EXAM 1 Chapter 1 - Health Economics studies the supply and demand of health care resources and the impact of health care resources on a population. - Health care resources consist of medical supplies, such as pharmaceutical goods, latex rubber gloves, and bed linens; personnel , such as physicians and lab assistants; and capital inputs, including nursing home and hospital facilities, diagnostic and therapeutic equipment, and other items that provide medical care services. - The Four Basic Questions o What mix of nonmedical and medical goods and services should be produced in the macroeconomy? o What mix of medical goods and services should be produced in the health economy? o What specific health care resources should be used to produce the chosen medical goods and services? o Who should receive the medical goods and services that are produced? o The first two questions deal with allocative efficiency: What is the best way to allocate resources to different consumption uses?  Concerns what combination of goods and services to produce in the health economy.  The second consumption decision involves the proper mix of medical goods and services to produce in the health economy. Also trade-offs. o The third question deals with production efficiency.  Implies that society is getting the maximum output from its limited resources because the best mix of inputs has been chosen to produce each good. - Production and Allocative Efficiency and the Product Possibilities Curve o The most straightforward way to illustrate production and allocative efficiency is the use of production possibilities curve (PPC).  A PPC is an economic model that depicts the various combinations of any two goods or services that can be produced efficiently given the stock of resources, technology, and various institutional arrangements  The bowed out shape of the PPC implies that opportunity cost is not constant buy increases with a movement along the curve. o Opportunity Cost – The value of the next best alternative that is given up. o Law of Increasing Opportunity Cost – Suggests that ever-increasing amounts of one good must be given up to receive successively more equal increments of another good. o If medical inputs are not fully utilized because some inputs are idle or used unproductively, more units of one medical service can be produced without decreasing the amount of the other medical service.o Production efficiency is attained when the health economy operates at any point on the PPC, since medical inputs are producing the maximum amount of medical services and no unproductive behavior or involuntary unemployment exists. o The ideal, or optimal, point for allocative efficiency depends on society’s underlying preferences for the 2 medical services. o The PPC provides a good example of a simple but powerful model because it shed light on a number of important lessons:  The all-important economic role of scarcity  The significance of economic choices  Costs of inefficiency  How growth takes place in an economy. - The Distribution Question o The answer to the 4th question deals with distributive justice or equity:  It asks whether the distribution of services is equitable, or fair, to everyone involved. o Two ways of distributing output:  Pure Market System - Goods and services are distributed, or rationed, to only those people who are both willing and able to purchase them in the marketplace. - The incentives associated with a pure market system typically mean that the economy operates on the PPC.  Perfect Egalitarian System - Everyone has access to the same goods and services without regard to income status or willingness to pay. - The economy may operate inside the PPC.  Most countries have adopted a mixed distribution system, with the reliance on central versus market distribution varying by degree across countries.  In the US, many goods and services are distributed by both the market and the government (food stamps, Medicaid). - Gross Domestic Product (GDP) captures the total market value of all goods and services produced in an economy during a particular period. - Medical Care consists of: Costs, Access, and Quality. - The CMS (Center for Medicare and Medicaid Services) data yield important insights with respect to how health care funds are used, where the funds come from, and how much money in total is spent on medical care in the US. - Hospital and physician services account for more than half of all health care spending. - Sources of Medical Funds o 2006 – 54% of all funds spent on national health care came from the private sector, down from approximately 76% in 1960. o According to Woolhandler and Himmelstein, tax financing represents the major source of health care funds in the US.- According to CMS figures, the US spent $2.1 trillion on health care or slightly over $7,000 per person in 2006. - One way of controlling for differences in the underlying productive capacity of an economy or economies is by dividing, in this case, the amount of health care spending by GDP. - The greater productive capacity of the US economy allowed for greater amounts of both health care and all other goods to be produced. - Prior to the 1970s, most people purchased only hospital insurance. - By 1975 the uninsured rate in the US dipped to about 13% because of both private purchases and public expansions. - A health care expenditure function can be states in general form as o E = f(Y) - Economic Models o Models are abstractions of reality and are used in economics to simplify a very complex world. o Can be stated in descriptive, graphical, or mathematical form. o Implies that health care spending is a function of consumer income/health care expenditures are expected to rise with income. o Linear expenditure function:  E = a +bY  States that health care expenditures are directly related to consumer income in a linear fashion. - Positive and Normative Analysis o Positive Analysis – Uses economic theory and empirical analysis to make statements or predictions concerning economic behavior. “What is?” or “What happened?” o Normative Analysis – Deals with the appropriateness or desirability of an economic outcome or policy. “What ought to be?” or “Which is better?” - Empirical Testing o Empirical testing of economic theories is important for two reasons:  Economic