Introduction to Health Economics PDF

INTRODUCTION TO HEALTH ECONOMICS DLBIHMIHE01 INTRODUCTION TO HEALTH ECONOMICS MASTHEAD Publisher: IU Internationale Hochschule GmbH IU International University of Applied Sciences Juri-Gagarin-Ring 152 D-99084 Erfurt Mailing address: Albert-Proeller-Straße 15-19 D-86675 Buchdorf [email protected] www.iu.de DLBIHMIHE01 Version No.: 001-2024-0827 Sergio Flores Cover image: Created with Midjourney on behalf of IU, 2024, using the prompt: "Hand of doctor with stethoscope and blue graph up, hospital background with health care icons and financial graphs, healthcare market HD resolution photography --ar 16:9 --v 6.0". © 2022 IU Internationale Hochschule GmbH This course book is protected by copyright. All rights reserved. This course book may not be reproduced and/or electronically edited, duplicated, or dis- tributed in any kind of form without written permission by the IU Internationale Hoch- schule GmbH (hereinafter referred to as IU). The authors/publishers have identified the authors and sources of all graphics to the best of their abilities. However, if any erroneous information has been provided, please notify us accordingly. 2 TABLE OF CONTENTS INTRODUCTION TO HEALTH ECONOMICS Introduction Signposts Throughout the Course Book............................................. 6 Basic Reading.................................................................... 7 Further Reading.................................................................. 8 Learning Objectives............................................................... 9 Unit 1 Health, Economics, and Health Economics 11 1.1 The Demand for Health and Healthcare........................................ 12 1.2 Health Production: Efficient Use of Resources.................................. 16 1.3 The Costs of Healthcare...................................................... 19 1.4 Health and the Market........................................................ 22 1.5 Supplier-Induced Demand and Agency......................................... 26 1.6 Market Failure and the Role of the State........................................ 28 Unit 2 Forms of Delivery of Medical Care 31 2.1 The Principal-Agent Relationship as the Key Problem............................ 32 2.2 The Physician as a Supplier of Medical Services................................. 34 2.3 Managed Care and Alternative Forms of Provision of Care........................ 37 Unit 3 The Hospital as an Economic Agent 43 3.1 The Hospital as a Productive Unit.............................................. 44 3.2 Hospital Cost Functions...................................................... 47 3.3 Hospital Cost Inflation........................................................ 53 Unit 4 Health Insurance 55 4.1 The Demand of Insurance..................................................... 56 4.2 The Supply of Insurance...................................................... 57 4.3 The Case for Moral Hazard.................................................... 59 4.4 Asymmetric Information and Adverse Selection................................. 60 3 Unit 5 Economic Evaluation 63 5.1 Theoretical Bases of Economic Evaluation...................................... 64 5.2 Measuring Costs............................................................. 67 5.3 Measuring Benefits........................................................... 69 5.4 Practical Steps in Economic Evaluation........................................ 75 5.5 Economic Evaluation and Resource Allocation.................................. 76 Unit 6 Distribution 81 6.1 Equity in Health and Healthcare............................................... 82 6.2 Interdependent Utility and Equity............................................. 87 6.3 Benefit Incidence Analysis.................................................... 88 Backmatter List of References................................................................ 92 List of Tables and Figures......................................................... 98 4 INTRODUCTION WELCOME SIGNPOSTS THROUGHOUT THE COURSE BOOK This course book contains the core content for this course. Additional learning materials can be found on the learning platform, but this course book should form the basis for your learning. The content of this course book is divided into units, which are divided further into sec- tions. Each section contains only one new key concept to allow you to quickly and effi- ciently add new learning material to your existing knowledge. At the end of each section of the digital course book, you will find self-check questions. These questions are designed to help you check whether you have understood the con- cepts in each section. For all modules with a final exam, you must complete the knowledge tests on the learning platform. You will pass the knowledge test for each unit when you answer at least 80% of the questions correctly. When you have passed the knowledge tests for all the units, the course is considered fin- ished and you will be able to register for the final assessment. Please ensure that you com- plete the evaluation prior to registering for the assessment. Good luck! 6 BASIC READING Guinness, L., & Wiseman, V. (2011). Introduction to health economics (2nd ed., pp. 7–158). McGraw-Hill Education. http://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?dir ect=true&db=cat05114a&AN=ihb.50221&site=eds-live&scope=site Glied, S., & Smith, P. C. (Eds.). (2011). The Oxford handbook of health economics. Oxford University Press. Chapters 18 and 28 7 FURTHER READING UNIT 1 Mwachofi, A., & Al-Assaf, A. F. (2011). Health care market deviations from the ideal market. Sultan Qaboos University Medical Journal, 11(3), 328–337. http://search.ebscohost.co m.pxz.iubh.de:8080/login.aspx?direct=true&db=edsdoj&AN=edsdoj.87de0556d9e451c a495dbbad5c9e17c&site=eds-live&scope=site UNIT 2 Glickman, S. W., & Peterson, E. D. (2009). Innovative health reform models: Pay-for-per- formance initiatives. The American Journal of Managed Care, 15(10), 6. http://search.e bscohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=cmedm&AN=20088634&si te=eds-live&scope=site UNIT 3 Chletsos, M., & Saiti, A. (2019). The economics of hospitals. In M. Chletsos & A. Saiti (Eds.), Strategic management and economics in health care (pp. 151–177). Springer. http://se arch.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=cat05114a&AN=ihb. 51870&site=eds-live&scope=site UNIT 4 McPake, B., Normand, C., Smith, S., & Nolan, A. (2020). Health economics: An international perspective. Taylor & Francis Group. Chapter 14 http://search.ebscohost.com.pxz.iubh. de:8080/login.aspx?direct=true&db=cat05114a&AN=ihb.51387&site=eds-live&scope=s ite UNIT 5 Rudmik, L., & Drummond, M. (2013). Health economic evaluation: Important principles and methodology. The Laryngoscope, 123(6), 1341–1347. http://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=edb&AN=87708799&site=eds-live&scop e=site UNIT 6 McPake, B., Normand, C., Smith, S., & Nolan, A. (2020). Health economics: An international perspective. Taylor & Francis Group. Chapter 25 http://search.ebscohost.com.pxz.iubh. de:8080/login.aspx?direct=true&db=cat05114a&AN=ihb.51387&site=eds-live&scope=s ite 8 LEARNING OBJECTIVES While health itself cannot be traded on a market, products and services that produce health are traded on a number of different markets. Competition between providers and different provider payment methods (e.g., fee-for-service, capitation, and pay for perform- ance) create financial incentives that influence provider behavior. Pre-payment systems are common (e.g., tax and public and private health insurance), meaning that healthcare is rarely fully paid for by the consumer at the point of use. Severe market imperfections, such as information asymmetries between patients, provid- ers, and payers, mean that traditional economic models are of little to no use when ana- lyzing health financing and healthcare markets. Several mechanisms – mostly in the form of financial incentives – have been devised to help correct these imperfections from a sin- gle actor perspective. Furthermore, these failures warrant government intervention to cor- rect them from a public health perspective. This Introduction to Health Economics will enable you to describe and discuss the analy- sis of economics, the production of health, and the financing and production of healthcare in terms of efficiency. 9 UNIT 1 HEALTH, ECONOMICS, AND HEALTH ECONOMICS STUDY GOALS On completion of this unit, you will be able to... – use economic concepts to analyze health production in relation to efficiency and mar- ket conditions. – identify the main drivers of costs in healthcare. – understand the dynamics of market forces and failures in the healthcare sector. – recognize the role of the government in the production of health. – analyze health as an economic good. – critically reflect on the approach taken by economics regarding the determinants of health. 1. HEALTH, ECONOMICS, AND HEALTH ECONOMICS Case Study One evening, Olga decides to go shopping for some ingredients to host a dinner for a cou- ple of friends. Being a budget-conscious student, she carefully looks through all the differ- ent brands and sizes of each of the products with the goal of choosing the best ingredients while saving as much money as possible. While shopping, she recalls that her friends enjoy drinking a particular brand of wine and picks up three bottles. She also remembers that she is running low on detergent and dish soap and decides to buy them. However, she realizes close to the register that if she takes all the extra items she will not be able to afford some of the necessary ingredients for her recipe. Reluctantly, she leaves two wine bottles behind and buys everything else she needs without going over her budget. The next day, Olga checks her receipts and reflects on how this type of trade-off decision applies to almost everything in life. She ponders what would happen to the world if every- one could always buy everything that they wanted and decides to read about how the market works. As a public health student, she wonders how much these choices and dynamics apply to the healthcare sector. 