introhealthecon notes columbia

8/10/2019 IntroHealthEcon Notes Columbia

http://slidepdf.com/reader/full/introhealthecon-notes-columbia 1/25

LECTURE 9/11/14

● Consumer Choice (Assumes a rational consumer)○ Individual demand curve (Figure 2)

■ When the price of food goes up, consumer (she) consumes less food

○ Law of Demand■ If the price of something goes up, a consumer will want less of it■ Curve will always slope downward

● Difficult to find counterexamples○ Expensive sushi vs cheap sushi

■ Not disproving the law of demand; other aspects ofthe good are changing (quality)

○ High fashion example■ Expensive purses; high price signifies a sense of

social status, not necessarily related to the law of

demand○ Potential scenario where healthcare is so important to a

consumer that price does not affect to demand■ Consumer has an individual utility set and a budget set that allows the

figure to be formed○ Market demand curve (Figure 3)

■ Horizontal sum of all individual agent demand curves■ Describes how consumers react to price and price changes

● Shifts to the right if consumer has more capital to spend; shifts tothe left if consumer has less capital to spend

○ Consumer will want more quantity if they can afford it● Competitive Firm’s Choice○ A firm’s goal is to maximize profits

■ Profit = price x quantity - cost(quantity)● Profit = p x q - cost(q)

■ Costs can either be fixed or variable● Fixed costs do not depend on quantity

○ Rent for office space is a fixed cost (does not depend onquantity of good produced)

○ For an imaging center, the imaging unit is a fixed cost thatdoes not matter on how often it is used

● Variable costs vary with output○ For a physician, the more patients you see the more

needles/tongue depressors you need to buy○ For a primary care physician, time is a variable cost

■ Average cost vs. Marginal cost● Average cost = total / goods produced

○ Avg. Cost = total/g



● Marginal cost is the additional cost of producing the next good○ In an imaging center, marginal cost would be time spent

with a receptionist or a gown that they need to wear duringan MRI

■ Could be high or low

■ Leads to a debate over consumer responsibility inhealth policy with businesses that operate with alarge fixed cost and small marginal cost

● Are consumers responsible for covering thefixed cost?

○ For a physician, the marginal cost for seeing an additionalpatient is high

○ Problem faced by firms (Figure 4)■ Market price vs. quantity produced■ Marginal cost (MC) is an upward sloping line

● Intersects AC at its minimum■ Average cost (AC) is U-shaped

● If too little or too much is produced, AC remains high○ Cost of production

■ Economies of scale (downward slope of AC)● As you increase production and produce more, average price goes

down● Linked to higher efficiency in mass production● Reason why hospitals are very large

■ Diseconomies of scale (upward slope of AC)

● Average cost begins to rise to account for overproduction■ Firm will graph the price with a horizontal line (B-C)● Until the price intersects MC, a firm will want to produce more

quantity○ At that intersection, the firm becomes indifferent towards

increasing production● Maximizing profits on the margin

■ Individual supply curve● Determines the amount produced by the firm based upon market

price○ Based on maximizing profits on the margin

○ Supply vs Demand (Figure 5)■ Competitive equilibrium

● Intersection between supply and demand● Describes the competitive price and competitive quantity● At this price and quantity, there is nothing wasted

○ Just as many producers want to sell the good asconsumers want to buy the good



■ Consumers get richer (Figure 6)● Start out with a competitive equilibrium and then the consumers

gain more capital○ Curve shifts to the right as price of product increases with

higher income levels

■ Producers become more efficient (Figure 7)● At any given price, suppliers can produce more of the good and

leads to lower prices and higher quantity● Think of technological advancements for farmers (tractors,

pesticides, better seeds, etc)● Food in Zimbabwe (Figure 8)

○ Before changes were made, Zimbabwe had a competitive market○ Rule comes in that creates a price ceiling○ Leads to a shortage in goods (food)

■ Winners : Consumers who can find food

■ Losers :● Producers● Consumers who cannot find food● Mis-allocation problem?

