Health Economics - Assignment Example

Assessment One Question 1 Briefly outline the trend in take-up of private health insurance in Australia over the last few decades. What are the likely factors that contribute to the growth? Evaluate the following statement from an economic perspective, “Private health insurance- the preserve of the rich- why on earth should they receive a subsidy?” Over the past few decades, there have been significant developments in the private health insurance (PHI) sector in Australia. Generally, the demand and supply of PIH seems to be increasing with time. It is estimated that PIH covers over 44% of the Australian population (Colombo & Tapay, 2003). By 2013, it was estimated by the Private Health Insurance Administration Council (PHIAC) that 10.8 million Australians (47% of the population) have PHI cover (PHIAC 2013). This is amongst the highest percentage of private coverage in OECD countries after Ireland (48%), Canada (70%), US (70%) and France (86%) (Colombo & Tapay, 2003). Based on the existing estimates the demand for PIH is not sensitive to price (Butler, 1999; Clarke 1999; Hopkins & Frech 2001). Nevertheless, income has predominant influence of insurance status (Hopkin & Kidd, 1996). Age is a key factor that seems to affect the purchasing decisions of PHI. The level of PHI coverage tends to increase with age. The increase in PIH coverage peaks in between the age of 45-54 years and then declines thereafter. The level of PHI coverage varies from state to state. The main reasons why people purchase PHI include; risk aversion (47%) choice of doctor (25%) and shorter waiting period (22%). Unlike other OECD countries where PHI is often purchased by employers as a work-related benefit, in Australia PHI cover is predominantly purchased on an individual basis (Colombo & Tapay, 2003). There are several factors that have over the years contributed to the growth of demand and supply of PHI coverage. A key driver for PHI cover demand is societal preference to direct more of their disposable income to healthcare as their income increases so as to enhance their quality of life and lifespan. Moreover, an increasing aging population and the prevalence of chronic diseases such as cancer, diabetes, stroke and heart disease due to lifestyle choice has propelled many people to take up PHI. In addition to this, some government policies and interventions in form of subsidies have acted as incentives for people purchase PHI cover (NCOA, 2014). It has been argued that PHI is a preserve the rich, therefore there is no need to provide subsidy. From an economic perspective, it is justified to provide subsidy for PHI since this is likely to increase the level of PHI coverage and relieve cost and capacity pressure on the public health system. Providing subsidies to PHI can generate net cost savings and minimize expenditure in public sector hospital care. This is mainly because individuals with PHI are more likely to seek hospital care as private patients thus minimising cost pressures on public health care budgets which are largely funded by the government (Cheng 2013). Generally, by promoting higher rates of PHI coverage by providing subsidy, the government shifts the burden of delivering hospital services from the public hospital system to the private system. The government also transfers the cost of delivering these services from public budgets to health funds and their members (NCOA, 2014). Question 2 Evaluate the following statement from an economic perspective, “Health care and asparagus- two different markets but the same economic tools of analysis and similar key questions apply.” What differentiates health care from other markets? Healthcare and asparagus are two distinct products based in different markets. However, the same economic tools of analysis can be used in both contexts to evaluate costs, benefits or effectiveness. In both context similar questions apply; “what works?”, “what are the benefits?” “what is the size of the impact?” There are different economic tools of analysis that can be used in both contexts. Key among these tools include; Cost Analysis (CA), Cost-Effectiveness Analysis (CEA) and Cost Benefit Analysis (CBA) among others (Zaza, Briss & Warriss, 2005). Cost analysis (CA) as an economic tool of analysis entails systematic collection and evaluation of both direct and indirect costs that are associated with a particular product or an intervention. For instance, within the health care context, CA may involve evaluating the cost of a vaccination program. In this case, the analysis takes into account the direct and indirect costs that have been incurred in developing and implementing the program (Zaza et al 2005). Cost Effectiveness Analysis (CEA), involves comparing the costs of a particular product or intervention and the improvement gained. For instance, as far asparagus is concerned when using CEA one may compare the cost incurred in purchasing the product and improvement or value gained from the purchase. As a far as health care is concerned, CEA can be used as a tool to analyse the cost of an intervention such as an oral health program against the improvements in health that the program has brought about. When using CEA health improvements are analyses in natural units for example; cases of diseases prevented (Zaza et al 2005). Lastly, Cost Benefit Analysis (CBA) can be used as an economics tool of analysis for both the healthcare and asparagus market. CBA involves considering the costs and consequences (benefits or harm) linked to a particular intervention or