Expert answer:Assignment 1

Solved by verified expert:You just started working as a Health Service Manager at a major hospital. The CEO thinks he has a great idea, and wants your opinion on the following: Expand health insurance coverage to all US citizens (similar to Medicaid) and the federal government will pay the entire cost of coverage. Write a 4 to 5 page report (double-spaced) on the economic implications of his idea. In discussing the issue, identify at least 3 economic concepts (discussed in Week1 and Week 2’s class content) when discussing whether or not (from an economic perspective) this idea is sustainable in the long-run. Rely on material in the course readings and summary slides to make your case. NOTE: THIS IS NOT A DISCUSSION OF THE CURRENT AFFORDABLE CARE ACT, IT IS A CONCEPTUAL PAPER APPLYING ECONOMIC CONCEPTS LEARNED IN THE FIRST TWO WEEKS OF CLASS. **WILL ATTACH COURSE REEADINGS AND SLIDES*** textbook is: Economic Theory Through Application And can be found at: https://saylordotorg.github.io/text_economics-theory-through-applications/ The Mayer book is titled: The Everything Economics Book : From Theory to Practice, Your Complete Guide to Understanding Economics Today ( try googling it) let me know if you have issues 1)Mayer Chapter 6: Supply and Demand 2) Economic Theory Through Application Chapter 4: Everyday Decisions (p. 54-90) 3) Economic Theory Through Application- Chapter 6.3 Supply and Demand (p. 202-213) Chapter 7.2: Revenues of A Firm (p. 244- 62) Monitoring Health Spending Increases: Incremental Budget Analyses Reveal Challenging Tradeoffs https://www.cms.gov/Research-Statistics-Data-and-systems/Research/HealthCareFinancingReview/Downloads/06Fallpg41.pdf 1) Mayer Chapter 1: What is Economics? 2) Mayer Chapter 13: Keeping Score: The Gross Domestic Product 3) Economic Theory Through Applications Chapter 1: What is Economics? (p. 6-18) https://saylordotorg.github.io/text_economics-theory-through-applications/ 4) Economic Theory Through Applications Chapter 2: Microeconomics in Action (p. 19-32) 5) Glossary of Health Economics Key Terms https://www.nlm.nih.gov/nichsr/edu/healthecon/key.html 6) National Health Expenditures 2015 HIghlights https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/downloads/highlights.pdf 7) What Do We Spend on Healthcare: National Health Accounts Forecast: See Forecast Summary link and Tables 1, 2, and 3 in detailed data files: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html
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UMUC HMGT 435
1
Key Learning Objective
 Important Economic Principles
 Scarcity of Resources vs. Unlimited Wants and Needs
 Three Key Economic Questions
 Opportunity Cost and Marginal Principal
 Normative vs. Positive Analysis
 Macroeconomic vs. Microeconomic
 Key Drivers of Healthcare Spending Next 10 Years
 Course Outline
2
Scarcity of Resources Amidst Unlimited
Wants
 Economics: Study of the behavior of economic agents – individuals, firms,
governments and other organizations – when confronted with scarcity of
resources.
 Two Important Economic Concepts That Govern Economic Behavior:
OUR MATERIAL
WANTS ARE
UNLIMITED AND
INSATIABLE
BUT………..
ECONOMIC
RESOURCES ARE
LIMITED AND
SCARCE
3
Scarce Resources in Healthcare
 Resources also called “Factors of Production”
 The Factors of Production in Healthcare Are:
1. Labor- Doctors, nurses, administrative staff, etc.
2. Physical capital – Hospitals, doctor’s offices, medical technology, etc.
3. Natural Resources and Raw Materials – land for the capital to be built,
energy sources (oil and gas), raw materials for pharmaceuticals
4. Entrepreneurship – scientists who develop cures for cancer, drug
companies who develop new drugs.
4
Balancing Unlimited Wants with
Scarcity of Resources in Healthcare
Key Trade-offs Must be Made and Economics Helps Explain these
Trade-offs
 How much of healthcare should be consumed and by whom? (e.g.
Demand)
 What products in healthcare should be produced and how much? (e.g.
