Lectures 9 - 13 for Final Flashcards
Value of a statistical life (VSL):
Threshold current = $7M
■ If intervention costs more → reject
■ If intervention costs less → accept
How are VSL’s determined?
Juries
● Revealed preference (willingness to pay)
● Revealed preference in occupation (ex. window washer wage differs depending on the height at which they wash; coal miners)
● Survey
Cost-Benefit Analysis (CBA)
- Convert Everything to Dollars
- Do the costs outweigh the benefits?
- Assumes a constant VSL
- Used more in regulation than in medicine/PH
Cost-Effectiveness Analysis (CEA)
Cost-effective
Incremental Cost Effectiveness Ratio/Cost-Effectiveness Ratio
Difference in costs / Difference in Effectiveness;
[Cv-Co]/[Ev-Eo]
Cost-Utility Analysis
Same as cost-effectiveness but units is QALYs or DALYs
What is considered a QALY threshold for cost-utility analysis?
$50k-$100k per QALY; in LIC use per capita GDP
Discuounting
PV = FV/[(1+r)^t]
You often need to compare stuff over time (i.e. chronic disease - cheaper to prevent or treat later)?
Need to use this to compare the future vs today
3% is seen as the starting discount rate for medical decision making
If you have 10mm people and the cost of a vaccine is $2; what is your cost to vaccinate all?
2*10mm = $20mm
If you have 10mm people and 99.5% of the people who are vaccinated live, how many people will live?
.995*10mm= 9.95 milliion lives saved
If you have 10mm people and vaccinate none of them, and 99% get no small pox, and of the 1% that do, 10% live, how may people are alive at the end?
.9910mm=9.9 million lives
plus
(0.010.10)*10mmm = 0.01mm
= 9.91mm lives
If total cost of vaccination = 20,000,000 and total cost of not = 0, and effectiveness for vaccination (aka lives saved) is 9.95mm and effectiveness for non-vaccination is 9.91mm, then what is the value per life saved?
(20,000,000-0)/(9.95-9.91) = 20,000,000,/.04= $500/lives saved.
Reminder to look at Heparin Decision Tree Example
Look at example
Sensitivity
P(T+|D+)
Specificity
P(T-|D-)
PPV:
P(D+|T+) = [sensprevalence]/[(sensprev)+(1-spec)*(1-prev)]
Where is the prevalence located on a 2x2?
bottom of the D+ column (“e” cell)
What is cell a as a calcuation?
prevalence*sensitivity
what is d cell as a calucation?
F cell*specificity
What is the calculation for PPV also?
a cell divided by total test positive.
What do we fear in testing?
false positivies
When does it make sense to screen?
When the A cell is way more heavily populated than the b cell.
When can we expect more false positives?
when the disease is very rare
review HIV example
review HIV example
Preventive Care Spectrum
1) saves lives and money
2) cost-effective
3) cost-ineffective
4) increases cost and worsens health
Calculation for cost WITH prevention
of peiople * cost of prevention
Calucation for cost WITHOUT prevention
of people * cost of event * incidence without prevention
When does prevention save money?
when the cost WITH prevention is less than the cost WITHOUT prevention.
Six Criticisms of Cost-Effectiveness
1) Ethics
2) Heterogeneity in patient benfit
3) Heterogeneity in provider skill
4) Some thresholds can be arbitrary
5) Normal people don’t think like this
6) Incentives Matter
Problem with Cost-Effectiveness: ethics
are we comfortable putting money on human lives?
Heterogeneity in patient benefit as a problem with cost-effectiveness
cost-effectiveness may be too crude/simple, bc for certain groups the treatment may be effective/worth it
Heterogeneity in provider skill as a problem with cost-effectiveness
volume-outcome relationship; providers who do the same procedure all the time have better outcomes; in high volume centers, outcomes are usually better and cost effectiveness will look better
Some thresholds are arbitrary as a problem with cost-effectiveness
why do we draw the line where we do?
