Health Economics

An Industrial Organization perspective

Pedro Pita Barros and

Xavier Martinez-Giralt

Contents

List of figures xi

List of tables xiii

Preface xv

Notations xvi

Acknowledgments xviii

PART I

Principles of economics 1

1 Introduction 3

2 Demand 5

2.1 The elements of the consumer problem 6

2.2 Demand function 9

2.3 Market demand 21

3 Supply 23

3.1 Introduction 23

3.2 The set of production possibilities 23

3.3 The production function 23

3.4 The cost function 27

3.5 Technical rate of substitution and elasticity of substitution 28

3.6 Marginal and average cost functions 30

3.7 An example: the Cobb-Douglas production function 31

3.8 Returns to scale, economies of scale and economies of scope 32

3.9 Variable and fixed costs 34

3.10 Opportunity cost 34

3.11 Supply 35

4 Markets 39

4.1 The perfectly competitive market 40

4.2 Imperfect competition 46

viii Contents

5 Regulation 62

5.1 Natural monopoly 63

5.2 The Averch-Johnson effect 66

5.3 Multi-product monopolist 68

5.4 Public firms 69

5.5 Public goods 70

5.6 Externalities 71

5.7 Asymmetric information 74

5.8 Yardstick competition 79

5.9 Competition for the market 81

5.10 Instruments 81

5.11 Regulating the health care market 83

6 Mergersandacquisitions 86

6.1 Introduction 86

6.2 Horizontal mergers 87

6.3 Vertical mergers 92

6.4 Conglomerate mergers 96

6.5 M&A failure 97

7 For-profitandnonprofitorganizations 100

7.1 Why do nonprofit organizations exist? 101

7.2 Modeling nonprofit organizations 102

7.3 Empirical evidence 111

7.4 What do nonprofit hospitals maximize? 112

PART II

Health care 114

8 Essentialconceptsinhealtheconomics 116

8.1 Differential characteristics of health economics 119

8.2 The organization of the health care market 121

8.3 Structure of a health care system 123

9 Demandforhealthandhealthcare 128

9.1 Value of life and of quality of life 128

9.2 Demand for health 135

10 Insurance 160

10.1 Basic concepts 160

10.2 Risk and uncertainty 163

10.3 Insurance 167

Contents ix

11 Contracts and asymmetric information 180

11.1 The problem of information 180

11.2 Imperfect information and competition 184

11.3 Incentives in the health care sector 184

11.4 Asymmetric information and conflict of objectives 187

11.5 Time-consistent contracts 206

11.6 Supplier-induced demand 210

PART III

IO in Health care 216

12 Competition in health care markets 218

12.1 Payment systems 218

12.2 Upcoding 226

12.3 Competition on quality 228

12.4 Technology adoption and medical arms’ race 237

13 Public and private provision 242

13.1 Mixed markets 242

13.2 Public-Private Partnerships 246

13.3 Moonlighting 253

14 Bargaining 256

14.1 A primer in bargaining theory 256

14.2 Bargaining in health care markets 261

14.3 The institutional setting 271

14.4 Bargaining within a national health service 274

14.5 Ways to enhance bargaining power 282

14.6 Empirical evidence 285

15 Waiting lists 288

15.1 The mechanics of waiting lists 289

15.2 Waiting time as an equilibrium device 291

15.3 Selecting from a waiting list 293

15.4 The perverse incentives of waiting lists 294

15.5 Policy interventions aimed at waiting lists 296

16 Referrals, gatekeeping and levels of care 298

16.1 The referral externality 299

16.2 Vertical integration vs market mechanism 300

16.3 Gatekeeping 304

17 Pharmaceutical market 306

17.1 R&D and patents 306

x Contents

17.2 Market access 307

17.3 International reference pricing 308

17.4 Making sense of Phase IV trials 311

17.5 Generics substitutions 311

17.6 Domestic reference pricing 312

17.7 The generics paradox 314

17.8 Retail pharmacy 316

Notes 320

References 324

Index 338