Economic Analysis in Healthcare (I)

“This book is written to provide […] a useful balance of theoretical treatment, description of empirical analyses and breadth of content for use in undergraduate modules in health economics for economics students, and for students taking a health economics module as part of their postgraduate training. Although we are writing from a UK perspective, we have attempted to make the book as relevant internationally as possible by drawing on examples, case studies and boxed highlights, not just from the UK, but from a wide range of countries”

I’m currently reading this book. The coverage has been somewhat disappointing because it’s mostly an undergraduate text which has so far mainly been covering concepts and ideas I’m already familiar with, but it’s not terrible – just okay-ish. I have added some observations from the first half of the book below.

“Health economics is the application of economic theory, models and empirical techniques to the analysis of decision making by people, health care providers and governments with respect to health and health care. […] Health economics has evolved into a highly specialised field, drawing on related disciplines including epidemiology, statistics, psychology, sociology, operations research and mathematics […] health economics is not shorthand for health care economics. […] Health economics studies not only the provision of health care, but also how this impacts on patients’ health. Other means by which health can be improved are also of interest, as are the determinants of ill-health. Health economics studies not only how health care affects population health, but also the effects of education, housing, unemployment and lifestyles.”

“Economic analyses have been used to explain the rise in obesity. […] The studies show that reasons for the rise in obesity include: *Technological innovation in food production and transportation that has reduced the cost of food preparation […] *Agricultural innovation and falling food prices that has led to an expansion in food supply […] *A decline in physical activity, both at home and at work […] *An increase in the number of fast-food outlets, resulting in changes to the relative prices of meals […]. *A reduction in the prevalence of smoking, which leads to increases in weight (Chou et al., 2004).”

“[T]he evidence is that ageing is in reality a relatively small factor in rising health care costs. The popular view is known as the ‘expansion of morbidity’ hypothesis. Gruenberg (1977) suggested that the decline in mortality that has led to an increase in the number of older people is because fewer people die from illnesses that they have, rather than because disease incidence and prevalence are lower. Lower mortality is therefore accompanied by greater morbidity and disability. However, Fries (1980) suggested an alternative hypothesis, ‘compression of morbidity’. Lower mortality rates are due to better health amongst the population, so people not only live longer, they are in better health when old. […] Zweifel et al. (1999) examined the hypothesis that the main determinant of high health care costs amongst older people is not the time since they were born, but the time until they die. Their results, confirmed by many subsequent studies, is that proximity to death does indeed explain higher health care costs better than age per se. Seshamani and Gray (2004) estimated that in the UK this is a factor up to 15 years before death, and annual costs increase tenfold during the last 5 years of life. The consensus is that ageing per se contributes little to the continuing rise in health expenditures that all countries face. Much more important drivers are improved quality of care, access to care, and more expensive new technology.”

“The difference between AC [average cost] and MC [marginal cost] is very important in applied health economics. Very often data are available on the average cost of health care services but not on their marginal cost. However, using average costs as if they were marginal costs may mislead. For example, hospital costs will be reduced by schemes that allow some patients to be treated in the community rather than being admitted. Given data on total costs of inpatient stays, it is possible to calculate an average cost per patient. It is tempting to conclude that avoiding an admission will reduce costs by that amount. However, the average includes patients with different levels of illness severity, and the more severe the illness the more costly they will be to treat. Less severely ill patients are most likely to be suitable for treatment in the community, so MC will be lower than AC. Such schemes will therefore produce a lower cost reduction than the estimate of AC suggests.
A problem with multi-product cost functions is that it is not possible to define meaningfully what the AC of a particular product is. If different products share some inputs, the costs of those inputs cannot be solely attributed to any one of them. […] In practice, when multi-product organisations such as hospitals calculate costs for particular products, they use accounting rules to share out the costs of all inputs and calculate average not marginal costs.”

“Studies of economies of scale in the health sector do not give a consistent and generalisable picture. […] studies of scope economies [also] do not show any consistent and generalisable picture. […] The impact of hospital ownership type on a range of key outcomes is generally ambiguous, with different studies yielding conflicting results. […] The association between hospital ownership and patient outcomes is unclear. The evidence is mixed and inconclusive regarding the impact of hospital ownership on access to care, morbidity, mortality, and adverse events.

“Public goods are goods that are consumed jointly by all consumers. The strict economics definition of a public good is that they have two characteristics. The first is non-rivalry. This means that the consumption of a good or service by one person does not prevent anyone else from consuming it. Non-rival goods therefore have large marginal external benefits, which make them socially very desirable but privately unprofitable to provide. Examples of nonrival goods are street lighting and pavements. The second is non-excludability. This means that it is not possible to provide a good or service to one person without letting others also consume it. […] This may lead to a free-rider problem, in which people are unwilling to pay for goods and services that are of value to them. […] Note the distinction between public goods, which are goods and services that are non-rival and non-excludable, and publicly provided goods, which are goods or services that are provided by the government for any reason. […] Most health care products and services are not public goods because they are both rival and excludable. […] However, some health care, particularly public health programmes, does have public good properties.”

