206 final notes

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206 notes 206 final notes Unit 1, 2: Cost benefit principle: take an action only if the extra benefits exceed the extra cost Types of efficiency: 1. technical: producing the maximum possible amount of output from the inputs used. 2. cost effectiveness: lowest cost for production. 3. allocative: produce and distribute according to the values of individuals. Utility – subjective satisfaction = welfare. *An allocation is AE id there it is impossible to reallocate resources in a way that makes at least one person better off without making someone else worse off. Pareto Criterion: if the gains from reallocation are sufficiently large that the winners could in theory compensate the losers and still be better off, the policy is deemed allocatively efficient thus, only a single point is allocatively efficient. Marginal benefit: the increase in gain as the result of increase in production or consumption of one additional unit. . Marginal cost: increase in cost … Produce/consume until marginal benefit = marginal cost. Externalities: Physical (selfish) externality: even a purely selfish person cares about others’ consumption of health care (e.g., flu shot). Caring externality: concern for others’ welfare. Unit 3: #7, #8, #9 Demand for health care can depend on: -out of pocket price -income -time costs -price of substitutes and complements -tastes and preferences -state of health -provider

206 notes PED range: 0 to minus infinity (-∞) Five cases: perfect inelasticity: PED = 0 inelastic demand: PED between 0 and -1 unitary elasticity: PED = -1 elastic demand: PED is less than -1 perfect elasticity: PED is minus infinity (- ∞) Primary care tends to be inelastic -0.1 -0.7 Dental and nursing home service are more elastic Complements : if price of one good goes up, you consume less of both. Substitutes : if price of one good goes up, you consume more of the other one. Determining factors of risk: -probability an event will occur -size of gain or loss Risk pooling: individuals contribute a small amount to the pool, this will compensate for loss. *Only risks that can be traded can be pooled. Works if uncertainty is: -unpredictable at the individual level -quite predictable in a large group Effective risk pooling depends on: -size of pool -presence of sufficiently independent risks -independence between the expected loss and the presence of insurance. Moral hazard: expected loss changes with the presence of insurance. Ex ante: insured takes less care to avoid loss. Ex post: those affected seek more expensive care than if the loss was not insured. *Death from boxing example. Expected value(x)= p1x1+p2x2+...pnxn Risk averse: doesn’t wants risks. Risk seeking want risks. Risk neutral: doesn’t care. *understand welfare gain of risk pooling Standard insurance model has limitations, but no single model has replaced it Uncertainty and risk aversion -> insurance can lead to significant welfare gains (Arrow, 1963)

206 notes Moral hazard -> significant welfare losses [argument for cost sharing] (Pauly, 1968) Limitations of the standard model: -magnitudes of gains and losses -loss aversion -risk reduction is the only source of welfare gain -little influence on the size of the expected losses -overconsumption -> welfare loss Supply side solutions: Motivations: Better judges necessary and effective care Limit ability to engage in SID Approaches: ‘gatekeeper’ model Managed care (HMO is one type) Capacity control (publicly funded systems Financial incentives Types of insurance and their effects on demand: If patient pays 0 for care demand will become perfectly inelastic. If patient coinsures demand will become more inelastic but not fully. If patient has a coverage limit demand will be perfectly inelastic till coverage threshold, then it will be back to its normal elasticity. If patient pays a fixed rate, insurer pays the rest demand will be normal till rate and perfectly inelastic after. Adverse selection = information asymmetry Cream skimming: choosing patients for some characteristics benefitable to supply rather than their need for care. Unit 4: #9,#10 Financing: the activity of raising funds from individuals to pay for the operation of the health care system. Example: direct out of pocket payments, private insurance, premiums, social insurance contributions and taxes. Funding and remuneration: the activity of allocating those funds to alternative activities within the health care sector. Example: fee for service, capitation, budgetary allocations.

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206 notes Efficiency in raising revenue (technical): -minimize cost per dollar raised -public funding tends to be more efficient for both providers and beneficiaries Efficiency when it comes to risk (allocative) -Where preferences vary private insurance is more efficient. -consumption should conform to preferences. -considerable scope for inefficiency this is because of: risk pooling (adverse selection, cream- skimming, etc..) in both private and public. Method of financing affects allocative efficiency in the market for services through the influence on consumption. Efficiency of utilization Welfarist: private market with cost sharing. Non welfarist: public financing. Wait times used as common critique of a single payer. Efficiency of investment One payer in multiplayer system has a disincentive to innovate because others will “free ride” No comparable problem with single payer public system Progressive: poor pay their portion, rich pay more

206 notes Regressive: poor pay more than rich. Mixed systems 1. Joint public and private financing: partly through public, partly through private. 2. Public and private financing as alternatives: either public or private financing is chosen 3. Complementary public and private financing: private sector pays for expenses not covered by the public plan. Funding Problem: third party insurer is allocating the resources, which creates incentives. -fee for service -capitation basis Principle-agent problem: example is sid. Principle: insurer agent: provider What makes this difficult? Info asymmetry, uncertainty outcomes, heterogenous agents which is preferences. Principle faces most of the problem : -difficulty in determine quality of providers -uncertainties -information symmetry Funders strategy: -reduce informational deficit and uncertainty -norms to encourage better agents -financial rewards to align incentives Types of payment -fee for service -case-based funding -capitation (risk adjusted) -global budget -bonus/incentive payments Different types of pay introduce different incentives. (retrospective/prospective) Unit 5: Leads to market failure: -SID -Information asymmetry Acknowledge physicians non income incentives: -market for physician -physician themselves -physician practices

