Professor Thornton ADVANCED HEALTH ECONOMICS Semester

ECONOMICS 536

Professor Thornton ADVANCED HEALTH ECONOMICS Semester

Office: Pray-Harrold 707F

Phone: 487-0080

Office Hours:

Text: S. Folland, A. Goodman, and M. Stano, The Economics of Health and Health Care, Second Edition.

Purpose: The purpose of this course is to demonstrate how economic analysis can be used to explain the behavior of patients, medical care providers, and insurers in health care markets. Recent changes in medical care markets, such as the increasing importance of managed care, and current health care policy issues, such as regulation of the medical care industry, financing of medical care services, and efficiency in the delivery of medical care services, are examined. This course will emphasize how economic and statistical concepts and techniques can be used to analyze health care issues and problems. The goal is to gain a better understanding of the financing and delivery of medical care, and to provide the student with a set of tools to conduct health care research and analysis.

Prerequisites: The prerequisites for this course are Economics 436 (Health Economics) and Economics 415 (Econometrics).

Grading: Your grade in the class will be based on two examinations, a midterm and a final, and two computer/homework assignments. Each exam is worth 35% of your total grade, and the computer/homework assignments are worth 15% each.

Computer Assignments: The computer assignments are designed to teach the student how to apply economic and statistical tools to real world data to analyze health care problems. In particular, the computer assignments emphasize the following: 1) how to estimate production and cost functions for medical care services and use this information to obtain estimates of input productivity, input substitution, and returns to scale, 2) how to measure technical and allocation efficiency in the provision of medical care services, 3) how to estimate physician response elasticities, 4) how to estimate demand and fee equations for medical care services. The computer assignments also emphasize how to interpret empirical results and draw conclusions from the data.

The following is an outline of topics to be covered and a list of related reading assignments. Readings are divided between required (*) and optional. Optional readings are designed to supplement class lectures, and provide students who are interested in a particular topic additional information on that topic.

1.Introduction and Economic Approach to Health Care Issues

What is health economics? What do health economists do? How are economic concepts and methods applied to health care problems and issues?

Readings:

Folland, Goodman, and Stano, Chapter 2, Chapter 3. (*)

Fuchs, V., (1993), “What is Health Economics,” in V. Fuchs, The Future of Health Care Policy, Chapter 2, pp. 25-40. (*)

Feldman, P., and M. Morrisey, (1990),“Health Economics: A Report on the Field,” Journal of Health, Policy, and Law, Fall, 627-646. (*)

2.Overview of the Health Care System

How is the health care system in the U.S. organized? Who are the major players in the health care system? What is the role of patients, medical care providers, insurers, employers, government, academic health centers, and philanthropic foundations? What are the major social problems that exist in the health care system?

Readings:

Folland, Goodman, and Stano, Chapter 22. (*)

Salsberg, E., and C. Kovner, (1995), “The Health Care Workforce,” in A. Kovner, Health Care Delivery in the United States, New York: Springer Publishing Company, pp.55-100. (*)

Iglehart, J., (1992), “The American Health Care System: Introduction,” New England Journal of Medicine, 326, April 2, pp. 962-967. (*)

Levit, K., et. al., (1994), “National Health Care Spending Trends, 1960-1993,” Health Affairs, Winter 1994, pp.14-31. (*)

Reinhardt, U., (1994), “Planning the Nation’s Health Workforce: Let the Market In,” Inquiry, 31, pp.250-263.

Newhouse, J. (1992), “Medical Care Costs: How Much Welfare Loss?,” Journal of Economic Perspectives, Summer, pp.3-21. (*)

3.Production and Cost of Health Care

How can production functions and cost functions be used to analyze productivity, input substitution, economies of scale, technical efficiency, and allocation efficiency in the provision of physician and hospital services? How can technical and allocation efficiency in the provision of medical care be measured ? What are the policy implications of findings of studies of economic efficiency for the delivery of medical care services?

