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Hardcover | $78.00 Text | £30.95 | ISBN: 9780262016766 | 848 pp. | 8 x 9 in | 35 b&w illus., 92 figures, 43 tables| March 2012
 

Of Related Interest

Health Economics

Overview

This book introduces students to the growing research field of health economics. Rather than offer details about health systems around the world without providing a theoretical context, Health Economics combines economic concepts with empirical evidence to enhance readers’ economic understanding of how health care institutions and markets function. It views the subject in both microeconomic and macroeconomic terms, moving from the individual and firm level to the market level to a macroeconomic view of the role of health and health care within the economy as a whole.

The book includes discussion of recent empirical evidence on the U.S. health system and can be used for an undergraduate course on U.S. health economics. It also contains sufficient material for an undergraduate or masters course on global health economics, or for a course on health economics aimed at health professionals. It includes a chapter on nurses as well as a chapter on the economics of hospitals and pharmaceuticals, which can be used in master’s courses for students in these fields. It supplements its analysis with readings (both classic and current), extensive references, links to Web sites on policy developments and public programs, review and discussion questions, and exercises.

A Student Solutions Manual provides answers to the odd-numbered exercises. Separately, downloadable supplementary material for instructors includes answers to all exercises and slides that can be used for class presentation.

Downloadable instructor resources available for this title: instructor’s manual, slides, and file of figures in the book

About the Authors

Frank Sloan is J. Alexander McMahon Professor of Health Policy and Management and Professor of Economics at Duke University. A leader in the field of health economics for more than thirty years, he is coauthor of The Price of Smoking (2004) and Medical Malpractice (2008) and coeditor of Incentives and Choices in Health Care (2008), all published by the MIT Press.

Chee-Ruey Hsieh is a Research Fellow at the Institute of Economics, Academica Sinica, Taiwan, and the coeditor of three previous books on the economics of health care.

