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Eco 343 Weeks 3, 4, and 5 Notes

by: Rachel Barnes

Eco 343 Weeks 3, 4, and 5 Notes ECO 343

Marketplace > Grand Valley State University > Economcs > ECO 343 > Eco 343 Weeks 3 4 and 5 Notes
Rachel Barnes
GPA 3.9

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About this Document

These notes cover weeks 3, 4, and 5 of class. The topics covered are demand of healthcare, price elasticity of healthcare, and the impact of education on overall health.
Health economics
Economics, health, Healthcare
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This 10 page Bundle was uploaded by Rachel Barnes on Wednesday February 10, 2016. The Bundle belongs to ECO 343 at Grand Valley State University taught by Callison in Summer 2015. Since its upload, it has received 116 views. For similar materials see Health economics in Economcs at Grand Valley State University.


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Date Created: 02/10/16
Eco 343, health econ Week 3 notes Demand for Health Care th Jan 26 , 2016  Consumer theory o Between the options of oranges and apples, you must choose somewhere on the  line to exhaust your income between the two choices  I=Xpx + Ypy  Simplifies to: y= I/py –x(px/px)  o Opportunity cost: by choosing one item, you forfeit the benefit of choosing the  other item  Indifference curve o Possible set of combinations that the consumer would be indifferent to consuming when it comes to satisfaction o Properties   Slopes downward (only one exception to this)  Not a constant slope, has a slight bow to it  Why? Diminishing marginal returns (the more you have, the less  value each additional unit has)  Slope = Marginal rate of substitution (MRS) o MUx/MUy (marginal unit/happiness)  Higher is better, it means more stuff, and more stuff gives us more utility   They never cross, they can only ever be parallel   They can only cross for different people with different preferences  At the optimal consumption point (where the indifference curve intersects with the  individual’s budget) the slopes are the same, so: o MUx/MUy = Px/Py o OR MUx/Px = MUy/Py (you may substitute the equal sign for an inequality) o You ALWAYS want to choose the point of tangency, not just an intersection  point, however   Grossman Model: is our heath something we have control over, or is it something that is  predetermined?  o Predetermined factors:  Family history  Genetics  Environment   Geography o Choices we make:   Diet: poor/good  Tobacco use  Exercise  Drug usage  Lifestyle  Medical care/going for checkups  o We must make 3 general assumptions to begin modeling:  We’re all born with an initial stock of health   The stock may vary   Health stock deteriorates over time  From both natural and unnatural causes  Consumption choices affect our health stock o U=f(H, X)  U: utility/happiness  H: health stock  X: all non­health consumption  There are tradeoffs between H and X (between health and leisure,  or non­health consumption)  For someone who places a high value on health: o A very flat, horizontal indifference curve for any  indifference to occur  For someone who places a high value on leisure o A very straight, vertical indifference curve for any  indifference to occur o How exactly do we get more health stock?  Health investment function:  Ht+1 = Ht + It –δHt  Health production function: It = g(Mt,THt,E)  Medical care, time spent on health, and education  Remember: we always want to be at the TANGENCY point on the indifference curve Jan 28 , 2016  Grossman model continued o Utility function: function of health stock on non­health goods o You can buy more leisure, or non­health goods (X), but you can’t buy more health stock for obvious reasons o So we have to have health investment functions so gradually increase our health  stock over time  Health production function has the following three inputs:  Medical care  Time spent improving heath  Education o On a graph, the health production function is positive, but increases at a  decreasing rate because the marginal improvement from receiving additional  medical care reduces  Flat of the curve spending­ additional spending has little to no benefit in  health care, and we could reduce our spending and not see any negative  consequences with health care (not harm any health at all while cutting  costs)  Marginal productivity: began high, ended up being low  Not efficient with spending by the time we get to small,  incremental improvements in healthcare o Education  Utility function: U= f(H,X)  How does optimal consumption change when the price of health care changes? o The slope of the budget constraint with either become steeper or flatter Moral Hazard  The increase in consumption of healthcare due to the decrease in price  o People are concerned with this; but it is undue  Price Elasticity of Demand: the percentage change in quantity