1.1 The Demand for Health and Healthcare Health was defined by the World Health Organization (WHO) constitution of 1948as “a state of complete physical, mental and social wellbeing and not merely the absence of dis- ease or infirmity” (p. 1). Humans intrinsically value maintaining physical and mental abili- ties while avoiding or alleviating diseases since it allows individuals to adequately cope with the demands of daily life. This implies that fluctuations of health can manifest in a variety of ways and at various stages of life, depending on when and by whom they are experienced. For example, a woman of fertile age trying to have children experiences a health context that is vastly different to that of a man in his late seventies. While the for- mer is interested in securing safe and affordable care to ensure the best chance of having healthy children, the latter is more likely to be invested in managing potential chronic dis- eases and maintaining independence. Health is determined by the life continuum, as well as many other contextual factors, as visualized in the figure below. Dahlgren and Whitehead (1991) describe the relationship between an individual, their environment, and disease. While the innermost layer is com- posed of factors we cannot modify (such as our genes), the rest of the layers are made of 12 influences on health that can be modified, such as exercise and diet choices; presence and composition of family and community networks; and broader socioeconomic, cultural, and environmental factors (Dahlgren & Whitehead, 1991, as cited in Jinks et al., 2010). Figure 1: Main Determinants of Health I Source: Sergio Flores (2022), based on Dahlgren & Whitehead (1991). Sometimes the terms health and healthcare are used interchangeably. Nevertheless, it is important to draw a distinction: Health is the state of complete wellbeing and is the ulti- mate goal, whereas healthcare is the set of tools, services, and actions that improve or preserve health. Healthcare is the pathway to health. There is no inherent value in health- care by itself; however, the two concepts become codependent when we talk about health need and demand, which can only exist as a function of available healthcare. Health Need and Demand Health need is succinctly defined as the capacity to benefit from healthcare or wider envi- ronmental changes (Wright et al., 1998). These health needs can be either met or unmet, and that is mostly determined by the supply and demand of healthcare. Healthcare supply can be understood as the availability of resources needed to cover health needs, such as qualified personnel, facilities, or medications. The demand for health refers to what patients ask for. The interactions between the exis- tence of health needs and the supply and demand of healthcare lead to several scenarios that are always present in the healthcare sector and are vital to understanding the pecu- liar dynamics of the healthcare market. These interactions are illustrated using the Venn diagram below. Venn diagram This is a diagram style consisting of overlapping circles to illustrate the relationships between dif- 13 ferent variables. Figure 2: Venn Diagram of Health Need, Supply, and Demand Source: Sergio Flores (2022), based on Santana et al. (2021). Using the Venn diagram above as a guide, (Allin et al., 2010) distinguished the following five types of unmet need. Unperceived (by the patient) This is the type of need that the patient does not know they have and is therefore unable to report. A professional could potentially recognize this sort of need because of their training, but since the patient is unaware of it, they do not attempt to address it. Conse- quently, the health need goes unmet because the patient does not realize it is present. A case of asymptomatic early-stage cancer is an example of such a scenario. Space one in the diagram includes unmet and unperceived needs. Chosen (informed) This is the type of unmet need that is the result of a patient’s personal, informed choice. For example, a patient could be sick and fully cognitively aware but still choose to avoid any kind of treatment. This could be the case of patients reaching the end of their life and choosing not to continue with uncomfortable treatment that might only extend their life by a short time. Space one in the diagram also includes unmet needs by choice. 14 Unchosen This is the type of unmet need that happens as a result of factors out of the patient’s con- trol and is more related to healthcare supply. Some of these factors could include a short- age of available healthcare providers, difficult access to providers due to long commuting distances and/or high travel costs, and long waiting lists. Space two in the diagram includes these supply-constrained needs. Clinician validated This type of unmet need happens when the patient cannot obtain the healthcare they demand and see a need for (that the professional healthcare community would also agree on). Therefore, the individual’s need is (at least partially) unmet. An example of this is if a clinician commits some kind of malpractice or negligence to a patient aware of their health need. This type of unmet need is found in space two of the diagram. Subjective unmet expectations This type of unmet need results from the patient feeling that their health need was not met by the healthcare professionals. This unmet health need is subjectively perceived as such by the patient and can thus be considered a demand. This type of unmet need falls into space three of the diagram. As in the case of health needs, there are also three different types of demands exemplified in the previous figure and explained by Santana et al. (2021): 1. Need-based demand refers to demand for healthcare that is backed up by a health- care need, corresponding to spaces two and five. 2. Unnecessary demand is represented in the Venn diagram by spaces three and six. This category indicates demand that is not based on need. If care is provided even though no need is present, it is represented by space six. If care is not provided when demand not based on need is present, then it is represented by space three. Space three repre- sents demand that is visible in some form but is not based on need and does not result in more healthcare utilization. A clinical consultation appointment prompted by a desire for social interaction rather than a medical requirement is one example of this. Space six involves demand for healthcare services that are not based on need, such as unnecessary follow-up dental or outpatient appointments. 3. Avoidable demand can occur for a variety of reasons: 15 a) A need initially goes undetected, resulting in demand at a later stage of the illness, for example, when a person is diagnosed with late-stage cancer and needs sur- gery or chemotherapy that could have been avoided if the cancer had been caught earlier. b) Some healthcare demand may be preventable if it is caused by behavioral risk fac- tors. These include a sedentary lifestyle, smoking, and substance abuse, which may trigger conditions like coronary heart disease, type-2 diabetes, or lung can- cer. c) Displaced demand is also potentially avoidable. 3a and 3b cases are represented in space five in the Venn diagram. Proactive preventative care (space four), as well as other types of early intervention for unmet needs (space one), might result in the effective transfer of cases out of space five or could at least lower the share of resources needed to treat them. 1.2 Health Production: Efficient Use of Resources Health economics is the study of all resources, activities, and institutions within the healthcare sector that are involved in producing goods or providing services. Within any economy, resources are the inputs used to produce outputs. These are often categorized as factors of production by mainstream economic theory: labor, which includes all human resources capital, which includes all goods that are used in the production of other goods, such as machines, factories, and equipment land, which usually refers to natural resources, like water or wood When these resources (inputs) are combined to produce something, we call this process production. Good health is what we ultimately want to achieve as an outcome of health production; however, it can be hard to measure and define, with many composite meas- ures proposed, such as life expectancy, disability-adjusted life years (DALYs), and quality- adjusted life years (QALYs). Therefore, intermediate outputs are often used to measure production and supply in healthcare (i.e., births attended, fractures treated, and home vis- its provided). Because inputs (resources) are always limited, decisions about where to allocate them must be made. These decisions must prioritize allocations to create outputs that provide Utility the greatest utility. For each output that is successfully created, there are several unreal- This is the total satisfac- ized potential outputs, which are the trade-offs (Guinness & Wiseman, 2011). The produc- tion received from con- suming a good or service. tion function of healthcare is a tool that allows us to visualize how different outputs can be achieved while using a certain combination of inputs. Consequently, it also lets us see which amount and type of inputs produce the most outputs (Guinness & Wiseman, 2011). 16 Imagine you work in a hospital and have to decide how many surgeons to hire (variable input) to produce a set number of surgeries (output). Surgeons are not the only inputs needed; supporting staff, operating rooms, and equipment shall be treated as fixed varia- bles (but only for the sake of this example). Imagine the case as described in the table below. Table 1: Production Function for Healthcare Table: Hospital Example Number Total sur- Marginal Total sur- Total fixed Total cost Average of sur- geries output geon cost costs cost geons per- formed 1 2 2 50 200 250 125 2 4 2 100 200 300 75 3 7 3 150 200 350 50 4 9 2 200 200 400 44.5 5 11 2 250 200 450 41 6 13 2 300 200 500 38.5 7 14 1 350 200 550 39.3 8 15 0 400 200 600 40 9 15 0 450 200 650 43.3 10 16 0 500 200 700 46.7 Source: Sergio Flores (2022). When plotting inputs versus outputs on a graph, we obtain the production function, which is shown in the figure below. 