efr ch1 econ_sr2.4

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CHAPTER 1: ECONOMICS OF HEALTH CARE• Explain at least three major characteristics of

the U.S. health care competitive market• Give examples of at least three economic

concepts applied to health care• Evaluate the impact of price on health care

consumer behavior• Summarize the history of health care

economics and policy in the United States

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HISTORICAL CONTEXT

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Stone Age

? 400 BCE Ancient Greece

? 400 ADMiddle Ages

? 1600 England

1776 American

Revolution

1820-1910Florence Nightingale

1910 T. Roosevelt

1920s-1930s Great Depression

1940s WWII

1965 Medicare & Medicaid

1970s-1980s

U.S.

2000-2008 Bush Administration

Present Time: Obama

Administration

Health care in families

Hippocrates, physicians begin charging fees

Hospice, religious orders give care

Poor Laws, “worthy poor”

Self-governance and self-reliance

Trust-busting antitrust laws

Hospitals become “physician workshops,” Flexner Report, technology, need to run hospitals as business, health insurance, and managed care

Health insurance tax exemptions

HMO Act 1974, growth of managed care

Consumer-driven health plans, rising uninsured population, soaring deficit, economic problems

Health reform, global health cost concerns, technology & genomics, ACOs

Germ theory, professional nursing, sanitation

Soaring health care costs


RELEVANCE OF ECONOMICS TO HEALTH CARE• Size and scope of health care industry• Perceived problems in health care costs• Assumption that health care differs from

other industries• Impact of economic issues and decisions on

patients, providers, and society

3


NATIONAL HEALTH EXPENDITURES• America has the most costly health care system in

the world, and costs are rising • U.S. health care expenditures increased from

5.2% to 17.6% of GDP from 1960 to 2009• Expenditures for U.S. health care totaled

$2.6 trillion in 2010• Health care costs are predicted to grow at a

faster rate than the U.S. economy over the coming decade, to $4.6 trillion or 19.8% of the GDP by 2020

4


U.S. NURSES• Nurses represent the largest sector of health care

professionals in the United States, with more than three million RNs

• The United States has more nurses than any other country, and is also a major importer of international nurses

• Nursing employment and access to nursing care are influenced by the economics of the health care industry

• Nurses make an important impact on health care costs and cost savings

5


COMPETITIVE MARKETS COMPARED TO HEALTH CARE MARKETS• Does price matter?• Uncertainty and information problems• Insurance• Nonprofits• Restricted competition• Need• Government

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MARKETS• Allocate (scarce) resources efficiently• Scarcity implies choices– What goods and services to produce, and how to

produce them– Who receives goods and services

• Competitive markets are based on economic theory– No market is purely competitive– Health care markets cannot be purely competitive

• For example, patients often require care regardless of ability to pay, so free choice and satisfactory substitutes do not always exist 7


EFFICIENCIES• Technical: inputs minimized or outputs

maximized• Productive: costs of production minimized or

output maximized for a given cost• Allocative: can’t make one person better off

without another person made worse off• Trade-off: when in order to increase or acquire a

benefit or value, one must give up all or part of another benefit or value

• Opportunity cost: the value of the trade-off

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DEMAND CURVE: PRICE AND QUANTITY• Quantity of a product consumers are able and willing to buy

at a given price over a specific time period• As price increases, the quantity of a product demanded

decreases, and vice versa• Substitution effect: the price of a satisfactory substitute

decreases the quantity of the substitute demanded increases

• Income effect: the higher a consumer’s income, the less sensitive the consumer is to changes in price

• Insurance effect: similar to income, so that consumers with health insurance are less sensitive to increases in health care costs

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SUPPLY CURVE: PRICE AND QUANTITY• Quantity of a product that producers want to sell at a

given price over a specific time period• As the price of a product increases, the quantity

supplied increases, and vice versa• Current producers: as the price increases (assuming

production costs do not change), profits increase so there are incentives to increase production

• Prospective producers: as the price increases (assuming production costs do not change), profits increase so there are incentives to enter the market

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ECONOMIES OF SCALE AND SCOPE

Economies of scale:• The long-run average costs

decline as output increases• Minimization of average

costs must also maximize profits

• High fixed costs with relatively low variable costs

Economies of scope:• A firm can jointly produce

two or more goods more cheaply than under separate production of the goods

• Minimize total costs if it maximizes profits

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SURPLUS VS. SHORTAGE

12q*q2 q1

p*Pr

ice

Quantity

Demand Supply

Surplus Shortage


COMPETITION VS. MONOPOLY

Perfect competition:• Sufficient buyers and sellers

—no power over price• Homogeneous good• Perfect information• No barriers to entry or exit

Monopoly:• No competitors• No close substitutes• Information problems• Barriers to entry or exit

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NURSING LABOR MARKET

Supply:• The nursing workforce

increases during economic downturns

• Increasing wages increases the supply of nurses

• Education and training costs decrease the supply of nurses

• Licensure and certification are barriers to entry in nursing

Demand:• Alternative labor markets for

nurses increase the demand for nurses

• Increased productivity decreases the demand for nurses

• Nursing is a derived demand for health

• Satisfactory substitutes reduce the demand for nurses

• Increased reimbursement increases the demand for nurses

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efr ch1 econ_sr2.4

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