○ Under a free market, allocation of resources is based upona willingness and ability of consumers to buy goods (pay)

○ In a low-income country like Zimbabwe, the price ceilinginstallation was put in place with the hope that the hungriesthad access to food

■ Ended up being more random where allocation of a

scare resource led to not enough people havingaccess■ Can lead to a black market where producers sell goods based on a

normal supply and demand curve● Apartments in NYC

○ New York City in the 1950s had a policy of rent control (eventually became rentstabilization)

■ Government capped rent because of rising prices■ Winners : Consumers who could find apartments

● Able to buy good for a low price■ Losers :

● Producers (landlords)● Consumers who are unable to find apartments

○ Leads to a shortage of apartments● Still suffers from the possible mis-allocation issue

○ Policy in place may not help the consumer group thatneeds it

○ Wall Street Journal article about rent control in Mumbai



● Applications relevant to healthcare○ The market for crystal methamphetamine

■ May be a competitive market without much friction● Locally produced by small firms

■ Displays a normal supply and demand curve

● If the DEA were to raise regulations against the availability ofchemicals needed to make meth

○ Supply would decrease and prices would increase■ Study on crystal meth sales

● Relied on dealer arrests to graph the going rate of meth per gram,forming a comparative purity vs price comparison

● Price and supply went down immediately after the new regulationswere instituted but eventually returned back to normal levels

○ Food supply and obesity○ Prices before a hurricane

■ Gas stations are prevented from “price gouging” or raising the price of gasbased upon an increase in demand in Long Island

● Prices remain the same, supply eventually is depleted● Government-imposed price ceiling leads to distinct winners and

losers■ Normally, prices would increase before a hurricane according to supply

and demand curves○ Famine in Bangladesh (Rice prices)

■ Before 1974 famine, price increases accordingly with wages■ After 1974 famine, price skyrockets unless more product is added to the

system (via foreign aid)■ NPR story on how foreign aid hurts patient farmers● Discussion questions

1. The ACA more-or-less provides comprehensive health insurance to everyone.How would this affect the amount of health care consumed?

a. Will increase the amount of health care consumed. Demand curve will beshifted to the right.

2. Suppose that more undergraduates decide to become physicians. What happensto the price of health care?

a. Will increase the amount of supply. Supply curve will be shifted to theright.

● Economic rent-seeking○ Artificial profits that occur only when competition is restricted○ Suppliers in a market convince the government to limit competition

■ NYC Yellow Cabs and their silver medallions● Medallion is worth exponentially more than the cab itself● Government sells a limited amount of medallions



○ Current cab owners with a medallion seek out thegovernment to ensure that fewer medallions are sold andless competition is available

■ Liquor licenses within city limits○ Health care is filled with rent-seeking behavior

LECTURE 9/18/14

● Positive externality○ Public goods

■ Non-rival■ Non-excludable

○ Vaccines● Negative externality

○ Pollution

● Figure 1 (Review)○ Firm deciding how many bicycles to produce○ Maximize profits on the margin

■ Determining how much revenue one makes from selling a unit and thecost to produce one unit

■ Eventually reaches a point of indifference where it costs more to producea good exceeds the revenue it brings in for selling a good

○ Let’s say producing a bicycle produces pollution as well■ There is a way to price out how much pollution is created

● Accounts for social costs (health issues, cleanup, etc)

● Price is added to the marginal cost to the firm● Shifts the marginal cost to the left○ There is a difference in curves when social cost is added to the equation○ A negative externality leads to overproduction in the private market

■ This firm is ignoring a cost, leading it to produce too much relative to if itfaced that cost

○ Government is utilizing a method to ensure that the firm accounts for its socialexternalities

● Figure 2○ A positive externality leads to underproduction in the free market

■ The firm and the consumer are ignoring social benefits and willconsume/produce too few of the goods that cause positive externalities

○ Government is utilizing a method to ensure that the firm accounts for its socialexternalities

● What are the solutions to externalities?○ For negative externalities, there are three solutions:

■ Quantity regulation (Fig. 1)● Government comes in and tells firms to produce less



○ Used in the regulation of power companies● Government will come in and tell firm to produce q e instead of q c

■ Pigouvian taxation● If you charge firms precisely the right tax, you can lead firms to

make the right decision (which happens to be the socially optimal

decision)● Lowers effective price that the firm sees, causing it to lower the

amount it produces itself■ Cap & Trade

● Government institutes a mandate claiming that an area can onlyhandle so much pollution

○ Creates a limited number of permits that allow a firm topollute a specified unit of pollution and then has competingfirms bid for that permit