17 Figure 3: Plot Showing the Health Production Function of Health Care, Using a Hospital Example Source: Sergio Flores (2022). Marginal analysis When facing these kinds of decisions, we make use of marginal analysis, which is an eval- This is the analysis of uation of the extent to which each additional unit of consumption or production of some- whether the costs of engaging in more of a par- thing yields further benefit or incurs greater loss (Guinness & Wiseman, 2011). As observed ticular unit of action can in this example, our first surgeon can perform two surgeries. As we add more surgeons, we produce enough benefits can produce more surgeries. The first additional surgeon hired produces two more addi- to compensate for the costs. tional (marginal) surgeries, and hiring a third would produce three more surgeries. The total cost for the hospital administrator rises correspondingly, but the average cost per surgery dramatically drops from 125 to 50 units per surgery with three surgeons. If the production function followed a linear trajectory, we could assume that the more sur- geons we hired, the more outputs we could obtain at a lower cost. However, in practice, this is not the case. Real-world scenarios have several constraints that would not allow that; in our example, the amount of supporting staff available for surgeries, the number of operating rooms present at the installations, the availability of pharmaceuticals, and the demand for surgeries are all factors that could reduce the number of outputs compared to inputs. The figures above show how the marginal benefit of each surgeon decreases, while the marginal cost stays the same or even starts to increase as more surgeons are hired. So, how many surgeons should be hired? As health economists, we want an optimal mix of inputs and outputs, ergo, the most efficient one. The situation in which at least one more input is required for a producer to create more output is referred to as technical efficiency (Guinness & Wiseman, 2011). The figure below illustrates this. 18 Figure 4: Technical Efficiency Plot Source: Sergio Flores (2022). The initial marginal outputs of this health production function are high, plotting the curve into an upward trajectory. As we add more inputs into our production function, the curve seems to flatten out, reaches its highest point, and ends up following a downward slope. This highest point is the point of technical efficiency where a maximum capacity to benefit is obtained. There are scenarios in which too many input units can actually cause detri- mental health outputs. For example, the prescription of too many medications or a liberal use of surgical treatment can result in side effects for patients and create a health deficit. As the figure above shows, the use of inputs before reaching the technical efficiency point is considered an efficient use of resources, while any use of inputs beyond this point is deemed ineffective. 1.3 The Costs of Healthcare Healthcare resources are all personnel, materials, infrastructure, earmarked accounts, and anything else that can be used to provide healthcare services. These can all be inputs in the production of health outputs (and, by extension, outcomes). We can divide healthcare costs into three main categories: human resources, physical capital, and consumables. Human Resources The most significant inputs into the health system are human resources, which include the various types of clinical (physicians, nurses, pharmacists, and dentists) and non-clinical workers (management and support staff) who make each health intervention possible. 19 Human resources is frequently the largest single expense within healthcare. In many nations, labor costs can account for two-thirds or more of total recurrent expenditures. The healthcare sector is labor intensive and requires qualified and experienced staff to function well. Physical Capital This is infrastructure and technology/equipment in the healthcare system. The material basis on which care is delivered is provided by physical resources. We can further divide this into three broad subcategories: 1. Buildings/structures with auxiliary facilities (i.e., energy and water systems) 2. Medical equipment (i.e., diagnostic laboratory equipment and radiological machines) 3. Logistics (i.e., supply systems, transport, warehouses, and their logistic facilities) Consumables These are items that are used for a short length of time and must be replaced on a fre- quent basis. This category includes pharmaceuticals and disposable (one-time) equip- ment and other supplies. Healthcare Cost Variations Among Countries The costs of all these inputs varies significantly across countries for many reasons, includ- ing demographic characteristics, health system characteristics, workforce and structural capacity, health utilization, and pharmaceuticals. Demographic characteristics The population structure of a country, based on parameters such as age; gender; and pro- portion of overweight, unemployed, drinking, or smoking population, can significantly alter the epidemiological characteristics of the population and, consequently, the type of resources that each country has to purchase to maximize health welfare. The demo- graphic characteristics of a country also largely determine the epidemiological needs of the population. Health system characteristics The type of service provision, health financing, and provider payment mechanisms greatly influence the overall health costs. For example, countries like Sweden, Canada, and the United Kingdom with single-payer systems in place (where the government is the single actor that buys healthcare on behalf of everyone) are able to negotiate or establish lower, more uniform costs due to the volume of patients the government represents. In contrast, the US has a fragmented multi-payer system (with multiple public and private payers) that has less bargaining power on behalf of health consumers, making healthcare more expen- sive. In the same way, payment mechanisms also affect healthcare costs. For example, if 20 healthcare providers are paid for each service they provide (fee-for-service payment mechanism), there is an incentive to overprescribe healthcare, making it inefficient and more expensive overall. Workforce and structural capacity The amount and concentration of the health workforce in relation to the country’s popula- tion is often the biggest source of cost for many countries. Furthermore, the variation of the types of skills health workers possess plays a significant role. Some countries have sig- nificantly higher numbers of professionals working in intensive units or specialized hospi- tal care than others that emphasize the importance of nurses and general practitioners (GPs). In others, much of the workforce profile is geared towards primary care or even relies heavily on community health workers and nurses. Additionally, the wages health- care workers obtain are often a direct function of the income per capita a country reports. Health utilization The amount and extent to which health services and health resources are consumed by the population is a major driver for health costs. Annual hospital discharges, use of imag- ing and laboratory services, average length of stay, etc. serve as proxies to measure this factor. Variation of technological use in medical practice Technological progress is widely considered an important driver of health costs. The com- plexity of the interventions and the type and amount of equipment required to perform them vary greatly among countries. Pharmaceuticals The price, availability, and coverage of pharmaceuticals varies across countries and is mainly driven by the type and source of the drugs purchased. In general, the variations of costs related to healthcare use are the result of either varia- tions in the prices of goods and services, the volume of care provided, or both (Health and Europe Centre, n.d.). As seen in the figure below, even countries that share similar overall economic conditions manifest variations in their healthcare costs, with the US being the clear outlier. In this particular case, the US spends almost twice as much as ten other high- income countries despite performing worse on many population health indicators (Papa- nicolas et al., 2018). We can observe that the characteristics of the US healthcare system (multi-payer system) result in a very complex structure that requires high administrative costs. Additionally, healthcare workers in the US have considerably higher salaries on average than in many other countries (Tijdens et al., 2013) and the prices of both drugs and tests are considerably higher there than anywhere else (Mulcahy et al., 2021). 21 Figure 5: Global Map Showing Variations in Health Care Costs by Country Source: Our World in Data (2020). CC BY 3.0. 1.4 Health and the Market Economists study the decision-making process humans engage in when facing scarcity. Market Markets are one of the ideal scenarios where this happens. A market is a situation in A market is a place where which suppliers of goods and services meet with consumers who want – or demand – buyers and sellers can meet to facilitate the those goods and services and agree on a price to purchase them. The benefit that an indi- exchange or transaction vidual gains from consuming these goods or services is called a utility, and the more utility of goods and services. a consumer expects to receive from their purchase, the higher the price they are willing to pay. When we pool the utility that all individuals in a society experience, we obtain the welfare (Guinness & Wiseman, 2011). Supply In a market, supply and demand from producers and consumers push and pull each other This is the willingness and to determine the prices of products and services that will be exchanged. Supply refers to ability of producers to create goods and services the goods and services that producers are willing and able to sell in the market, and to take them to market. demand includes the goods and services that consumers are willing and able to purchase Demand in the same market. The dynamic between the interests of buyers and sellers in this mar- This is the consumer’s ket is known as market force of supply and demand. Demand from the buyers stems from desire to purchase goods and services and willing- their interest in obtaining as much utility as possible (utility maximization) at the lowest ness to pay a price for a possible price. Supply from sellers originates from their interest in maximizing profit by specific good or service. producing at the lowest possible cost while selling at the highest possible price (Guin- ness & Wiseman, 2011). 22 A way to visualize this is a tug of war between supply and demand. When supply wants to increase their output price too much (pulls the rope), demand will simply buy less of it (pulls the rope back) and supply will have to reduce prices. If demand asks supply to pro- duce a significantly larger amount of product, then supply will tug back by increasing pri- ces. This process leads to a state of equilibrium in which the amount demanded equals the quantity supplied, as seen in the figure below. Figure 6: Market Equilibrium: Supply and Demand Source: Sergio Flores (2022). If a state of market equilibrium is reached, then we should observe a state of efficiency from both the producer’s and the consumer’s point of view. In this equilibrium, goods and services are produced at the lowest possible unit cost for the benefit of the producer, and consumers perceive that they are obtaining the most possible utility out of their money within their budget. From both a consumer’s and a supplier’s perspective, money is not wasted in either production or consumption. Pareto optimality is how economists char- Pareto optimality acterize this situation. Given their resources, everyone is at their best feasible welfare level This is an economic state where resources cannot (Mwachofi & Al-Assaf, 2011). Most economists would argue that the ideal scenarios of free be reallocated to make markets like the ones explained above are the best placed to promote efficiency. Neces- one individual better off sary requirements for perfect free markets to produce efficient allocations include without making at least one individual worse off, implying efficiency but the number and size of “actors” (i.e., producers and consumers) in the market. If you not equality or fairness. have few suppliers, prices can be set among them without taking consumer demand into consideration (Eastin & Arbogast, n.d.). 