Readings:

Folland, Goodman, and Stano, Chapter 13, Chapter 14. (*)

Reinhardt, U., (1972), “A Production Function for Physician Services,” Review of Economics and Statistics, 54(1), pp.55-66. (*)

Reinhardt, U., (1991), “Health Manpower Forecasting: The Case of Physician Supply,” in E. Ginzberg, Health Services Research, Harvard, pp. 234-283. (*)

Brown, D., (1988), Do Physicians Underutilize Aides?,” Journal of Human Resources, 23(3), pp.342-355. (*)

Thornton, J. (1996), An Analysis of Efficiency in the Provision of Medical Care Services of Solo Practice Physicians,” Journal of Economics and Finance, Summer/Fall,

1998. (*)

Gaynor, M., and M. Pauly (1990), “Compensation and Productive Efficiency in Partnerships: Evidence From Medical Group Practice,” Journal of Political Economy, 98, pp.544-573.(*)

Hurdle, S., and G. Pope, (1989) “Physician Productivity: Trends and Determinants,” Inquiry, 26(1), pp.100-115.(*)

Pope, G., and R. Burge, (1996) “Economies of Scale in Physician Practice,” Medical Care Research and Review, 53(4), ppl 417-440.

Eakin, K., “Do Physicians Minimize Cost?,” in C. Lovell, and S. Schmidt, The Measurement of Productive Efficiency: Techniques and Applications, pp.221-236

Cowing, T., et. al., (1983), “Hospital Cost Analysis: A Survey and Evaluation of Recent Studies,” in Advances in Health Economics and Health Services Research, 4.

Breyer, F., (1987), “The Specification of a Hospital Cost Function,” Journal of Health Economic, 6, pp.147-158. (*)

Vita, M., (1990), “Exploring Hospital Production Relationships with Flexible Functional Forms,” Journal of Health Economics, 9, pp.1-22. (*)

Zuckerman, S., J. Hadely, and L. Iezzoni, (1994), “Measuring Hospital Efficiency with Frontier Cost Functions,” Journal of Health Economics, 13, pp.255-80.

Dor, A., (1994), “Non-Minimum Cost Functions and the Stochastic Frontier: On Applications to Health Care Providers, Journal of Health Economics, 13, pp.329- 334.

Eakin, K., and T. Kneisner, (1988), “Estimating Non-Minimum Cost Functions for Hospitals,” Southern Economic Journal, 54(3).

Escarce, J., (1996) “Using Physician Practice Cost Functions in Payment Policy: The Problem of Endogeneity Bias,” Inquiry, 33, pp.66-78.

Lee, L., and W. Tyler, (1978), “The Stochastic Production Function and Average Efficiency,” Journal of Econometrics, 7, pp.385-389. (*)

4.Economic Models of the Physician Firm

How can economic analysis be used to explain and predict physician behavior in medical care markets? How can a model of the physician firm be formulated and implemented empirically? What sorts of statistical questions must be addressed when estimating a model of physician behavior?

Readings:

Folland, Goodman, and Stano, Chapters 7, 8, 9, 10, 15, and 16. (*)

Pauly, M., (1980), Doctors and Their Workshops, pp. 1-15. (*)

Scitovzsky, T., “A Note on Profit Maximization and Its Implications,” Review of Economic Studies, 1943, pp.57-60. (*)

Sloan, F., (1974), “A Microanalysis of Physicians’ Hours of Work Decisions,” in M. Perlman, The Economics of Health and Medical Care. (*)

Brown, D, and Lapan, H., (1979), “The Supply of Physician Services,” Economic Inquiry, April, 269-279. (*)

Thornton, J. and K. Eakin, “The Self-Employed Utility Maximizing Physician,” Journal of Human Resources, 32(1), pp.98-128. (*)

Thornton, J., (1997), “The Labor Supply Behavior of Self-Employed Solo Practice Physicians, forthcoming in Applied Economics.

McCarthy, T., (1985), ‘The Competitive Nature of the Primary Care Services Market,” Journal of Health Economics, 4, pp. 93-117.

Gaynor, M., (1989), “Competition Within the Firm: Theory Plus Some Evidence from Medical Group Practice,” Rand Journal of Economics, 20, pp.59-76. (*)

Lee, R., (1990), “Monitoring Physicians: A Bargaining Model of Medical Group Practice,” Journal of Health Economics, 9, pp.463-481.

Newhouse, J.P., (1973), “The Economics of Group Practice,” Journal of Human Resources, 8(1), pp.37-56.

5.Physician Induced Demand

Can physicians shift the demand curve for their services by distorting information provided to patients and inducing patients to consume unnecessary medical care services? If so, would they actually engage in this type of behavior for economic reasons? What sorts of empirical studies have been conducted to test the physician induced demand hypothesis, and what have these studies found?