○ For positive externalities

■ Subsidize productions (Figure 2)● Providing incentives for companies that produce positive

externalities● Firm is at point D and is given an incentive so that they move up to

point E● Town fishing exercise● Applications to health

○ Vaccines■ Seen as a positive externality■ Government subsidizes clinics to promote increased vaccination access

and supply■ Forms an argument that government should be more involved inhealthcare…

● May not be applicable for wealthy countries, where most spendinggoes towards non-communicable diseases

○ Autopsies■ In the US, less than 10% of deaths receive autopsies

● Issue of underproduction■ Epidemiologists believe that positive externalities associated with

autopsies could be utilized to help form a better understanding of diseases■ Cost associated with the actual autopsy, but also a private cost for the

family to emotionally grapple with their deceased’s body being dissected● What if the physician made a mistake?● What if the patient was misdiagnosed?

○ Car accidents (Pounds that Kill)■ Two main negative externalities:

● Gas consumption/pollution greater in larger SUVs● Larger size leads to greater danger due to accidents



■ Concludes with the belief that Americans are paying too little at the gastank

● Economic epidemiology○ Wearing a condom

■ Private benefits

● Lowers risk of obtaining HIV■ Private costs

● Hassle…○ If HIV were to be rare in a region, the private benefit of wearing a condom is

lowered and the private cost does not change■ Ultimately leads to HIV coming back

● Self-limiting incentive effect of epidemics■ Tends to happen in reality

○ Vaccination policies■ Two models of thoughts

● Parents are stupid: People are confusing anecdote with science;coincidence that autism symptoms show up around the time thatsome vaccinations are given

● Maybe Jenny McCarthy is right?● Antibiotic usage

○ Should be regulated by the government because of the possibility that antibioticresistance could occur through overuse and possibly cause an epidemic

■ Antibiotic-resistant strain○ Unique negative externality

● Knowledge (awareness)

○ John Snow discovers that cholera is waterborne and not airborne■ Treating water supply is the correct way to go○ Knowledge is a public good

■ Non-rivalling (everyone can know it)■ Non-excludable (once it’s out there it does not matter who knows it)

○ For drug development that requires a lot of capital investment to produce, thegovernment can provide incentives such as patent protection for the drug so thatthe pharmaceutical company can maintain a profit

● Smoking (The Taxes of Sin)○ Why are there cigarette taxes?

■ About $13/pack in Manhattan; would be $4/pack without taxation■ Is it a Pagouvian tax to justify its negative externalities?■ Major negative externalities associated with it:

● Causes much property damage due to fires (+ tax)● Medical care (+ tax)● SIck leave (+ tax)● Group life insurance (+ tax)● Nursing home (- tax)



● Retirement pension (- tax)○ Death benefit of smoking

■ Smokers die before they are able to capitalize on pension or nursing homebenefits

○ Behavioral economics

■ According to surveys, the average smoker tries to quit every 8 months■ ¾ of smokers begin as teenagers■ Behavioral economists would argue that smokers are ignoring future

costs● Also have a self-control problem

○ Actions are not in-line with their utility● Utility maximization does not apply in these cases

■ Internalities (made up word)● Term to describe true internal costs towards a person’s actions

○ People are inherently irrational towards most future costs

● Economists argue that they need regulation similar to externalities■ Commitment contract

● Story of two graduate students who bet each other about losingweight

○ Made a real bet that they held each other to● Plug for stickk.com

■ Very controversial aspect of economic research● Referred to as paternalism

○ Slippery slope argument that regulation could becomeexcessive and fix all issues within a person’s life (starts

with cigarettes and extends to food, web browsing, etc)○ Utility maximizers, not health maximizers■ People do not live to maximize health, but rather

maximize utility (makes unhealthy decisionsrational)

○ Exploiting “default bias” (Asymmetric paternalism or libertarian paternalism) or“nudging”

■ Discusses 401k assignments● Whether people decide to opt-in or opt-out has an affect on

everyone■ Evidence in favor of behavioral economics■ People will have a tendency to take the default option