Supply)
 How do you produce these products? (Market Structure and Nature of
Regulations)
5
Prices and Income Important to
Balance Demand and Supply
In “General” Economic Markets:
 PRICES of goods and services are important determinants of Supply
and Demand and help temper unlimited wants against scarcity of
resources
 The income of individuals and the wealth of the nation also determine
demand for goods and services
 Generally, markets are “perfectly competitive” meaning information is
readily available about quality of products and value
6
Why Healthcare Demand is Different
Patients Do Not Behave the Same Way as Consumers
 They cannot “test” the product before consuming it
 Difficult for patients to obtain information about what medical care is
appropriate for their condition – medical knowledge is complex
 Interdependencies between consumer actions (e.g. vaccinations impact
public health)
 Existence of insurance reduces sensitivity of demand to price changes
7
Why Health Care Supply is Different
Doctors/Medical Providers Do Not Behave in the Same Way as Other
Firms
 Entry into the industry is restricted by medical licensing
 Advertising and overt competition are generally absent in medical markets
(this has been changing recently with drug ads)
 Advice given by physicians is supposed to be completely divorced from selfinterest
 Goals of providers may differ than profit maximization (instead more
towards social and ethical factors)
 Doctors can price discriminate and charge different fees for different patients
8
Evaluating Economic Trade-offs
 Two important economic concepts can be used when evaluating
economic trade-offs
 Opportunity cost
 Marginal Principle
 These two economic concepts are important when evaluating the
economic implication of spending economic resources on one thing
(e.g. healthcare) vs. another (e.g. defense or education)
9
Opportunity Cost
 Choosing factors of production for a given purpose (e.g. more
healthcare) lose the ability to use for something else (e.g. more
education or more defense)
 Opportunity cost of committing resources to produce a good or service
is the benefits forgone from those same resources not being used in
“next best alternative.”
 Economic Cost = Explicit cost + Implicit Cost
 Explicit cost: actual monetary payments for products/services or inputs to
production
 Implicit cost: opportunity cost (benefits forgone from not using resources
for next best alternative)
10
Marginal Principle
 Compare the marginal cost(MC) versus marginal benefit(MB) of a
decision.
 Marginal Principle:
 Increase the level of activity as long as the marginal benefit (MB) exceeds
the marginal cost (MC).
 The optimal level of spending chosen is when the MB = MC.
 Example:
 Spending a lot of resources to develop a vaccine that may not result in a
large marginal benefit.
11
Positive Economic Analysis
Positive Analysis and the Way of Economic Thinking:
 “What is” or “What will be”

Investigating the relationship between economic variables

Measuring efficiency of a procedure or its effectiveness on achieving
a goal is an example of positive analysis in health care
Normative Analysis—Not the Economic Way of thinking
 “What ought to be”
 “Desirability” of alternative outcomes
 Ethical and fairness arguments often fall under normative analysis
12
Microeconomics vs. Macroeconomics
Microeconomics
 Focuses on decision-making of individuals and businesses
 Examples: pricing decisions, nature of markets, and wage
determination.
Macroeconomics
 Study of the nation’s economy as a whole
 Includes issues of changes in overall prices (inflation), unemployment,
and economic growth (as measured by GDP)
13
Sources and Uses of Health Care
Spending in 2015
Financing of Health Care by Source
Out-ofPocket
13%
Where Does Health Care Dollar Go?
Prescription Dental
5%
Drugs
12%
Medicare
25%
Home
Health and
NH Care
9%
Pvt. Health
Insurance
41%
DME
2%
Medicaid
21%
Hospital
Care
37%
Other
12%
Physicians
and Clinical
Services
23%
Source: National Health Expenditures, CMS
14
Projections of Factors Impacting Future
Healthcare Spending
Overall Trends (2015-2025):
 Health spending exceeds growth in
the economy (as measured by GDP)
 By 2025, health spending will
consume about 20 percent of our
economic resources
 Prior to 2020, the Affordable Care
Act will contribute to growth in
spending but its impact will wane
by 2025
 Biggest long-run factor will be faster
growth in medical prices and
population aging
Individual Sectors:
 By 2025, the public sector will
finance nearly half of all health care
spending (47%)
 Prescription drug spending while
small in dollar terms, is expected to
be one of the strongest growing
sectors over next 10 years
(increasing 6.7% per year),
compared to hospital growth (3%),
and physician and clinical services
(4.9%)
15
HMGT 435 Course Overview
 Week 2: The Demand for Health Care
 Week 3: The Demand for Health Insurance
 Week 4: The Supply of Health Care in Competitive Markets
 Week 5: The Supply of Health Care in Noncompetitive Markets
 Week 6: Role of Government Regulation: Market Failures, Price
Controls, Licensing
 Week 7: Comparative Effectiveness (Cost-Benefit analysis)
 Week 8: Health Economics and Affordable Care Act
16
UMUC HMGT 435
1
Key Learning Objectives Week 2
 How to interpret a demand curve
 Understand why demand curve is “generally” downward sloping
 Learn about elasticity of demand and what that means
 Identify factors that lead to a change (shift) in demand
 Understand how “substitutes” and “complements” impact demand
 Identify unique characteristics of health care relative to other goods
 Healthcare as an Investment
 Elasticity of Demand
 Asymmetric (Imperfect) Information
2
What is the Individual Demand Curve?
