on the average risk (if they base premiums on lower risks, they take losses) - but the following argument applies for any premium other than that based the very highest risk.
Now, some of those who would be insured would recognize that they have lower risk than the average and thus are overpaying (remember, they have information about themselves), and therefore drop out or not sign up for the policy. The rest would be willing to stay since they benefit from underpaying as they have a higher risk than the average. Unfortunately the loss of the first group of people raises the average risk, and thus the premium, and the same situation occurs where the ones who are now overpaying drop out, until only a very small group with the highest risks remain - the rest go uninsured since they do not want to effectively subsidize those with poorer health.
If the influence of asymmetric information is strong enough, the only viable solution then might be for the government to regulate or simply take over health insurance and make it compulsory (see the UK system), thus preventing the low risks from dropping out (and have them subsidize the high risks). Whether that is fair is another matter altogether, but it certainly makes things rather simpler.
Bonus trivia (outside of the module): The most important form of insurance a young person should take is probably disability insurance. Look at it this way - for most other accidents, one can at least work to cover the losses, but disability can be a drain that a family cannot recover from. It is probably possible to be badly overinsured as well - for example, an older person with no dependants or liabilities remaining has little need of life insurance.
Examination comments: Possibly questions based on market failure due to asymmetric information, e.g. double coverage. Just go through systematic analysis
Week 6: Physician's Practice/Services
"Doctors are men who prescribe medicines of which they know little, to cure diseases of which they know less, in human beings of whom they know nothing"
- Voltaire
Private doctors likely operate under
monopolistic competition as there are certain differences between their ability and availability. Asymmetric information also exists here, as when illness actually strikes, the doctor generally knows more about how best to treat it than their patient (which is why they are approached by patients in the first place). Relying on the seller for advice is understandably not regarded as very smart in most markets, but it appears unavoidable (at least without burdening overloaded health systems further) in medicine (with private doctors at least - government/managed care plan-employed [more later] ones on a fixed salary have less incentive to prescribe more profitable treatment, but it cuts both ways). This effect is somewhat mitigated by the doctors' reputation.
Personal thoughts: While obviously doctors are as a whole professional and ethical, it is hard to imagine them being completely unmotivated by financial concerns. Take for instance a new drug that he thinks is slightly better than the alternative, but is quite a bit more expensive (and thus brings say twice the profit margins). Should a doctor switch to prescribing it, or should he discuss the pros and cons with a patient (do they even do that most of the time?). Note that the drug example is only applicable for countries where clinics have attached pharmacies (like Singapore). A more general example would be follow-up care - it may indeed be in a patient's best interests to visit (and pay) a doctor now and again, but how often? This is known as Supplier-Induced Demand (SID).
There also exist variations in medical practice (aka Small-Area Variations) where doctors in different areas tend to have their own styles and diagnoses, perhaps due to habits from different medical schools. This clearly causes inefficiencies either from too much or too little care provided, and might be reduced through standardized guidelines and protocols (including computerized expert systems?)
Another issue is the number of doctors - can there be too many of them? Economically yes, but this is probably not the case yet for most countries. Given limited resources, it is often good to ask if some medical slack can be taken up by other professionals, such as trained nurses and midwives, however. Other barriers to entry include limited intakes for medical schools (
true in Singapore). Possibly of concern is the fact that much of the regulation is by doctors themselves, which is probably a factor in practices like undisclosed fees (which may prevent doctors from going down the undignified route of price-slashing to get business, but also makes it possible to overcharge richer patients for specialized services since no easy comparisms can be made, and the service is non-transferable. A common example problem concerns two groups of patients [rich/poor] with different demand curves)
Examination comments: Practice examples on price discrimination
Week 7: Non-profit Firms/Hospitals and Long-Term Care
"Health nuts are going to feel stupid someday, lying in hospitals dying of nothing"
- Redd Foxx
Considering the hospital as a normal firm, the standard concepts of
technical and allocative efficiency,
economies of scale,
cost minimization etc all apply. Non-profit hospitals, where no residual claimants of profits are allowed (as opposed to doctor-owned hospitals, which are popular in Japan), also exist (similar situation to UK government funded ones). However a zero-profit constraint may still allow hospital managers to favour quality over quantity due to prestige factors [Newhouse], resulting in inefficiency from underutilization of advanced technology (
"Medical Arms Race", which can be modelled as a game theory problem). For doctor-owned hospitals, the decision on whether to admit new doctors (partners) may hinge on how much extra revenue he can bring in, compared to his cut of the profits. Also depends on capital equipment and salaries of other staff. Of course, altruistic motives may also play a part (though they usually aren't modelled in given problems).
Examination comments: Mostly the usual analysis of firms
Week 8/9: Pharmaceuticals/Technological Change
"[Medicine is] a collection of uncertain prescriptions the results of which, taken collectively, are more fatal than useful to mankind"
- Napoleon Bonaparte
Pharmaceuticals (more commonly medicine/drugs) generally make up 10-20% of treatment costs in developed countries, more in developing ones (e.g. over 50% in China). They have the property of being very difficult and costly to discover through research and to trial for safety purposes, but very cheap to produce after that (possibly by reverse engineering).