● If it is the norm to pay, then people will pay; if not, then people willnot

■ People will follow the path of least resistance

LECTURE 10/2/14 - Uncertainty



● Insurance allows us to trade money across universes● Story of Matt betting money against the Red Sox in the world series to an online betting

company in Ireland○ Notion of insuring yourself when your favorite team loses

■ If your team loses, you receive compensation; if they win, you receive the

satisfaction of knowing they won● Health Insurance (The model for expected utility)

○ The market for health insurance■ Probability

● Number between 0-1● Describes the relative frequency that an event occurs

■ Bets● Flipping a coin

○ Heads - I get $1000, Tails - I give you $900■ Expected value of that bet: +$50

■ 50% chance the coin lands heads, 50% chance thecoin lands tails

■ Not a good bet to take if it’s only performed once○ Employs the notion that people are risk averse

■ Despite being a positive bet for you, it still involves ahigh degree of risk

■ Rational consumers do not make decisions basedon expected value, but rather expected utility

■ Figure 1 (Consumer utility over all the money they could have)● Upward sloping (more wealth is always better)

● Accounts for a consumer’s tendency to be risk averse● Measures utility based upon how much wealth is accumulated○ Assumes that more wealth is always better

● Exhibits to diminishing marginal utility○ Going from $0-$1000 is a much higher slope than going

from $1000-$2000○ Diminishes as you get wealthier

● Losing money leads to a greater loss of utility than gaining thesame amount of money

● Example: Consumer starts at point B with a 10% chance that sheends up at point A

○ Faces two states of the world: point B or point A○ 10% of the time she will have a utility of $1000, 90% of the

time she will have a utility of $2000○ Expected utility is 194 (point C)

■ .9(200)+.1(140)● Insurance example

○ Bad state:



● People who are less risk averse tend to participate in riskieractions and not have health insurance

■ Figure 4● Both consumers have the same degree of risk aversion (same

slope)

● Consumer 1○ 10% chance of being sick (point A) and 90% chance of

being healthy (point B)○ Expected utility of point E○ Makes sense for him to not take the insurance

● Consumer 2○ 90% chance of being sick (point C) and 10% chance of

being healthy (point D)○ Expected utility is point F○ Makes sense for her to take insurance

○ Greater demand for health insurance● Insurer’s Perspective

○ Expected profits: E(profits) = P(sick) x (+premium-benefits) + P(healthy) x(+premium)

○ When E(profits) = 0, there is “actuarially fair” insurance○ Will want to charge high risk consumers a higher premium○ Makes money on healthy (low risk) consumers; loses money on high risk

consumers○ Healthy subsidize the sick○ Law of Large numbers

■ In statistics, if I flip a coin 10,000 times, I’m pretty sure there will be 5,000heads● May not be exact, but it should be pretty close

■ If you flip a coin once, there’s a much greater degree of variance■ Large employers will tend to self-insure

● IBM knows how much it needs to pay in insurance because thereis a much lower variance due to size

○ Community rating■ A law where the government forces insurers to charge the same

premium, regardless of risk■ Both start with $2000

● Young: 10% chance of losing $1000○ Actuarially fair price: .1(+P - $1000) + .9(P) = 0

■ P = $100● Old: 90% chance of losing $1000

○ Actuarially fair price: .9(+P - $1000) + .1(P) = 0■ P = $900

● Old person is more expensive to insure than young



■ (.5)(.1)(P - $1000) + (.5)(.9)(P) + (.5)(.9)(P - $1000) + (.5)(.1)(P) = 0● P = $500

○ Experience rated insurance■ Involves an externality where the decisions of a person greatly affects

other people

■ Car insurance● If you get into an accident, your premium increases as you

become labeled into a higher risk■ Same policy doesn’t apply to health insurance■ Graph describing average cost based upon age, driver’s history,

occupation, etc● Not allowed to discriminate based upon race, ethnicity, religion,

socioeconomic status, etc● Gender can be described though

■ Health insurance is allowed to change rates based upon income, age,

(sometimes) gender, education, and smoking preference● Problems with Health Insurance

○ Reclassification risk (John Cochrane article and Amy Finkelstein article)■ Contracts tend to be written from year to year

● If health issues occur during the middle of your contract, you’recovered

● If health issues occur closer to the end of your contract, youbecome a higher risk consumer and are charged a higherpremium across contracts

○ Insurance company doesn’t protect you from that risk

■ Issue because it imposes a larger risk for consumers, which in turn posesa risk for insurance companies to lose healthy consumers○ Job Lock (Mark Zuckerberg example and Madrain article)