Table of Contents

  • Health Economics
  • Health Economics
  • By Frank A. Sloan and Chee-Ruey Hsieh
  • The MIT Press
  • Cambridge, Massachusetts • London, England
  • ©
  • 2012
  • Massachusetts Institute of Technology
  • All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher.
  • MIT Press books may be purchased at special quantity discounts for business or sales promotional use. For information, please email special_sales@mitpress.mit.edu or write to Special Sales Department, The MIT Press, 55 Hayward Street, Cambridge, MA 02142.
  • This book was set in Melior and MetaPlus by Toppan Best-set Premedia Limited. Printed and bound in the United States of America.
  • Library of Congress Cataloging-in-Publication Data
  • Sloan, Frank A.
  • Health economics / Frank A. Sloan and Chee-Ruey Hsieh.
  •  p. cm.
  • Includes bibliographical references and index.
  • ISBN 978-0-262-01676-6 (hardcover : alk. paper)
  • 1. Medical economics. I. Hsieh, Chee-Ruey. II. Title.
  • RA410.S55 2012
  • 338.4′73621—dc23
  • 2011032823
  • 10 9 8 7 6 5 4 3 2 1
  • Brief Table of Contents
  • Preface
  • xxvii
  • Acknowledgments
  • xxxiii
  • Chapter 1 Introduction and Overview
  • 1
  • Part I Demand for Health, Health Care, and Insurance
  • 37
  • Chapter 2 Health and Health Behaviors
  • 39
  • Chapter 3 Demand for Health Care Services
  • 83
  • Chapter 4 Demand for Private Health Insurance
  • 127
  • Part II Supply of Health Care Services and Insurance
  • 169
  • Chapter 5 The Market for Physicians’ Services
  • 171
  • Chapter 6 Hospitals
  • 219
  • Chapter 7 Quality of Care and Medical Malpractice
  • 275
  • Chapter 8 Nurses in Hospital and Long-Term Care Service
  • 319
  • Chapter 9 Pharmaceutical Manufacturers
  • 367
  • Chapter 10 The Supply of Private Health Insurance
  • 417
  • Part III Market Structure in the Health Care Sector
  • 467
  • Chapter 11 Private Financing of Health Care Services
  • 469
  • Chapter 12 Government Financing and Private Supply
  • 503
  • Chapter 13 Public Supply and Financing
  • 563
  • Part IV Performance of the Health Care Sector: Positive and Normative Aspects
  • 615
  • Chapter 14 Cost and Cost-Effectiveness Analysis
  • 617
  • Chapter 15 Measuring Benefits and Cost-Benefit Analysis
  • 657
  • Chapter 16 The Contribution of Personal Health Services to Longevity, Population Health, and Economic Growth
  • 693
  • Chapter 17 Frontiers of Health Economics
  • 737
  • Index
  • 753
  • Contents
  • Preface
  • xxvii
  • Acknowledgments
  • xxxiii
  • Chapter 1 Introduction and Overview
  • 1
  • 1.1 Health Economics as a Field of Inquiry
  • 2
  • The Importance of Health Economics
  • 2
  • The Growth of Health Economics
  • 3
  • 1.2 Factors Accounting for the Growth of Health Economics
  • 5
  • Improvements in Health and Longevity
  • 5
  • Expansion of Health Sectors
  • 8
  • 1.3 Important Institutional Features of Health Care
  • 10
  • Health Insurance
  • 11
  • Externalities and Government Intervention in Health Care Services Provision
  • 13
  • Asymmetric Information between Consumers and Suppliers of Health Care and the Institutional Responses
  • 15
  • 1.4 Government Intervention in Health Care Markets
  • 16
  • Government’s Roles in Achieving an Equitable Distribution of Resources
  • 17
  • The Equity-Efficiency Quandary and Government’s Role
  • 18
  • Government’s Role in Correcting Market Failures
  • 20
  • 1.5 The Book’s Four Parts: A Road Map
  • 21
  • Structure of the Book
  • 21
  • Part I Demand for Health, Health Care Services, and Insurance
  • 22
  • Part II Supply of Health Care Services and Insurance
  • 24
  • Part III Market Structure in the Health Care Sector
  • 28
  • Part IV Performance of the Health Care Sector: Positive and Normative Aspects
  • 30
  • 1.6 Conclusion
  • 32
  • Key Concepts
  • 32
  • Review and Discussion Questions
  • 32
  • Exercises
  • 33
  • Online Supplemental Material
  • 34
  • Supplemental Readings
  • 34
  • References
  • 34
  • Part I Demand for Health, Health Care, and Insurance
  • 37
  • Chapter 2 Health and Health Behaviors
  • 39
  • 2.1 Rationality and Other Economic Assumptions
  • 40
  • 2.2 Health Production Functions
  • 43
  • The Concept
  • 43
  • Health Stocks and Flows
  • 44
  • 2.3 The Demand for Health: Health as a Capital Stock
  • 44
  • Evolution of a Person’s Health over Time
  • 44
  • Demand for Health and for Medical Care
  • 46
  • Predictions of the Grossman Model
  • 50
  • A Reduction in the Price of Medical Care
  • 50
  • An Increase in the Individual’s Wage Rate
  • 51
  • An Increase in the Individual’s Age
  • 51
  • An Increase in the Individual’s Educational Attainment
  • 51
  • 2.4 Measuring Health Capital
  • 54
  • Mortality
  • 54
  • Quality-of-Life Rating Scales
  • 55
  • Quality of Life Derived from Trade-off Questions
  • 56
  • 2.5 Adding Uncertainty: Decision Trees, Backward Induction, and Decision Making under Uncertainty
  • 57
  • A Realistic Application: A Pediatrician’s Decision about Ordering a Throat Culture
  • 58
  • Errors in Diagnostic Tests
  • 60
  • 2.6 Consumer Choices about Health Behaviors: A General Framework
  • 61
