Transcript March 29, 2006

Basic Economic Principles
N287E Spring 2006
Joanne Spetz
29 March 2006
Course web page and contact
My office is at Laurel Heights
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Suite 410
2-4443
Cell phone: 415-271-6496
Nursing school office: N505
Web page: www.saidin.com/joanne
Class time & assignments
Class time is divided
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11am-2pm, generally in classroom U506
 15 minute break to get lunch
Readings
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Finkler & Kovner book
Reading listed in syllabus, most are on line
Class time & assignments
Assignments
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2 problem sets
Final project
Be prepared to discuss readings in class
Grading
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30% each problem set
10% proposal for final project
30% final project
+up to 10 extra points for class participation
Final project
Business plan
Policy topics

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Earthquake retrofit
Universal health insurance proposals
Health of academic medical centers
Workforce analysis

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Solutions to the shortage
Mandatory overtime
Cost effectiveness analysis
Financial analysis
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Financially troubled hospital or health care provider
Proposed hospital merger
What is “health economics”?
The study of health and health care
from the economic perspective
Economics:

The study of the allocation of scarce
resources
Principles of economics
Resources are limited

You must make choices
Substitutability


Resources can be dedicated to many uses
What is the value of alternate uses of a
resource?
Heterogeneous preferences

One person’s pleasure is another’s poison
Trade occurs because…
People have different productivity

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Specialized skills
Access to capital (land, equipment)
People have different preferences

Preferences vary with amount already
consumed
Where did health economics
start?
Kenneth Arrow, 1963
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“Uncertainty and the welfare economics of
medical care”
American Economic Review
Some people focus on nursing
economics


Donald Yett
Peter Buerhaus
Utility
Economic analysis begins with the
concept of utility
utility
“diminishing marginal benefit”
product
Indifference curves
cheese
better
wine
How do we decide how much
to consume?
Prices of trade determine consumption
Cheese:
$1/ounce
Slope = -3
Tangent point is optimal
Wine: $3/glass
What if prices change?
New prices are wine=$2, cheese=$1
Cheese
New optimal point
Slope = -2
Wine
Why marginal instead of
average values?
The value of a tradeoff may vary based
on the quantity of the unit
Average values does not reflect the
actual change of a particular unit
Calculating Marginal Values
Marginal=(change in output)/(change in nurses)
Average=(total output)/(total nurses)
Number Total Pt
of Nurses care hours
Average
product
Marginal
product
0
0
-
-
1
100
100/1=100
(100-0)/
(1-0)=100
2
250
250/2=125
(250-100)/
(2-1)=150
Volume discounts
Cheese
Optimal point
Wine
From the indifference curves,
we can derive a demand curve
$
Demand for wine
Wine
What about production?
Cost
Per
pill
MC=marginal cost
Economy of scale =
“diminishing marginal cost”
# pills
How much do you choose to
produce?
Marginal revenue = marginal cost
$
MC
P*=price
Sum of individual
demand curves
MR=marginal revenue=demand
Q*=quantity
quantity
There is a logic to this
If you are a producer:


The marginal cost of making one more pill
is $0.50
The marginal revenue of that pill is $1.00
 you will produce one more pill
Normally, there is a point where
the margins balance
To sell more pills you have to drop the
price
To increase production you might have
to increase marginal cost of production

Build a new plant or pay overtime
Marginal costs can have many
shapes
$
$
MC
quantity
MC
quantity
We also care about average
costs
$
“decreasing returns
to scale”
MC
AC=average cost
quantity
What do firms do?
Firms maximize profit

Profit = revenue – cost
 Revenue = price * quantity
 Cost = AC * quantity

Profit will maximize at MR=MC
 If MR=$16 and MC=$12, producing one more
unit increases profit $4
Equilibrium: where supply and
demand intersect
price
supply
Neither buyers nor sellers
has any incentive to change
the price they are bidding
or asking.
This is the price and quantity
we will observe in the
market.
demand
quantity
Changes in equilibrium
Shifting of the supply or demand curve
can change the equilibrium market price
and quantity
Understanding these changes are
important because they reflect what we
observe in the market place
How will this change the
demand or supply for a drug?
cheaper generic medicines available in
the market
$
supply
demand
quantity
How will this change the
demand or supply for a drug?
successful advertisement
$
supply
demand
quantity
How will this change the
demand or supply for a drug?
new technology and a more efficient
production line
$
supply
demand
quantity
How will this change the
demand or supply for a drug?
rising costs of resources used to
produce drug X
$
supply
demand
quantity
In perfect competition…
Many buyers and sellers
Product is homogeneous
Can enter & exit market
Perfect information
In a perfect market…
Firms are “price-takers”
S
D
There is zero “profit” in the long run – this means
all firms earn the same economywide profit
Elasticity
Elasticity refers to the degree to which
supply or demand changes with the
price


“Inelastic” demand doesn’t change with
prices (e.g., perfectly competitive market)
“Elastic” demand changes a lot with prices
A chart to explain elasticity
$
Inelastic: price changes don’t
affect quantity much
Elastic: price changes affect
quantity a lot
Quantity
How do supply and demand
lead to price changes?
$
S
Firms will bid
up the price
P1
D
S1
D1
Excess demand
Q
Economic theory applies to
health care, to some extent
Production of health:

H = h(m,X)
 m=medical care
 X=other stuff (genetics, behavior, etc.)
We assume more medical care
increases health
This is not always so…
H=
health
Diminishing marginal
returns
m=medical care
Why can we have diminishing
marginal returns to med care?
Nosocomial infections
Higher morbidity from some treatments