■ Problem when people primarily get health insurance from their employerand feel “locked” into their job to avoid the risk of not being covered by theiremployer insurance

■ Issue with entrepreneurs● Forces you to leave your insurance plan and go uninsured● If Mark Zuckerberg were to have diabetes, would he have been

able to go uninsured on his own and left Harvard?● Economists argue that strong economies need entrepreneurial

ambition○ The Good Samaritan Problem (Herring article)

■ Example of Professor Gross’ friend who does not have insurance anddepends on a local Catholic hospital to provide charity care

■ There are “Good Samaritans” who will help you no matter what■ Why should you buy insurance if you know you can receive care when you

need it?



■ Price elasticity of demand■ Percent change in quantity demanded given a percent change in price■ Wheat elasticity

● ED = -0.35● An increase in 10% of the price is going to lead in a decrease of

3.5% of the demand for quantity■ Americans have a relatively elastic demand curve when it comes to the

market for wine■

● Figure 2 (Perfectly inelastic)○ ED = 0 (realistically, approaching 0)○ Not sensitive to price at all○ ED = % change Q D/% change P○ Example could be insulin prices

■ People absolutely need it to survive; are willing to pay whatever to get it

● Figure 3 (Perfectly elastic)○ ED = -INF○ Highly sensitive to price○ Example could be a non-essential item (Texaco gas)

■ If one gas company changes their prices, then consumers will either stopdriving if it’s their only option or go to another source to find gas

● Things tend to be surprisingly elastic● Health Insurance

○ Cost-Sharing Mechanisms■ The consumer is sharing their costs with the insurer

■ The consumer has some skin in the game■ Premium● Price of insurance● Paid in both worlds (whether you are sick or healthy)

■ Copayment● Price you pay for a given encounter with a health system

○ Pay for a treatment or prescription● Tend to be round numbers

■ Deductible● Amount a consumer has to pay before the insurance benefits kick

in● If my deductible is $500 for my car insurance and I get into an

accident that costs $1000, I have to pay $500 before my insurancewill cover the rest

■ Coinsurance Rate (rare nowadays)● Percent paid by the insurer until you hit some maximum

○ Moral Hazard■ Ex-Ante Moral Hazard



● Back in the day, fires were a very common occurrence (woodenhouses, candle lighting, coal ovens)

● Fire insurance map for Manhattan in 1909○ Depending on the build of houses, insurers would survey

their customers to determine how likely a house would be

to catch fire○ Found “immoral character” in clients with fire insurance

■ These clients tended to not take care of their yard,let ivy grow along their house, etc because theyknew that if their house caught fire they wereinsured to get a new one

● Behavior that occurs before the uncertainty is resolved○ Running after the train example

■ Running to the train when you’re worried you’ll missit is justified, but if you arrive and find you’re early

then it switches and the running is no longer justified

● Huge issue regarding car insurance● Dave and Kaestner Paper

○ Describe ex-ante moral hazard○ Anecdote about someone dropping their health insurance

and adopting a healthier lifestyle○ Poses an interesting scenario - does insurance lead people

to lead less healthy lifestyles because consumers knowthey have coverage?

■ Nothing decisive, but compelling nonetheless■ Ex-Post Moral Hazard● Behavior that occurs after the uncertainty is resolved● Figure 4 (My individual demand curve for health care when I’m

sick)○ When I’m sick and uninsured, my price is high so I won’t

purchase that good○ When I’m sick and insured, my price is low so I will

purchase/consume that good○ Insurance lowers the price of hospital visits from P1 to P2

■ Instead of consuming q1 hospital visits I am goingto consume q2 hospital visits

○ If your demand is perfectly inelastic, then there is no moralhazard

○ Adding cost-sharing mechanisms such as copaymentslead to less consumption by raising the price somewherebetween P2 and P1

● Figure 5 (Review)



○ Copayments impose risk on consumers■ Downside of process

○ Point E is someone who insured, but has to face a lot ofcopayments

○ Fundamental trade-off

■ Want to prevent moral hazard while providing riskprotection

■ We want copayments to be really high to deal withmoral hazard, but high copayments will raise riskfor consumers and lead them to underconsume ordrop their insurance

○ Empirical debate regarding welfare compensation andmotivation to seek out a job

■ Do consumers on welfare payments have lessincentive to get a job and stabilize their financial

situation when they are able to receive welfarebenefits?

