PMEP544: Health Economics II

Spring 2018

Darius Lakdawalla, Ph.D.

213-538-8736

Schaeffer Center 414-K

Office Hours: By appointment

Course Description:

Health Economics II is a doctoral-level course in the theory and practice of health economics. More generally, it is a course in applied microeconomics with specific application to health and medical care. Its goal is to communicate the techniques of microeconomic analysis useful for health economists. Thematically, economic behavior in health care markets is similar to economic behavior observed in other markets, but the unique institutions of health care influence the way economists study and predict behavioral change. There is a consistent emphasis on applications toinform health policy issues. Broadly, the course covers three major areas of health economics: the theory and evidence on health insurance markets, and its implications for regulation of these markets; the theory of medical innovation, and its implications for patents, health insurance policy,and regulators; and the theory of individual health behavior, along with its implications for public health policy.

The material for this class will be delivered through lectures, assigned readings, student presentations and in-class discussions. Students will be able to demonstrate the depth of their knowledge through a final exam.

Credit Hours

The course is 4 credit hours

Prerequisites

No prerequisite coursework but graduate level courses numbered 500 or higher in microeconomic theory and econometrics are recommended.

Applicable Programmatic Ability Outcomes

Communications abilities

Thinking abilities

Professional ethics

Social Interactions, leadership

Self-learning abilities

Course Objectives

Upon completion of this course:

  1. Students will be able to summarize and discuss the salient points of each research article, paying particular attention to: research question to be addressed; data sources; summary of methods; key findings; policy relevance; weaknesses of the paper.
  2. The student will be able todescribe the state of the empirical knowledge in the topic areas:patents and innovation, health policy and innovation, pharmaceutical regulation,physician-induced demand, hospital competition, variations in physician practice, hospital ownership, andphysician supply.
  3. The student will be able to examine current health policy issues from an economic perspective.

Course Format

The course will be a lecture format, combined with discussion. Class participation is essential for the reinforcement of key concepts, and is expected during every lecture. Course requirements are as follows:

  1. Readings. Students must read and understand the lecture notes before every class, along with the required readings. They are encouraged to do as many of the optional readings as their interest dictates. Students will be required to understand the in-class lecture and discussion concerning the optional readings. Moreover, optional readings are a fruitful source of ideas for group presentations. Required readings appear either in one of the required course texts, or in electronic form on Blackboard. Each set of readings typically contains a mix of technical and less technical treatments of a particular health policy issue. Students are encouraged to dive as deeply as possible into the technical material, but at a minimum, grasp the essential implications for policy.
  2. Class participation. The class places an emphasis on the ability to communicate effectively about health policy issues and approaches. Therefore, class participation during lectures is important. Students who do not regularly attend class will be at a substantial disadvantage and will be penalized in grading. Moreover, students will be asked to present specific parts of a lecture to the rest of the class. Performance during these tasks will count towards the class participation grade.
  3. In-class presentation. Students, or groups of students, will be asked to identify a key health policy question for analysis. At the conclusion of the semester, each student or group will give a 30-45 minute presentation laying out the key problems associated with this health policy question, the major alternatives, and the preferred policy approach as determined by the group. If done in a group, a grade will be assigned to the entire group for this assignment.
  4. Problem sets. There will be two problem sets assigned during the course of the semester. Students will be expected to work individually on these. The assignments will be made available on Blackboard two weeks before the due date. In all cases, emphasis will be on clear, succinct written answers to health policy problems of interest.
  5. Examinations. There will be a final examination, which will be in-class and closed-book. The final exam will be cumulative, in the sense that material from the entire course up to that point may appear. Students will be expected to work individually on their examinations and will be graded accordingly.

Reading Materials

Required Reading List:
The course outline contains the required reading list.

Other recommended reading:

An introductory-level textbook may be helpful as a resource in some cases. The best undergraduate textbook is Health Economics by Charles Phelps (Addison Wesley, 2003). Well written books that provide general, nontechnical introductions to issues in health economics and the U.S. health care system include Victor Fuchs’ Who Shall Live? and The Future of Health Policy (especially the early and late chapters), and for a somewhat different perspective, Henry Aaron’s Serious and Unstable Condition. Health economics sometimes requires some knowledge of the details of diseases and their treatments, as well as of the important institutions in health care delivery and its regulation.

