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ECON383/D200 -Heath Economics Problem set 1 Solutions

1. Discuss the difference in the design of the public health insurance in your home country and Canada, (if your home country is Canada, compare it to the case in the US). Briefly discuss pros and cons of each system. e.g. the US vs. Canada Canada has universal health insurance coverage maintained by each provincial government. On the other hand, the US health insurance system heavily rely on the private health insurance except for the poor (Medicaid), the elderly (Medicare), and other government sponsored programs such as SCHIP (State Children's Health Insurance Program). As a result, the percent of public health spending to total health spending in the US is 46.5 % while that of Canada is 70.2 % in 2008, mainly due to the difference in government’ involvement in health insurance system. 2. Other than income, state three possible explanations for the rise in medical expenditures? Which factor do you think contributes the most? e.g., Malpractice, Aging, Price increase, Technology, Expansion in health insurance coverage, Increase in reimbursement for physicians and hospitals As for the biggest contributing factor, as long as you make a logical statement, it is fine. Most of economists agree that main channel of rise in medical expenditure is due to technological change. 3. Identify the key social or economic institution or arrangement that seems to be established primarily to deal with the uncertainty in the health care system described in each area: 1)

Financial risks arising from random illness e.g., health insurance

2)

Demand inducement for major surgery e.g., second opinions

3)

Variable competence by doctors and other medical providers e.g., licensure, health care report cards—public disclosure of patient health outcomes at the level of the individual physician or hospital or both

4)

Incomplete information about the effectiveness of medical treatments e.g., expert panels, and government’s prior authorization for approving 1

treatments in advance and retrospectively, drug regulations by the government 4. Identify four things that will likely affect an individual’s demand for medical care. Which will likely have the best ability to predict spending for a single individual (assuming that you don’t know anything about individuals’ health events)? e.g., Illness event; insurance coverage; income; price of medical care; education; sex; life style choices and age all affect individual demand for care. The single most important of these for an individual is the individual’s illness event (if it can be observed). In groups, if you cannot observe individual illness events, age is the strongest predictor of medical care use. 5. What is the fundamental difference between these two relationships: (i) doctor and patient; and (ii) auto-repair mechanic and customer? •

Information disparity is much huge in medicine (i.e.(i)) than (ii)

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Mistakes are harder to correct with service (i.e., medical treatment to your body!) than with goods such as (ii).

6. List three real-life examples of a negative externality of health care or health. Briefly discuss why you think each is negative. • •

Smoking: Second hand smoke is harmful for the people around you. Drinking & Driving: This increases the risk of death for people around you.

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Antibiotics: This increases the chances of superbugs immune to antibiotics.

7. Provide three examples of a situation where the marginal productivity would decline because of an increase on the extensive margin. Use real-life examples for a specific medical treatment (Note: other than mammography discussed in the class). •

Back surgery: Some people are clear candidates for surgery. However, some surgeons are more aggressive and will operate without clear signs of symptoms. Consequently the yield of successful cases will fall.

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Low Dose Lovastatin (a cholesterol-reducing drug): The drug has a high marginal productivity for the highest risk population (older male heart attack survivors). Also treating those with low cholesterol reduces the marginal productivity of the drug.

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Exercise Electrocardiogram Screening: This is productive for men. Not as productive for women because their underlying risk is lower. Therefore 2

extending the screening to women would reduce the marginal productivity. 8. Cross-regional studies of medical practice variations and comparisons of individual physicians' "styles" show considerable differences between the rates of use of medical care across providers. Presuming (for the moment) that the populations being treated in these comparisons are equivalent (or sufficiently so to ignore the differences), would you say that these studies show (a) that some doctors treat too much; (b) some doctors don't treat enough; (c) both; (d) neither; or (e) we can't tell from data like that. Explain your conclusion. Answers may vary. As long as you make a logical statement, it is fine. For example, (e) You can’t tell; variations arise from disagreement about proper treatment use, but that could be correct on average or too much or too little. 9. In the class, we cover a paper by Ashenfelter and Greenstone (2004) to estimate the value of life. We now consider an alternative way of estimating the value of life. Assume that there are only two types of jobs in the labor market (safe jobs versus risky jobs). Briefly describe how we may be able to estimate the value of life in this setting. Under the assumption that wage captures the underlying risk of the jobs, the differences in wages between two jobs can be viewed as the additional amount of income that a worker must be offered in order to motivate him/her to accept the risky job relative to the safer job. Thus, dividing the wage difference by the difference in mortality risks associated with the jobs provide the estimate of the value of life.

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