  • Unhealthy Behaviors
  • 61
  • The Concept of Present Value
  • 62
  • Fundamental Underlying Assumptions
  • 62
  • Assumptions: Rational, Forward-Looking, and Time Consistency Described
  • 62
  • Ex Ante Expectations and Decisions, Ex Post Realizations, and Revising Expectations from Learning
  • 64
  • Is the Economic Framework of Health Behavior Decision Making Plausible?
  • 65
  • Economic Evidence on Health Behaviors and Public Policy Implications
  • 66
  • 2.7 Frontier Issues: The Behavioral Economics Critique—Theory and Evidence
  • 67
  • 2.8 Summary and Conclusions
  • 69
  • Key Concepts
  • 70
  • Review and Discussion Questions
  • 70
  • Exercises
  • 71
  • Online Supplemental Material
  • 75
  • Supplemental Readings
  • 76
  • 2A Application to Decision to Start and Stop Smoking
  • 76
  • References
  • 80
  • Chapter 3 Demand for Health Care Services
  • 83
  • 3.1 Basic Economic Concepts of Demand
  • 85
  • 3.2 Demand in the Context of Health Insurance Coverage
  • 87
  • 3.3 The Concept of Time Price
  • 95
  • 3.4 Empirical Studies of Demand
  • 97
  • Data Used in Demand Studies
  • 97
  • Observational Data
  • 97
  • Randomized Controlled Trials
  • 98
  • Natural Experiments
  • 99
  • The RAND Health Insurance Experiment
  • 100
  • The Research Issues
  • 100
  • HIE Study Design
  • 101
  • HIE Results
  • 102
  • Effects of Deductibles
  • 108
  • Cost Sharing: Greater Effect on Demand for Low-Income Than High- Income Families?
  • 108
  • Income Effects on Demand for Care
  • 109
  • Effects of Capitation on Use of Services
  • 111
  • Other Empirical Evidence on the Effect of Price on the Quantity Demanded
  • 113
  • Empirical Evidence on the Effects of Health Insurance on Demand in a Low- Income Country
  • 114
  • 3.5 Welfare Analysis
  • 115
  • 3.6 Other Determinants of Demand for Personal Health Care Services
  • 118
  • 3.7 Summary and Conclusions
  • 119
  • Key Concepts
  • 120
  • Review and Discussion Questions
  • 121
  • Exercises
  • 121
  • Online Supplemental Material
  • 124
  • Supplemental Readings
  • 125
  • References
  • 125
  • Chapter 4 Demand for Private Health Insurance
  • 127
  • 4.1 Relationships among Health, Health Insurance, and the Use of Personal Health Care Services
  • 128
  • 4.2 Insurance Concepts and Terminology
  • 130
  • First-Party and Third-Party Insurance
  • 130
  • Pecuniary and Nonpecuniary Loss
  • 131
  • The Price of Insurance
  • 131
  • 4.3 Diminishing Marginal Utility of Wealth and the Demand for Insurance
  • 133
  • Utility of Wealth
  • 133
  • Expected Utility
  • 134
  • 4.4 Model of Demand for Insurance
  • 136
  • The Basic Model
  • 136
  • Effects of Shifts in the Utility Function, Changes in Θ, and in Changes in
  • L
  • on the Decision to Purchase Insurance 138
  • Shifts in the Utility Function
  • 138
  • Change in Probability of Incurring a Loss (Becoming Sick)
  • 139
  • Change in the Magnitude of the Loss Conditional on a Loss (Becoming Sick)
  • 139
  • The Risk-Lover Case
  • 139
  • Implications of Theory: Determinants of Demand for Insurance
  • 140
  • The Premium of a Health Insurance Policy
  • 142
  • 4.5 Empirical Issues
  • 142
  • Why Do the Probability and Magnitude of the Loss Vary?
  • 142
  • Why Income Affects Demand for Insurance
  • 143
  • 4.6 Health Insurance and Welfare: The Deadweight Loss of Excess Insurance Revisited
  • 144
  • 4.7 Role of Tax Subsidies in Demand for Health Insurance
  • 145
  • 4.8 Adverse Selection
  • 147
  • How Adverse Selection May Arise in Health Insurance Markets
  • 147
  • Adverse Selection and Unraveling in Insurance Markets
  • 150
  • Adverse Selection and Unraveling: The Case of Harvard University
  • 155
  • Empirical Evidence on Adverse Selection in Private Health Insurance Markets
  • 157
  • 4.9 “Risk Adjustment” and Adverse and Preferred Risk Selection
  • 161
  • 4.10 Summary and Conclusions
  • 162
  • Key Concepts
  • 163
  • Review and Discussion Questions
  • 164
  • Exercises
  • 165
  • Online Supplemental Material
  • 166
  • Supplemental Readings
  • 166
  • References
  • 167
  • Part II Supply of Health Care Services and Insurance
  • 169
  • Chapter 5 The Market for Physicians’ Services
  • 171
  • 5.1 Medical School Capacity and Concepts of Physician Shortage and Surplus
  • 172
  • 5.2 Physician Supply in the Long Run
  • 174
  • Choice of Medicine as a Career
  • 174
  • Physician Choice of Specialty
  • 178
  • Concept of Present Value
  • 179
  • Concept of Internal rate of Return
  • 180
  • Physician Geographic Location Decisions
  • 184
  • The Economics of Physician Group Practice
  • 185
  • Economies of Scale and Scope
  • 185
  • Referrals
  • 186
  • Coverage of Patients
  • 186
  • Reduction in Earnings Fluctuations
  • 186
  • Empirical Evidence
  • 187
  • 5.3 Physicians’ Short-Run Decisions
  • 188
  • Overview
  • 188
  • Reconciling Stylized Facts of the Physicians’ Services Market with Standard Economic Models
  • 192
  • Why the Demand Curve Facing the Individual Physician May Be Downward Sloping
  • 192
  • Why Are Physicians’ Fees Often Higher in Markets with More Physicians?
  • 193
