Advanced economics

  • Created by: Frankgrim
  • Created on: 13-05-19 10:11


  • Factor accumulation is not the key 
  • Technology diffuses quickly, so theoretically is unlikely to explain national variation 
  • Profits and prices in the health sector are important – the US has significant monopoly power 
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Newhouse 1977

  • Find r^2 of 0.92 when explaining health spending using GDP 
  • Finds healthcare is a luxury good (e of 1.3)
  • Contradicts micro level of elasticity, which are lower than 1 
  • Uses cross sectional macro OECD data from 1970s 
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Newhouse 1992

  • Measures the size of factors attributing to growth in health spending – 0.25-0.5 

    • Growth of insurance 
    • Aging 
    • Income growth (elasticity of 0.4) 
  • Assumes that the unexplained residual is the result of growth in tech 
  • This means there is not such a large welfare loss from rising spending – making use of new opportunities 
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Smith, Newhouse et al. 2009 – why does health spen

  • Increasing medical technology accounts for 0.25-0.5 of growth 
  • Income effect – macro level elasticity 1, pure income effect of 0.6-0.9. Accounts for  0.25-0.5 
  • 5-20% of total growth due to increases in prices 
  • 10% due to expansion in insurance   
  • 'income plays a critical role, primarily through the actions of governments and employers on behalf of pools of consumers 
  • Dynamic moral hazard – the decision to pay and the decision to use do not occur at the same time – innefficiently broad application of new technologies 
    • Incentive for over use can be reduced using DRGs, rather than fee for service 
  • 'the rate of technological innovation is influenced by the size of the market, which in turn is influenced by income and insurance' - aggregation issues
  • Difference between micro and macro is insurance
    • Households pay for care net of insurance
    • Countries have mechanisms to adapt spending to match incomes  
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Baumol – The Cost Disease

  • Productivity growth is intrinsically low for health spending  
  • It's a service industry 
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McGuire, Parkin, Yule – Is Healthcare a luxury goo

  • Suggests healthcare is a staple, not a luxury good, but not statistically significant from 1 
  • Estimate sensitive to functional form  - studies use linear
  • Using exchange rates rather than PPP has issues because they are not market specific - growth in prices varies
    • spending elasticity not income elasticity
  • Relies on using micro level models to understand macro data – but there's no reason to believe that the two act in the same way  
  • micro OVB - income distribution
  • macro OCB - government preferences/structure
  • Using PPP leads to a staple
  • intepretation
    • relationship is not causal
    • R^2 is not causal
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Chandra and Skinner - Tech Growth and Health Spend

  • US has higher levels of spending, but growth not out of line 
  • Healthcare productivity depends on: 

    • Heterogeneity of treatment effects across patients 
    • The shape of the health production function 
    • The cost structure of procedures such as MRIs with high fixed costs and low marginal costs 
  • Three types of medical technology 

    • Highly cost effective interventions with little chance of overuse – ART 
    • Treatments highly effective for some but not for all  
    • Grey area treatments with uncertain clinical value such as ICU days 
  • Adopting 3 and too much of 2 leads to high spending growth (as is the case in the US) 
  • Some technology induced growth is spending is welfare enhancing, some is not 
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Weisbrod 1991 Quadrilemma

  • Three key changes 
    • Massive expansion in health technology in US 
    • Expansion of insurance coverage (22% - 73% 1960-84, and greater breadth) 
    • Personal health expenditures have significantly increased – as %  
  • The expansion of health care insurance has paid for the development of cost increasing technologies and these have expanded demand for insurance 
  • Claims 

    • R and D is affected by method of payment for available technologies (I.e. affected by expected utilisation, which is affected by insurance) 
      • DRGs encourage providers to be cost conscious 
    • Demand for insurance depends on available technology 
    • Growth in spending is a product of the interaction between insurance and tech 
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Ellis and Mcguire

  • Clinicians decide quantity of services to provide, to trade off patient benefit and hospital surplus 
  • Forms of contract 

    • Full cost reimbursement: clinicians maximise patient benefit 
    • Prospective payment: clinicians are sensitive to cost, if they weight cost and treatment benefit equally (no private social benefit), social optimum is obtained, otherwise, under provision 
    • Cost sharing: correct fraction can induce optimum trade off between cost and benefit 
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Chalkely and Malcomson when demand does not reflec

  • Trade off between cost and one dimensional quality  
  • Demand does not reflect quality 
  • Treatment benefit from quantity and quality 
  • Provider motivation 

    • Fully benevolent provider – block and cost and volume can achieve optimal 
    • Partially benevolent providers – some degree of cost sharing is optimal  
    • Full self interest- first best not possible -  the second best can be achieved by cost per case 
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  • Demand reflects quality 
  • An optimal trade off between cost and quality can be achieved via prospective payment when all patients are identical  
  • When a provider cannot refuse patients who require high treatment costs or discriminate patients by qualities 
  • optimally designed prospective payments can implement the efficient quality and cost reduction efforts, but cost reimbursement cannot induce any cost incentive 
  • When the provider can refuse expensive patients, implementation of the first best requires a piecewise linear reimbursement rule that can be interpreted as a mixture of pure prospective payment and pure cost reimbursement.  
  • Adjusting prospective payment may not be effective, it alters cost reduction incentive 
  • Quality discrimination can address the issues of dumping under prospective payment 
  • Screening for dumping and cherry picking requires effort 
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Propper 1996 - market power

  • Measures market power of providers according to markup in the NHS internal market 
  • It was found that prices were not solely related to cost 
  • Some evidence that prices were lower in more competitive areas 
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Chalkely and Malcomson – unmonitored quality