“[H]ealth care is typically consumed under conditions of uncertainty with respect to the timing of health care expenditure […] and the amount of expenditure on health care that is required […] The usual solution to such problems is insurance. […] Adverse selection exists when exactly the wrong people, from the point of view of the insurance provider, choose to buy insurance: those with high risks. […] Those who are most likely to buy health insurance are those who have a relatively high probability of becoming ill and maybe also incur greater costs than the average when they are ill. […] Adverse selection arises because of the asymmetry of information between insured and insurer. […] Two approaches are adopted to prevent adverse selection. The first is experience rating, where the insurance provider sets a different insurance premium for different risk groups. Those who apply for health insurance might be asked to undergo a medical examination and
to disclose any relevant facts concerning their risk status.
[…] There are two problems with this approach. First, the cost of acquiring the appropriate information may be high. […] Secondly, it might encourage insurance providers to ‘cherry pick’ people, only choosing to provide insurance to the low risk. This may mean that high-risk people are unable to obtain health insurance at all. […] The second approach is to make health insurance compulsory. […] The problem with this is that low-risk people effectively subsidise the health insurance payments of those with higher risks, which may be regarded […] as inequitable.”

“Health insurance changes the economic incentives facing both the consumers and the providers of health care. One manifestation of these changes is the existence of moral hazard. This is a phenomenon common to all forms of insurance. The suggestion is that when people are insured against risks and their consequences, they are less careful about minimising them. […] Moral hazard arises when it is possible to alter the probability of the insured event, […] or the size of the insured loss […] The extent of the problem depends on the price elasticity of demand […] Three main mechanisms can be used to reduce moral hazard. The first is co-insurance. Many insurance policies require that when an event occurs the insured shares the insured loss […] with the insurer. The co-insurance rate is the percentage of the insured loss that is paid by the insured. The co-payment is the amount that they pay. […] The second is deductibles. A deductible is an amount of money the insured pays when a claim is made irrespective of co-insurance. The insurer will not pay the insured loss unless the deductible is paid by the insured. […] The third is no-claims bonuses. These are payments made by insurers to discourage claims. They usually take the form of reduced insurance premiums in the next period. […] No-claims bonuses typically discourage insurance claims where the payout by the insurer is small.

“The method of reimbursement relates to the way in which health care providers are paid for the services they provide. It is useful to distinguish between reimbursement methods, because they can affect the quantity and quality of health care. […] Retrospective reimbursement at full cost means that hospitals receive payment in full for all health care expenditures incurred in some pre-specified period of time. Reimbursement is retrospective in the sense that not only are hospitals paid after they have provided treatment, but also in that the size of the payment is determined after treatment is provided. […] Which model is used depends on whether hospitals are reimbursed for actual costs incurred, or on a fee-for-service (FFS) basis. […] Since hospital income [in these models] depends on the actual costs incurred (actual costs model) or on the volume of services provided (FFS model) there are few incentives to minimise costs. […] Prospective reimbursement implies that payments are agreed in advance and are not directly related to the actual costs incurred. […] incentives to reduce costs are greater, but payers may need to monitor the quality of care provided and access to services. If the hospital receives the same income regardless of quality, there is a financial incentive to provide low-quality care […] The problem from the point of view of the third-party payer is how best to monitor the activities of health care providers, and how to encourage them to act in a mutually beneficial way. This problem might be reduced if health care providers and third-party payers are linked in some way so that they share common goals. […] Integration between third-party payers and health care providers is a key feature of managed care.

One of the prospective imbursement models applied today may be of particular interest to Danes, as the DRG system is a big part of the financial model of the Danish health care system – so I’ve added a few details about this type of system below:

An example of prospectively set costs per case is the diagnostic-related groups (DRG) pricing scheme introduced into the Medicare system in the USA in 1984, and subsequently used in a number of other countries […] Under this scheme, DRG payments are based on average costs per case in each diagnostic group derived from a sample of hospitals. […] Predicted effects of the DRG pricing scheme are cost shifting, patient shifting and DRG creep. Cost shifting and patient shifting are ways of circumventing the cost-minimising effects of DRG pricing by shifting patients or some of the services provided to patients out of the DRG pricing scheme and into other parts of the system not covered by DRG pricing. For example, instead of being provided on an inpatient basis, treatment might be provided on an outpatient basis where it is reimbursed retrospectively. DRG creep arises when hospitals classify cases into DRGs that carry a higher payment, indicating that they are more complicated than they really are. This might arise, for instance, when cases have multiple diagnoses.”

February 20, 2017 Posted by | books, economics, health care | Leave a comment