Readings:

McGuire, T., and M. Pauly, (1991), “Physician Response to Fee Changes with Multiple Payers, Journal of Health Economics, 10, pp. 385-410. (*)

Rizzo, J., and T. Blumenthal, (1996) “Is the Target Income Hypothesis an Economic Heresy?,” Medical Care Research and Review, 53(2), pp. 243-266. (*)

Reinhardt, U., (1985), “The Theory of Physician Induced Demand: Reflections after a Decade,” Journal of Health Economics, 4, pp.187-193. (*)

Wilensky, G., and L. Rossiter, (1983), “The Relative Importance of Physician-Induced Demand for Medical Care Services,” Millbank Memorial Fund Quarterly, 61, pp. 252-277. (*)

Fuchs, V., (1978), “The Supply of Surgeons and the Demand for Operations,” Journal of Human Resources, 13, pp.35-56. (*)

Rice, T., (1884), “The Impact of Changing Medicare Reimbursement Rates on Physician Induced Demand, “ Medical Care, 21, pp.803-815.

Rice, T., and R. Labelle, (1989), “Do Physicians Induce Demand for Medical Services?,” Journal of Health, Politics and Law, 14, pp.587-601.

Labelle, R., G. Stoddart, and T. Rice, (1994), “A Re-examination of the Meaning and Importance of Supplier Induced Demand,” Journal of Health Economics, 13, pp.347-368.

Pauly, M., “Editorial: A Re-examination of the Meaning and Importance of Supplier Induced Demand,” Journal of Health Economics, 13, pp.369-372.

Christensen, S., (1992), “Volume Responses to Exogenous Changes in Medicare’s Payment Policies,” Health Services Research, 27(1), pp. 65-79.

Phelps, C. (1986), “Induced Demand - Can We Ever Know Its Extent,” Journal of Health Economics, 5, pp.355-365.

Pauly, M., and M. Satterthwaite, (1981), “The Pricing of Primary Care Physicians’ Services Market: A Test of the Role of Consumer Information,” Bell Journal of Economics, 12, pp. 480-506.

Auster, R., and R. Oaxaca, (1981), “Identification of Supplier Induced Demand in the Health Care Sector,” Journal of Human Resources, 16, pp.327-342.

Dranove, D., (1988), “Demand Inducement and the Physician/Patient Relationship, Economic Inquiry, 26, pp. 281-298.

Mitchell, J., and T. Sass, (1995), “Physician Ownership of Ancillary Services: Indirect Demand Inducement or Quality Assurance?,” Journal of Health Economics, 14, pp.263-289.

6.Medical Malpractice and Physician Behavior

What is the structure of the medical malpractice system, and what are its major social functions? Why have medical malpractice litigation and medical malpractice insurance premiums increased dramatically over the past several decades? How do physicians respond to the medical malpractice climate? Do physicians practice defensive medicine?

Readings:

Danzon, P., (1991), “Liability for Medical Malpractice,” Journal of Economic Perspectives, 5(1), pp.51-70. (*)

U.S. Congress, Office of Technology Assessment, (1994), “ Defensive Medicine: Definition and Causes,” in Defensive Medicine and Medical Malpractice, Chapter 2, pp.21- 37. (*)

Danzon, P., M. Pauly, and R. Kingston, (1990), “The Effects of Malpractice Litigation on Physician Fees and Incomes, American Economic Review, May, 122-127. (*)

Reynolds, R., J. Rizzo, and M. Gonzalez, (1987)“The Cost of Medical Professional Liability,” Journal of the American Medical Association, 257, pp.2776-2779. (*)

Thornton, J. (1997), “Are Malpractice Insurance Premiums a Tort Signal That Influences Physician Hours Worked?,” Economics Letters, September 1997. (*)

Thornton, J. (1997), “The Impact of Malpractice Insurance Costs on Physician Behavior: The Role of Income and Tort Signal Effects,” Applied Economics, 31, 1999. (*)

Sloan, F., and R. Bovbjerg, (1989), Medical Malpractice: Crises, Response and Effects, Research Bulletin, Health Insurance Association of America, May.

Levinson, W. et al., (1997), Physician-Patient Communication: The Relationship With Malpractice Claims Among Primary Care Physicians and Surgeons, Journal of the American Medical Association, 277(7), pp.553-559.

