I
need the following question answered: 300 Words
Topic
: Where are the Costs
and What Should be Cut?
Question
- Nearly all healthcare economists agree that
the future costs of healthcare must be controlled to protect the economy.
Given the 70% to 80% of all healthcare expenditures go to hospitals and
doctors, it seems logical that reduction in those payments is most likely to
control costs. What are the impacts of cutting hospital and physician
reimbursements?
Economics of Healthcare Economics of Healthcare Survey of Healthcare Administration HCA 5013 James Hess, Ed.D. Associate Professor – Family Medicine * The Problems of Health Care Health care is something which touches all of our lives. Everyone visits the doctor and many of us have been treated in a hospital Yet health care seems to be in almost permanent crisis – there are shortages of hospital beds and providers Why is health care such a controversial area? Why is there never enough money to give us the level of health care we want? * Asking people what they think Ann Bowling of the King’s Fund conducted a detailed survey of the residents of a large metropolitan area. Some responses taken from the survey include: * “I think life saving treatments for children are most important. We've had our time now” * “If a child is really unable to survive it really does seem a bit naive to plough a lot of money into it” * Asking people what they think * “If people don’t lead healthy lives why should the health agencies waste money on making them aware” * “The most important thing is to cure people who have life threatening illness and then help people to lead a good life” * “Instead of curing it prevent it. There’s no guarantee that you can cure someone so it is better to prevent illness” * The Emotions of Health Care Economists would argue that the problem with these responses is that they mix opinions and value judgments with facts. A statement such as “Specialist in heart-lung transplants resigns in protest over lack of funding” is a positive statement. It can be shown to be true or false and is not dependent upon the value system of the observer. * The Emotions of Health Care In contrast, “Health care is a basic right and should be provided free” is a normative statement. It cannot be proved true or false: our view of it depends on our value system. One of the things which makes the debate over the provision of health care difficult to resolve is that positive and normative issues are very much intertwined Sorting out fact from opinion is a first step but it does not explain why there are not enough beds in hospitals or why access might be restricted. To analyze this we need to explore the idea of scarcity * Scarcity and Wants Changes in the age structure Aging population and demographic shifts Increasing real incomes Greater disposal incomes Increased sub-specializations Improvements in medical technology Advances in treatment methods have increased need for access, i.e., oncology, dialysis, interventional radiology * Scarcity and Resources The other side of the scarcity equation relates to the finite nature of resources. The term resources covers all inputs used to produce goods and services. Economists also refer to these as the factors of production. They are divided into four categories: 1. land - the physical resources of the planet including mineral deposits 2. labor - human resources in the sense of people as workers 3. capital - resources created by humans to aid production, such as tools, machinery and factories 4. enterprise - the human resource of organizing the other three factors to produce goods and services. All four factors are at work in the production of healthcare. Since the available quantity of these factors is limited, there is some maximum quantity of health care that can be produced at any one time. * Scarcity and Resources Scarcity has two sides: the infinite nature of human wants and the finite or limited nature of resources available to produce goods and services. We can explore this idea theoretically by using what economists call a Production Possibility Frontier (PPF). * Production Possibility Frontiers Let us start by looking at the production of health care within a single hospital and in particular at the ability of a specific hospital unit to carry out surgical procedures such as heart bypass operations. Suppose the heart bypass unit has 10 surgeons working in it, and assume that the only factor which affects the quantity of operations provided is the number of surgeons assigned to them. If all the surgeons are assigned to heart bypass operations then the unit can carry out 50 heart operations per week. If all the surgeons are assigned to other operations, the unit can carry out 50 of these other operations per week. * Efficiency A healthcare system is judged to be efficient if it is producing the right quantity of the different combinations of healthcare activities that society would want, and that it is doing this at the lowest possible cost. This means we can refine the concept of efficiency further to discuss allocative efficiency and technical (also known as production) efficiency. Production Possibility Frontier * Marginal Rates of Transformation What determines the shape of the graph? Look at the graph. The shape reflects the fact that if we transfer one surgeon to heart bypass from other operations, we get more heart bypasses but we lose other operations, i.e. the trade-off between the twopossibilities is multidimensional. This is what is called the marginal rate of transformation, MRT. Efficiency The definition of efficiency used by economists is named after the Italian economist, Vilfredo Pareto, who formulated it. He said that an allocation of resources is efficient if it is impossible to change that allocation to make one person better off without making someone else worse off. Obviously it would be possible to re-organize the hospital’s resources to increase the number of other operations without having to reduce the number of heart operations. In fact we can determine whether we are getting a maximum combination possible, given the resources we have based upon the reimbursements for different procedures Efficiency If we choose we can increase the number of any surgical procedure, but we do so at the expense of the other operations. Moving from one type to another or different mixes of procedures involves a cost, which economists call an opportunity cost. Opportunity cost is defined as the benefit given up by not choosing the next best alternative. Service Determination Rationing of Services Public owned facilities and public employed physicians Socialized medicine initiatives Free market approach Discussion of social and market driven forces Markets and Supply Seeking to maximize profits leads each physician to want to sell more care at higher prices. There is a reliable and predictable positive relationship between price and quantity supplied. Formally, supply is defined as the quantity of a good or service that a population of sellers is willing and able to sell at everyconceivable price. This positive relationship is shown graphically by economists as a supply curve Markets and Supply If the price changes there is a