product and expressing them in monetary (dollar) terms. Subsequently, the dollar terms are adjusted to their current value through an approach referred to as discounting. Discounting involves making the value of benefits and costs comparable despite of the time when they occurred (Zaza et al 2005). Although similar economic tool of analysis can be used in the health care market as well as other markets, there healthcare market is generally distinct from other markets. There are different factors that make the health care market different from other markets. These factors include; the extent of government involvement, level of uncertainty and the enormous difference in knowledge amongst key players (knowledge asymmetry). Unlike other markets, the level of government involvement in the healthcare market is extremely high. The government directly controls the licensing of professions, registration of entities and provision of insurance among many other factors. Secondly, there is high level of uncertainty in the health care market. This uncertainty is brought about by randomness of patients’ illness and the efficacy of medical treatments. Additionally, knowledge asymmetry makes the healthcare market different. In this case, one party (i.e the doctor) has a greater level of knowledge than the other party (patient). This puts the party with the greater level of knowledge in a power position and makes it possible for them to mislead or take advantage of the other party with less knowledge (i.e the patient) (Phelps, 2013). Question 3 Earlier this year the Australian Federal Government indicated its intention to introduce an up-front fee payable by customers visiting bulk-billing doctors. Through the use of basic economic principles, demonstrate the resulting market shifts that would occur and use theory to discuss the potential impact on equity. As a result of the Federal Government’s revamp of medical practice funding, millions of patients will no longer be bulk billed and will instead face up-front charges to see their doctor .The introduction of up-front fees payable by customers visiting bulk-billing doctors is likely to bring about significant market shifts. Firstly, this move is likely to shift the cost of health care from the government to patients. It is possible that some doctors will opt not to continue with bulk bulling and decide to pass the costs of the patients. This implies that patients will have to pay more in order to receive medical attention. In essence the price of health care is likely to increase. The increase in the price of health will in turn bring about changes in demand (AMA 2014). In reference to the conventional theory, health economists consider additional health care fees as inefficient since they embody care that is worth less to consumers than it costs to produce. The conventional theory further holds that the additional health care cost spawning from insurance embodies a welfare loss to society.When individuals purchase insurance, the insurance pays for their care. From an economists’ perspective, insurance is minimizing the price of care to zero. As a result, individuals are likely to purchase more health care than they would have at the normal market prices (Nyman 2004). Secondly, patients may have to face increased wait times to see a doctor, as medical doctors are now required to see patients for a minimum of ten minutes. Previously doctors were required to spend at least six minutes with patients. Under these changes, doctors are likely to lose significant amounts of income since they will have to spend twice as long time with patient. This will also imply that doctors will have to see fewer patients in a day. Consequently, this will compel some doctors to charge higher fee in order to make up for the income that they have lost Some doctors may also opt to stop-bulk-billing altogether and charge a fee for short consultation. Hence some patients who currently receive free care under Medicare will have to pay (ABC 2015; AMA 2014; Medew 2015). The introduction of up-front fees payable by customers visiting bulk-billing doctors will have significant impact on equity as far as affordability and accessibility of healthcare services is concerned. This revamp will undermine equity in a number of ways. According to a study by the Australian Bureau of Statistics, (ABS), the introduction of up-front fees payable by customers visiting bulk-billing doctors is likely to have a negative impact on the accessibility of healthcare services. Due to the cost of consultation, many patients are likely to delay or put off doctor appointments. The introduction of up-front fees will develop a two tiered health care system that makes it difficult for the already disenfranchised people to access health care services or pay for their medications. This will in turn increase the burden of disease on Australians, especially among people from indigenous communities (Baker 2014). Question 4 Smoking is good for no-one. Evaluate this statement from an economic perspective. Explain the relevance of elasticity of demand to the issue of smoking. What government interventions might be effective in reducing smoking behavior? Discuss. Smoking brings about a number of adverse effects to the economy. It is associated with cancer and a wide range of cardiovascular diseases that are a burden to the health care system and increase the costs of health care. Moreover, smoking is linked to loss of productivity, premature deaths, work absenteeism and fires which cost the Australian economy over $1.8 billion each year. Over