Normal people don’t think like this as a problem with cost-effectiveness
we dont think in terms of monetary value with lives but economists do
Incentives Matter (as a problem with cost-effectiveness)
Problem is when providers make money from providing cost-ineffective care; these doctors are poorly incentivized
An agency problem is what?
its a transaction with two key issues:
- information assymetry
- misaligned incentives
Capitated payment
an alternative to fee-for-service
providers are paid a lump sum for all treatment and must allocate care accordingly
therefore it is more profitable to provide less care
Target Earnings Hypothesis
Physicians have target earnings in mind; if you decrease the price, physicians will increase the quantity to meet that benchmark.
what does the mcguire model do?
shows why fee-for-service model induces demand because physicians do not determine price but they do determine quantity.
Net surplus
utility gained by paying less than you would normally
total difference between willingness to pay and the price
Minimum Net Surplus
the minimum quantity of care a patient will accept (or the minimum net surplus required) from a physician before they’d move physicians.
surplus maximizing level of medicine on mcguire model
maximizes are abetween price and demand
Review McGuire Model
Review McGuire Model
What are the assumptions of the mcguire model?
fee for service
patients understand the dynamics of cost and quantity
patients pay so they care about the thigns they buy
What is the conclusion of the mcguire model
physician will induce demand because its profitable under the FFS model and the patient is willing to accept more care than they want.
How can you make the mcguire model worse?
By removing assumption that patients understand price/qty dynamics, and when there is a third party payer!
Goals of malpractice system
compensate and deter negligence
Does our system of malpractice insurance meet the two goals?
no:
- not necessarily compensating patients well or quickly
- not even addressing negligence
- if anything leads to defensive medicine
Two key points for malpractice
system as it stands doesnt work well or achieve its goals - BUT - its not as expensive as you might think.
Credence Good
a good where the seller knows how much you need but you dont know how much you need.
R&D for a drug
around $800mm
R&D is a
public good
why does the patent system exist
to incentivize r&d of drugs since its a public good
What happens afgter the patent runs out and generics enter the market?
inelastic consumers are the only ones who stick with the brand; generic price is lower and branded price goes up
3 ways we can induce R&D
patents, NIH grants, advance market comittments
Tradeoffs in drug r&d
static vs dynamic efficiency
persuasive vs informative adds
bad drugs sold vs good drugs not sold
dynamic vs static efficency as a pharma tradeoff
dynamic efficienchy = benefits over time
static efficiency = benefits today
so if you get rid of patents, you up static efficiency (cheaper drugs today)
but you reduce dynamic efficiency (people less incentivized to do r&d so you reduce production of drugs in the future)
persuasive vs invofmative re; tradeoffs in pharma
advertising vs informing people w/ ads
bad drugs are sold vs good drugs are not sold
i.e. a tough fda means better/safer drugs’
but it also means more people will die from waiting until the drugs are “good enough”
3 other policy debates for pharma
drug reimportation (import cheap drugs but issue is higher us prices incentivize research)
patent lengths (trade off between static and dynamic efficiency)
advertising
Advanced Market Committments
issue; 90% of r&d is focused on 10% of the deaths
put money into the bank account and commit to giving it to whomever creates the drug.
Three types of supply
licensing through the private/free market to regulate even when there is asymmetric info (i.e. yoga teachers)
rent seeking behavior (i.e. regulated yacht brokers)
quality/quantity trade off (i.e. NPs vs MDs debate)
IRR
summarizes in one # how to determine whether or not to make an investment
its the value of R that equalizes pv of costs and pv of benefits
monopolist
only one seller/producer of a good
the more you produce the less you make per good
What do monopolists do
they sell less than they should at a higher price relative to competitive firms.
who is an example of a monopolist?
the AMA - they determine the # of docs and med schools and may have a perverse incentive to do this (to keep doc salaries high).
what would the AMA say about their restrictions on doctorness?
they are doing it to keep quality high. so you know your doctors are good.
specialization’s issue?
there are huge income differences across specifialization which are attributed to differential barriers to entry - i.e. # of residency slots.
two issues with doctor rankings
docs don’t choose patients - so they may just be getting sicker patients
cream skimming
Monopsonist
when there is only one buyer of a good
i.e. coal mine in north dakota
needs to attract more workers so they pay higher wages than a competitive market would.