 Shows relationship between the
price of a good and the quantity
demanded (holding all else
constant)
 Demand is defined for a “specific
time period.”
 Higher price leads to lower
quantity demanded and vice
versa (downward sloping)
3
Why is Demand Curve Downward
Sloping?
 For “normal goods” demand curve is downward sloping because the
quantity demanded falls as prices rise (holding all other conditions constant)
 Note movements along the demand curve represent changes in quantity demanded due to
changes in price while shifts in the demand curve represent changes in demand.
 The demand curve is the Marginal Benefit curve that shows how much each
“additional unit” of a service is worth.
 Later you will learn that the supply curve represents the marginal cost of a good.
 The “slope” (e.g. steepness) of the demand curve is determined by the
sensitivity of consumers to the price of the good (often called price elasticity)
4
What Leads to A Shift in Demand Curve
 Factors that Lead to An Increase
in Demand (shift D curve right)
 Increase in Consumer income
 Price of related goods ( increase P
substitutes or decrease P of
complements)
 Changes in consumers tastes and
advertising
 Consumer Expectations about
future prices (e.g. expect prices to
increase in future)
5
What Determines the Demand Curve
 Consumer choice theory explains why consumers behave or react in certain





ways to changes in various factors to “maximize their utility”
Utility is illustrated using “indifference curves” showing a consumer’s
preferences across different good.
An “indifference curve” shows what combination of two good that yield
equal satisfaction.
Slope (steepness) of indifference good shows the “marginal rate of
substitution.” This is the amount of one good that must be sacrificed to get
the other good.
Diminishing Marginal Utility: At some point, if you keep consuming a good,
your utility diminishes (e.g. eating too much candy)
Consumption is constrained by both the price of the good and their income.
6
What Does Price Elasticity Mean?
 Elasticity measures how sensitive quantity demanded is when prices
change.
 Mathematic Formula:
 Price elasticity = % change in quantity/% change in demand
 Graphically:
 The slope (steepness) of the demand curve indicates elasticity of demand
 The steeper the slope the more inelastic demand is
 The flatter the slope the more elastic demand is
7
What Does Price Elasticity Mean?
“Price Elastic”
 Quantity demanded will change by more than change in price. This
indicates that consumers are “very sensitive” to price changes.
“Price Inelastic”
 Quantity demanded will change by less than the change in price
 *** Many health care goods are price inelastic and not sensitive to price
changes****
“Unit Elastic”
 Quantity demanded changes by the same percentage as price changes
8
When Demand is Price Elastic
 High P elasticity (>1) means that
consumer are more “sensitive” to
changes in price
 A small change in price leads to a
larger change in quantity
 Can you think of healthcare
goods that are price elastic?