23 the ease with which “actors” can enter and exit the market. For example, if a consumer has restricted access to the market through barriers, such as long waiting times, long distances, or extremely high prices, they do not have ease to enter the market and demand may not apply the right effect on the price (Eastin & Arbogast, n.d.). the degree to which producer outputs are differentiated from other producers. the price and product information available to both buyers and sellers. If a buyer has knowledge of the product, then they can set a price they are willing to pay for a good or service. In the same sense, if an insurance provider does not know about the health risks of a population, they may set prices that are too low to make insurance sustaina- ble for everyone. Other aspects to consider include the following (Mwachofi & Al-Assaf, 2011): how easy it is to advertise the goods and services in the market how steady and predictable demand from sellers is the reliability of the quality and amount of goods from suppliers how easy is it for consumers to test a good or service before purchase access to uniform information between buyers and sellers standardized prices for the exact same product regardless of the buyer that all market suppliers have a profit motive All of these requirements are very hard to meet in the real world, but they provide a navi- gation guide to how equilibriums are influenced by market forces. The Special Case of the Healthcare Market The healthcare market differs from an ideal market in several ways. The special character- istics of this market are explained below. Information Asymmetry Information asymmetry exists if one party has information that the other lacks. On the one hand, suppliers (doctors, physical therapists, nurses, etc.) have vastly more knowledge of diseases and their treatments than patients. Therefore, even if patients look for a second opinion, they ultimately have to trust a healthcare provider about how much healthcare to consume. This creates an unusual circumstance in which the supplier of goods and serv- ices is also setting the demand, which can lead to a market failure. On the other hand, and in a similar fashion, healthcare providers make decisions on how much healthcare to supply based on information provided by the consumer. A healthcare professional relies on a patient’s previous history and account of their current illness to chart a treatment plan. In the case of healthcare insurance organizations, they require information from the consumer to determine the most efficient production costs, which should ultimately lead to a good price in the market (Mwachofi & Al-Assaf, 2011). The two following failures derive from information asymmetry. 24 Adverse selection Adverse selection is the exploitation of information asymmetry. For example, people who are less healthy might identify that their costs when covered by health insurance are much lower than without it since their use of healthcare is significantly higher than those who are healthy. Therefore, they have an incentive to sign up for insurance without disclosing information that would make healthcare providers adjust their costs. Insurance providers may then boost premiums after unexpectedly seeing a rise in their costs in order to avert losses. More expensive premiums can result in healthy people deciding that the cost is no longer providing them enough utility in return and therefore leaving the scheme, leaving only the less healthy and possibly leading to the market’s collapse (Mwachofi & Al-Assaf, 2011). Moral hazard A moral hazard is a situation in which someone will take risks because they will not be affected by the cost that they could incur. Individuals who are aware that their healthcare costs are being subsidized by other people are likely to consume more healthcare (even if it is not warranted) or take risks that could be detrimental to their health that would not be taken if they had to pay the full cost of healthcare themselves. As a result, healthcare resources are not efficiently allocated based on health need but on artificially created need (Mwachofi & Al-Assaf, 2011). Externalities Externalities are the effects of consumption or production that have an impact on people who do not participate in the transaction; they can be either positive or negative. Positive externalities materialize when one person’s actions in the market have a positive effect on an individual that was not directly part of the transaction (i.e., herd immunity caused by vaccination of multiple individuals), while negative externalities have a negative effect on another person (i.e., secondhand smoke from tobacco users). Because spill-over effects are not evident to either the producer or consumer, they are frequently overlooked in decision-making. As a result, the consumption or output level chosen is inefficient or inef- fective (Mwachofi & Al-Assaf, 2011). Consumer Rationality and Ability to Make the Best Judgments About Their Welfare Even if conditions allow them to do so, consumers looking for healthcare are not always in a position to make the best decisions regarding their health. To start with, they may not have enough information about their illness or how to treat it, as opposed to how they might approach purchases in a different market. Furthermore, intense stress as a result of illness makes it hard for an individual consumer to make an informed decision. Moreover, consumers are unable to precisely foresee the outcomes of healthcare consumption (Mwachofi & Al-Assaf, 2011). 25 Interdependent Demand and Supply Determination Increased demand for healthcare (due to an influx of people or an epidemic, for example) can lead to increased prices. In this scenario, as a result of the price rise, a physician may now be willing to provide fewer hours of service. This exemplifies how healthcare supply and demand are not set independently, resulting in market failures (Mwachofi & Al-Assaf, 2011). As you can see from the previous examples, healthcare markets do not have the condi- tions of a perfect market and thus cannot behave as a perfect economic market would. Many of the necessary requirements for a perfect market simply cannot be met, and if left alone, will derive into multiple market failures and inefficiencies. To counter this and keep markets as close to Pareto optimality as possible, markets require intervention in the form of regulation from actors other than suppliers and consumers. 1.5 Supplier-Induced Demand and Agency One of the ways to overcome the information asymmetry between patients and physi- cians can be explained with the agency relationship. Agency Relationship Figure 7: Principal–Agent Relationship in Health Care Source: Sergio Flores (2022). 26 The principal (patient) appoints an agent (healthcare provider) to counsel them in making decisions through recommendations and information they lack. The principal then com- bines the advice given by the agent with personal preferences to make decisions as if per- fectly informed. However, it is more likely that a decision is made when an agent com- bines information with a principal’s preferences; that is, doctors make decisions for patients (Nguyen, 2011). This can lead to several special considerations from the agent: Should the agent maximize patient or societal utility? What if the patient is unable to com- municate or be part of the decision-making process? Furthermore, as the agent is usually also a supplier, this leads to a situation where one actor (the agent) is both the demander and supplier in the market. Supplier-Induced Demand Because of the aforementioned scenario, supplier-induced demand is a very common sce- nario in the healthcare sector. In a normal market, a patient would use their own judg- ment to demand a certain amount of healthcare based on open and available information and knowledge, whereas in this scenario, an excess demand is created based purely on the supplier’s own knowledge, which is never entirely privy to the patient. Induced demand is described as a change in healthcare demand caused by a provider’s discretionary influence over patients, especially coming from medical doctors. Even when patients cover the full costs, induced demand obstructs the efficient deployment of state resources. This situation may alter the supply-and-demand balance in the healthcare sec- tor. Induced demand presents two economic challenges: First, it increases healthcare expenses while also putting a burden on government resources. Second, because a larger amount of a country’s resources is spent on healthcare with low benefits, it has an impor- tant influence on efficiency (Seyedin et al., 2021). Additionally, from a health perspective, induced demand from healthcare providers does not always reflect health gains for the patient. For example, a 1985 report by the WHO suggested that no health benefits were identified when cesarean section rates exceeded 10–15 percent, and this was confirmed by more recent studies (Althabe et al., 2006; WHO, 1985, 2021b). We also know that, as with any kind of surgical intervention, cesarean sections carry inherent unavoidable risks. Even so, when private obstetricians in the Indian region of Madhya Pradesh were paid to deliver babies in 2016 with higher amounts paid for cesarean sections, the rates of cesar- ean delivery increased from 26.6 to 40.7 percent (Bogg et al., 2016). Naturally, since physicians do not always put the needs of others ahead of themselves, some measures have been designed to avoid the double agent problem (in which the roles of principal and agent are both filled by the physician), such as a professional self- regulation/ethical code, standardized clinical guidelines and protocols, and incentives to affect provider behavior through efficient monitoring and policing. 