Production of Health - Wayne State University

Production of Health FGS - Chapter 5 General Formulation What Whatare are these? these? HS = f (Health Care, Environment, Human Biology, Life Style) HS = f (HC, Env, HB, LS) If were concentrating on health care, Total Product: HS = f (HC, Env, HB, LS) Marginal Product: MP = HS/HC Average Product: AP = HS/HC (Excel Spreadsheet - Ch 5.xls) HS = HCaAE1-a a

0.1 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

100 HC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

19 20 HP 63.1 67.6 70.4 72.5 74.1 75.5 76.6 77.7 78.6 79.4 80.2 80.9 81.5 82.2 82.7 83.3 83.8

84.2 84.7 85.1 Ave. Pr. Mgl. Pr. 63.1 33.8 23.5 18.1 14.8 12.6 10.9 9.7 8.7 7.9 7.3 6.7 6.3 5.9 5.5 5.2

4.9 4.7 4.5 4.3 4.5 2.8 2.1 1.6 1.4 1.2 1.0 0.9 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.5

0.5 0.4 Total, Average, and Marginal Products 90.0 80.0 70.0 60.0 Products All Else 50.0 40.0 30.0 20.0 10.0 0.0 0 5

10 Health Care 15 HS Ave. Pr. Mgl. Pr. 20 Measures of Health Status Death rates (easiest to measure) Healthy days Think about longevity. Morbidity rates It may be critical to distinguish between total and marginal contributions, since low marginals may accompany high totals.

Total v. Marginal It is critical to distinguish between total and marginal contributions. It may turn out that although the total contribution may be substantial, the marginal contribution may be . Why do we care? Because many decisions are made at the margin. Additions to the amount spent, may not be worth it. very small Marginal Products Under most conditions, marginal products are always going to be non-negative. Why? Can H/x (where x = health care) be negative? Yes! 2 Possibilities Iatrogenic (physician caused)

17% 6% Females Neonate Mortality Table 5.3 looks at neonate mortality. Rate is the ratio of infant deaths aged 1 month or less per thousand live births. It fell 1964-1982 from 17.9 to 7.7. Corman, Joyce, and Grossman were able to estimate the contributions of specific types of medical care and specific types of neonate-related programs. WIC - Women, Infants and Children (improved nutrition program) is means tested, directed toward the poor. For whites - 25% of the reduction can be explained For blacks - 56% can be explained. Bureau Bureauof of

Community Community Table 5.3 Contributions of Selected Factors to Reductions in Neonatal Mortality Rates Health HealthServices Services Projects Projects Factor Organized Family Planning WIC BCHS project use Neonate intensive care Abortion Prenatal care Total explained reduction Total reduction Percent Explained

Whites Blacks 0.084 0.425 0.002 0.140 0.824 0.434 1.909 7.5 25.3 0.526 1.330 0.030 0.534 2.109 1.949 6.478 11.5

56.5 Morbidity Mortality is useful because it is easy to measure. Morbidity refers to illness. What might we expect? If most diseases are either self-limiting, or irreversible, the possibilities for additional medical services to reverse morbidity are small. May work for some services (hypertension, periodontal disease), and not for others. That's about what is found. Schooling - Two Different Theories Grossman - Educated people produce health more efficiently. Why? If so, it makes sense to transfer resources from medical care to education. Fuchs - Education is an investment with a long time horizon. So is health! Since individuals with low time discount rates, or long time horizons will tend to invest both in education and health, the two (health and education) will be correlated.

No explicit link. This debate has been around for a while, and theyre still arguing about it. Cutler Starts with a simple model: U = V(q) C(q), where q = health output To maximize total utility Mgl. Value = Mgl. Cost Nothing profound here. What weve done thus far in all of our analyses today is Mgl cost. What about Mgl value? \$ Decreasing MB s TB TC Increasing MC s

MB MC q* q Example Studies have shown that were willing to pay \$300 (MC) for an air bag. What are MB? Air bag will save life of 1 in 10,000. So: MC for airbags MB for airbags \$300 probability of dying * Value of life .0001 * Value of life Value of life \$300/0.0001 = \$3,000,000 Depending on how we discount it, this is worth about \$100,000 per year. Look at Cardiovascular Care Cutler asserts that average 45 year old will spend \$30,000 in present value on CV

care. Average person will live 3 years longer because of the medical advance? Is it worth it? Who is average? Turns out that average discounted benefit is B/C=120/30 = 4! \$120,000. Yes, it is worth it! Mgl. Valuation But \$ Mgl. Costs We want to look not only at marginal product marginal costs, but at marginal valuation relative to marginal costs! Low marginal product, may

mean increasing marginal costs, but it doesnt mean that care is not valuable. Source: David M. Cutler Are the Benefits of Medicine Worth What We Pay for It? FIFTEENTH ANNUAL HERBERT LOURIE MEMORIAL LECTURE ON HEALTH POLICY, Syracuse University, 2004 Quantity of Care

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