  • Practice Input Price Differences
  • 193
  • The Pauly-Satterthwaite Model
  • 195
  • The Quality-Amenities Model
  • 195
  • Summing Up
  • 196
  • Reconciling Stylized Facts of the Physicians’ Services Market with Standard Economic Models: Fees Set Administratively
  • 197
  • Quantity Increases with Administered Price Decreases
  • 197
  • Backward-Bending Supply Curve of Physicians
  • 197
  • Other Empirical Evidence on the Effects of Administered Price Reductions on Volume of Physician Services
  • 199
  • Summing Up
  • 199
  • Reconciling Stylized Facts of the Physicians’ Services Market: Other Models
  • 200
  • Target Income and Supplier-Induced Demand
  • 200
  • Empirical Findings on TI and PID
  • 202
  • Public Policy Implications If PID Is Supported by Empirical Evidence
  • 203
  • 5.4 Price Discrimination
  • 204
  • Background
  • 204
  • Theory
  • 205
  • Empirical Evidence
  • 208
  • 5.5 Summary and Conclusions
  • 210
  • Key Concepts
  • 211
  • Review and Discussion Questions
  • 211
  • Exercises
  • 213
  • Online Supplemental Material
  • 216
  • Supplemental Readings
  • 216
  • References
  • 216
  • Chapter 6 Hospitals
  • 219
  • 6.1 Context
  • 220
  • 6.2 Alternative Models of Hospital Behavior
  • 221
  • The Profit-Maximizing Hospital: The Base Case
  • 221
  • A Model of a Private Not-for-Profit Hospital
  • 224
  • The Model’s Basics
  • 224
  • Effects of Exogenous Changes in Wage Rates, Population Size, Fraction of Persons with Health Insurance Coverage, and Subsidies of Hospitals
  • 228
  • The Pauly-Redisch Model of the Not-for-Profit Hospital as a Physicians’ Cooperative
  • 228
  • Physician-Hospital Organizations
  • 236
  • Summing Up
  • 237
  • 6.3 Hospital Ownership and Performance
  • 238
  • Why Are For-Profit Hospitals a Minority?
  • 238
  • Fiduciary Relationships and Complex Output
  • 238
  • Noncontractible Quality
  • 239
  • Public Goods
  • 240
  • Implicit Subsidies
  • 240
  • Explicit Subsidies
  • 241
  • Cartels
  • 241
  • Low Profits
  • 241
  • Empirical Evidence on Hospital Ownership and Performance
  • 241
  • Allegations against For-Profit Hospitals
  • 241
  • Empirical Analysis of the Effects of Ownership on Hospital Performance
  • 243
  • Reviews of the Literature on the Effects of Ownership on Hospital Performance
  • 244
  • 6.4 Regulation of Hospitals
  • 245
  • Context
  • 245
  • Retrospective Cost Reimbursement
  • 247
  • Regulatory Responses
  • 249
  • Entry Regulation
  • 250
  • Price-Revenue Regulation and Prospective Payment
  • 254
  • 6.5 An Alternative to Regulating Hospitals: Increasing Competition among Hospitals
  • 259
  • Description
  • 259
  • Empirical Evidence on the Effects of Competition under the New Regime
  • 260
  • Empirical Evidence on the Effects of Increased Competition on Hospital Quality
  • 263
  • 6.6 Summary and Conclusions
  • 264
  • Key Concepts
  • 265
  • Review and Discussion Questions
  • 265
  • Exercises
  • 266
  • Online Supplemental Material
  • 269
  • Supplemental Readings
  • 270
  • References
  • 270
  • Chapter 7 Quality of Care and Medical Malpractice
  • 275
  • 7.1 Markets and Market Failure
  • 275
  • 7.2 Characteristics of Health Care Quality
  • 279
  • How Economists View Quality
  • 279
  • How the Quality of Personal Health Care Services Is Measured
  • 280
  • 7.3 Adverse Events and Negligent Injuries
  • 283
  • The Issues
  • 283
  • How the Estimates of Adverse Outcomes Were Generated
  • 283
  • The Quality of the Estimates
  • 284
  • Do Observed Rates of Medical Errors and Adverse Outcomes Represent a Market Failure Justifying Government or Other Intervention?
  • 285
  • 7.4 Supply-Side Quality-of-Care Safeguards and Government Oversight and Regulation
  • 286
  • Overview
  • 286
  • Professional Norms
  • 286
  • Peer Review
  • 287
  • Licensure
  • 287
  • Certification
  • 288
  • 7.5 Mandatory Error Reporting
  • 288
  • Description
  • 288
  • Implications
  • 290
  • 7.6 Tort Law as a Mechanism for Improving Patient Safety and Health Care Quality
  • 291
  • Why Other Quality Assurance Mechanisms May Fail
  • 291
  • The ABCs of Tort Law
  • 292
  • Tort Law Defined
  • 292
  • The Socially Optimal Injury Rate
  • 293
  • The Negligence Rule: Only One of Several Alternative Liability Rules
  • 295
  • Contracts versus Torts
  • 296
  • When the Negligence Rule Leads Private Parties to Select a Socially Optimal Precaution Level
  • 298
  • Tort Liability under Attack
  • 298
  • 7.7 Medical Malpractice
  • 299
  • Overview
  • 299
  • Medical Care Market
  • 300
  • Legal Market
  • 302
  • 7.8 Does the Threat of Medical Malpractice Suits Deter Iatrogenic Injuries?
  • 303
  • 7.9 Summary and Conclusions
  • 308
  • Key Concepts
  • 309
  • Review and Discussion Questions
  • 309
  • Exercises
  • 310
  • Online Supplemental Material
  • 312
  • Supplemental Readings
  • 313
  • References
  • 314
  • Chapter 8 Nurses in Hospital and Long-Term Care Service
  • 319
  • 8.1 Labor Markets for Nurses Worldwide
  • 320
  • 8.2 Supply of Nurses: Too Many or Too Few?
  • 325
  • Economic Concepts of Surplus and Shortage
  • 325