time, numerous studies have provided compelling evidence on the health risks that cigarette smoking imposes to both smokers and non-smokers. A number of economic studies have showed how smoking related illnesses weigh on the healthcare system and increase health care costs (Chaloupka et al, 2002; Chaloupka & Warner 2000; Saffer & Chaloupka, 2000).Consequently, many states in Australia have increased cigarette excise taxes in order to increase the costs of cigarettes and eventually reduce smoking and the health risks and costs associated with smoking. Studies have found that changes in cigarette prices brought about by taxes imposed on manufacturers have led to changes in cigarette smoking. This trend conforms to the basic principles of economics which predict that as the price of a product increases , the demand or the quantity of the product decreases and vice versa (Chaloupka et al, 2002; Chaloupka & Warner 2000). The elasticity of demand when it comes to smoking is a critical issue that needs to be understood in order to come with suitable interventions that deter smoking. Although some studies have found that the demand of cigarettes is likely to decrease with the increase in price, in some contexts the demand of cigarettes has become inelastic regardless of the increase in price. For instance, in young smokers the demand of cigarettes is sensitive to price. However, amongst older smokers the demand for cigarettes is not sensitive to price. The economy theory postulates that there are a number of factors that make the demand for smoking among young population sensitive to price increases. Key among these factors include; the level of addiction, and lower level of income. The fact that young smokers have been smoking for a shorter period of time implies that their level of addition may be low. Furthermore, their level of income may be lower as compared to older smokers. This in turn makes them more responsive to the changes of cigarette prices. On the contrary, the demand for cigarettes among older smokers may not be sensitive to price mainly because their level of addiction is likely to be high and they are likely to have more disposable income (Chaloupka et al, 2002; Chaloupka & Warner 2000). Despite of the tax increases, there also a number of factors that have also exacerbated the demand of smoking. For instance, in response to tax increases players in the tobacco have resulted to the use of different strategic marketing practices in order to increase cigarette sales. Some of the marketing strategies used to target consumers whose consumption has been affected by price increases include multipack discounts, couponing, advertising via direct mail, mass media and point-of purchase. In order to reduce smoking, there is need for the government to employ comprehensive approaches to counter marketing strategies used by tobacco companies. It is essential for the government to regularly initiate awareness or sensitization campaigns that seek to inform and educate consumers on the harmful effects of smoking not only to individual health but also to the economy. Moreover, the government should introduce regulations that restrict some marketing strategies used by tobacco advertisers. For instance, the use of strategies such as direct mail or advertising through mass media should be highly regulated due to the impact they have on consumer behaviour. Increasing restrictions on promotion or adverting cigarettes will play a critical role in limiting the ability of tobacco companies to attract new smokers or reinstating old smoking habits. In the long-run this will help to significantly minimise the public health toll from tobacco (Saffer &Chaloupka 2000). Furthermore, since there is compelling evidence in literature that suggests that high taxation on tobacco can reduce smoking especially among populations of young people with low income, there is need for the government to continue setting high tax rates that will discourage people from smoking. Basically, the demand for cigarettes is largely influenced by the percentage of tax increase. Thus if the tax rates are increased, manufacturers are likely to shift the tax burden on consumers through higher prices. Hence, if consumers find cigarette prices too high they are bound to reduce their smoking or find alternatives to substitute their addiction. This will eventually reduce smoking. In addition to this, the government should set up suitable framework and guidelines for enforcing regulations on tobacco promotion, advertising and sale (Chaloupka et al, 2002; Chaloupka & Warner 2000). Question 5 Watch the video- “The price of life” .In reality is there a price placed on human life? Explain the ethical / moral issues associated with placing a price on life. Is it a necessary evil? Evaluate from an economic perspective. The video “The price of life” raises critical ethical/ moral issues linked to placing price on life. From a moral/ ethical perspective life is sacred and cannot be equated to any amount of money. As a result of the sanctity of life, there is need to protect and preserve life at all costs. In theory life is priceless, however based on this video and other scenarios, it is evident that in reality, there is a price placed on human life. Health insurance cover provides a good example of how price is placed on human life. The quality of one’s health and life to some extent hinges on the nature or cost of their health insurance cover. One’s health insurance cover may determine the type and quality of healthcare services that they receive. Evidently