27 1.6 Market Failure and the Role of the State Healthcare markets are prone to market imperfections if unregulated and subjected to the forces of the free market, thus throttling its efficiency. Since healthcare is a type of good that will always be consumed because it is necessary for our survival no matter the price, an unregulated market would inexorably drift towards higher costs and fewer health gains. Because it lacks the conditions a perfect market needs, it would not be able to self-regu- late. Furthermore, no one would be incentivized to invest in health initiatives that benefit payer and non-payer patients, such as vaccines or certain types of medical research. Imagine the following scenario: You live in a town called Freeville where, for the last ten years, the previous administration did not allow government regulation in the healthcare sector. In Freeville, a very popular chain of fast food called “Bad Burger” has introduced extremely cheap food that is very dense in sugars and fat. In fact, they have introduced a new soda beverage of 64 ounces (half a gallon) in their most popular kid’s menu. Most people see this option as a great deal and embrace it quite quickly, and Bad Burger becomes the biggest business in town with ads everywhere inviting kids to eat. Eventually, it also becomes the provider of lunches in schools for kids, as it is cheaper and saves peo- ple money. Soon after, the biggest park in Freeville, which had a children’s playground, running and biking tracks, and a large area of forest, is bought by Bad Burger and trans- formed into a soda factory for the chain. As a result, childhood obesity rates have shot up. As a resident of Freeville, you wonder why the market isn’t fixing this issue itself and real- ize that the conditions for a perfect free market are not always present in the healthcare sector. These imperfections are arguably best addressed through the market intervention of an external force. Governments are usually the best placed actors to intervene, considering that they are the only actors with enough power to set parameters for all actors in the healthcare market. A government theoretically represents the best interest of all stake- holders and is able to consider a broad and longer-term perspective. The free market, however, will not factor in health and the need for health services as a fundamental human right and an indispensable foundational condition to any other human activity. The main ways a government intervenes are as follows: informing consumers, providers, and suppliers that they must act in a certain way. For example, the use of cigarette labels warns consumers of health hazards incurred by con- suming the product. regulating how a private activity may be undertaken. For example, the government may pass laws limiting how much pollution a factory may produce. financing healthcare with pooled funding, for example, from tax revenue or employee/ employer contributions providing or delivering health services using publicly-owned facilities and civil service staff, for example, by building, maintaining, and staffing public health centers taxing and subsidizing goods, for example, taxing alcohol (making it more expensive and harder to obtain) but subsidizing vaccines (making them free and easier to access) 28 The following two types of goods that the private free market is not designed to incentiv- ize are provided/enabled by the government and play vital roles in maintaining the health of a population: 1. Public goods. These are goods that produce large amounts of positive externalities Positive externalities and are provided to the population at large. These include actions such as initiatives This is a trait of a good or service that, when con- to control populations of insects that could transmit diseases, vaccination campaigns, sumed, has a positive and investment in research. effect on (or benefits) a 2. Merit goods. These are goods that are considered beneficial to the individual or soci- third party that is not the consumer or producer. ety regardless of their ability or willingness to pay. These include subsidized educa- tion, use of helmets and seatbelts, and fire departments. SUMMARY In this unit, we defined health as a state of complete physical, mental, and social wellbeing and not merely the absence of disease or infirmity; health need as the capacity to benefit from healthcare or from wider and environmental changes; and health demand as what patients ask of the healthcare sector. We then identified human resources; physical capital (which includes infrastructure, equipment, and logistic networks); and consumables as the biggest categories of inputs in healthcare. The vol- ume and the price of these inputs determine how healthcare costs vary per country around the world. The healthcare market diverts significantly from what a theoretical per- fect market should be for several reasons, mainly the information asym- metry existing between suppliers and consumers. This propitiates the existence of phenomena such as moral hazard and adverse selection; the frequent presence of both positive and negative externalities; the absence of consumer rationality in many scenarios where health need is present; and a particular interdependent supply and demand determi- nation, with a disproportionate influence coming from the supplier. In many instances, these lead to the phenomena of supplier-induced demand. Because of this, the healthcare market suffers from critical imperfections that require government intervention to function appro- priately. 29 UNIT 2 FORMS OF DELIVERY OF MEDICAL CARE STUDY GOALS On completion of this unit, you will be able to... – understand the role and influence of healthcare providers in the patient’s care path- way. – identify different provision schemes aimed at modifying healthcare provider behav- iors. – recognize the evolving trends in healthcare delivery. 2. FORMS OF DELIVERY OF MEDICAL CARE Case Study Olga has been feeling pretty good after her dinner with friends. However, a few weeks later, she starts experiencing regular abdominal pain and cramping. She decides to visit a doctor but is uncertain which specialist she should book an appointment with, when to do so, or what kind of treatment she should expect to receive. She ultimately decides to go to her family doctor, who refers her to a gynecologist. The gynecologist carefully explains the different treatment options available, but Olga finds it hard to decide for herself and ulti- mately decides on following the treatment the physician recommends, even if it is more expensive than she would like. While leaving the office, she wonders how hard it is for her to look for, select, and pur- chase appropriate healthcare treatment compared to most other things in her life. For example, whenever she needs a maintenance check on her car, she has a general idea of what the car might require and can choose from different mechanic shops. She is also free to choose where to buy the needed car parts, or even if she is willing to replace them. Enthralled by this, she decides to enroll in a health economics course to understand the underlying mechanisms. 2.1 The Principal-Agent Relationship as the Key Problem In a perfect market, consumers have a high degree of independence and power over the direction of supply and demand. They are the ones that decide the amount and price of goods they are willing to consume, partly because both prices and product/service infor- mation are available to both buyers and sellers beforehand and on a comparable scale. Even if that was not possible, the market allows consumers to test the product or service prior to consumption. 32 Figure 8: Principal–Agent Relationship in Health Care Source: Sergio Flores (2022). In the healthcare market, one of the most important characteristics distinguishing it from a perfect market is the asymmetry in information between a consumer (patient) and a supplier (healthcare professional). Patients are often not familiar or updated enough with all the nuances of pathologies and the wide array of treatments available to them. There- fore, they are in a weaker position to make an informed, rational decision about their health. Because of the scenario just described, supplier-induced demand is a very common sce- nario in the healthcare sector. This translates to a demand greater than what would be necessary if patients and physicians had the same level of knowledge. When a provider prioritizes other interests at the expense of the patient’s interests, a principal-agent prob- lem is created (Nguyen, 2011). In most cases, this creates a higher demand than if the patient alone made the decision. To exemplify this kind of relationship, try to imagine the same dynamic occurring in a mar- ket that is not healthcare. Imagine you are an owner of a mechanic shop that fixes cars and sells spare parts. A person with a car that is experiencing mechanical problems comes to you. It is in your best interest to retain the customers and try to sell them your services. In fact, if we saw this scenario solely from your interests as a provider of car repair serv- ices, the best possible scenario is to sell this costumer as many services as possible to maximize your utility, even if the car does not require immediate repairs. If the customer knows enough about the mechanical upkeep of cars, they might directly tell you the serv- ices they need and will then decide if your prices are fair. If the customer’s and your inter- ests do not align, the customer will either explicitly tell you what they need or go to another shop. If, however, the customer does not know anything about car repair (i.e., 33 information asymmetry), then they will probably rely on your advice. For all intents and purposes, you are playing both the role of the supplier and consumer, which might lead to a conflict of interest. These dynamics between potentially conflicting interests were observed in India in 2016. When the government tried to increase the hospital delivery rates in the regions of Gujarat and Madhya Pradesh, two different approaches were implemented: In Madhya Pradesh, private obstetricians were paid to deliver babies, with higher rates paid for cesarean sec- tions than vaginal deliveries. In this region, cesarean rates increased from 26.6 to 40.7 per- cent. For Gujarat, obstetricians were paid for each block of 100 deliveries, regardless of the type of delivery. In this case, cesarean sections decreased from 8.1 to 4.3 percent (Bogg et al., 2016). 