Detailed introductions to health problems, written for interested nonphysicians, include the AMA GuideHealth Economics Winter 2003 Page 1 of 2 4/4/2005to Family Health or similar books by Harvard, Mayo Clinic, Redbook, etc.Other sources for articles on health economics include the National Bureau of Economic ResearchWorking Paper Series and RAND Publications.Finally, many government agencies provide useful material. The Congressional Budget Office evaluatesmany health care reform proposals using their in-house economic models. The General AccountingOffice publishes a large number of reports with detailed background information on Federal policyissues. The Agency for Healthcare Research and Quality publishes reports on the studies that they fund,and the Bureau of Labor Statistics reports on health insurance and employment (see also the reportspublished regularly by the Employee Benefits Research Institute). The Physician Payment ReviewCommission summarizes current financing problems and reform options for the Medicare program. Allof these reports are available for free, or virtually free, and can provide good introductions to policy issues and proposals to deal with them. The National Center for Health Statistics publishes reportsregularly related to the health, health care, health insurance, and health behavior of the U.S. population;one good "snapshot" annual report is Health United States.

Class Attendance and Missed Work

A. Attendance Policy

1. Students are expected to attend and participate in all lectures.

2. The student is expected to carry out all assigned work and to take examinations at the class period designated by the instructor.

3. Class begins promptly. If the instructor does not convene class within twenty (20) minutes after the hour, it may be assumed that class is canceled for that day.

4. Unresolved problems regarding class attendance, grading policies or other issues involving the class should be discussed with the instructor. If the student is not satisfied with the results of these discussions, he or she should follow the School of Pharmacy procedures for handling course-related disputes.

B. Make-Up Work

1. There will be no make-up work.

2. There will be no Replacement Examinations offered in this class. Failures will require a remedial summer school course. Ergo, the following applies:

a. A student who receives a D or F grade in a course will be eligible to take the Remedial Summer Session course, provided the student is not academically disqualified from the program, and where a Replacement examination is not offered.

b. A student who receives a D or F grade in a course where a Remedial Summer Session course is offered, will have both that grade, as well as the grade earned in the summer course, recorded. In other words, the grade earned during the summer session shall not replace the grade earned during the fall or spring semester and will be calculated as part of the student’s cumulative grade point average.

c. The grade earned in the Remedial Summer Session course may be an A, B, C, D, or F grade.

d. Where a Remedial Summer Session course is offered, the student who receives a D or F grade in a fall or spring course, that student must take the Remedial Summer Session course in the summer that immediately follows that fall or spring course.

Grading

Final Exam 40% of grade

In-class presentation25% of grade

Problem sets25% of grade

Class Participation*10% of grade

The grade will be based on the elements listed above. The final exam will be cumulative.

* Students must lead class discussions, and read the notes and required articles prior to coming to class; this will be reflected in the grades. Students will also be expected to present derivations of some results within the lecture notes. The instructor will determine which sections of the notes are to be presented, and students will be randomly invited to present their derivations.

At the end of the course, a weighted average score for the course will be constructed for each student. Letter grades will then be assigned on a curve determined by the instructor.

Regrades: If a student has a complaint regarding the grading of any examination, he or she should submit the complaint (in writing) along with the examination to the instructor. If the student has made marks on the returned exam, the written complaint should note it, so that the instructor will not wonder whether the student has attempted to change the response for a higher grade. The instructors will keep a copy of your exam when it’s returned. The student must submit this information within one week following the return of the work in question. If you are not in class the day the exam is returned you still have only one week to submit your re-grade. In the event of any requested re-grade, the entire assignment will be re-graded, and it is possible that the score will go down if sufficient numbers of errors are found that were in the student’s favor.

Special Needs:

It is the policy of the University to provide accessibility to its programs and activities and reasonable accommodation for persons defined as having disabilities under Section 504 of the Rehabilitation Act of 1973, as amended, and the Americans with Disabilities Act of 1990. Students should contact the instructor at the beginning of the quarter so that accommodations can be arranged.