movement along the supply curve. When the price of treatment rises the theory is this might influence more people to become physicians Conversely, a drop in treatment reimbursements would negatively effect physician supply Given that more physicians are becoming employed by hospital groups, how does this impact the supply curve? Supply and Demand Economic principles tell us that as the number of physicians decreases, demand for those services will increase As demand increases the rate of reimbursement will increase, presumably creating more physicians As more physicians become available the demand for services will decrease, creating excess supply and lower reimbursements Supply and Demand This cyclical rate of supply and demand is inherent to the market system. These forces acting together to balance one another is the basis of equilibrium theory and presupposes that the market will balance itself. While this is a natural economic event it makes healthcare a volatile commodity Pricing Factors In a free market environment prices are presumed to float on their own based upon supply and demand. Are there other factors at play in the pricing of health care products? What are those factors? Is healthcare in our country a real market driven system? Physician Influences on Markets David Green looked at the performance of the health care market in the US and came to the conclusion that the introduction of a more effective free market in the early 1980s resulted in the emergence of a flexible, cost effective system. Alleged problems often associated with the American health care system, such as rapidly rising costs and doctors providing patients with unnecessary surgery, were the result of a failure of the free market to operate. Physician Influences on Markets Green argued that the problems of US health care in the 1960s and 1970s were the result of the doctors’ monopoly power over supply. The doctors achieved this partly by restricting entry to the medical profession through limits on entry to medical schools and partly by keeping consumers in ignorance. The American Medical Association (AMA), “was able to keep a tight grip on the number of doctors trained and hence to limit the supply of doctors in active practice.” They also maintained the monopoly by preventing doctors from advertising which prevented consumers from gaining the information they needed to make a rational market choice. Physician Influences on Markets This monopoly power was fatally undermined in 1982 when the US Supreme Court outlawed the AMA’s ban on advertising. The Federal Trade Commission had already enforced a number of other pro-competition policies on the doctors such as making price fixing by the Michigan State Medical Society illegal. Combined with a significant expansion in the number of doctors, this led to the effective emergence of competition between them. Green argues that the emergence of this effective competition in the health care market has led to exactly the results predicted by the free market model. Physician Influences on Markets Since Green, new types of health care purchaser have grown up in the US, called Health Maintenance Organizations (HMOs). These have more bargaining power over doctors on behalf of the patients who are insured with them. This is seen by many commentators as a further example of the free market working, although others have argued that HMOs restrict patients’ access to doctors in order to hold down costs. Free Market? Most people believe that you cannot buy and sell health care like other goods and services. They believe that health care is different. Economists approach the same question rather differently. They analyze the question of health care and markets from a theoretical perspective. The main theory of use is called market failure. In theory, markets produce the goods and services we want in the right quantities and at the lowest possible cost. This is why markets are so powerful. But in the real world markets do not always work in the way theory predicts. It is possible for a free market to produce an inefficient result - i.e. the market fails. Perfect Competition An efficient free market requires producers to be operating under conditions of perfect competition. This requires a stringent set of conditions - perfect information, many buyers and sellers, a uniform product and freedom of entry and exit - which ensure that firms are price takers, producing for the lowest possible cost in the long run and only earning normal profits. If producers do not operate in this way and, in particular, if they have a significant power to influence price or the total quantity being produced, then the market will fail. Doctors and other suppliers of health care often have this power. Risk and Uncertainty If we are going to buy health care in a free market, then we have to have enough money to pay for it. But health care is expensive and we cannot predict when we are going to be ill. What makes this worse is that postponing buying health care is often risky. So we face the problems of risk and uncertainty. The market response to this problem is to develop an insurance market to remove the uncertainty and risk from health care spending. Risk and Uncertainty We pay an agreed amount of money per year whether we need health care or not. But then, when we need care, the insurer pays the bills, however large they are. So a free market in health care requires an effective health care insurance market. Unfortunately, the health care insurance market itself is often inefficient. Moral hazard and adverse selection both cause significant market failure. Moral Hazard Having insurance can change the way in which we act. Imagine you are at work you remember that you have left your car unlocked. If you have comprehensive insurance which will compensate you against any loss you are much less likely to carry on watching the film. Your attitudes have been changed by the fact that you have insurance - this is what economists call moral hazard. Moral hazard can affect any insurance market but is a particularly serious problem for health care insurance. Moral Hazard Consumers who are insured have an incentive to over-consume health care or not bother to follow a healthy lifestyle or to get preventative checkups. As a result when they do fall ill, the cost of treatment is higher than it would otherwise have been. Doctors too are affected by moral hazard. They know that the costs of treatment are covered by insurance so the temptation is to over-treat and over-prescribe medicines for their patients. Moral hazard thus leads to an inefficiently large quantity of resources being allocated to health care. Adverse Selection A company selling health care insurance has to estimate the level of risk accurately . This is difficult because they will not have complete information on the risk status of the person they are insuring. One solution is to set the premium at an average risk level. But this makes the policy expensive for low risk customers who therefore may choose not to buy the insurance. The process whereby the best risks select themselves out of the insured group is called adverse selection. Adverse Selection Insurance companies know that