  • Role of Public Regulation
  • 329
  • Role of Monopsony Power
  • 334
  • 8.3 Empirical Estimates of Nurses’ Response to a Wage Change
  • 338
  • 8.4 Nonwage Determinants of the Nurse Labor Supply
  • 343
  • 8.5 Nurses in the Production of Hospital Services
  • 344
  • Do Higher Nurse-to-Patient Ratios Improve the Quality of Hospital Care?
  • 344
  • Public Policy Responses
  • 349
  • 8.6 Nurses in the Production of Nursing Home Services
  • 352
  • Overview
  • 352
  • Effects of Economic Factors on Nurse Staffing and Mix
  • 353
  • Effects of Nurse Staffing Levels and Mix on Patient Outcomes
  • 355
  • Implications for Public Policy
  • 355
  • 8.7 Summary and Conclusions
  • 357
  • Key Concepts
  • 358
  • Review and Discussion Questions
  • 358
  • Exercises
  • 359
  • Online Supplemental Material
  • 362
  • Supplemental Readings
  • 362
  • References
  • 363
  • Chapter 9 Pharmaceutical manufacturers
  • 367
  • 9.1 Companies’ Decisions about Investments in R&D
  • 368
  • Basic Facts of the Pharmaceutical R&D Process
  • 368
  • The Optimal Investment Decision from a Pharmaceutical Company’s Vantage Point
  • 370
  • Incentives for Pharmaceutical Innovation
  • 371
  • Pull Incentives
  • 371
  • Push Incentives
  • 372
  • Combination of Pull and Push Incentives
  • 375
  • Disincentives for Pharmaceutical Innovation
  • 376
  • 9.2 Pricing of New Drugs
  • 379
  • Rationale for Patents and Public Policy Trade-offs
  • 379
  • Pricing New Drugs: Empirical Evidence
  • 382
  • 9.3 Entry of Generic Drugs and Its Consequences
  • 384
  • Competition between Generic and Brand-Name Drugs
  • 384
  • Factors Affecting Generic Competition
  • 386
  • Consequences of Generic Competition
  • 388
  • 9.4 Advertising
  • 389
  • Companies’ Incentives to Allocate Funds to Marketing
  • 390
  • Composition of Pharmaceutical Company Marketing
  • 392
  • Detailing and Its Effects
  • 393
  • Direct-to-Consumer Advertising and Its Effects
  • 393
  • 9.5 International Pricing
  • 394
  • Cross-National Price Differentials
  • 394
  • The Consequences of Differential Pricing
  • 396
  • Ramsey Optimal Pricing
  • 398
  • Empirical Evidence on Ramsey Pricing of Pharmaceuticals
  • 399
  • 9.6 Developing New Drugs: Rare Diseases and Diseases Prevalent in Low- Income Countries
  • 401
  • Rewards as a Substitute for Patents: Overview
  • 401
  • Specific Proposals
  • 403
  • Advance Purchase Commitments
  • 403
  • Optional Rewards Based on Therapeutic Effect
  • 404
  • Priority Review Voucher
  • 406
  • 9.7 Summary and Conclusions
  • 406
  • Key Concepts
  • 408
  • Review and Discussion Questions
  • 408
  • Exercises
  • 410
  • Online Supplemental Material
  • 412
  • Supplemental Readings
  • 412
  • References
  • 413
  • Chapter 10 The Supply of Private Health Insurance
  • 417
  • 10.1 The ABCs of the Business of Insurance
  • 418
  • Functions of Insurers
  • 418
  • Risk Bearing
  • 418
  • Marketing and Underwriting
  • 419
  • Claims Processing
  • 420
  • Loss Prevention
  • 421
  • Measuring the Financial Strength of Insurers: An Insurer’s Income Statement and Balance Sheet
  • 421
  • Income Statement
  • 421
  • Balance Sheet
  • 422
  • Insurerers’ Cash Flow, Income from Investments, and Premium Setting
  • 422
  • Timing of Insurers’ Revenue and Expenses
  • 422
  • Investment Income
  • 423
  • Higher Investment Income Leads to Lower Premiums on the Underwriting Side of an Insurer’s Business
  • 423
  • Reinsurance
  • 424
  • Underwriting Cycles
  • 425
  • 10.2 Are Insurers’ Premiums and Returns Excessive?
  • 425
  • 10.3 Private versus Public Provision of Health Insurance Coverage
  • 427
  • The Case for and against Relying on Private Health Insurance for Provision of Coverage to a Population
  • 429
  • 10.4 Employer-Based Private Health Insurance Coverage
  • 432
  • Advantages of Employer-Based Coverage
  • 432
  • Who Really Pays for Employer-Based Health Insurance Coverage?
  • 434
  • 10.5 Government Regulation of Private Health Insurance
  • 437
  • Rationale for Government Regulation
  • 437
  • Insurance Mandates: A Form of Private Regulation of Private Health Insurance
  • 439
  • Community Rating
  • 443
  • Managed Care Defined
  • 445
  • The Effect of Managed Care on Market Structure and Providers’ and Patients’ Incentives
  • 448
  • Managed Care and Health System Performance
  • 451
  • Overview
  • 451
  • Effects of Managed Care on Spending on Personal Health Care
  • 451
  • Effects of Managed Care on Diffusion of Technology
  • 453
  • The Backlash against Managed Care
  • 456
  • Private Health Insurance and Universal Health Insurance Coverage
  • 456
  • 10.6 Summary and Conclusions
  • 457
  • Key Concepts
  • 459
  • Review and Discussion Questions
  • 459
  • Exercises
  • 460
  • Online Supplemental Reading
  • 462
  • Supplemental Readings
  • 462
  • References
  • 463
  • Part III Market Structure in the Health Care Sector
  • 467
  • Chapter 11 Private Financing of Health Care Services
  • 469
  • 11.1 Rationale for Health Systems Analysis
  • 470
  • 11.2 Classification of Health Care Systems
  • 474
  • 11.3 Cash Systems
  • 484
  • Overview
  • 484