this is likely to bring about some inequalities as the life of the wealthy will be highly priced or valued more that the live of individuals from disadvantaged socio-economic background (Waluchow, 2003). The video, “Price of Life” highlights the plights of Myeloma patients as they seek to obtain access to a drug called Revlimid that is believed to elongate life and reduce the mortality rates of Myeloma patients. However, the drug is so expensive that the National Health Service (NHS) is yet to decide whether the government can afford to make the drug accessible to patients. Through the NHS’ rationing body the National Institute of Health and Care Excellence (NICE) the drug was assessed and initially found not to be cost effective. In essence, the cost of the drug does not justify its effectiveness in extending life. Nevertheless, after the manufacturer offered to share some of the costs, NICE revised its stand and approved the provision of the drug through the NHS (Wishart, 2009). The provision of this drug to 1200 Myeloma patients will cost the government €45 million each year. This is an enormous amount of money that is likely to be a burden to the health care system (Alsumidaie 2015; Wishart, 2009). From a deontological ethical standpoint, which asserts that the morality of an action can be justified based on its adherence to rules or obligation, spending such a huge sum of money so as to extend the life of a few can be considered as justifiable or ethical. This is mainly because based on this view life is sacred and as a result there is need to protect and preserve life at all costs. Thus it is a necessary evil. However, from a utilitarian ethical standpoint which holds moral action is one that maximises benefits for many, spending such a huge sum of money so as to extend the life of a few may not be considered as justifiable or ethical (Waluchow, 2003). Similarly from an economic perspective, this move raises several issues. First, there is the question whether it is justified for the NHS to spend an enormous amount of money to purchase drugs that will only benefit a few people (1200 patients) at the expense of the entire country. Secondly, the cost effectiveness of the drug is questionable (Alsumidaie 2015). It is worth questioning, is it worth it to spend so much money only to extend the life of Myeloma patients for 2 to 3 years? If the drug costs too much money for too little benefit from an economic standpoint it is justifiable for the NHS to deny patients the drug. This may imply that some Myeloma patients may die sooner but it is the rational thing to do. If drug prices are not controlled the markets are likely to push prices higher and threaten the healthcare of the entire country (Wishart, 2009). References ABC (2015). GP Payments: What changes can you expect? Retrieved March 17 2015 Alsumidaie, M. (2015). The cost of saving a cancer patient’s life: An analysis of Celgene’s Revelimid.Retrieved March 18 2015 Australia Medical Association (AMA) (2014). End of Bulk Billing for Millions. Retrieved March 17 2015 Baker, D. (2014). Submission to the Senate inquiry into out-of-pocket costs in Australian healthcare. Retrieved March 17 2015 Butler, J. (1999). Estimating Elasticities of Demand for PHI in Australia. National Centre for Epidemiology and Population Health (NCEPH) Working paper no. 43. Canberra: ANU. Cheng, C. T (2013). “Measuring the effects of reducing subsidies for private insurance on public expenditure for health care”. Journal of Health Economics 33 (1), 159-179 Chaloupka, F.J. & Warner, K.E. (2000). “The economics of smoking”. In: Culyer AJ,Newhouse JP, eds. Handbook of health economics. Amsterdam: NorthHolland. Chaloupka, F.J. Cummings, K.M., Morley, C.P. & Horan, J.K.(2002). “Tax, price and cigarette smoking: evidence from the tobacco document and implications for tobacco company marketing strategies”. Tobacco Control 11(1), 62-72. Clarke, P.M. (1999).”The effect of the 30% private health insurance rebate on the purchasing behaviour and intentions of the Australia population”. Australian Health Review 22 (3), 7-17. Colombo, F. & Tapay, N. (2003). Private Health Insurance in Australia: A Case Study. OECD Health Working Papers. Retrieved March 17 2015 Hopkins, S. & Frech, H.E. (2001).”The rise of private health insurance in Australia: early effects on insurance and hospital markets”. Economics and Lanour Relations Review, 12 (2), 225-238. Hopkins, S. & Kidd, M.P. (1996).”The determinants of the demand for private health insurance under Medicare”. Applied Economics 28 (1),1623-1632 Medew, J. (2015, January 13). ‘Patients face new $20 fee for seeing their GP’. Sydney Morning Herald. National Commission of Audit (NCOA) (2014). A pathway to reforming healthcare. Retrieved March 17 2015 Nyman, J. A. (2004). ‘Is ‘Moral Hazard’ Inefficient? The Policy Implications of a New Theory’. Health Affairs 23 (5), 194-199. Phelps, C.E (2013). Health Economics. 5th Ed. Upper Saddle River, NJ: Pearson. Private Health Insurance Administration Council (PHIAC) (2013). Membership & coverage June 2013. Canberra: PHIAC. Saffer, H. &Chaloupka, F.J. (2000). “The effect of tobacco advertising bans on tobacco consumption”. Journal of Health Economics 19(1), 1117–37 Waluchow, W.J. (2003). The Dimensions of Ethics: An Introduction to Ethical Theory. Ontario: Broadview Press. Wishart, A. (2009). The Price of Life. Retrieved March 18 2015 Zaza, S., Briss, P.A. & Warriss, K.W. (2005). The Guide to Community Preventative Services: What Works to Promote Health? 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