Industry Overview

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Industry Overview

• Health EconomicsProfessor Vivian HoFall 2009

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Health Care Expenditures in the United States,
1960-2007
1960 1970 1980 1990 2000 2005 2007
Nominal health expenditures 27.5 74.9 253.9 714
.0 1,353.3 1,987.7 2,241.2 (billions of
dollars) Annual rate of growth --
10.5 13.0 10.9 5.9 8.9 6.2 (average annual
change from previous period shown) Nominal per
capita health 148 356 1,102 2,813 4,790 6,697 7,4
21 expenditures Health expenditures
as 5.2 7.2 9.1 12.3 13.8 16.0 16.2 percentage of
GDP
Source CMS Homepage http//www.cms.hhs.gov/Nat
ionalHealthExpendData/downloads/tables.pdf
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The Health Care Industry is Rapidly Evolving

• Advances in medical technology and drugs are
  dramatically improving patient care
• But, these improvements are costly
• Aging U.S. population
• 65 years
• 1950 8.1
• 1970 9.8
• 2008 12.8

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The Health Care Industry is Rapidly Evolving

• Increased cost containment efforts
• Changes in government reimbursement of health
  care providers
• Private insurers are exercising more control over
  patient care
• Increased competitive pressures
• Mergers of existing providers
• Entry of new competitors
• Where are the most promising business
  opportunities?

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Which category has the largest share of health
care expenditures?

• Hospital Care
• Physician Care
• Prescription Drugs

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Americas Top 100 Fastest-Growing
CompaniesFORTUNE, September 29, 2008
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PHARMACEUTICAL INDUSTRY

• U.S. prescription drug expenditures reached 228b
  in 2007
• Industry highly dependent on research and
  development (RD)
• 897m to bring a new drug to market
• Aggressive marketing to physicians, hospitals,
  pharmacists, and even the patient

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PHARMACEUTICAL INDUSTRY

• Pfizer
• 48.3b in sales in 2008
• 40.8 of sales come from 4 drugs Lipitor,
  Lyrica, Celebrex, Norvasc.

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PHARMACEUTICAL INDUSTRY

• The Wall Street Journal Online April 6, 2005
• Pfizer Plans a RevampAnd 4 Billion in Cost Cuts
• Drug Giant Scales BackEarnings Estimates, Citing
  Patent and Safety Woes

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MANAGED CARE

• Systems which manage the quality and cost of
  patient care
• Most common
• Health Maintenance Organization (HMO)
• Consumer pays a fixed annual capitation fee, for
  which HMO agrees to provide comprehensive medical
  services
• 21 of U.S. population (64.5m) enrolled in 2009

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MANAGED CARE

• ADVANTAGE If capitation fee gt costs, HMO keeps
  the profit
• DISADVANTAGE HMO responsible for cost overruns
• Subject to lawsuits if provides sub-optimal care

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WSJ 2/17/98
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LONG-RUN KEY TO SURVIVAL

• Be an efficient provider of high-quality patient
  care

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• Can we apply the tools of economics to study the
  health care sector?

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Valuing Human Life

• Individuals make decisions everyday that reflect
  how they value health and mortality risks.
• Driving a car
• Smoking a cigarette
• Eating a medium-rare hamburger
• Note These slides draw from material in Viscusi
  WP and Aldy JE, The Value of a Statistical Life
  A Critical Review of Market Estimates Throughout
  the World, The Journal of Risk and Uncertainty
  2003 27(1) 5-76.

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Valuing Human Life

• Many of these decisions involve observable market
  choices
• Purchase of a safety device.
• Working on a risky job.
• These decisions involve implicit tradeoffs
  between risk and money.
• Economists can use data on these decisions to
  construct the value of a statistical life (VSL).

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Valuing Human Life

• Example How much additional money must a firm
  offer a worker to take on a risky job, versus one
  with no risk?
• To answer this question, one could compare the
  average wages of risky jobs vs. non-risky jobs.
• Working as a coal miner is more risky than
  working as an investment banker, but investment
  bankers get paid more.
• One must examine the tradeoff between wages and
  risks, holding constant all other factors that
  influence pay.

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Valuing Human Life

• Dataset with observations on workers, their
  annual Earnings, worker characteristics, job
  characteristics, including the risk of dying on
  the job in that workers industry.
• Ln(Earningsi) a0 a1(Educationi)
  a1(Experiencei)
• a2(Management Positioni) a3(Fatality Riskj)
  eij
• One can estimate this regression, and the
  estimate of a3 can be used to derive a VSL.

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Valuing Human Life

• Suppose the estimated coefficient a3 300.
• This implies that a worker requires 300 times
  more earnings for a job with a 100 fatality risk
  versus a job with a 0 fatality risk, holding all
  other factors constant.
• If average earnings are 32,000 then the VSL
  32,000 300 9,600,000

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Valuing Human Life

• Data on worker characteristics is available from
  the Bureau of the Census.
• The Department of Labor collects data on fatal
  occupational injuries by industry.

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Valuing Human Life

• Labor market data from the U.S. typically finds a
  VSL 4m to 9m in year 2000 dollars.
• One can also estimate a VSL based on the prices
  that people pay for safety devices that reduce
  the risk of death.
• Price of smoke detectors vs. reduction in fire
  fatality risks.
• Premium paid for areas with low air pollution vs.
  reduction in death from clean air.
• Price of childrens car seats vs. reduction in
  auto fatalities when in use.

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Policy Implications

• U.S. agencies are required to compare the costs
  of proposed regulations to the benefits, which
  are often in terms of lives saved.

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Policy Implications

• Should the VSL vary with
• Age?
• Income?
• Country?

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Conclusion

• Because resources are limited, health economists
  are concerned with determining what medical
  services to produce, how they should be produced,
  and who should receive them
• As we will see in this course, the tools of
  economics can be applied to the health care
  sector to derive valuable insights about our
  health care system