Transcript 3 Basic Steps in Economic Evaluation

Industry Overview
Health Economics
Professor Vivian Ho
Fall 2009
Health Care Expenditures in the
United States, 1960-2007
1960
1970
1980
1990
2000
2005
2007
Nominal health expenditures $27.5
(billions of dollars)
74.9
253.9
714.0
1,353.3
1,987.7
2,241.2
Annual rate of growth
-(average annual % change
from previous period shown)
10.5%
13.0
10.9
5.9
8.9
6.2
Nominal per capita health
expenditures
$148
356
1,102
2,813
4,790
6,697
7,421
Health expenditures as
percentage of GDP
5.2%
7.2
9.1
12.3
13.8
16.0
16.2
Source:
CMS Homepage: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf
The Health Care Industry is
Rapidly Evolving

Advances in medical technology and drugs
are dramatically improving patient care
 But,

these improvements are costly
Aging U.S. population
% 65 years+
1950
8.1
1970
9.8
2008
12.8
The Health Care Industry is
Rapidly Evolving

Increased cost containment efforts
 Changes
in government reimbursement of health
care providers
 Private insurers are exercising more control over
patient care

Increased competitive pressures
 Mergers
of existing providers
 Entry of new competitors
 Where
are the most promising business
opportunities?
Which category has the largest share
of health care expenditures?

Hospital Care

Physician Care

Prescription Drugs
America’s Top 100 Fastest-Growing Companies
FORTUNE, September 29, 2008
100
RANK
COMPANY
EPS
GROWTH
RATE
REVENUES
(millions)
WHAT THEY DO
9
Intuitive Surgical
62%
753.7
Makes and services surgical robots that allow for
less invasive procedures
29
Natus Medical
57%
139.8
Makes products to detect, treat and monitor
newborn health conditions
64
Psychiatric
Solutions
44%
1686.0
Provides in-patient behavioral-health services in 27
states
66
Omnicell
26%
238.6
Sells devices for controlling, dispensing and
tracking medications in 1,100 hospitals
67
Kendle
International
44%
633.3
Provides support for clinical development,
regulatory affairs, biometrics, and late phase
projects
70
Health Extras
57%
2233.3
Manages 60,000 network pharmacies that process
prescriptions (now Catalyst Health Solutions)
76
Amedisys
43%
900.7
Provides home health care and hospice services
94
Allscripts
Healthcare
Solutions
46%
300.4
Develops software for doctors to reduce errors,
costs, and paper in charts, prescriptions and orders
PHARMACEUTICAL INDUSTRY

U.S. prescription drug expenditures reached
$228b in 2007

Industry highly dependent on research and
development (R&D)
 $897m

to bring a new drug to market
Aggressive marketing to physicians,
hospitals, pharmacists, and even the patient
PHARMACEUTICAL INDUSTRY

Pfizer
 $48.3b
 40.8%
in sales in 2008
of sales come from 4 drugs: Lipitor,
Lyrica, Celebrex, Norvasc.
PHARMACEUTICAL INDUSTRY
The Wall Street Journal Online
April 6, 2005
Pfizer Plans a Revamp
And $4 Billion in Cost Cuts
Drug Giant Scales Back
Earnings Estimates, Citing
Patent and Safety Woes
MANAGED CARE

Systems which manage the quality and
cost of patient care

Most common:
 Health
Maintenance Organization (HMO)
Consumer pays a fixed annual capitation fee, for
which HMO agrees to provide comprehensive
medical services
 21% of U.S. population (64.5m) enrolled in 2009

MANAGED CARE

ADVANTAGE: If capitation fee > costs,
HMO keeps the profit

DISADVANTAGE: HMO responsible for
cost overruns
 Subject
care
to lawsuits if provides sub-optimal
WSJ 2/17/98
LONG-RUN KEY TO SURVIVAL
Be
an efficient provider of highquality patient care
Can we apply the tools of
economics to study the health
care sector?
Valuing Human Life

Individuals make decisions everyday that
reflect how they value health and mortality
risks.
 Driving
a car
 Smoking
 Eating
a cigarette
a medium-rare hamburger
Note: These slides draw from material in Viscusi WP and Aldy JE, “The Value of a Statistical
Life: A Critical Review of Market Estimates Throughout the World,” The Journal of Risk and
Uncertainty 2003; 27(1): 5-76.
Valuing Human Life

Many of these decisions involve observable
market choices
 Purchase
 Working
of a safety device.
on a risky job.

These decisions involve implicit tradeoffs
between risk and money.

Economists can use data on these decisions
to construct the value of a statistical life
(VSL).
Valuing Human Life

Example: How much additional money must a firm
offer a worker to take on a risky job, versus one with
no risk?

To answer this question, one could compare the
average wages of risky jobs vs. non-risky jobs.

Working as a coal miner is more risky than working
as an investment banker, but investment bankers get
paid more.

One must examine the tradeoff between wages and
risks, holding constant all other factors that influence
pay.
Valuing Human Life

Dataset with observations on workers, their annual
Earnings, worker characteristics, job characteristics,
including the risk of dying on the job in that worker’s
industry.
Ln(Earningsi) =α0 +α1(Educationi) + α1(Experiencei) +
α2(Management Positioni) + α3(Fatality Riskj) + εij

One can estimate this regression, and the estimate of
α3 can be used to derive a VSL.
Valuing Human Life

Suppose the estimated coefficient α3 = 300.

This implies that a worker requires 300 times
more earnings for a job with a 100% fatality
risk versus a job with a 0% fatality risk,
holding all other factors constant.

If average earnings are $32,000 then the VSL
= $32,000 * 300 = $9,600,000
Valuing Human Life
U.S. Occupational fatality rates by industry, 2005


Data on worker
characteristics is
available from the
Bureau of the Census.
The Department of
Labor collects data on
fatal occupational
injuries by industry.
Industry
BLS, CES survey
Natural resources and mining
139.0
Mining
28.3
Construction
16.2
Manufacturing
2.8
Trade, Transportation, & Utilities
5.8
Wholesale Trade
3.5
Retail Trade
2.6
Financial Activities
1.2
Educational & Health Services
0.9
Fatality Rates Per 100,000 Workers
Valuing Human Life

Labor market data from the U.S. typically
finds a VSL $4m to $9m in year 2000 dollars.

One can also estimate a VSL based on the
prices that people pay for safety devices that
reduce the risk of death.
 Price
of smoke detectors vs. reduction in fire
fatality risks.
 Premium
paid for areas with low air pollution vs.
reduction in death from clean air.
 Price
of children’s car seats vs. reduction in auto
fatalities when in use.
Policy Implications

U.S. agencies are required to compare the costs of
proposed regulations to the benefits, which are often in
terms of lives saved.
Values of a statistical life used by U.S. Regulatory Agencies, 1985-2000
Agency
Regulation
Value of a statistical
life (millions, 2000 $)
Federal Aviation
Administration
Protective Breathing Equipment
$1.0
Food & Drug
Administration
Regulations Restricting the Sale &
Distribution of Cigarettes &
Smokeless Tobacco to Protect
Children & Adolescents
$2.7
Environmental
Protection Agency
National Ambient Air Quality
Standards for the Ozone
$6.3
Policy Implications

Should the VSL vary with:
 Age?
 Income?
 Country?
Conclusion

Because resources are limited, health
economists are concerned with
determining what medical services to
produce, how they should be produced,
and who should receive them

As we will see in this course, the tools
of economics can be applied to the
health care sector to derive valuable
insights about our health care system