From the viewpoint of society, it is efficient for the drug to be sold at the (low) production price, but this cannot happen (at least for some years) if pharmaceutical companies are to get profits (and thus continue developing new drugs). Thus the patent system (which does apply to many other forms of innovation) is employed to allow companies to sell the drugs at a high price (to patients who have little choice but to pay up). Usual balancing act of the length of the patent (now ~20 years) applies - too long and society is denied full use of the drug for even more years, too short and companies are not adequately rewarded for their innovation (as other firms can produce an identical generic version), and may hinder new investment and discoveries. The scope of patents also matter - too broad and minor improvements are not recognized, too narrow and other firms can just tweak the formula a bit and claim it as their own. Same goes for the comprehensiveness of testing.
Internationally, the patent system (usually national) has sometimes been ignored by countries without much ongoing research & development, as they just produce the patented drugs anyway (free-riding/piracy - see
Brazil). Clearly this act saves lives as poorer patients now can access the drugs at an affordable price, but is unsustainable if too many do it. Personal comment: There might not be a big loss for the companies if the demand for their drug at the original (high) price is very low in those (probably poorer) countries to begin with. Of course, if significant amounts of generic/pirated drugs get exported, they will be badly hit (possible for Singapore/Malaysia, as with groceries?).
The Goddeeris model (remember spelling) asserts that new health-improving technologies (e.g. a new cancer drug) are effectively subsidized by insurance, as opposed to cost-reducing technologies that may be used by doctors and hospitals (e.g. a cheaper X-ray machine). Thus inventors of the former can charge far more, since doctors can charge their insured patients more for usage.
Finally, one dimension of technology is that it often allows us to prolong life - at a price. I forget where I read that
"there exist treatments that are able to keep patients alive but with little quality of life, and reduce the rest of the population to penury" (and everybody dies in the end), but that sums up the issue well enough.
Examination comments: Study the Goddeeris model, especially the graphical representation
Week 10/11: Managed Care (apply Adverse Selection)
"Be careful about reading health books. You may die of a misprint"
- Mark Twain
Managed care (MC) was mentioned as a solution to the moral hazard problem of insurance. It essentially locks patients into getting chosen treatments at selected providers, and since doctors assigned by the insurance (managed care) firm do the diagnosis, there is no concern at the patient buying too much of healthcare services, just because they are subsidized. Of course, this implies a higher level of trust placed with the insurance firm, as they have an incentive to drive away riskier (and therefore more expensive) consumers [Dumping], try to attract fitter ones [Creaming - Prof: perhaps by having one's offices on the 20
th floor of a building without an elevator?] and underspend on treating insured people [Skimming], counterbalanced by reputational concerns. Again very similar to UK model with gatekeeping, capitation, etc
In practice, costs for Health Maintenance Organizations (strict form of MC) do appear to be lower, a good choice for healthier people, and they support more preventive care since they lose out on expensive curative treatments. Less strict forms of MC are Point of Service (POS), which allows out-of-plan providers, and Preferred Provider Organizations (PPO), which offers discounts on affiliated providers. Providers such as hospitals and doctors may not like MC much, but will agree to get the patients on MC plans (
"patient steering")
Introduction of normative considerations (what
should be, versus positive's
what is) - two main concerns, of efficiency and equity. Note MC cannot overcome adverse selection.
Examination comments: Seems mostly understanding only... study adverse selection example for HMO vs FFS
Week 12/13: Government Health Insurance/Health System Reform/Comparative Health Care (+Canada/Japan)
"A government that robs Peter to pay Paul can always depend on the support of Paul"
- George Bernard Shaw
Can't opt out into private insurance in Canada and Japan, their
"public contract" systems are funded through taxation, but unlike the UK the government does not operate the providers as well (mostly private in Canada, a mix in Japan). Outpatient care paid through fee-for-service (FFS), hospital budgets often negotiated in Canada. Relatively low costs in Japan due to fees being biased against hospitalization, but expensive drugs (coincidentally supplied by doctors, like in Singapore). However long waiting times (appears a feature of collectivized plans)
Interesting development - voucher models (inspired by Alain Enthoven) where the government provides a voucher to citizens, who can then use it as partial payment for a private insurance plan. Attempts to achieve near universal coverage and reduce adverse selection, featured in Clinton's plan (1990s) and the Dekker-Simmons plan in Holland (2006). See
Obama's plan. This model appears to be gaining popularity.
Examination comments: Back to memory work
Week 14: Epidemics/Addiction
"Every form of addiction is bad, no matter whether the narcotic be alcohol, morphine or idealism"
- Carl Jung
Rational addiction model: Choices that have future negative consequences (e.g. smoking) may still be undertaken by rational people if they discount future suffering greatly (i.e. prefer to enjoy now, rather than wait for a tomorrow that might not come). Addiction can then be explained by addiction capital (remember health capital in the Grossman model, week 4?), the idea that the enjoyment derived from an activity (smoking, drinking, classical music, DotA) is dependant on the amount consumed previously (
"use it or lose it"). Standard arguments on externalities and government intervention enter - taxes, advertising bans (e.g. tobacco and Formula 1), outright bans (
Prohibition didn't go down too well, though).
Epidemics: Not everyone needs to be vaccinated for acceptable results - the costs may be very high for the last few holdouts (whether due to concern about side effects, or
religious objections), and the benefits low since most people can't be affected anyway - simple marginal costs/marginal benefits intersection, though determination of marginal benefits not straightforward. External benefits rise initially when most are uninfected, and eventually fall as the chance of meeting an infected person falls due to previous vaccinations.
Examination comments: The two models, not that many details to be bothered about
