Lecture Slide Two

Health, Medical Care, and

Medical Spending
 Can we apply the tools of
managerial economics to
health care?

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 Outline

• An economic model of utility, health, and

medical care.
• Measuring health status.

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 A Basic Economic Model
• Health as a consumer durable good:
– Utility = U (X, Health)
• X represents “other goods and services.”
• H is a stock -- every action will affect
health.

• On its own or combined with other goods

and services, the stock of H generates a
flow of services that yield satisfaction=utility

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 A Basic Economic Model…
Marginal Utility
 The increase in utility resulting from a
given increase in health.
MUH = U/H

Law of diminishing marginal utility

 Each incremental improvement in health
generates smaller and smaller additions to
total utility.
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 The Total Utility Curve for Health

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 The Marginal Utility Curve for Health

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 A Basic Economic Model…
• Production of health:
– H = g (Medical care, other stuff)
• Marginal productivity
– The increase in health resulting from a given
increase in medical care (q).
MPq = H/q
• Law of diminishing marginal productivity
•
Health increases at a decreasing rate with
respect to additional amounts of medical care.

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 The Total and Marginal Product of
Medical Care

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 A Basic economic model…
• Health production function:
– Would the health prodn function eventually
bend down?
– 1. Iatrogenic disease
– 2. medicalisation c’d effectively lead to less
personal effort to produce health →problems
of living incorrectly treated as medical
problems.

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 A Basic Economic Model …
• Medical care is not homogeneous and
differs in:
– Structural quality (e.g. facilities and labor)
– Process quality (e.g. waiting time, case
mgmt.)
– Outcome quality (e.g. patient satisfaction,
mortality)
• Therefore medical services are often
difficult to quantify.
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 A Basic Economic Model …
Health=H(Profile, Medical Care, Lifestyle,
Socioeconomic Status, Environment)
• If an individual has a heart attack, then overall
health decreases, regardless of the amount of
medical care consumed.
– The total product curve for medical care shifts down.
• As a person ages, both health and the marginal
product of medical care are likely to fall.
– The total product curve shifts down and flattens out.

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A Shift in the Total Product Curve for Medical
Care

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 MEASURING HEALTH

• Important for all health care managers

today.

– Insurers and consumers are demanding

 costs AND  quality.

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 HEALTH OVER THE LIFE CYCLE

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 HEALTH OVER THE LIFE CYCLE
• Individuals make choices about health (make
tradeoffs) which maximize U over time.

• Relatively high value for the future

• Low discount rate
• e.g. Low-fat diet and exercise to avoid heart
disease.

• Relatively low value for the future

• High discount rate
• e.g. Smoking, excess drinking, drug abuse.

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 MORTALITY MEASURES

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 MORTALITY MEASURES…

A note of Life Expectancy

• Life expectancy NOT a prediction of how long
people live.

– 76.9 is a summary of age-specific death rates

in 2000.
– “If those born in 2000 experienced age-
specific death rates prevailing in 2000, on
average they would live to be 76.9”

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 MORBIDITY
 The relative incidence of disease

 Advantages:
Captures quality of life.

 Disadvantages:
Difficult to measure
Difficult to aggregate when patient has >1
problems.

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 MORBIDITY
• Acute disease
– e.g. appendicitis, pneumonia, gun shot
wounds
• Chronic disease
– e.g. arthritis, diabetes, asthma
• Incidence
– occurrence of new cases in any particular
year
• Prevalence
– new and ongoing cases in any particular year

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 MEASURING MORBIDITY
• Distinguish between symptom and disease.
– e.g. high blood pressure vs. stroke

• Disabilities are also a sign of morbidity.

• Subjective measures - i.e. self-rated health.
– “Is your health excellent/good/fair/poor?”
– Problem: 1970-80, # of people with high blood
pressure declined. But % of people reporting
restricted activity due to hypertension doubled!
– Depends on what you want to do - e.g. astronaut,
airline pilot, or professor?

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 MEASURING MORBIDITY...
• How far do we go in classifying “medical”
problems?
• e.g. cosmetic surgery

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 OTHER FACTORS AFFECTING HEALTH
 Education
 One more year of schooling reduced the
prob of dying w/in 10 years by 3.6%
(Lleras-Muney 2001).

 Income
 People without high school education &
income <$10k were 2-3 times more
likely to have functional limitations and
poorer self-rated health.

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 Conclusions
• In an economic model, medical care and other goods
and services are combined to produce health, which
yields utility to the consumer.
• The production of health can be measured in a variety of
ways.
• Both higher health care expenditures and other factors
are important improving health status over time.

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