Localio, A., et. al, (1993), “Relationship Between Malpractice Claims and Cesarean Delivery,” Journal of the American Medical Association, 269(3), pp.366-373.

Glassman, P. et. al., (1996), “Physicians’ Personal Malpractice Experiences Are Not Related to Defensive Clinical Practices,” Journal of Health, Policy and Law, 21(2), pp.219-241. (*)

Klingman, D., et. al., (1996), “Measuring Defensive Medicine Using Clinical Scenario Surveys, Journal of Health, Policy and Law, 21(2), pp.185-217.

Kinney, Eleanor, (1995), “Malpractice Reform in the 1990s: Past Disappointments, Future Success?,” Journal of Health, Policy, and Law, 20(1), pp.99-135.

Danzon, P., (1985), Medical Malpractice: Theory, Evidence and Public Policy. Cambridge: Harvard University Press.

Weiler, P., (1991), Medical Malpractice on Trial. Cambridge: Harvard University Press.

7.Economic Models of the Hospital

How can economic analysis be used to explain the behavior of hospitals? Do nonprofit hospitals behave differently from for-profit hospitals? Why are independent community hospitals merging into vertically integrated, multi-hospital systems?

Readings:

Folland, Goodman, and Stano, Chapter 17, Chapter 18. (*)

Kovner, A., (1995), “Hospitals,” in A. Kovner, Health Care Delivery in the United States, New York, Springer Publishing Company, pp.162-193. (*)

Iglehart, J., (1993), “The American Health Care System: Community Hospitals,” New England Journal of Medicine, 329, pp.372-376. (8)

Newhouse, J., (1970), “Toward a Theory of Nonprofit Institutions: An Economic Model of a Hospital, American Economic Review, March, pp.64-70. (*)

Pauly, M., and M. Redisch, (1973), “The Not-For-Profit Hospital as a Physicians’ Cooperative,” American Economic Review, March, pp.87-99. (*)

Harris, J., (1977), “The Internal Organization of Hospitals: Some Economic Implications,” Bell Journal of Economics, 8, pp.467-482.

8.HMOs and Managed Care Organizations

What is a managed care organization? What are the underlying forces driving the managed care revolution? How can economic analysis be used to explain the behavior of managed care organizations? What impact do managed care financial incentive systems have on the behavior of medical care providers? Do managed care organizations lower medical care costs and insurance premiums? Do managed care organizations provide quality medical care services?

Readings:

Folland, Goodman, and Stano, Chapter 12. (*)

Luft, H., and E. Morrison, (1991), “Alternative Delivery Systems,” in E. Ginzberg, Health Services Research, Harvard, pp.195-233.

Iglehart, J., (1992), “The American Health Care System: Managed Care,” New England Journal of Medicine, September 3, 327, pp.742-747. (*)

Miller, R., and H. Luft, (1994), “Managed Care Plan Performance since 1980,” Journal of American Medical Association, May 18, 271, pp.1512-1519. (*)

Hillman, A., M. Pauly, and J. Kerstein, (1989), “How Do Financial Incentives Affect Physicians’ Clinical Decisions and the Financial Performance of Health Maintenance Organizations,” New England Journal of Medicine, July 13, 321, pp.86-92.

Soonman, K., (1996), “Structure of Financial Incentive Systems for Providers in Managed Care Plans, Medical Care Research and Review, 53(2), pp. 149-161.

Greenfield, S. et. al., (1995), “Outcomes of Patients with Hypertension and Non-Insulin Dependent Diabetes Mellitus Treated By Different Systems and Specialties: Results from the Medical Outcomes Study,” Journal of the American Medical Association, 274, pp.1436-1444. (*)

Hellinger, F., (1996), “The Impact of Financial Incentives on Physician Behavior in Managed Care Plans: A Review of the Evidence, Medical Care Research and Review, 53(3), pp.294-314. (*)

Unland, J., (1996), “The Emergence of Providers as Health Insurers,” Journal of Health Care Finance, 23(1), pp.57-88.

Rice, T., and J. Gabel, (1996), “The Internal Economics of HMOs: A Research Agenda,” Medical Care Research and Review, 53 Supplement, pp.S44-S64.

Gold, M., (1995), “A National Survey of the Arrangements Managed-Care Plans Make with Physicians,” New England Journal of Medicine, 333, pp.1678-1683.