  • The Indian Health Care System
  • 485
  • The Chinese Health Care System
  • 486
  • 11.4 The Private System: The US Experience
  • 491
  • Base Case: Private Provision and No Insurance Coverage
  • 491
  • Evolution of Private Health Insurance in the 1930s and 1940s
  • 491
  • 11.5 The Managed Competition Model
  • 491
  • 11.6 Comparisons between Single- and Multiple-Payer Systems
  • 494
  • Cost Shifting
  • 494
  • Patient Selection
  • 495
  • Spillover Effects
  • 496
  • 11.7 Summary and Conclusions
  • 496
  • Key Concepts
  • 498
  • Review and Discussion Questions
  • 498
  • Exercises
  • 498
  • Online Supplemental Readings
  • 500
  • Supplemental Readings
  • 500
  • References
  • 501
  • Chapter 12 Government Financing and Private Supply
  • 503
  • 12.1 The Role of Government as a Payer: Rationale for the Public Provision of Health Insurance
  • 504
  • Universal Coverage, Social Insurance, and Means-Tested Insurance
  • 504
  • Arguments of Advocates for the Public Provision of Health Insurance
  • 505
  • Choices in the Design of Public Payment Systems
  • 508
  • 12.2 Evolution and Structure of the Payment System: German Statutory Health Insurance
  • 514
  • 12.3 Evolution and Structure of the Payment System: The US Medicare Program
  • 516
  • Background
  • 516
  • Hospital Payment under Medicare: The Medicare Prospective Payment System
  • 519
  • Physician Payment under Medicare: Fixed Fees Based on a Resource- Based Relative Value Scale
  • 522
  • Effects of Medicare
  • 524
  • Technological Change
  • 524
  • Population Subgroups
  • 525
  • Population Health
  • 526
  • 12.4 Evolution of Payment Systems: The US Medicaid Program
  • 528
  • Background
  • 528
  • Choice of Medicaid Benefits versus Self-Insurance versus Private Insurance
  • 528
  • Empirical Evidence on Medicaid Fee Schedule
  • 532
  • Medicaid and Nursing Home Care
  • 533
  • 12.5 Evolution of Payment Systems: Canada’s Medicare
  • 534
  • Background
  • 534
  • Effects of the Canadian Medicare Program
  • 535
  • Patient Waiting Time to Receipt of Care
  • 535
  • Use of Costly Procedures
  • 536
  • Disparities in Health and in the Use of Services
  • 536
  • 12.6 Evolution of Payment Systems in Asian Countries on the Pacific Rim
  • 536
  • Background
  • 536
  • Japan
  • 537
  • South Korea
  • 539
  • Taiwan
  • 540
  • Effects of Universal Health Insurance
  • 542
  • 12.7 The Public Health Insurance Program in Rural China
  • 545
  • Background
  • 545
  • Effects of the NCMS
  • 546
  • 12.8 Discussion and Conclusions
  • 549
  • Key Concepts
  • 551
  • Review and Discussion Questions
  • 551
  • Exercises
  • 553
  • Online Supplemental Material
  • 556
  • Supplemental Readings
  • 557
  • References
  • 557
  • Chapter 13 Public Supply and Financing
  • 563
  • 13.1 The Rationale for Public Provision of Health Care
  • 564
  • The Role of Transaction Costs
  • 564
  • Noncontractible Outcomes Revisited
  • 565
  • Redistributive Concerns
  • 569
  • 13.2 Public Provision in High-Income Countries in Practice
  • 572
  • The United Kingdom's National Health Service
  • 572
  • Overview
  • 572
  • Rationing by Queues Rather Than by Prices
  • 573
  • Non-price Rationing: Pros and Cons
  • 574
  • Empirical Evidence on the Costs of Waiting Lists
  • 579
  • The NHS Internal Market
  • 583
  • Australia
  • 585
  • Overview
  • 585
  • Empirical Evidence
  • 586
  • 13.3 Public Provision of Personal Health Care Services in Other Countries
  • 587
  • High-Income Countries
  • 587
  • Middle- and Low-Income Countries
  • 587
  • Dominance of Public Ownership Form
  • 587
  • Evidence on Quality of Care
  • 588
  • Public Policy Options for Improving Quality of Care
  • 590
  • Empirical Evidence on Effects of Interventions to Improve Quality of Care
  • 591
  • 13.4 Evaluation and Comparison of Health Care Systems
  • 593
  • Comparisons Based on Intermediate Performance Measures
  • 593
  • Access
  • 593
  • Cost
  • 595
  • Quality
  • 599
  • Comparisons Based on Two Performance Goals
  • 600
  • Efficiency
  • 600
  • Equity
  • 601
  • 13.5 Summary
  • 603
  • Key Concepts
  • 605
  • Review and Discussion Questions
  • 605
  • Exercises
  • 606
  • Online Supplemental Material
  • 608
  • Supplemental Readings
  • 609
  • References
  • 610
  • Part IV Performance of the Health Care Sector: Positive and Normative Aspects
  • 615
  • Chapter 14 Cost and Cost-Effectiveness Analysis
  • 617
  • 14.1 Overview of Cost-Effectiveness and Cost-Benefit Analysis
  • 618
  • 14.2 Cost-Effectiveness Analysis: Measuring Cost
  • 622
  • Overview
  • 622
  • Concept of Opportunity Cost
  • 622
  • Direct and Indirect Costs
  • 623
  • Other Cost Concepts
  • 624
  • Transfer Costs
  • 624
  • Future Costs
  • 624
  • Sunk versus Incremental Costs
  • 625
  • Joint Costs/Joint Production
  • 625
  • Cost from Alternative Perspectives
  • 626
  • 14.3 Cost-Effectiveness Analysis: Measuring Effectiveness
  • 627
  • Effectiveness versus Efficacy
  • 627
  • Endpoints
  • 628
  • Evaluating the Marginal Effect of Specific Technologies
  • 632
  • Goal of Evaluation
  • 632
  • Transition Probabilities