○ Rand Hie■ Health Insurance Demand Randomized Experiment

● Polled six random, typical cities and polled citizens on differenttypes of plans

● Used a free plan, 25%, 50%, 95%, and individual deductible○ All randomized to those five groups○ Ran for roughly five years from 1976-1981

● Knew people’s health before and after

● People on the free plan tended to spend 25% more on healthcarethan those on the deductible● Forcing copayments has a major effect on healthcare

consumption■ -0.2

● An increase in healthcare cost is going to decrease yourhealthcare consumption by 20%

■ Cost sharing leads to a decrease in both effective and ineffective care● People cut back on everything when cost sharing is imposed upon

their plans● Effective, necessary care is less utilized, which is what insurance

is trying to maximize■ On average. no effect on health

● Difficult to measure how healthy someone really is● Create indices to try and gauge one’s health

■ Cost sharing hurt the high-risk consumers● Many people going into this study had a pre-existing condition● Labeled as elevated risk patients going into the experiment



● Cost sharing raised the risk of dying for that person■ Some argued that the data from the Rand Hie experiment were convinced

that there were not enough cost sharing implements in effect, causing Americans to pay too much for health insurance

● The insured vs. the uninsured (Anderson, Dobkin, Gross paper)

○ A lot of Americans became uninsured at age 19 after being dropped from theirparent’s plans

○ Fig. 2 (share of people insured vs. uninsured)■ If all of the sudden people turn 19 and lose insurance, how does their

behavior change?● Consumers become less likely to go to the emergency department● Drop in utilization after losing insurance

○ Insurance appears to increase utilization○ Finkelstein paper

■ Story in Oregon where government had run out of money and didn’t have

enough slots to provide medicaid for those who needed it (10,000 peoplevying for 1,000 slots)

● Decided to run a lottery on who received it■ Compared health behavior for people who received medicaid compared to

those who did not■ Those on medicaid consumed more healthcare than those who were not■ Higher utilization by consumers when having insurance

● Problems with solutions to moral hazard problems○ Van Halen example

■ One of the most popular bands in the 1980s

■ Van Halen would travel the country performing and would make requestsfor preparations at venues for their concerts■ Rumor that Van Halen intentionally requested no brown M&M’s in their

dressing rooms● Added this stipulation to ensure that if the M&M’s weren’t taken

care of, they were concerned that other demands weren’t met aswell

● If the venue did not take the time to take out the brown M&M’s, theymay not have taken the time to reinforce the stage

■ Interesting solution towards moral hazard○ Offset Effect

■ Argument against copayments and deductibles■ If you raise copayments on small issues to reduce moral hazards, the

subsequent cost of a doctor visit offsets the reduced consumption cost■ Chandra, Gruber, McKnight paper

● Physician visits before 2002 had a copayment of $0.00 and raisedit to $10.00

● At pharmacies, went from $0.00 to $5.00 to $15.00



○ Used their $1000 for one year and then waited until it wasrenewed to use their next $1000

● Certain types of healthcare consumption can be delayed so itbecomes cheaper for a person to consume

● Closing ceremonies

○ Defined inelasticity■ Good tool for comparisons

○ Ex-ante moral hazard■ Doesn’t matter as much in health insurance

○ Ex-post moral hazard■ Matters in health insurance

○ Rand is major experiment for health policy○ Edward Snowden example of moral hazard in the CIA with recruiting double

agents

LECTURE 10/16/14 - Adverse Selection

LECTURE 10/23/14 - Demand

● Feldstein is a conservative professor emeritus of economics at Harvard○ Proposed this plan in the hopes that Republicans would adopt this plan as a

counter to the Affordable Care Act (ACA)○ How does he think about adverse selection?