over percentage change in price  Inelastic demand curve: o Vertical, very close to zero, or is zero  Why? At any given price, the good is still needed and the demand is still  high (with large changes in price, quantity demanded remains unchanged)  Whether it is medication or any other need that must always be met, the  consumer will buy the amount needed at $1, $10, or at $1,000  This is inelastic –quantity demanded is unmoved in regards to price  Elastic demand curve o Horizontal, larger than one, usually a very large number  Why? With tiny changes in price, quantity demanded changes drastically  The good can be replaced for a cheaper one if prices change  this is elastic –quantity demanded is moved in regards to price Eco 343, Health Econ Week 4 notes Price Elasticity of Demand for Healthcare nd Feb 2 , 2016  Price Elasticity of Demand= %change of Quantity divided by %change of Price o PED> 1, elastic  Luxury goods o PED< 1, inelastic  Necessities without any close substitutes  o Price elasticity is a part of the slope of the demand curve, therefore it can alter it,  but it is NOT the slope o Considering the moral hazard myth, we want an inelastic demand curve  This debunks the myth that when price changes, demand changes (i.e.  people will utilize more health care when the price drops)   RAND theory: o Sicker people require more medical care  The demand curve shifts to the right and becomes more inelastic  Someone with a more severe illness is less responsive to price factors  Not as much reaction to price changes, won’t change consumption   RAND Experiment o Randomized: make sure they were measuring utilization, and not any other  outside, force or factor that could skew their results o One of the most important studies by far in health economics (1971­1982)  0%­95% cost sharing plan (out of pocket max of $1,000) o Outpatient care: the more they paid, the less you see the primary care  physician/family doctor   Same for other medical care, outpatient expenses, total medical expenses,  etc.  Based on number on visits o Hospital admissions/Inpatient care: not really any correlation. Why?  Inelastic, if you need it, you need it  They hit the out of pocket maximum  They knew they were going to be repaid for their expenses, so  once they hit the cap they figured there wasn’t any pressure to stay  and receive medical treatment o Results:  Price elasticity for medical care: between ­0.1 and ­0.2  INELASTIC   10% increase in price will reduce consumption by 1­2% o Proposition: insurance coverage should be more generous for care exhibiting a  small price elasticity of demand (for hospital care and inpatient service) o Rand tested whether outpatient and inpatient care are substitutes   It’s a myth, outpatient and inpatient care are compliments, not  substitutes  th Feb 4 , 2016  Oregon Health Insurance Experiment o Second randomized experiment to occur after RAND  2008, decided to increase Medicaid by 10,000  Demand was high and 90,000 people enrolled  Decided to choose who got the Medicaid by a lottery system o Harvard sent out surveys and researched the applicants since the randomization  was done so well in this study o Results:  Health care utilizations increased significantly   For all inpatient, outpatient, and prescriptions  Effects on health were inconclusive  Does insurance really make people healthier? o Caveats: short follow up period  Only two years out after enrollment  Power issues (treatment groups with small sample sizes)  People respond to changes in price with health care Determinants of Health Care Article: Life at the Top in America Isn’t Just Better, It’s Longer  Miele, 66 o Upper­middle class o Architect o Wife is his advocate/network o College graduate o Family upbringing o Family history o More exercise o Diet concerns o Overweight o Low stress job/lifestyle o Back surgery o High cholesterol/blood pressure  Ambulance  Choice of hospital  Angioplasty right away  Two days in hospital  Two follow up appointments  Immediate lifestyle change with help of wife   Cardiac rehab program  Wilson, 53 o Utility worker o Middle class o Poor diet o High cholesterol, blood pressure, and diabetes o No college education o Already had a heart attack o Former smoker o Quit taking his medication after first heart attack  Ambulance  Choice of hospital  Medication   Next day: transferred to different hospital for angioplasty  Damage done to his heart  5 days in hospital  Made an effort to change diet  Goes back to work and cardiac rehab  Gora, 59 o Smoker o Housekeeper o Working class o Immigrant from Poland  Language barriers o Family history of heart attacks o Lots of travel issues (public transportations) o Overweight  o Poor diet o Poor network  Home remedy: salt water and vodka  Ambulance  City hospital  Very long wait  Medication   Two weeks in hospital because of infection  Can’t change diet   Can’t work  Insurance benefits run out  Issues with quitting smoking  Continues gaining weight  Many other health issues begin happening   What is the relationship between socioeconomic status and health insurance? o Education and health  It operates both ways  Reverse causality  Education effects how healthy you are but how healthy you are  effects how much education you receive   o What are the mechanisms that make higher educated people to have better health?  