206 notes Leisure is a normal good hence the backward bending labour supply curve. Why do not for profit arrangements dominate the hospital industry? -lower transaction/contacting costs -less likely to dupe consumers if not chasing SID -incomplete markets or demand for public goods -absence of sufficient market discipline NFP less efficient due to organizational structure Unit 6: Economic evaluation provides a framework to make the best use of clinical evidence through an organized consideration of the effects of all available alternatives on health, health care costs, and other effects that are regarded as valuable. Why is economic evaluation important? 1. Without systematic analysis, it is difficult to clearly identify the relevant alternatives. Minimize the chances of an important alternative being excluded. 2. Without some attempt at quantification, informal assessment of orders of magnitude can be misleading. Example is the cancer for the large bowel, the 6 th test reached a marginal cost of 47 million dollars Neuhauser (1975). The real cost of the program isn’t about the money but about the value forgone by committing the resources in the wrong places. It comes down to opportunity cots. 3. Systematic approaches increase the explicitness and accountability in decision making. Economic evaluation has two features: 1. Inputs and outputs in other words costs and consequence of alternative course of action. 2. Choices. Resources are limited choices have to be made.

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206 notes Economic evaluation is the comparative analysis of alternative courses of action in terms of both their costs and consequences. Thus, the task is to identify, measure, value and compare the costs and consequences of alternatives. Types of economic evaluation: Cost utility analysis the most appropriate method. similar to CEA except they use a generic measure of health gain as the consequence. (Healthy years consequence) (quality adjusted life years) necessary comparison. CUA can use the following types of analysis to better their decision making. CUA however is the best analysis. -outcomes measures as utilities QALY-an explicit requirement Advantages Single outcome for morbidity and mortality Aids comparability Disadvantages Ambitious objective Additional data collection Cost effective analysis : costs are related to a single, common effect that may differ in magnitude between the alternative programs. It is most effective when a decision maker is given a budget and considering a limited range of options within a given field. (Natural units: Disability saved, life years gained consequences) ICER= (cost1-cost2)/(effect1-effect2) Order matters because effects are reported in natural units that are clinically relevant Advantages: Familiarity for clinicians Often no additional data collection for consequences Disadvantages: Multiple outcomes Comparability Cost minimization analysis: if the two or more alternatives under consideration achieve the given outcome to the same extent. Cost benefit analysis turning costs and consequences into monetary value for easier comparison. Used for monetary terms (Monetary consequences) Cost minimization analysis is a costing exercise and not a formal economic evaluation.

206 notes Cost consequence analysis should be a complement to CUA not a substitute. Aids in transparency when reporting, this is because events are reported as costs and outcomes. (e.g. events predicted, survival, gains in quality of life) Economic evaluation requirement: -two or more alternative courses of action. -both costs and consequences of alternatives must be examined. Only the individual can decide whether their welfare has improved or not and that is based on their personal preferences. Comparators: should reflect the target population and the decision at hand. “Current case” should be considered. Health preferences should be included in the model and be conceptualized. The economic evaluation should be assessed based in the incremental cost effectiveness ratio. The impact of uncertainty on the estimated costs and outcomes for each intervention should be presented using cost-effectiveness acceptability curves (CEACs) and cost-effectiveness acceptability frontiers (CEAFs). Cost Estimation 1. Identification of the range of resource use 2. Determine the quantity of use 3. Valuation of health services Decision modelling: data from various sources Trail based  Self-report methods  Medical charts  Routinely collected data  Under researched area Issues to consider

206 notes Protocol driven costs Recall bias Top-down costing -makes use of routinely available data Bottom-up Primary data collection Complex and expensive Seen question How should Canadian family physicians be remunerated to encourage the efficient delivery of health care services? What trade-offs does your preferred funding mechanism face? Draw on economic concepts and theories, evidence, and illustrative examples to support your position. Provide a base amount through capitation funding but pay ffs for a portion of the costs services provided. In an optimal situation the ffs would be dependendt of on the MC of service provision. Principle agent problems arise in many contexts, including every workplace. Health care is not immune to this issue. Based on national health expenditure databases for Canadians account for 15.1% of health- related money. This static is not a concern, the concern is the 3.5 % growth in spending per person which outpaces hospitals and prescription drugs. Allocating bigger chunks funds toward providers is not a major area of concern necessarily it becomes an issue when those funds are not used efficiently. Providers are humans, the first rule of economics states that everyone is a maximizer. Providers profit maximizing, self-interested providers Physician behaviour is a crucial part of health care planning Principle agent problems arise in many context Maybe a blended model 12.2 textbook prospective payment and retrospective payment FFS Higher SID Cream scheming Wanting to keep people in hospitals Determining fee is a challenge Procedural orientation Wants higher risk patients Capitation Crème scheming Increase enrollees decrease resources per enrollee

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206 notes Underproviding care Profit making incentive to keep people out of the hospitals. Wants lower risk patients Physician behaviour *Backward bending labour supply curve unit 5 week 11 slide 29 the relative strength of the two factors of substitution effect and income effect is the determinate for the change in fees. However due to consumer preferences and the heterogeneity of the market it is practically impossible to create a fully efficient system. Leisure is a normal good, the higher your wage becomes the higher your demand of leisure. Which raises the question how to incentive the agent in other words the physician behaviour to act in order to maximize utility the principle or the insurer. The answer U need to understand both payment and the response from physicians Primary care is changing the market gender age Acknowledge the difference in generational behaviour in gp

206 notes millennials want happiness more than work (Malcom, 2016) https://www.usatoday.com/story/money/personalfinance/2016/04/14/millennials-workplace- happy-salary-pay/82943186/ Trade off with all payment methods Try to find the least bad one Why blended method Explain method Why is it better Wrap up by accounting for the actual change in behaviour Perfect agent does not mean efficient

206 final notes

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