E.g., chemotherapy
What is “m”?
Medicare care is not a single,
homogeneous thing

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Some treatments don’t have decreasing
returns
Some “treatments” have no effect on
health
Improving “health” may not be the
same as “curing” the patient
What about “X”
Smoking
Fatty foods
Motorcycling
Exercise
Veggies
Volvos
Genetics
Aging
In most industrialized nations,
X is more important than m
“Perfect competition” might
not exist
No free entry/exit
Imperfect information
Uncertainty/risk
Non-homogeneous goods
People don’t see prices of products
 Does this sound like health care?
Break Time!
Demand for nursing personnel
wage
Supply (perfect
competition)
Demand for nurses
# nurses
Why do we see nursing
shortages?
Limited number of employers
Delays in wage increases
Delays in producing new nurses
Licensing regulations
Minimum staffing requirements for
hospitals, LTC facilities, other providers
Minimum wages
Limited number of employers
Supply slopes up
wage
Supply
Shock to demand:
D1 to D2
Wage responds slowly
Temporary shortage
D2
D1
# nurses
Slow production of new RNs
wage
S1
w2
w1
S2
D2
D1
Shock to demand:
D1 to D2
S responds slowly
Temporary shortage
Can overshoot supply!
# nurses
Monopsony from limited
number of employers
MC
wage
S
w*
D
N*
Reported shortage
Nurses
Research on monopsony
Donald Yett
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Survey
Data analysis
Urban vs. rural markets
Sullivan – monopsony
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“inverse elasticity”
Hansen – no monopsony
Spetz et al. – some market power
Is This Shortage Different?
Severity of current shortage is greater than in
the past
Demand won’t adjust even when wages rise
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Focus on staffing due to recent research
Minimum nurse-to-patient ratios
Aging nursing workforce will lead to massive
retirements

There cannot be enough new graduates to keep
up
Delving more deeply into the
nursing shortage…
Forecasts predict worsening shortage
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Bureau of Health Professions report, 2002
Buerhaus, Staiger, & Auerbach, 2000
Age distribution of California
RNs, 2004
30
-3
4
35
-3
9
40
-4
4
45
-4
9
50
-5
4
55
-5
9
60
-6
4
O
ve
r
64
U
nd
er
30
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Source: California Board of Registered Nursing 2004 Survey
Percent of RNs Working in
Nursing, by Age
30
-3
4
35
-3
9
40
-4
4
45
-4
9
50
-5
4
55
-5
9
60
-6
4
O
ve
r
64
U
nd
er
30
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: California Board of Registered Nursing 2004 Survey
Change in the Age Distribution
Source: California Board of Registered Nursing Surveys
Changes in income for RNs
Any forecasting exercise is
open to critique!
Typical forecasts assume:
Wages do not change
Changes in numbers of graduates follow
a time trend
Demand does not fundamentally
change

RN demand is based on health care
demand
The BHPr Projections
3,000,000
Number of RNs
2,500,000
2,000,000
Supply
Demand
1,500,000
1,000,000
500,000
0
00 002 004 006 008 010 012 014 016 018 020
0
2
2
2
2
2
2
2
2
2
2
2
Year
What if we create a model…
Allow wages to increase as a result of
shortage
How much do wages need to increase
to end the shortage?
Can wages increase too much, so a
surplus results?
Forecasting with National Data
15.0%
Wages 1999$
NLN graduates
10.0%
5.0%
0.0%
-5.0%
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
-10.0%
Forecasting Strategy
How much growth in graduations do we need
per year to meet BHPr demand forecasts?
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2,810,414 needed in 2020
Use a regression to get relationship between
wage growth and graduation growth
Calculate wage growth needed to get
required number of graduates
Assumptions
Demand does not respond to wage increases
Wages can increase as needed in response to
shortage
Nursing schools can expand to produce
needed numbers of graduates
Outflows of nurses due to retirement/other
factors match BHPr’s projections
Regression models: change in
graduations
Change in wage
3-year lag
3-year lag
2.509
(0.687)
2.477
(0.727)
Change in
unemploymt.
rate
4-year lag 4-year lag
2.285
(1.117)
0.053
(0.137)
2.252
(1.168)
-0.097
(0.168)
Intercept
-0.026
(0.019)
-0.023
(0.021)
-0.022
(0.031)
-0.024
(0.033)
R-squared
0.60
0.60
0.34
0.37
Wage growth scenarios
Regression model used for forecast
3-year lag
3-year lag with
unemployment
4-year lag
4-year lag with
unemployment
Required
yearly real
wage growth,
2005-2016
3.2%
3.5%
3.7%
3.8%
Cumulative
real wage
growth, 20022016
55.4%
61.9%
66.3%
68.6%
Real wage in
2016
$37.12
$38.77
$39.92
$40.50
3.2 – 3.8% Wage Growth
Meets Demand
This is comparable to current wage
growth rates
Cumulative wage growth of up to 69%
between now and 2016
Total RN expenditures would double by
2016
What About Cycles?
Nursing shortages are historically
cyclical
Real wage growth may be greater than
3.8% as shortage widens in short-term
Problem: cannot estimate effect of
degree of shortage on wage changes

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No historical data on degree of shortage
Measurements of shortage are suspect
Creating a Cycle
Cal Nurses Assoc contracts give
approximately 4% real wage growth
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Assume this is the national rate through 2004
This produces 6.9% annual growth in graduations
through 2008
Assume wage growth is about 2 percentage
points less than shortage

Measure shortage by (BHPr demand – supply)
Cyclical forecasts:
20%
15%
10%
Shortage/surplus of RNs
5%
Wage change
0%
Change in # of RN grads
-5%
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
-10%
This Shortage Is Different!
Most RN shortages have lasted 3-8
years
10 more years of shortage appear likely
Substantial wage growth from the
shortage could create a surplus by 2016

Assuming nursing schools can increase
graduations by that much!
Does this have policy
implications?