  • 633
  • Markov Chains
  • 633
  • Obtaining Transition Probabilities from Observational Data
  • 634
  • Discounting
  • 636
  • Rationale for Discounting
  • 636
  • Determining the Appropriate Discount Rate: Financial versus Health Discount Rates
  • 637
  • Computing a Cost-Effectiveness Ratio
  • 639
  • 14.4 Applications of Cost-Effectiveness Analysis
  • 640
  • Disease Prevention
  • 640
  • The Experience of a US State, Oregon
  • 640
  • Cost-Effectiveness of Thrombolytic Therapy for Acute Myocardial Infarction
  • 641
  • Cost-Effectiveness of HIV Treatment in Low-Income Settings
  • 643
  • Cost-Effectiveness of Screening for Cervical Cancer in Low-Income Settings
  • 648
  • 14.5 Use of Economic Evaluation in Practice: Conclusions and Implications
  • 650
  • Key Concepts
  • 652
  • Review and Discussion Questions
  • 652
  • Exercises
  • 653
  • Online Supplemental Material
  • 654
  • Supplemental Readings
  • 655
  • References
  • 655
  • Chapter 15 Measuring Benefits and Cost-Benefit Analysis
  • 657
  • 15.1 Measuring Benefits in Cost-Benefit Analysis: A Review
  • 658
  • 15.2 The Revealed Preference Approach
  • 660
  • Objective
  • 660
  • Underlying Assumptions
  • 661
  • Evidence from Labor Markets
  • 661
  • Value of a Statistical Life
  • 665
  • An Application of the Revealed Preference Approach: Cigarette Smokers as Job Risk Takers
  • 666
  • 15.3 The Stated Preference Approach
  • 669
  • Contingent Valuation
  • 669
  • Stated Choice or Attribute-Based Methods
  • 671
  • Contingent Behavior or Contingent Activity Questions
  • 671
  • Assessing the Validity of Stated Preference Measures
  • 671
  • Stated Preference Method Application 1
  • 672
  • Stated Preference Method Application 2
  • 674
  • Theory: Risk-Dollar Trade-offs
  • 674
  • Theory: Risk-Risk Trade-offs
  • 675
  • Surveys of WTP to Avoid Intangible Loss of Multiple Sclerosis
  • 675
  • Results
  • 677
  • Implications
  • 678
  • Stated Preference Application 3: Benefits and Costs of Cholera Vaccination
  • 679
  • Background and Study Rationale
  • 679
  • Program Benefit and Cost
  • 679
  • Measuring Private Benefit to the Vaccinated
  • 680
  • Use of Stated Preference Method to Measure Vaccine Demand
  • 680
  • Measuring Private Benefit to the Unvaccinated
  • 681
  • Measuring Savings in Public Health Expenditures Attributable to the Vaccine Program
  • 682
  • Some Key Findings
  • 682
  • 15.4 Use of Cost-Benefit and Cost-Effectiveness Analysis in Public Decision Making
  • 683
  • 15.5 Conclusions
  • 686
  • Key Concepts
  • 686
  • Review and Discussion Questions
  • 687
  • Exercises
  • 688
  • Online Supplemental Material
  • 689
  • Supplemental Readings
  • 690
  • References
  • 690
  • Chapter 16 The Contribution of Personal Health Services to Longevity, Population Health, and Economic Growth
  • 693
  • 16.1 The Link between Health and Economic Sectors
  • 694
  • Overview
  • 694
  • The Relationship between Improved Health and Longevity and Economic Growth
  • 697
  • 16.2 Effects of Health Care Financing on National Economies
  • 698
  • Savings Behavior
  • 698
  • Labor Market Outcomes
  • 699
  • Welfare Loss of Taxation
  • 701
  • 16.3 Secular Trends in Determinants of Health Inputs and Outputs
  • 704
  • Secular Trends in Expenditures on Personal Health Care Services
  • 704
  • Determinants of Personal Health Care Expenditures
  • 706
  • Secular Trends in Health Outcomes
  • 709
  • Determinants of Mortality
  • 709
  • 16.4 Contributions of Personal Health Care Services to Improved Population Health
  • 710
  • Conceptual Framework
  • 710
  • Empirical Evidence from Cross-Sectional Studies
  • 712
  • Overview of Analytic Approaches
  • 715
  • The Disease Approach
  • 715
  • The Proxy Variable Approach
  • 717
  • The Accounting Method
  • 719
  • 16.5 Contribution of Improved Health to Economic Growth
  • 720
  • Direct Effect on Productivity
  • 720
  • Indirect Effects Operating through Fertility, Education, and Saving
  • 721
  • Other Indirect Effects
  • 723
  • Contested Issues
  • 723
  • 16.6 The Health Sector as a Job Machine
  • 725
  • 16.7 Economic Growth and Disease Patterns
  • 726
  • 16.8 Summary and Conclusions
  • 728
  • Key Concepts
  • 729
  • Review and Discussion Questions
  • 729
  • Exercises
  • 731
  • Online Supplemental Material
  • 732
  • Supplemental Readings
  • 732
  • References
  • 732
  • Chapter 17 Frontiers of Health Economics
  • 737
  • 17.1 Rational versus Irrational Decision Making in Health Care
  • 737
  • 17.2 Information, Asymmetric Information, and Its Effects
  • 740
  • How People Obtain Information
  • 740
  • 17.3 Industrial Organization of the Health Care Sector
  • 743
  • Principal-Agent Issues: Physicians
  • 743
  • Pay for Performance
  • 744
  • Competition among Hospitals
  • 745
  • 17.4 Competition versus Public Regulation versus Public Ownership in Health Care
  • 746
  • 17.5 Clinical Decision Making
  • 747
  • 17.6 Final Word
  • 748
  • Key Concepts
  • 749
  • Review and Discussion Questions
  • 749
  • Supplemental Readings
  • 750
  • References
  • 750
  • Index
  • 753