A better understanding of what it means to be healthy, the knowledge of  what health is   Resources, or access to care  Why do we die? o The answer changes over time o Public health initiatives   Reversed the river to improve public health (Chicago, back in the day)  Helped prevent parasitic and infectious diseases from spreading and  killing people   These investments were successful and very cost effective  Caveat: you can only do it once and then you have to find other ways o Education   Surgeon general report on smoking  Significantly reduced smoking and all of the diseases associated  with it o Top causes of deaths today  Heart disease  Cancer  US white men, death rates are going up (ages 45­54)  This is not the case for any other country o Why?  Suicide rate  Poisoning (prescription opioids)  Empirical evidence o Strong positive correlation between education and health and education and  healthy behaviors  Correlation isn’t causation  Get around the reverse causality  Education does cause better health, in general Eco 343, Health Econ Week 5 notes Education and the Impacts on Health th Feb 9 , 2016  Are people contributing too much to education and its impact on health? o The third variable hypothesis   How does the rate of time preference affect the education/health  relationship  Is there a third variable that drives both education and health?  Discount rate: how heavily we discount the future  This is correlated with the future o Can I sacrifice my immediate benefit now for the benefit of the future? o This goes for healthcare, or for other things, like a  retirement fund, paying of loans, a mortgage, etc.  People with low discount rates will have better health  People with high discount rates will have worse health  Discount rate leads to better education AND better health, so is this the third variable? We don’t really know, we only have some  evidence o Biggest consensus is that formal education contributes the most to good health,  even more important than occupation and income  Income and Health o Income and health are positively correlated o The first $7000 of GDP per capita is vital for life expectancy, but then it flattens  out very fast after that  Economics of Risky Behaviors o The model of Rational Addiction:  Ut=f(Ct, Yt, St)  C =addictive good  Y =all other goods  S =stock of consumption capital o This is what makes the model addictive, what defines an  addictive good o An accumulation of the stock over time  o The higher the stock, the higher the consumption of the  addictive good  Stock on the x axis and current consumption on the y axis  Positive slope, with diminishing marginal returns (flattens out)  Consumption curve, between consumption capital and current  consumption (looks like a hook) o Investment function:  St+1 = St+Ct –δSt  Ct adds to consumption  δSt decreases stock (depreciation) o Steady state, or equilibrium: happens when stock at time St+1 is equal to St, or  stock next year will be my stock this year   When current consumption gains to the stock is offset by current  depreciation to the same stock (Ct=δSt)  What does the graph look like?   A 45 degree line coming out from the corner of the graph, where  there is no change from any movement from point a to point b  To the left: consumption is greater than depreciation (stock is  increasing)  To the right: depreciation is greater than consumption (stock is  decreasing)  You are always pushed toward the equilibrium point where the steady  state curve and the consumption curve intersect   The lower intersection is an unstable equilibrium, pushed away  from the point, not towards it  What happens when the price of the addictive good changes? o If the price increases, consumption should go down  Therefore consumption and stock should fall  The consumption curve would shift to the right with new equilibrium  points o Short run effect: consumption is immediately dropped from point a to point b.  Stock doesn’t change o Long run effect: equilibrium is decreased to point c on the curve eventually  What about a large price increase? o A very large shift to the right in the consumption curve with a large decrease in  consumption and the curve moved so far, that it doesn’t touch the steady state  equilibrium line anymore. Therefore, there is no long run effect other than  quitting smoking, since economically the curve could never touch the equilibrium  line. 


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