Some more health economics stuff

The Oxford Handbook of Health Economics (here’s a previous post about the book) has a lot of stuff. Here are some more observations which might be of interest:

User charges:

“Out-of-pocket payments play a dominant role in LMICs [low- and middle-income countries] where they cover about 50 percent of health care expenditures. [They] are less important in the high-income countries [but] there seems to be a tendency toward an increase of patient cost-sharing in countries where it traditionally has played a minor role […] This is not only explained by a concern to fight moral hazard and overconsumption, but it also reflects the increasing pressure on the public financing part of the system.” [In ‘low-income-countries’ out-of-pocket expenditures in 2008 made up on average 67.4 % of total expenditures in health, whereas the corresponding numbers for ‘lower middle income countries’, ‘upper middle income countries’ and ‘high income countries’ were 46.8%, 30.2% and 14.4% respectively. The global average was 22.5%. Note that total out-of-pocket expenditures incurred in high-income countries (in e.g. dollars) may make up a much larger share of the total global out-of-pocket expenditures than you might believe from those numbers alone – recall that high income countries spend approximately 100 times as much money on health per person than do low-income countries (low income countries spent on average $23 on health per capita in 2008, whereas high income countries spent $2414 per capita).]

“User charges do have a negative effect on health care consumption. The evidence is overwhelming for co-payments in the developed insurance systems. […] The evidence is almost equally strong for the effects of user charges in LMICs. Introducing or increasing user fees has almost always and everywhere led to a decrease of utilization […] both in developed health insurance systems and in LMICs, the evidence suggests that the decrease in utilization may have negative effects on the quality of care […] Most studies find that cost sharing leads to a decrease in the utilization of essential medication, defined as medication that is necessary to maintain or improve health. Often adherence to a regimen of maintenance medication goes down with patients skipping doses or stretching out refills. With a few exceptions […], higher cost-sharing for, and therefore lower utilization of, prescription drugs, has led to greater use of inpatient and emergency medical services by chronically ill patients [effects like these, I should point out, may well make cost-sharing a less than ideal cost-saving mechanism; emergency services are incredibly expensive compared to ‘routine management’] […] cross-price effects are also significant. Again, the evidence for the developed countries and the LMICs goes in the same direction. Two- or three-tier plans for prescription drugs in the US, introducing differentiated cost sharing for different categories of drugs, have clear effects on the pattern of drug use. […] user charges are a strongly regressive component in the health care financing structure of developed countries […] A large majority of studies suggest that user charges lead to a stronger reduction in utilization among the poor than among the rich (James et al. 2006).”

Insurance and the demand for medical care:

two main empirical findings from research to date are these: (1) the aggregate or average consumer demand curve, whether Marshallian (uncompensated) or Hicksian (compensated), slopes downward and to the right. (2) Demand curves are significantly price responsive at all consumer income levels. These conclusions are at variance with common perceptions of medical care demand by non-economists, who traditionally have asserted that non-poor consumers only use medical care when they have to do so because they are sick or are ordered to do so by their physician, and that only lower income households would restrain their demand for needed care because of cost sharing.”

“When the consumer has price-sensitive demand for care, the influence of deductibles on spending is complex because a deductible in effect faces the consumer with a two part block tariff: full price up to a certain level of spending, and then low or zero marginal price. Since the marginal price is different depending on whether the deductible is covered or not, the consumer has to consider the distribution of expected expenses […] While the actual analytics of demand responsiveness are complicated by a deductible […] the main intuitive finding is obvious: the lower the deductible the higher the demand for care, other things equal.”


“A traditional discussion about choosing the “right” (desired) hospital output is associated with the role of quality and the trade-off between lower costs and higher quality. This trade-off is based on the assumption that higher quality implies more costs. This is likely to be so in efficient hospitals. However, inefficient hospitals may have room to improve simultaneously in both dimensions.”

“Whenever hospitals are funded by case payments they prefer to receive more patients for treatment while hospitals funded by capitation (to treat people in a defined catchment area) will invest more in keeping patients treated at primary care level when clinically feasible. […] several health systems make referral by a GP a necessary condition to visit a specialist. […] Gatekeeping determines to a considerable extent the demand faced by the hospital. Moreover, referrals to the hospital depend on both the incentives faced by GPs and on the formal relationship between primary care and hospitals.”

One of the main issues in measuring economies of scale (productivity, in general) in hospitals is the role of quality. More efficient hospitals are more likely to have a lower marginal cost of providing quality, and accordingly they may supply a higher quality level in equilibrium (which is likely to raise costs and mask their efficiency advantage). […] Under regulated prices, quality is the main “competitive tool” of hospitals and it is used intensively. Whenever both price and quality are available instruments to the hospital, the effort to attract patients is spread over both of them. […] response to an unexpected demand surge for hospital services is more likely to be met by early discharges to free up capacity than rationing admissions.”

The economics of the biopharmaceutical industry:

“The US research-based biopharmaceutical industry invests 15-17 percent of sales in R&D, and the R&D cost of bringing a new compound to market is estimated at over $1bn. […] The cost of developing an approved new medical entity (NME), measured as a discounted present value at launch, [was] $138 million in the 1970s […] the global nature of pharmaceutical R&D raises issues of appropriate cross-national price differentials and cost sharing. National regulators have incentives to free-ride, driving domestic prices to country-specific marginal cost, leaving others to pay for the joint costs of R&D. The long R&D lead times – on average roughly twelve years from drug discovery to product approval – make the incentives for short run free-riding by individual countries particularly acute because negative effects will be delayed for years and hard to attribute. […] In practice, the ability of pharmaceutical firms to price-discriminate is undermined by government policies […] the design of each country’s price regulatory system affects not only its prices and availability of drugs but also availability in other countries through price spillovers in the short run, and through R&D incentives in the long run. […] North America accounted for 45.9 percent of global pharmaceutical sales in 2007, compared to 31.1 percent for Europe

“The theoretically optimal insurance/reimbursement contract for drugs must deter both insurance-induced over-use by patients and excessive prices by manufacturers, while paying prices sufficiently to reward appropriate R&D, taking into account the global scope of pharmaceutical sales. […] An important conclusion is that patient cost sharing alone cannot simultaneously provide optimal incentives for efficient use of drugs, control of patient moral hazard and optimal provider incentives for R&D. In addition, given the global nature of pharmaceutical utilization, creating optimal R&D incentives require appropriate price differentials across countries […] generally, regulatory systems that induce price convergence across countries are likely to reduce social welfare. […] Overall, countries that use direct price controls do not consistently have lower prices than countries that use other indirect means to constrain prices”

In the US, generics now account for almost seventy percent of all prescriptions but only about 16 percent of sales, due to their low prices. Although US prices for on-patent drugs are on average 20-40 percent higher in the US than in other industrialized countries, US generic prices are lower […] many middle and low income countries have relatively high generic prices […] and uncertain generic quality. […] Empirical studies of generic entry has shown, not surprisingly, that generic prices are inversely related to number of generic competitors […]; generic entry is more likely for compounds with large markets […], [and in] chronic disease markets”

“the FDA is required by statute to consider risks and benefits to patients. Costs […] is beyond the FDA’s purview. […] Currently the US lags other countries in the use of comparative and/or cost-effectiveness as an input to reimbursement decisions.”


February 10, 2014 - Posted by | Books, Economics, Health Economics, Medicine, Pharmacology

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