  • If quality has one dimension, a hybrid of block payment and cost per case can be optimal 
  • Inefficient to treat all those that demand healthcare, consumers are not sensitive to price and supply can be constrained 
  • In this setting, price for quantity schedules will lead to quality being too low, even when costs are known  
  • When capacity is constrained, it may be beneficial to base payments on the waiting list, as this is a further indicator of quality 
  • If quality is multi dimensional and not correlated in the same way that the payer preference is correlated, even this will be inefficient 

    • There are more dimensions then instruments 
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  • Some providers might have altruistic tendencies, and if altruism is high enough, there may be a negative relationship between competition and quality  
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Staiger, Spetz and Phibbs - Traditional Monopsony

  • Use change in pay in VA hospitals as an instrument for analysing competitiveness of nurse pay 
  • Labour supply to individual hospitals is inelastic in short run – short run monopsony, high wage setting power 
  • Localised competition  
  • Marginal product high above wages 
  • Previous empirical findings 

    • Persistent shortages 
    • Increases in minimum wage can increase employment  
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  • Find that labour supply is not responsive to wages in the short run 
  • Vacancy rate is high  
  • Special features 

    • Female dominated – career breaks 
    • Second earners 
    • No close job substitutes for skills 
    • Non wage factors affect attachment to job – treatment benefit  
  • Wage increases are likely to be inneffective in increasing labour supply  
  • Increasing intrinsic motivations by altering conditions is likely to be more effective  

    • Promotion and training 
    • workload 
  • Spouse wage matters 
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Tommaso, Strom and Saether

  • Labour supply is inelastic  
  • Build a model that takes into account employment options and work related utility, not purely as a result of wage 
  • Compares willingness to work shifts Vs daytime and suggests the differential wage is unnecessarily high  
  • Find income elasticity with respect to different types of nursing (e.g. shift Vs day) 
  • Job satisfaction is more important 
  • norway 
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Hirsch and Schumacher – New Monopsony

  • 'firm labour supply is upward sloping, independent of market structure' - I.e. concentration 
  • Wage level and concentration are not correlated in the US 
  • Wage decline with increases in hospitals concentrationn- suggests classic monopsony in the short run, but not the long run  
  • Wage is not found to be correlated with mobility – new monopsony 

    • RNs display greater inter employer mobility than the general population 
  • Therefore, market for RNs is not a new or classic monopsony 
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Heyes – nursing as a vocation (sticky upwards?)

  • Nursing is a vocation, increasing the wage attracts lower quality candidates 
  • Vocation 

    • Intrinsic motivation 
    • Willing to exceed contract  
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  • Healthcare is an individual necessity and a national luxury 
  • Individuals purchase insurance, within the pool, their level of spending is related to need 
  • Most variation at the individual level is due to need  
  • Units of observation must correspond with the scale that decisions are made  
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  • the hospital is multi product 
  • It can shift focus from some areas to other areas 
  • Uses PROMs instead of mortality as its relevant to more patients- based on gains 
  • Find that the introduction of patient choice of hospital may have had a negative effect on elective surgical quality 
  • Choice leading to quality competition implies patients can judge quality 
  • Did not find a correlation between AMI and PROMS 
  • IV 
    • Sicker patients may choose higher quality hospitals because quality is more important to them 
    • A high quality hospital may attract patients from farther afield, thus giving it a larger market radius, and making it appear more competitive 
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  • AMI mortality is the best and most common measure of quality 

    • Benefits 

      • Not subject to gaming 

      • Clear link between quality of treatment and outcomes 

      • Emergency procedure, taken to nearest hospital with no choice 

      • Correlates well with other measures of quality  

    • Costs 

      • Not relevant to everything hospitals do 

  • Mortality fell during competition and fell more in more competitive areas 

  • Costs did not rise 

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  • Some providers might have altruistic tendencies, and if altruism is high enough, there may be a negative relationship between competition and quality  
  • Competition will reduce the focus on quality 
  • Under competition – treat fewer patients – less treatment benefit and less revenue – less incentive to invest in quality 
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  • Providers facing more rivals had higher mortality, before the introduction of choice 
  • After the introduction of choice, this pattern was present, but smaller 
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Carol Propper - competition and management

  • Do hospitals that face more competition have better management practices? 
  • Use marginal constituencies as an instrument 
    • There was an association 
  • Theory 
    • Competition based on a fixed price will improve quantity 
    • Competition where providers set their own prices and undetermined effects 
  • Effects depend on the features of markets 
  • Market structure may be endogenous to quality 
    • New entrants may to choose to locate in areas where quality is poor 
  • A large portion of healthcare uses are elderly and frail 
  • Evidence from the UK 
    • In the UK, information has been made available to help people choose 
    • Evidence that people choose GPs on quality, as well as location 
    • When competition was introduced, demand for high quality hospitals increased  
    • Mortality fell and quality rose, they fell more in areas where there was more choice 
  • Mergers and consolidation don't improve quality and increase spending 
  • Competition based on fixed prices improves quality 
  • There is a lack of understanding of how decision makers respond to competition 
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Competition timelines

US timeline

  • 1960s and 70s 

    • Cost reimbursement by providers 

    • Competition on quality 

  • 1980s 

    • Prospective payment 

  • Post 1980s 

    • Managed care 

    • Capitation payments per individual 

UK timeline 

  • 1990s – internal market 

  • 2000s – patient choice, any willing provider, price negotiation replaced with prospective payment 

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Kessler and McLellan

  • Switch from cost reimbursement in US 
  • Measure market concentration using the distances patients live from hospitals 
  • Measure quality using AMI mortality 
  • Mortality rates were higher in more concentrated markets 
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Kessler and Geppert

  • Low risk patients in less competitive markets receive more intensive treatment than in more competitive markets, but have similar health outcomes  

  • High risk patients in less competitive markets receive less intensive treatment than in more competitive markets and have significantly worse health outcomes 

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