9
When Demand is Price Inelastic
 Low P elasticity (P is inelastic)
and < 1 means consumers are “not sensitive” to changes in price  Inelastic: % change in Q < % change in P  Can you think of healthcare goods and services that are price inelastic? 10 Elasticity in the Extreme  Perfectly Inelastic: Quantity demanded does not change when price changes (e.g. lifesaving drugs)  Perfectly Elastic: At a certain price quantity demanded is infinite, if a firm increased price by 1% all of its demand would evaporate (e.g. good with large number of substitute) 11 Impact of Substitute Goods on Sensitivity of Demand to Prices  A “substitute” is a good used in lieu of another good that functions similarly or provides the same service.  The availability of a “substitute” for a good impacts the price sensitivity or elasticity  Demand for a product will be “relatively elastic” (more sensitive to price) if there are a large number of substitutes for the product  “Antacids” Example: There are many different substitutes for antacids. Demand for “Tums” may decrease if price of Tums increase and price of Prilosec decreases. 12 What are Complementary Goods  A “complement” is a good used in conjunction with another good.  Example: Gauge and Tape used to cover a wound. If you use gauge you also need tape to hold the gauge to the wound.  An increase in the price of the complementary good, reduces the demand for the good you are focusing on. 13 Other Determinants of Price Sensitivity (Elasticity)  Share of Consumer’s Budget  The larger the share of a good is of a consumer’s budget (like food), the more sensitive (elastic) the consumer will be to changes in price  Luxury Goods vs. Necessity  The more discretionary a good is (like a diamond necklace), the more sensitive (demand is more elastic) a consumer is to prices  The more a good is a necessity (e.g. insulin for a diabetic patient), the less sensitive (demand is more inelastic) a consumer is to prices 14 Price Elasticity and Total Revenue  Total Revenue = P times Q  Thus, elasticity or sensitivity of demand to price impacts impact on total revenue  TR will decline by a smaller amount when prices rise and demand is inelastic (see next slide) 15 How Elasticity Impact Total Revenue 16 Need to See Supply Curve for Equilibrium Price  Demand is only one component of analysis  As price changes, producers (suppliers) are willing to produce more or less  Need to overlay supply curve on demand curve to identify equilibrium price  We will discuss more about supply and its characteristics in Week 4 and Week 5 17 Unique Characteristics of Demand for Health Care  Investment Component as well as Consumption Component  Demand for health care tends to be more inelastic (reasons discussed below)  Information is not readily available about quality of care and care plan (e.g asymmetric information) 18 Health Care as An Investment  Health care has both two characteristics: 1) Consumption good, makes consumer feel better 2) Investment commodity component– a state of health will determine the time available to the consumer to work and for leisure  Example Of Investment Component:  A decrease in the number of sick days will increase the time available for work and leisure  The Return to Investment on health is the monetary value of the decrease in sick days  Implications for Demand – Include a “time” component that impacts demand for health care 19 Health Care As An Investment (Cont.)  Investment in health care is costly as consumers must trade off time and resources devoted to health, such as exercising at a local gym, against other goods.  Optimal Level of Investment in Health is:  Marginal benefit = Marginal cost  Because as we age, health depreciates so it becomes more costly to attain the same level of health capital or health stock as one ages  Age also decreases the marginal benefit of health  Optimal health investment will therefore decrease as we age Source: Michael Grossman (1972), “On the Concept of Health Capital and the Demand for Health” Journal of Political Economy, 80(2): p 223-255 20 The Elasticity of the Demand for Health Care  Existence of health insurance reduces the exposure of insured individuals to the price of health care  Reduces the elasticity of demand for health care services  Out-of-pocket costs play a larger role in influencing patients  Big push for “high-deductible” health plans intended to increase the price sensitivity of individuals when consuming health care services  For the uninsured, the “need” for care reduces sensitivity to prices 21 Asymmetric Information in Health Care  Doctors are better informed about health care and the health care needs of their patients  A “principle-agent” relationship develops in which the doctor (the agent) makes available their specialist knowledge to the principle (the patient)  Problem is end up with “supplier induced demand”  Doctors act as imperfect agents (failing to maximize the patients’ utility) in order to maximize their own utility. Hard to measure this.  Example: Doctor owns the lab, he has incentive to order blood tests to increase the profit of the lab. A number of laws exist to prevent these relationships. Source: Kenneth Arrow (December 1963), “Uncertainty and the Welfare Economics of Medical Care,” American Economic Review, 53 (5) p.941-973 22 In This Week’s Readings  Be sure to read and understand the article in this week’s reading: Monitoring Health Spending Increases: Incremental Budget Analyses Reveal Challenging Trade-offs by Hartman, et al.  After reviewing this article what is the key trade-off our nation faces as the share of our nation’s GDP is spent on an ever-increasing health care budget?  Can health care increase indefinitely at current rates?  Why or why not? 23 ... Purchase answer to see full attachment

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