Statement for Students with Disabilities

Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to me (or to TA) as early in the semester as possible. DSP is located in STU 301 and is open 8:30 a.m.–5:00 p.m., Monday through Friday. The phone number for DSP is (213) 740-0776.

Statement on Academic Conduct

Plagiarism – presenting someone else’s ideas as your own, either verbatim or recast in your own words – is a serious academic offense with serious consequences. Please familiarize yourself with the discussion of plagiarism in SCampus in Section 11, Behavior Violating University Standards Other forms of academic dishonesty are equally unacceptable. See additional information in SCampus and university policies on scientific misconduct,

Discrimination, sexual assault, and harassment are not tolerated by the university. You are encouraged to report any incidents to the Office of Equity and Diversity or to the Department of Public Safety This is important for the safety whole USC community. Another member of the university community – such as a friend, classmate, advisor, or faculty member – can help initiate the report, or can initiate the report on behalf of another person. The Center for Women and Men provides 24/7 confidential support, and the sexual assault resource center webpage describes reporting options and other resources.

Emergency Preparedness/Course Continuity:

In case of emergency, and travel to campus is difficult, USC executive leadership will announce an electronic way for instructors to teach students in their residence halls or homes using a combination of Blackboard, teleconferencing, and other technologies. Instructors should be prepared to assign students a "Plan B" project that can be completed at a distance. For additional information about maintaining your classes in an emergency please access:

Course Outline

Part I: Health Insurance

Lecture 1.Introduction to the theory of insurance

Machina, Mark J. “Choice Under Uncertainty: Problems Solved and Unsolved.” Journal of Economic Perspectives 1(1): 121-54.

Lecture 2.What is unique about health insurance?

Baicker and Chandra, “Myths and Misconceptions about U.S. Health Insurance,” Health Affairs web exclusive, October 21, 2008.

Feldstein, M. and B. Friedman, “Tax Subsidies, the Rational Demand for Insurance and the Health Care Crisis,” Journal of Public Economics, April 1977, Vol. 7, pp. 155-178.

Pauly, M., “Taxation, Health Insurance and Market Failure,” Journal of Economic Literature, June 1986, Vol. 24, pp. 629-675.

Optional

Card, D., C. Dobkin and N. Maestas (2009). "Does Medicare Save Lives?" Quarterly Journal of Economics124(2): 597-636.

DiCarlo, Steven and Jon R. Gabel, “Conventional Health Insurance: A Decade Later,” Health Care Financing Review, Vol. 10, No. 3, Spring, 1989, pp. 77-89.

Feldman, R, M Finch, B Dowd, and S Cassou.“The Demand for Employment-Based Health Insurance Plans.” Journal of Human Resources 24(1):114-142;1989.

Lecture 3.Moral hazard in insurance markets

Gaynor, M., D. Haas-Wilson and W. B. Vogt (2000). "Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets." Journal of Political Economy108(5): 992-1005.

Pauly, M. V. (1968). "The Economics of Moral Hazard: Comment." American Economic Review 58(3): 531-537.

Optional

Gruber (2006).“The Role of Consumer Copayments for Health Care: Lessons from the RAND Health Insurance Experiment and Beyond,” Kaiser Family Foundation paper, October.

Newhouse, J. P. and The Insurance Experiment Group (1993). Free for all? Lessons from the RAND Health Insurance Experiment. A RAND Study. Cambridge and London, Harvard University Press.

Lecture 4.Problems and solutions in the market for health insurance

Ehrlich, I. and G. S. Becker (1972). "Market Insurance, Self-Insurance, and Self-Protection." The Journal of Political Economy80(4): 623-648.

Lecture 5.Medical technology as a substitute for health insurance

Lakdawalla, Darius, Anup Malani, and Julian Reif. “The Insurance Value of Medical Innovation.” Journal of Public Economics 145: 94-102.

Lecture 6.Introduction to managed care

Cutler, D. Your Money or Your Life, Chapter 8.