■ In the current system, some healthier individuals have dropped out■ His plan is that everyone gets a voucher that ensures that everyone has

health insurance● Everyone would be covered■ Many details not discussed; just an Op-Ed

○ Health-care credit card deals with moral hazard● Front Page Graph (Percent of NHIS Respondents Who Have Ever Had a Colonoscopy)

○ Gradient pattern exists based upon level of education, unrelated to cost○ Why do more educated people consume more health care and are healthier than

less healthy people?● Human Capital Revolution

○ If you go back before the 1960s economists focused primarily on stereotypicaleconomic trends (boring)

○ Economists started to approach new topics from other social sciences to applyan economic basis to human behavior

■ Started thinking about education and the motivation people have behindreceiving an education

■ CD stock of a person’s ability to produce goods■ Becoming educated is an investment in your human capital

● Analogy: Firms invest in their equipment to increase profitability



● Ideally, investing on one’s education leads to a return on thatinvestment

■ People with an education should make more money on average● On average, educated people make 7% more than uneducated

people for every year of education

○ Standard term in economics■ Mirrors social capital from sociology

○ Politicians will talk about political capital● Grossman Model (1972)

○ Wrote a paper to try and explain health capital■ Comes up with this term in the midst of economic advances in the notion

of human capital○ Health capital is a stock of health-related wellness

■ Investments increase health capital (exercise, doctor visits, eating healthy,avoiding unhealthy behavior, etc.)

■ Depreciation can occur if you do not invest in your health capital● Health capital can disappear

○ Care about healthy days■ The higher your health capital, the more healthy days you have, the longer

you live, the less you’ll be sick, etc.○ Figure 1 (Grossman Health Production Function)

■ Famous among health economists■ Horizontal axis is your health capital

● Starts at H min (minimum amount of health capital you need to stayalive)

■ Vertical axis is the amount of health days● There is a maximum amount of healthy days you can have peryear (365)

■ There are diminishing returns in that the gain in healthy days is further outas you increase your health capital

● Initial gains in health capital result in a lot of healthy days● At point A, there’s a huge return from investment; at point C,

there’s much less of a return○ Figure 2 (Graphing return to investment for every amount of health capital)

■ Derivative of figure 1■ Graphing the return of investment from figure 1■ There is a much higher return at point A compared to point C■ Allows people to make decisions on the margin■ Graphs cost as a horizontal line

● Price it takes to go to the gym, go to the doctor, or pay for vitamins■ Consumers start at H min and decide whether or not they want to go

forward with investments



● h* is a rational choice for the amount of health capital that a personneeds (intersection of return on investment and cost)

■ People are utility maximizers, not health maximizers○ Figures tell us that someone can make a rational choice to not be in perfect

health

○ Grossman makes the assumption that education increases the return oninvestment

■ Investment shifts the curve in figure 2 upward; return increases to morehealth capital for a greater investment in education

■ Education increases your ability to interpret your doctor’s directions● Better able to follow directions

■ Going to school just allows you to be more efficient in investing○ Paper is incredibly boring

● Fuch’s Third Variables○ Health economist from the west coast

○ There is a relationship between education and health behavior (association,correlation)

■ Grossman argues that its a causal effect● Fuch disagrees…

○ Fuch instead argues that there are three variables■ Education■ Health Behavior■ Persistence, attitude, self-control

○ These variables work together to determine health capital○ The Marshmallow Test (Professor at Columbia)

■ Attempts to understand the will power of people■ Places a marshmallow in front of children to see if they can resist eating itwhen left alone

● Promised a second marshmallow if they can wait■ In 1972, it was discovered that of children could not resist delaying

gratification■ Followed up to determine their SAT scores in 1990 and found that those

who were able to resist had higher SAT scores on average● Regression Discontinuity Design

○ Figure 3■ Discussing the National Merit Scholarship

● Curious whether the scholarship has a causal effect on one’sfuture wages?

● If you could randomly assign a scholarship would those people dobetter years later?

■ Everyone who scores above a 700 receives the scholarship■ If you compare someone who scored 100 and someone who scored 900,

they are very different



● But what about comparing scores between 699 and 701○ If we look very close at this discontinuous change we can

see if there is a trend■ Leads to the formation of figure 4

○ Figure 4

■ The gap between these two best-fit lines shows us the causal effect of thescholarship on the wages

● Difference between the cut-off is that causal difference despite nothaving a randomized control trial

● McCrary and Royer Paper○ Interested in the relationship between education and health○ When looking at birth data, there is this same gradient

