lecture 2 - value of health

Question 1

two levels of health spending efficiency

Answer 1

1. Efficient allocation of resources within health system (is the budget spend efficiently?)
   o Compare health produced by marginal spending across healthcare programmes
   o Cost-effectiveness analysis
   o Module 3
2. Efficient allocation of resources to health system (determine the efficient level of the budget)
   o Compare value of health produced by healthcare with value of other goods
   o Cost benefit analysis
   o Module 2

Question 2

5. Explain how the missing market for health both leaves us with a resource allocation problem and denies us the information to solve it?

Answer 2

o Health is produced but not traded (you cannot sell it to anyone else)
o Even if there could be a market (organs), it is not ethical
o No decentralized market mechanism to
o Allocate resources to health production
o Capture value of health in a price
o Centralized allocation implies a value of health
o Opportunity costs

Question 3

6. Why can’t we presume that the level of healthcare spending is efficient?

Answer 3

o Most healthcare spending is not market determined i.e. centralized
o Healthcare markets are highly distorted
o Imperfect competition  MSB > MSC
o Imperfect information
o Moral hazard  MSB < MSC
o Adverse selection  MSB > MSC
o Positive externalities

Question 4

human capital method limitations

Answer 4

• Value of health gains to those no longer working = zero
  o Very large share of healthcare spending on elderly/ retired  no value!
• Health gains to low earners valued < health gains to high earners
  o Skews resource allocation in favour of high earners
• Maximisation of GDP is narrow societal goal
  o GDP imperfect measure of social wellbeing
  o Leaves out value of non-marketed goods, such as health
• Ignores preferences for health
• Biased estimate of total value of health gains, as well as their distribution
  o Against older people and people with a lower income
• Plausibly, HC method gives lower bound estimate of value of health/ life

Question 5

preference based methods

Answer 5

• Revealed preference
  o Infer value implicitly placed on health or life from market behaviour that changes health or mortality risk
   Looking for market behaviour where basically people are making trade offs between getting money or goods and perhaps damaging their health or mortality risk. This trade off can infer the value.
• Stated preference
  o Elicit value explicitly placed on health or life from money amount reported as sufficient to compensate for change in health or mortality risk

Question 6

VSL larger if

Answer 6

• Survival probability lower
  o Dead anyway effect = if your survival probability is low and you get a chance to increase that probability, even for a small amount, you are probably willing to pay a lot for that small probability. This because if you do not do it, you are dead anyway.
• Income higher
  o Increases benefit from remaining alive
  o Reduces opportunity cost of income sacrificed to remain alive

Question 7

revealed preference in labour market - limitations

Answer 7

• Limitations of theory
  o Imperfectly competitive labour market  low market power workers not fully compensated for risk  underestimate VSL
  o Imperfectly informed workers à underestimate risk à underestimate VSL
• Limitations of empirics
  o Estimates from working aged population apply to older and younger populations?
  o Unobservable differences in job characteristics
   Risky, intrinsically rewarding jobs (doctor, police,..) à underestimate wage premium & VSL
   Wage premium may compensate for high mortality & health risk à overestimate VSL
  o Unobservable differences in worker characteristics
   Risk lovers select into risky jobs  their wage premium < average  underestimate VSL
  o Measurement error in risk data

Question 8

are we spending too much or too little: pessimistic view

Answer 8

• High and rising levels of health spending are due to incomplete & distorted markets
• Social & private insurance  moral hazard  overspending on healthcare (MSC > MSB)
• Lack of price sensitivity  incentives to discover and use expensive medical technologies
• Value of these technologies well below cost
• Population ageing further pushes up health spending and reduces relative size of labour force
• Rising insurance premiums  rising labour costs à loss of employment
• Healthcare becoming unaffordable and straining the economy
• Rising health spending will make us poorer

Question 9

are we spending too much or too little: optimistic view

Answer 9

• We are getting richer
• As we do so, the marginal utility of (non-health) consumption falls
• Consequently, the opportunity cost of health spending falls
• That spending, by increasing longevity, allows us to enjoy high consumption for longer
• Marginal utility of life extension does not fall as we get richer
• There are diminishing marginal returns to health spending
• As income grows, marginal utility of consumption falls faster than enjoyment from the marginal gain in longevity generated by health spending
• Allocate relatively more resources to health (and healthcare) as we get richer  ↑ health spending as % GDP
• Health is a luxury good (income elasticity > 1; N L income elasticity = 1.2)
• Rising health spending results from getting richer