Miller R and H Luft, “Managed Care Plan Performance Since 1980: A Literature Analysis,” JAMA 271(19):1512-1519;1994.

Lecture 7.What does managed care do differently?

Hellinger F. "Selection Bias in HMOs and PPOs: A Review of the Evidence," Inquiry 32(2):135?142;1995.

Luft, H.S., “Why Do HMOs Seem to Provide More Health Maintenance Services?”, Milbank Memorial Fund Quarterly, Spring 1978, pp. 140-168.

Polsky D. and S. Nicholson. “Why Are Managed Care Plans Less Expensive: Risk Selection, Utilization, or Reimbursement?” Journal of Risk and Insurance, Vol. 71, No. 1, March 2004, pp. 21–40.

Optional

Brown R et al., "Do Health Maintenance Organizations Work for Medicare?" Health Care Financing Review, 15(1):7-23, Fall 1993.

Goldman, DP.1995."Managed Care as a Public Cost Containment Mechanism."RAND Journal of Economics 26(2):277-295.

Luft HS. “How Do HMO’s Achieve Their Savings?”, New England Journal of Medicine, Vol. 298, 1978, pp. 1336-1343.

Newhouse JP et al., "Adjusting Capitation Rates Using Objective Health Measures and Prior Utilization," Health Care Financing Review, Spring 1989, 10(3):41-55.

Riley et al. “Biased Selection and Regression Toward the Mean.” Medical Care 27:337-351;1989.

Welch, W.P., “Health Care Utilization in HMO’s”, Journal of Health Economics, 1985 4:293-308.

Zwanziger, J., and Auerbach, R., "Evaluating PPO Performance Using Prior Expenditure Data," Medical Care, 142-151, February 1991.

Assigned: Problem Set #1

Lecture 8.Spillovers from managed care

Baker LC. “Association of managed care market share and health expenditures for fee-for-service Medicare patients.” JAMA 281(5):432-437;1999.

Feldman, R, B Dowd, and G Gifford. 1993. “The Effect of HMOs on Premiums in Employment-Based Health Plans.”Health Services Research 27(6):779-811.

Lecture 9.Section review

Due: Problem Set #1

Part II: Medical Innovation

Lecture 10.Classical theory of innovation

Nordhaus, W. (1969) "An Economic Theory of Technological Change." American Economic Review 59(2): 18-28.

Lecture 11.Extensions of the classic theory: Patent races and cumulative innovation

Chang, H.F. (1995). “Patent Scope, Antitrust Policy, and Cumulative Innovation.” RAND Journal of Economics 26(1): 34-57.

Green, J.R., and S. Scotchmer (1995). “On the Division of Profit in Sequential Innovation.” RAND Journal of Economics 26(1): 20-33.

Lee, T., and L. L. Wilde (1980). "Market Structure and Innovation: A Reformulation." Quarterly Journal of Economics 94(2): 429-36.

Loury, G. C. (1979). "Market Structure and Innovation." Quarterly Journal of Economics 93(3): 395-410.

Scotchmer, S., and J. Green (1990). "Novelty and Disclosure in Patent Law." Rand Journal of Economics 21(1): 131-46.

Lecture 12.Demand-side determinants of innovation

Acemoglu, D. and J. Linn (2004). "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry." Quarterly Journal of Economics119(3): 1049-90.

Dubois, P., O. de Mouzon, F. Scott-Morton, and P. Seabright (2011). “Market Size and Pharmaceutical Innovation.” CEPR Working Paper.

Optional

Finkelstein, A. (2004). "Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry." Quarterly Journal of Economics119(2): 527-64.

Lakdawalla, D. N., D. P. Goldman, P.-C. Michaud, et al. (2009). "U.S. Pharmaceutical Policy In A Global Marketplace." Health Aff28(1): w138-150.

Assigned: In-class Presentation

Lecture 13.Supply-side determinants of innovation

Grabowski H. The Determinants of Industrial Research and Development: A Study of the Chemical, Drug, and Petroleum Industries. J Polit Econ. March/April 1968;76(2):292-306.