Emmons, D., and C. Simon, (1996), “Managed Care: Evolving Contractual Arrangements,” Socioeconomic Characteristics of Medical Practice, pp.15-25.(*)

9.Demand for Medical Care and Patient Behavior

How can economic analysis be used to explain the behavior of patients in the market for medical care services? How can a model of the demand for medical care services be formulated and implemented empirically?

Readings:

Folland, Goodman, and Stano, Chapter 5, Chapter 6 (*)

Holtmann, A., (1972), “Prices, Time, and Technology in the Medical Care Market,” Journal of Human Resources, Spring, pp.179-190.

Acton, J., (1975), “Nonmonetary Factors in the Demand for Medical Services: Some Empirical Evidence,” Journal of Political Economy, June, pp.595-614. (*)

Grossman, M., (1972), “On the Concept of Health Capital and the Demand for Health,” Journal of Political Economy, March/April, pp.223-255. (*)

Becker, G., (1965), “A Theory of the Allocation of Time,” Economic Journal, September, pp.493-517. (*)

Manning, W., et. al., (1987), “Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment,” American Economic Review, June, pp.251-257. (*)

Pauly, M., (1968), “The Economics of Moral Hazard,” American Economic Review, 58, pp.531-537.

Feldman, R., and B. Dowd, (1993), “What Does the Demand Curve for Medical Care Measure?,” Journal of Health Economics, 12, pp.193-200.

Duan, N. et. al., (1983), “A Comparison of Alternative Models for the Demand for Medical Care,” Journal of Business and Economic Statistics, April.

10.Physician Choice of Medical Specialty and Physician Workforce Policy

What is the mechanism that allocates physicians across medical specialties? How important are economic factors, such as earnings and hours worked, in specialty choice? How important are non-economic factors, such as medical school environment and personal characteristics, in medical specialty choice? Does the U.S. health care system have too many specialists and too few primary-care physicians? If so, what is the most appropriate policy to correct this imbalance?

Readings:

Thornton, J., and A. Esposto, (2002), “How Important Are Economic Factors in Choice

of Medical Specialty?” Health Economics, January. (*)

Thornton, J., (2000), “Physician Choice of Medical Specialty: Do Economic Incentives

Matter? Applied Economics, 32, 1419-1428. (*)

Reinhardt, U. (1994), “Planning the Nation’s Workforce: Let the Market In,” Inquiry, 31,

250-63. (*)

Eisenberg, J. (1994), “If Trickle-Down Physician Workforce Policy Failed, is the Choice

Now between the Market and Government Regulation?,” Inquiry, 28, 241-49. (*)

Hadley, J. (1977), An Empirical Model of Medical Specialty Choice,” Inquiry, 14,

384-401. (*)

Sloan, F. (1970) Lifetime Earnings and Physicians’ Choice of Specialty,” Industrial and

Labor Relations Review, 24, 47-56.

Bazzoli, G. (1985), “Does Educational Indebtedness Affect Physician Specialty Choice,”

Journal of Health Economics, 4, 1-19.

McKay, N. (1990), “The Economic Determinants of Specialty Choice by Medical

Residents,” Journal of Health Economics.

Nieman, L., Holbert, D., Brenner, C. and Nieman, I. (1989), “Specialty Career Decision

Making of Third Year Medical Students,” Family Medicine, 21, 359-63.

11.Biomedical Research and Medical Technology

What forces have been responsible for the rapid rate of technological advancement in the health care system in the U.S.? How do advancements in medical technology and the implementation of new technologies influence medical care demand, supply, cost, expenditures, and quality?

Readings:

Folland, Goodman, and Stano, Chapter 14. (*)

Ginzberg, E., (1990), “High-Tech Medicine,” in E. Ginzberg, The Medical Triangle, Harvard, Chapter 5, pp.39-53. (*)

Ginzberg, E., (1990), “Academic Health Centers,” in E. Ginzberg, The Medical Triangle, Harvard, Chapter 6, pp.57-77.

Fuchs, V., and A. Garber, (1993), “Technology Assessment and Health Policy,” in V. Fuchs, The Future of Health Care Policy, Harvard, Chapter 13, pp.192-213. (*)

Weisbrod, B., (1991), “The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment,” Journal of Economic Literature, June, pp.523-552. (*)

Romeo, A., (1983), “Prospective Payment and the Diffusion of New Technologies in Hospitals, Journal of Health Economics, April.