2.2 The Physician as a Supplier of Medical Services When a patient decides to demand healthcare following a perceived health need, a com- plex process of mutual decision-making and organization of care is started. Physicians play a key role in this process. For example, they can establish a relationship with the patient to the point that they can influence the patient’s demand for health, playing a dual role as supplier and demander of healthcare. Additionally, physicians act as important gatekeepers for specialized medical care and the supply of drugs. They also play a major role as researchers, policymakers, and even commercial actors within the healthcare sec- tor. Their presence throughout the care process is constant and highly influential. A literature review and metanalysis (Stewart, 1995) provided evidence that just the pres- ence of good communication between physicians and patients has a positive effect on a patient’s health outcomes. Even when physicians are not actively taking part in the patient care, their effect on the patient’s behavior can be felt. For example, the amount of health- care providers that choose to establish themselves in a certain area (thus increasing the density of health professionals in an area) tends to increase the healthcare utilization of consumers. How? A larger amount of health professionals reduces waiting times for patients and leads to higher competition, which can bring prices down. It could also mean an increase in healthcare centers, which translates into shorter travel distances. All these “barriers” to the consumer are reduced, which facilitates (and tends to increase) con- sumption. Even when patients are facing life threatening scenarios, such as prostate cancer, evidence suggests that physician recommendations are the most likely determinant of the treat- ment choice over patients’ preferences or worries about side effects, such as diminished sex life (Scherr et al., 2016). Similar studies involving other diseases, such as pneumonia, gangrene, cancer, and asthma, show similar results (Adams et al., 2001; Sekimoto et al., 2004). Sekimoto et al. (2004) found that only 12 percent of patients would prefer an active role in decision-making, and Adams et al. (2001) found that, on average, patients with severe asthma do not wish to be predominantly responsible for decision-making about 34 asthma treatment. Considering the huge influence that physicians have as health suppli- ers, healthcare provision schemes aim to modify healthcare provider behavior to align with the patient’s best interests. Figure 9: Physicians as Gatekeepers to the Patient Care Pathway Source: Sergio Flores (2022). When a patient has a health need and demands healthcare that is accessible to them, they go through several stages of care, including first contact with a health professional, testing and diagnosis, subsequent consultations with more specialized healthcare personnel, treatment of the disease, and (sometimes) palliative care. A patient would find it difficult to navigate all this alone. It is physicians who determine the best path for the patient by performing diagnostic examinations, referring them to other professionals, and providing necessary treatment. These decisions are, in turn, backed up by evidence-based guide- lines stemming from research and health legislation, which are spheres in which physi- cians and other healthcare professionals also partake. It is clear that physicians can have a very strong influence on the patient care pathway. Because of this unbalanced relationship between patient and physician, several mecha- nisms attempting to compensate for this have been proposed. Mainstream economic theory establishes that the use of financial incentives can lead to different types of health- care provider behaviors, each with their own strengths and limitations. Some of them are listed below. Capitation The provider agrees to supply a predetermined list of health services to a predetermined group of people for a set fee per person and period. When the real cost of these services exceeds that specified level, the provider takes a financial risk. In contrast, when the cost is less than the predetermined reimbursement, the provider keeps a portion of the money. 35 The most common concern about capitation is that the provider organization receiving the payment may overly restrict service use, potentially removing certain essential serv- ices alongside unnecessary ones. As a result, patients may receive lower-quality care. To illustrate this with an example, if you are a healthcare provider under a capitation pay- ment mechanism, you sign an agreement stating (in a fictional setting) that you will be covering 1,000 patients in a community. The monetary terms are as follows. Table 2: Capitation Monetary Terms Example Subpopulation Number of patients Capitation per month Total (US dollars) Children 350 $30 $10,500 Women 250 $25 $6,250 Men 200 $20 $4,000 Seniors 200 $30 $6,000 Total 1,000 $26,750 Source: Sergio Flores (2022). For each subpopulation (children, women, men, and senior patients) you offer to provide a specific set of services dependent on their needs. Ultimately, in this example, you as a provider will get 26,750 USD per month to cover the entire population. If you spend less than this amount, you can keep the difference. However, if you exceed it, you as a provider bear the financial risk and must cover the difference. Fee-for-Service Healthcare providers are paid for each service they deliver to a patient. Assuming more medicals services benefit patients, fee-for-service payments would be presumed to improve quality of care and patient outcomes. More care, however, does not necessarily imply higher quality or better outcomes (Fisher, 2003; Smeets et al., 2009; Tsugawa et al., 2017) Therefore, this method could incentivize overprovision of health services or priori- tize fee-paying patients. To illustrate, let us assume you are the healthcare provider for a clinic subscribed to a fee- for-service payment scheme. If a patient came with a fracture and you managed to treat it with a cast, you would get paid for each service provided: the emergency visit, radiological studies, costs of materials used to immobilize the limb, and medications prescribed to the patient. If a surgical approach was required, then a higher reimbursement fee would be given since the costs for you are higher. 36 Salary The healthcare provider is paid a set sum for a set length of time. There is no financial motive to provide unnecessary services or underprovide. Because there is no financial incentive for providers to give high-quality treatment when they are paid on a salary basis, payers often rely heavily on the implementation of regulations and processes that are sup- posed to improve quality. To illustrate, let us assume you are a healthcare provider under a salary payment mecha- nism. In this case, you get paid a fixed amount every month, no matter the volume or com- plexity of services you provide. 2.3 Managed Care and Alternative Forms of Provision of Care Imagine you are in charge of the health centers of a rural region in Honduras. For many years, people with low income have struggled to improve their health. Clinics are always understaffed and the population is underserved. Only wealthy people have access to the private doctors, while the rest are struggling. To improve things, you decide to employ the help of private healthcare providers to improve your population’s health. You read that one way forward is through managed care. Principles of Managed Care In an attempt to keep costs low for patients (consumers), managed care plans were invented. Managed care plans combine finance and delivery of healthcare services that aim to keep costs low and reduce the unilateral influence of healthcare providers, designed to manage cost, health utilization, and quality via the use of guidelines and pro- tocols; strict administrative controls; and focus on certain diseases, such as chronic path- ologies. However, the extent to which this integration occurs varies greatly, ranging from health maintenance organizations (HMOs) in which the health plan subscribes a limited network of physicians to preferred provider organization plans, which generally negotiate a discounted fee-for-service price schedule and provide access to a broad provider net- work (Glied & Smith, 2011). Various tools are used to influence care and/or costs across the managed care spectrum. These include utilization review/management systems, changes in how physicians are compensated, and provider network restrictions (Glied & Smith, 2011), which are explained in more detail below. Provider network restrictions Managed care organizations find the most cost-effective providers by comparing the prices charged by various hospitals and practitioners for the same procedures. When such organ- izations are large enough, having hundreds of thousands of subscribers, they can opt to bring specific providers into their network, thereby procuring discounts for the provision of health services to their members in healthcare marketplaces with multiple providers. 37 To attract more patients, providers are willing to offer steep discounts to these organiza- tions. By offering these reductions, providers can also keep or gain market share (Glied & Smith, 2011). Changes in physician compensation Managed care organizations are constantly trying to keep costs down for their members; to do so, they are constantly persuading both patients and physicians to choose cheaper healthcare options via economic incentives. For example, managed care organization may require preauthorization from patients before they access hospital emergency rooms or specialized outpatient care, or they may make it harder for patients to seek treatment at more expensive facilities. Costs are also controlled by capping physician salaries, setting them at the outset, and allowing annual adjustments (Glied & Smith, 2011). Furthermore, physician compensation comes from a mix of salary, productivity bonuses, and other fac- tors to keep it attractive to healthcare professionals (Ryan et al., 2015; Darves, 2011). Utilization reviews and management systems Many managed care organizations have created complex information systems that track provider prices and the quality of healthcare obtained by their members in order to con- Utilization reviews duct utilization reviews (Glied & Smith, 2011). These are processes in which the patient’s care plan is carefully reviewed Managed care plans work by spreading financial risk and through strict healthcare man- on a case-to-case basis, agement, that is, detailed records of patient’s health consumption; very careful adminis- usually against a set of trative control of expenses and membership; and rationing measures in place, such as the guidelines to make sure the patient is receiving use of gatekeeping and a limited wait time. However, their incentive system (fee-for-serv- appropriate care at mini- ice, capitation, or salaries) still allows through some of the vices that come with a princi- mal costs. pal–agent relationship, such as supply-sided increased demand in the case of fee-for-serv- ice and a supply-sided decreased demand or favoring patients with the least health needs (cream skimming) in the case of capitation or salaries. To avoid the limitations of these traditional payment mechanisms, pay for performance (P4P) schemes as an alternative form of provision have been introduced. These are meant to directly align the interest of the agent with the interest of the principal (Guinness & Wiseman, 2011). Figure 10: Pay-for-Performance Mechanisms Source: Sergio Flores (2022). 