Understanding Health Care Production and Policy: A Model Analysis

Economics 7550 – Fall 2013 Lecture 2 – A Model of Health Care Production and Policy From Zweifel and Breyer

C C = Home Good We produce these! H = Health C = C(X) X = Non-medical Good M = Medical Good We buy these! X H M

C C = Home Good H = Health C = C(X) X = Non-medical Good M = Medical Good Why do these look like this? X H Y(H) = pX + qM Y3 Y2 Y1 Y0 Y = pX + qM H = H (M) M

Y = pX + qM This leads to a relationship between goods X and M. If we differentiate the function, realizing that H = H(M), we get: This leads to: Numerical Example

Normally: If Either equals 0, negative relationship occurs This implies that more M less X. Here, if you buy more M, you’re healthier -- it may allow you to buy more X as well. Thenmore M  more X

C C = C(X) X H Y(H) = pX + qM Y = pX + qM H = H (M) M

C U = U(C, H) C = C(X) X H Y(H) = pX + qM Y = pX + qM H = H (M) M

C U = U(C, H) C = C(X) C* X* X H H* Y(H) = pX + qM Q* Y = pX + qM M* H = H (M) Q* = qM*/y(H*) = Optimal Health Share M

Some Macro thoughts • We may not know much about H or C, but we can measure [qM] and [pX]. • Let H = person-years of good health qM = national health expenditures pX = aggregate consumption expenditures • Suppose there’s an improvement in health technology.

C U = U(C, H) C = C(X) C* X* X H H* Y(H) = pX + qM Q* M* H = H (M) H+ = H+(M) M

Other types of changes • Preferences between health and consumption. • C (X) is not constant. Better education, for example, may increase C. • Budget constraint is subject to changes in p and in q, as well as to increasing incomes (or wage rates). • Institutional factors (e.g. Social Security, Medicare, National Health Insurance) may make a difference.

Ruhm on Macroeconomy and Health • In 1970s there was a lot of literature (Brenner, a sociologist, and others) that said • Bad economy  bad health • They did some time series analysis that purported to show that a bad economy had adverse health impacts. • The answer, not surprisingly, is “well, it depends.”

Let’s look at drinking • Bad economy  stress ↑  drinking ↑ • BUT, bad economy  income  drinking . • Drinking less  drunk driving and fewer deaths from drunk driving.

These should be examined at the individual level • I looked at this using a 2001 database.

Income and Alcohol The relationship is complicated.

Understanding Health Care Production and Policy: A Model Analysis