Endorsements

"Health Economics is Sloan and Hsieh's magnum opus, in which they share with readers their exceptionally broad and rich understanding of all aspects of the field. There are very few people who could have written this book, and among them very few who would have been willing to expend the time and effort to synthesize decades of research and make it all clear and accessible. This textbook is a gift to the next generation of health economists."
John Cawley, Professor of Policy Analysis and Management, Professor of Economics, and Co-Director of the Institute on Health Economics, Health Behaviors and Disparities, Cornell University

"Sloan and Hsieh fluidly integrate the basic insights from economics into the study of health care and health care financing, while incorporating new developments in medical decision-making analysis and behavioral economics. Many students in the U.S. come to health economics with an interest in global health issues, and they will see here international application of the main principles. An excellent first textbook in health economics."
Thomas McGuire, Department of Health Care Policy, Harvard Medical School

"This comprehensive book covers virtually every aspect of health economics. The book can be used in a highly successful manner in courses for undergraduate economics majors and minors, as well in those for undergraduates and graduate students with little background in the discipline. Moreover, given its wide-ranging discussions of practically all of the recent literature, it is a key supplementary text for graduate courses in health economics. Bravo for this tour de force of the field!"
Michael Grossman, Distinguished Professor of Economics, City University of New York Graduate Center; Health Economics Program Director, National Bureau of Economic Research

"Health Economics is likely to be the new standard. The exposition is accessible and engaging. The economic content is deep as well as broad, and will serve the needs of both advanced students and economics novices."
John A. Romley, Price School of Public Policy, University of Southern California; Economist, Leonard D. Schaeffer Center for Health Policy and Economics; Managing Editor, Forum for Health Economics & Policy