38 Pay for Performance Imagine that, after learning about managed care organizations, you decide to implement these health provision mechanisms in a rural setting. However, you start experiencing some of the inherent disadvantages of managed care organizations after some time. Your healthcare providers are not being productive enough, trying to only treat the patients with the highest chance of being healthy or over diagnosing people to earn more profit. At the same time, epidemiological evidence seems to suggest that there is an increase of dia- betes in the region, along with new reports of macrosomia (babies born much larger than normal) that have not been identified during pregnancy due to deficient prenatal care. So, you now decide to approach payment in a different way. Instead of paying private health- care providers based on a salary, capitation, or fee-for-service mechanism, you decide to pay them only if they reach certain goals. Pay for performance was implemented in this setting as a means for payers to focus on quality while also lowering expenses. A pay for performance program pays healthcare pro- viders an extra amount for achieving or surpassing predetermined quality, performance, or health outcome goals, such as lowering body mass indices (BMIs) in overweight patients. Improvements in the achievement of these goals over time, such as decreases in the rate of anti-hypertensives prescribed, may be rewarded with extra compensation. Pro- viders who do not meet these goals may face financial penalties under pay for perform- ance arrangements (James, 2012). The quality indicators employed in pay for performance generally fall into one of four cat- egories: process measurements, output or outcome metrics, patient experience metrics, and structural measures (James, 2012). Process measurements Process measurements evaluate the frequency and completion of intermediate actions taken to assure health outcomes of patients are achieved, for example, how often aspirin was dispensed to patients vulnerable to myocardial infarctions per guidelines or how often smoke cessation initiatives were held for patients with compromised lung function. Outcome metrics Whereas process measurements evaluate intermediate actions, outcome metrics focus on the final results of healthcare provision. Some examples of these metrics are whether a patient’s diabetes is under control based on laboratory testing, incidence of major cardiac events, survival measures, and remissions rates for oncological patients. The use of these metrics in pay for performance is not straightforward since outcomes also depend on several other contextual factors that are beyond the healthcare provider’s con- trol. For example, if the provider is following best practices in diabetes management and providing the patient with the latest generation of blood glucose controlling drugs, but the patient is not disciplined with its consumption or keeps a diet rich in carbohydrates, the outcome metrics can be skewed. Partly as a result of this, cost savings are increasingly being included as outcome indicators. 39 Patient experience metrics Patient experience metrics look at how patients feel about the care they’ve received and how satisfied they are with it. In the inpatient context, patients’ perceptions of the quality of communication with healthcare professionals, as well as whether health facilities were clean and in an appropriate state, are examples. Infrastructure measures Infrastructure measures evaluate treatment facilities, personnel, and equipment. Many pay for performance systems, for example, provide incentives for clinicians to use health information technology (James, 2012). To revisit the example at the beginning of this section in which you are trying to get the providers in the rural community to work under a pay for performance scheme, you now have to decide how to evaluate your providers to pay them. Based on the previous list of quality indicators categories, you decide to create three instruments: 1. A fidelity checklist that measures process outcomes, such as the number of home vis- its that the healthcare professionals delivered during the month or how many sex education talks were given at schools 2. A review of medical files assessing blood HbA1 levels glucose (measure of blood sugar levels) for the last three months in patients diagnosed with insulin resistance (diabe- tes) or number of children delivered at a healthcare facility during the last trimester 3. Surveys delivered to patients to assess their perceptions of how the healthcare pro- vider has explained their illnesses and proposed treatments, how clean and ordered the facilities were, and if they feel their health problems have been addressed in a sat- isfactory way Some of the programs currently in place that base their financial incentives on the pay for performance as an alternative form of provision are disease management programs (DMPs) and wellness programs. DMPs are systematic treatment regimens aimed at assist- ing patients in better managing their chronic illnesses and maintaining and improving their quality of life. They are also conducted with the long-term goal of enhancing medical care (Institute for Quality and Efficiency in Healthcare, 2016). Wellness programs include activities such as (often online) risk assessment programs for nutrition, weight manage- ment, stress management, and smoking cessation. Some common challenges when designing P4P programs are as follows: It is difficult to set reliable and consistent quality indicators that can be used to evaluate healthcare provider performance. Some patient populations present specific chal- lenges, such as differences in intrinsic motivation to improve health, socioeconomic fac- tors, and very different baseline measures. It requires a high level of administrative complexity. Careful records must be maintained and organized, verifying it for accuracy and linking health indicators with treatments and costs. Accountants and other record keeping professionals must be involved, as this method relies heavily on carefully curated documentation. 40 Cases must be evaluated on an individual, case-to-case basis, which precludes the pos- sibility of easily incorporating standardized guidelines or protocols to evaluate perform- ance. SUMMARY In this unit, we have explored the special relationship existing between a patient and a healthcare provider due to the steep information asymme- try between them. This relationship, described under the framework of the principal-agent relationship, is so extraordinary that it often modi- fies normal demand and supply dynamics. Healthcare providers can very often affect the whole patient care pathway in particular means, setting up the conditions for the existence of supplier-induced demand. In order to counteract this phenomenon, many supplier behavior-induc- ing mechanisms have been introduced, mostly based on differing pay- ment methods. At first, these methods focused mostly on spreading financial risk while aiming to obtain the most healthcare provision possi- ble at a lower cost by connecting healthcare providers and patients through mechanisms such as capitation, fee-for-service, and salaries. However, over time, these evolved into strategies aimed at aligning more closely the interests of both agent (healthcare provider) and prin- cipal (patient) by reimbursing the achievement of process, quality, and health output indicators. 41 UNIT 3 THE HOSPITAL AS AN ECONOMIC AGENT STUDY GOALS On completion of this unit, you will be able to... – understand the production function of hospitals. – visualize a standard inpatient care path from beginning to end. – incorporate economic principles into the analysis of hospitals. – identify main factors and elements influencing hospital costs. 3. THE HOSPITAL AS AN ECONOMIC AGENT Case Study Mario is really excited. He has recently been hired as assistant to the hospital director and his mission is to help the hospital achieve a new level of productivity and efficiency. He holds a master’s degree in business administration and is sure that, by applying main- stream financial and managerial theory, he can turn things around. However, he soon realizes that hospitals have some unique characteristics as productive units. He learns that, unlike in other industries, he cannot simply streamline personnel, stocks of equipment, and medications to the bare minimum in pursuit of maximum effec- tiveness; he must be ready for surge capacity scenarios. He realizes receiving reimburse- ments for services rendered is more complex than he thought and observes that hiring more doctors or expanding the number of beds in the hospital does not produce corre- lated returns. He decides to take a course in health economics to better understand the dynamics at play. He quickly learns about the framework of managed care and how reimbursements are shaped, realizing that, for a few decades now, hospitals have shifted their focus from revenue creators to cost containment centers. 3.1 The Hospital as a Productive Unit Hospitals are important components of the healthcare system and one of the most impor- tant units operating in healthcare markets. They are typically able to provide more com- plex and specialized healthcare than any other kind of facility by bringing together a wide range of health resources in a single location, organized in such a way that services can be provided 24 hours per day. Additionally, in many instances, they serve as research centers aimed at better understanding disease and treatment. Finally, they can be hubs of medical training and health technology innovation. Their medical, research, academic, and even social role is such that they are often on the receiving end of the biggest allocations in the healthcare budget. An analysis of 148 countries in the world from 1995 to 2017 determined that 34.5 percent of the healthcare budget globally goes into hospitals, which is more than any other healthcare provider (Schneider et al., 2021). Although a standardized definition is hard to find in the literature, the American Associa- tion of Hospitals defines hospitals as “a healthcare facility … with organized medical and professional staff, inpatient beds available 24 hours a day and … providing inpatient healthcare services for surgical and non-surgical conditions and usually provides some outpatient services, especially emergency care” (Abdelhak & Hanken, 2014, p. 726). The type of staff and equipment hospitals possess to cover all the services they provide make them one of the most complex healthcare facilities in existence. 