What type of supply curve do monopsonists face?
upward sloping - so they underemploy relative to competitive people
what does a wage floor do for monopsonists?
it enocurages them to hire more employees than they would because wages are set and they cant reduce wages by firing workers …therefore both wages and employment increaes.
aka are forced to hire more rather than choosing to hire less - opposite of a competitive market reactio where you choose to hire less
what is monopsonists’ inclination?
fire workers to reduce wages for everyone. and pay less wages for that fired employee.
Six New Ways to pay for care (vs. fee for service)
- selective contracting
- gatekeeping
- prospective payment
- ACO’s
- bundled payments
- pay for performance
bargaining/bilateral
bilateral bargaining - prices are set by 2 negotiating parties @ a competitive market
- agreement will only happen when both parties are better off than they were
disagreement point
2 negotiating parties wont agree to anything less than this bc they wont profit.
involving 2 rational actors
will only agree to a situation where they’re better off than they would be wihtout an agreement
review graph for disagreement point
review graph
selective contracting
when the insurance company dictates which hospital you can go to (covered in network)
its a managed care situation where the insurer is selectively contracting.
what does selective contarcting do to the model showing bargaining?
it shifts the disagreement point toward the insurer’s benefit…and thus the bargaining power.
bc - if the hospital doesnt agree to the insurer’s demands, they wont be in network and will lose profits.
what happens over time with selective contracting?
insurance companies almost become monopsonists with a lot of bargaiing power
what exacerbates selective contracting problem?
m&a among insurance compainies… but hospitals have started to consolidate to get more power too.
takaways about selective contracting as a method of payment
it does decrease prices (at least temporarily)
but consolidaiton amount is worriesome.
what is gatekeeping
pcp becomes the gatekeeper to determien whether or not you can get more specialized care/ insurer may not cover specialized care unless you see a pcp first.
pros and cons to gatekeeping
pro: can help to cut cost=ineffecrive care and fight induced demand
con: paperwork and bureaucracy to get through the gagtes.
also, do they make mistakes about what care is necessary? and horror stories about patients being manhandled
prospective payment
pro- fights induced demand
cons - upcoding throughput creamskimming stinting
upcoding
when you shift payments toward a more highly reimbursed category and are strategic about how you go about it
thruput
when a hospital pushes people through to care for more people … lots of people, shorter stay = more profit.
issue is it gives hospital less incentive to care about population health as its cost ineffective
counter to throughput worry - readmission penalties have been introduced.
stinting
when hospitals give too little care (opposite of induced demand)
ACOs
hospitals with a bunch of private physician providers that change care incentives
its paid for in a combo of ffs and capitation
pro: induces firms to provide care more efficiently
cons: cream skimming, stinting (bc some payment is capitated).
Bundled payments
capitations tied to an event. provide care for patient and a lump sum is to be split by all service providers
P4P - pay for performance
physicians are rewarded for good outcomes
mainly for pcp’s
pro: resolves moral hazard bc incentives are aligned
pro: rewards good physicians
con: multitasking problem
con: creamskimming
PPO:
preferred provider network
network no gatekeeping
HMO:
staff model hmo (i.e. kaiser, where insurance co owns hospitals)
independent practice association (a network with gatekeepers)
network gatekeeping
POS
hybrid between hmo and ppo; you can go out of network but cost sharing increases
gatekeeping no network
people on managed care tend to…
consume less care and have better access
therefore costs are cut
no evidence it hurts people or worsens care.
where does the major cost saving seem to be for managed care?
managed care can lower prices and save costs through selective contracting without hurting other margins.
ffs on the managed care 2x2
no network no gatekeeping
what is a non-profit?
its a firm where no one can claim profits
no owners per se
tax exempt for any donations received
why do nonprofits exist?