■ Educated women have a higher average birth weight for their children■ Education is held to be a key determinant of fertility and infant health■ Cite Grossman about whether there is a causal relationship between

education and birth weight○ Claim that causality is unclear; unsure of the direction of causality○ In many states, there is a threshold for when students can go to school

■ In California, you must be 5 years old by December 1st to attend school;also illegal to drop out of school before your 16th birthday

■ Suppose we have two girls with different birthdays: November 30th andDecember 2nd

● When December 1st comes around, one goes to school and theother does not

● The first girl is going to be 16 in 10th grade and immediately drops

out; the second girl is going to be 16 in 9th grade and immediatelydrops out○ The first girl has an extra year of schooling because she

was born right before the cutoff (December 1st)○ Four Pictures Comparing California and Texas

■ California and Texas have similar systems, but different cut off dates■ Shows that there is quasi-experimental correlation between proximity to

cut off day and education● People born before the cutoff date have a higher education level

than those born after● There is no difference in birth weight though

■ Determine that there is no effect on health because of education once youeliminate quasi-variation

○ Clark and Royer Paper■ Establishment of mandatory education laws in the UK (can’t leave school

until your 15 if born past April 1st, 1947 and 16 if born past September 1st,1957)

● Create two discontinuities in education



● MIDTERM○ First day: Maximization

■ Came up with a model of consumer choice● Prices in income were modelled with a budget set (triangle)● Utility functions

○ Indifference curves● Combined these to form choice

○ Model for how a consumer behaves■ The Peltzman Effect■ Crowdout

● Raises the price of covering the uninsured■ Key terms

● Opportunity costs● “On the margin”● Competition

○ Second day: Markets■ Demand curves■ Profit maximization

● Cost functions○ Variable costs○ Fix costs○ Marginal costs○ Average costs

● Economies of scale● Price = marginal cost

○ Determines the firms individual supply curve■ Supply curves■ Equilibrium

● Price ceilings○ Watermelon story, rent control, gasoline prices after the

hurricane in NY, food supply in Zimbabwe● Rent seeking

○ Third day: Externalities■ Defined positive, negative, and non-rival■ Consequences of underproduction and overproduction■ Solutions from the government■ Applications in the real world■ Internalities and behavioral economics

● Smokers death benefit● Can’t justify cigarette taxes based upon externalities, but rather

must look at internalities (controversial notion)● Default bias

○ Fourth day: Uncertainty



■ Introduced the concept of insurance■ Risk aversion■ Expected utility

● Risk of little copayments is small; people are more concernedabout large figures

■ Comparisons● Bigger risks imply higher demand for insurance● More risk aversion increases demand

■ Insurer’s perspective● Actuarially fair● Law of large numbers

○ Actuarially fair insurance has a mathematical definition○ Insurers are attracted to big pools compared to small

■ Community rating■ Problems

● Reclassification risk○ Insurance contracts tend to go year-to-year

● Job lock● Good Samaritan problem

■ Tax subsidy○ Fifth day: Moral Hazard

■ Elasticity■ Ex-ante moral hazard■ Ex-post moral hazard

● Relevant to health insurance

■ RAND Study● Four key conclusions○ -0.2

■ When price of health insurance goes up 10%,usage goes down 2%

○ People cut back on everything, both effective andineffective care

○ On average, there was no effect on health○ People who were high risk were impacted

■ Offset effect● VBID (Value-based insurance design)

○ We need complicated copayments dependent on healthstatus

■ Multi-tasking○ Sixth day: Adverse Selection

■ Akerlof's lemons● Asymmetric information can skew data

■ Death spirals



● Decision of being insured vs. uninsured■ Mandate (Pros and Cons)■ Adverse Selection across plans■ Medicare advantage

● Risk classification

● Debate of privatization of Medicare (Cream skimming)○ Take away all of the good candidates, raising prices

○ Seventh Day: Grossman vs. Fuchs● Know how to interpret elasticity and how to use supply and demand curves; know

actuarially fair premiums (using the equations)● Have a familiarity with every graph

○ Won’t need to draw each one● Don’t memorize names or obscure facts● Exam resembles practice questions from handout (but longer)

○ Study recommendations:

■ Go through outline and ensure that you understand the basic concepts● Understand the argument; why support one

■ Go over homework solutions■ Closed book

● Only use topics that have been discussed in class■ Paper-based exam

introhealthecon notes columbia

Documents