44 From a strictly economic point of view, a hospital transforms different inputs – such as qualified personnel, equipment, and consumables like medication – into outputs, such as number of patients discharged, surgeries performed, or inpatient childbirths. From this same economic point of view, its main objective is either sustainability or profit maximiza- tion, depending on, for example, whether they are owned by a commercial or public entity. Essentially, it follows the same production function of any other business unit, but Production function with the main distinction that hospitals always need to be ready to provide precise health- This is the relationship between the number of care services that specifically suit each patient at any given moment of the progression of inputs and the amount of their disease. That readiness can be planned to a certain extent, as in elective surgeries or product obtained. outpatient consultation appointments, or completely unplanned, as in emergencies (which require reserve capacity) or extraordinary events such as natural disasters (which require surge capacity). This creates a cloud of uncertainty regarding resource use, which also translates into issues of scale and scope that few other business units outside the sec- tor ever experience. Figure 11: Hospital Production Function Source: Sergio Flores (2022). To best understand the production function of a hospital, we must first attempt to identify the inputs, outputs, and processes that transform inputs into outputs. Within the context of a production function, inputs are the units of resources (factors of production in main- stream economic theory) needed to produce outputs, which are the goods or services we intend to create out of the inputs. Since this production function attempts to establish a relationship between inputs and outputs, these need to be quantifiable or measurable. Inputs can be generally classified into one of three main categories: 45 1. Labor, which corresponds to healthcare personnel and supporting staff 2. Equipment and consumables, which correspond to devices, machines, instruments, and pharmaceuticals 3. Infrastructure, which includes physical installations In a hospital setting, each of these resources serve specific and specialized roles that are not normally present in other kind of healthcare facilities. For example, healthcare person- nel are usually trained at a specialized level, depending on the kind of pathologies they need to attend to, such as pediatricians or anesthesiologists. Hospital equipment is simi- larly more technologically advanced to support specialized diagnosis and treatment serv- ices, such as positron emission tomography or genetic laboratories. Physical installations within a hospital must be able to support both personnel and equipment requirements and can be broadly divided into the kind of care they are designed to provide. For exam- ple, hospitals may have neonatal, pediatric, and maternal units; intensive care units; oper- ating theaters; or emergency units, among others. Outputs are more difficult to define in the hospital context. The main purpose of hospitals is to provide healthcare, but that may be achieved through different pathways and lead to different outputs. The reader might be aware that the ultimate goal of healthcare organi- zations is to improve health, so the ideal unit of output measurement would be a unit of health improvement. Although researchers over time have managed methods to quantify health in different ways, it is not practical to apply them to routine administrative data and we must therefore select intermediate outputs, such as physical measures of activity. Hospitals provide inpatient treatment, outpatient visits, and emergency care (Glied & Smith, 2011). When analyzing inpatient treatment, perhaps the most common output Hospital discharge measure is hospital discharge. When considering outpatient care, the number of consul- This is the transfer of care tations is generally the most commonly used measure; when considering emergency vis- of a patient from a hospi- tal to other providers of its, and due to the ever open and uncertain nature of its service, it is preferably measured healthcare or home. just by logging the amount of patient emergencies treated. Outpatient care This is the care of patients In any case, when considering the hospital as a productive unit, we understand that inputs administered without overnight stays in the are converted through several healthcare delivery processes into outputs. The inputs and hospitals. processes used within a hospital are tailored to each patient. Even patients with the same diagnosis can follow different care pathways depending on their inherent characteristics, Patient flow such as age or sex. We can exemplify this through a patient flow. This is the movement of patients through a health- care facility. Imagine a woman in her thirty-eighth week of pregnancy starting to feel Braxton Hicks contractions. She decides to go to the hospital’s maternity unit. There, a group of health- care professionals assess her condition (using physical examination and equipment, such as ultrasound and laboratory tests) and decide to admit her into the hospital. This prompts a host of administrative and medical actions: A unique identifier and a bed is assigned to the patient; she goes into observation; and, if needed, she will start receiving medication to help her during labor. During labor, she will be constantly monitored to measure her progress and assure her wellbeing by more personnel using more equipment and medication. Once it’s time for childbirth, the patient will be transferred to another space within the hospital especially suited for the event. More specialized personnel will be equipped and ready to handle the health needs of the child, effectively starting a new 46 patient flow within the hospital. At this particular point in the patient flow, a different patient could instead qualify for a cesarean section, requiring a different set of resources in an operating room. Nevertheless, once childbirth is complete, a separate process starts for the child and the mother enters a new observation and monitoring phase. During the next few hours, the mother recovers and receives maternal education from another set of professionals, while the child receives a first set of vaccines and is examined for any kind of abnormality. If their health status evolves satisfactorily, both patients are discharged from the hospital and expected to continue their health monitoring with a different healthcare provider. Using the previous example, we can attempt to identify how a hospital transformed inputs into outputs: The hospital used healthcare personnel (midwife, gynecologists, pediatri- cians, nurses, administrative personnel, and potentially anesthesiologists); medications (analgesics, oxytocin, and prostaglandins); equipment (ultrasonography, labor cot, and cardiotocograph); and facilities within the hospital (expulsion room, operating rooms, gynecological admission unit, and neonatal unit) to produce a dual discharge of both a healthy mother and child. The healthcare delivery process that makes this possible includes steps such as assessment, diagnosis, treatment, and monitoring. 3.2 Hospital Cost Functions From an economic point of view, a hospital’s main objective is either sustainability or profit maximization. However, after the introduction of case-based payments like diagno- sis-related groups (DRG), managed care organization, and capitation-based payments (where payment is pre-established based on the number and type of patient attended regardless of how much is actually spent), hospitals are now more focused on cost con- tainment than revenue generation. This means that a hospital needs to keep costs as low as possible. Costs can be classified in many ways. We can start by introducing average and marginal costs. In the simplest terms, average costs are the total costs the production of outputs incurred divided by the total amount of outputs. Marginal costs are the costs of producing an additional unit of output. Function equations are mathematical expressions that define the relationship between independent variables and a dependent variable. In the specific case of a cost function, it shows the influence of a cost driver on a cost. Therefore, we can use cost function tools to predict what a cost will be based on a cost driver. The reader might be able to infer that, in this relationship, if a cost driver increases, then the cost would also increase. However, a hospital cost function also allows us to forecast how much (and not only if) the cost goes up based on how much a cost driver increases. It also allows us to identify how much the total cost can be attributed to other subtypes of cost. Hospital costs can be broadly divided into two types: fixed and variable costs. Fixed costs remain the same no matter the production output (i.e., rent for the space). Variable costs change according to the amount of output produced. In the hospital context, the rent for a 47 building could be a fixed cost, whereas the expenses for analgesic medication are variable costs. Let us exemplify what we have learned so far. Imagine that the following simplifica- tion is a real scenario. Table 3: Types of Costs Clinic Rent per Mainte- Total Number (Varia- Total Average month nance fixed of con- ble) cost variable cost per (A) costs per costs sulta- per con- costs consul- month (A+B) tions (C) sultation (CxD) tation (B) (D) (A+B+ (C/D))/C 1 1,000,000 500,000 1,500,000 100 5,000 500,000 20,000 2 1,200,000 500,000 1,700,000 140 5,000 700,000 12,143 3 1,600,000 500,000 2,100,000 180 5,000 900,000 16,667 4 2,000,000 500,000 2,000,000 220 5,000 1,100,000 14,091 Source: Sergio Flores (2022). In this example, we can identify four key components of our cost function: 1. Fixed costs (A and B), such as rent and maintenance costs for outpatient clinics, are costs that stay the same no matter the amount of outputs we aim to produce. In this example, the fixed cost for clinic 1 is 1,000,000 for rent plus 500,000 for maintenance. Some common hospital fixed costs could be building maintenance, utilities, and salar- ies. 2. Variable costs (D) in this case are the costs each outpatient consultatio

Introduction to Health Economics PDF

Document Details

Tags

Related

Summary

Full Transcript