1) median voter theorem
2) conflicts of interest
3) interest groups
median voter theorem for nfps
median voter is centrist/swing voter… they are the ones to decide elections.
bc of median voter, extremes can never win
so nfp’s exist to plug holes where the gov’t cant go bc of the median voter.
is why nfp’s tend to be right and/or left leaning
conflicts of interest for nfps’
most profitable biz for education and hospitals are contrary to what is best for their target customer. so, you make these orgs nonprofit to remove this misalignment of interest.
interest groups
for-profit groups are difficult to control
so internal interest gorups cant control its direction
non-profits are more susceptible to being controlled and can go in the direction internal leaders choose
4 views re: what do non-profits do? if they aren’t maximizing profits, what are they doint?
1) quantity/quality view
2) physicians cooperative
3) perquisite or prestige maxing
4) cynical take
quantity/quality view for why nonprofits do what they do
1) quantity/quality view - nfp’s dont max profits, they max utility through quantity qual tradeoffs
physicians cooperative view for why nonprofits do what they do
they are maximizing the salaries of a few executives at the top but not maximizing profits overall
perquisite or prestige maxing for why nfp’s do what they do
they max the pristige of institution, not its profits; or they make it more attractive to work there bc profits arent the main focus
cynical take for why nfp’s do what they do
nfps are really the same as for profits. only public hospitasl seem immune to going after $. nfps are for profits in disguise.
Small Area Variation Takeaways
- there is huge variation in spending
- there does not seem to be a relationshiop between spending and quality
Where do we see more small area variation?
in procedures that have a lot of physician discretion
in higher intensity environment (seems to be the envionment that matters, not the physician)
Three explainations for Small Area Variation
1) Flat of the Curve
2) Roemer’s Law
3) Specialization
Flat of the curve
looks similar to a grossman’s health production functio if looking at activity
US is so far to the right on spending/high on benefits that there are diminishing returns for spending –> waste
Roemer’s Law
A built bed is a filled bed
leads to induced demand –> more care –> more variation in care
Therefore we’ve created a certificate of need you have to get before you build a hospital
pro: gov’t is protecting against roemer’s law and thus induced demand
con: its rent-seeking behavior on the part of the hospitals
Specialization as it ties to Small area variation
flat of the curve may not tell the whole story
we assume the hospital will do what’s best for the patient.
hospitals that specialize one way or another may be a better fit for a patient –> comparing regions is too crude
there is a difference in care based upon speciailization of the hospital that may determine its a better treatment for one patient, vs another, etc.
Cross-Country Comparisons
US is an outlier - spends way more than other rich countries
the growth rate of spending is steeper here
US is actually less healthy, so no ROI on this intense investment
Our prices are really what make the difference
The fact that we have shorter wait times is Ok, but not justifiable for increase in cost (we are not an outlier in waiting convenience)
Problems with our assumptions when comparing the US vs other countries
1) Case Mix in statistical analysis (cant compare parisian and texan)
2) Heterogeneity in population
3) the rich still come here for care
4) all countries have the same increasing spending problem, we’re just farther along the curve
5) We subsidize the rest of the world and encourage R&D
CPI
Consumer price index; allows you to adjust for the price of goods over time taking into account inflation
Problems with CPI
- increasing quality can’t be accounted for
- hard to handle new goods
- prices aren’t observed in healthcare, so hard to use this as a metric
3 positive views on teh US healthcare costs
1) Baumol’s cost disease
2) applying cost-effectiveness to the bigger picture
3) income elasticity approach
Baumol’s cost disease
sectors are either progressive or stagnant
progressive: tech - things are becoming more productive over time
stagnant - health - things are less productive over time
- so, its expected that our HC costs are increasing bc we’re in a stagnant sector (vs tech which is decreasing). its net ok because the US gdp isnt increasing over all, its just shifting
Applying cost-effectiveness to the macro picture
we’ve seen an increase in both wealth and life expectancy over past hundred years
we want to get rid of the waste but not the good stuff
we’re wealther now not just due to increased spending but also gains in life expectancy
from a CE pov our high spending might be worth it bc we’re living longer which is good value.
Income elasticity approach
as you get richer, more of your money will go to HC.
but hc is different bc as you spend money, you live longer.
so, you’re not concerned about HC spending bc you live longer –> driving trends in HC spending.
