HSA 524 Health Economics
Spring 2002
Dr. Robert Jantzen
Economics Department


Where and When
Course Description
Course Objectives
Teaching Method
Course Grading
Term Project
Course Outline
Review Questions
Contact Information

Where and When

In the Spring of 2002, this course meets on Thursday nights, 6:30-8:30 p.m., in Hagan Hall 206.

Course Description

This course will apply economic analysis to the health care sector.  The course will first develop the "economic" perspective on what constitutes optimal consumer, firm and government behavior, using health care examples.  The course will then examine the performance of various health care sectors, i.e., insurers, physicians, hospitals, government, etc., and prospects for improvement.  No prerequisites.  3 credits.

Course Objectives

The primary objective of this course is to impart to students a working knowledge of how economic efficiency can be measured and obtained, with a particular emphasis on the health care sector.  Students will learn to utilize a variety of "tools" including demand analysis, economic cost accounting, cost-benefit analysis, optimal pricing and production, and market simulation.  Specific objectives for each topic are listed at the end of this syllabus.

Teaching Method:

This course will rely principally on lecture, discussion and mathematical problem solving, by hand or spreadsheet. Because of the breadth of the topics, the readings for the course will be extensive.


Lee, Robert H.  2000.  Economics for Healthcare Managers. Chicago, IL:  Health Administration Press.  This text is denoted as (L) in the course sequence below.

Feldstein, Paul J.  1999. Health Policy Issues: An Economic Perspective on Health Reform : 2nd Ed. Chicago, IL: Health Administration Press.  This text is denoted as (F) in the course sequence below.

Additional required xeroxed reading will be assigned by the instructor at appropriate times in the course.

Contact Information:

Instructor:             Robert Jantzen, Ph.D.
                                Professor, Department of Economics
Office Location:      34 Hubert Place, 3rd Floor
Office Hours:          Monday, Wednesday and Thursday, 10 - 11 a.m., and Thursday
                                5:30 - 6:30 p.m., by appointment
Phone:                     (914)637-2731.
Fax:                         (914)633-2511.
E-Mail:                RJantzen@Iona.edu
WebPage:            www.iona.edu/faculty/rjantzen/homepage.htm

Course Requirements and Grading:

Student grades in this course will reflect assessment in three areas.  First, exams.  Two in-class exams (Midterm and Final) will be given during the semester.  Second, a term project.  Students will conduct an economic analysis of a health care organization or service.  The project will be presented in written form to the instructor, and defended orally (time permitting) during the last class of the semester.  A description of the term project follows below.  Third, students are expected to participate actively and intelligently in class discussions, and class participation will be assessed on the basis of both quantity and quality.

Course grades will be based on the following "formula":

            Exams                         64%
            Project                        32%
            Class Participation      4%

Academic dishonesty will be penalized heavily.  Plagiarism (the failure to place in quotes text obtained from other sources) and/or cheating will result in a grade of F for the paper/exam involved.  In addition, students having excessive absences (five or more) will receive the grade of FA (failed for absence).

Term Project:

     Students may choose to complete either a case study or a term paper to fulfill the term project requirement of the course. For either option, students must submit a written report to the instructor and present an oral presentation to the class. The due date for the report, and the date of all presentations, is the last day of classes. Below are descriptions of the minimum requirements for each option:

     A.  Case Study Option:  The case study represents an economic analysis of a healthcare organization/department/activity.  Students may choose to analyze something that they are familiar with, and/or something that particularly interests them.  The analysis should address the following:

     1.  Describe the activity, i.e., what are the inputs and outputs being examined.

     2.  What factors (likely) influence the activity's demand?  How important are economic considerations?  Is there information regarding the relevant elasticities?  Could they be developed?

     3.  What are the objectives of the provider(s) of the activity?  What kind of environment does the provider(s) operate in, i.e., market or nonmarket?  How does the provider(s) operate
to meet their objectives?

     4.  How efficient is the provider(s)?  Evaluate in terms of the various economic criteria discussed in the course, i.e., minimizing the per unit costs of production, equating price and
marginal cost, etc.

     B.  Term Paper Option: The following represent the minimum requirements for a term paper:

     1.  An original, well-researched, and cogent discussion of a topic relevant to health economics.

     2.  Construction:

     a. About 5-7 typed pages of double-spaced text, written in your own words.

     b.  At least 10 cited (i.e., footnoted) reference sources, of recent vintage wherever applicable.  The citations must include author, title, source, date and page.  NOTE:  This
is a minimum requirement, not a maximum.  Also, 10 footnotes from 3 books/articles does not meet the requirement.  At least 10 different books/articles must be cited.

    c.  Footnotes/endnotes at appropriate places, i.e., wherever the text refers to material not authored by the student or existing in common knowledge.  A bibliography is not necessary
if complete footnotes/endnotes are used.  The copying of text from other sources, if not placed in quotes, will be considered plagiarism.

    d.  No typographical, spelling or sentence structure errors.  This requirement might seem picayune, but the consequences of such errors in this course are slight compared to
those out in the "real" world (i.e., lost job or promotion).

    3.  The instructor is potentially a useful source for reference materials, suggestions, and other assistance.  Feel free to utilize him.


New England Journal of Medicine
Health Affairs
Health Care Financing Review
Journal of Health Politics, Policy and Law
Journal of Health Economics
Milbank Memorial Fund Quarterly
Medical Care
American Journal of Public Health
Health Services Research
Journal of Medical Systems
Social Science and Medicine

NOTE:  The instructor and/or the reference librarian can assist
you in conducting a computer-based search of all library
collections in the metropolitan area.  Just ask.


US Homecare Corp.
Managed Care:  Solution or Smokescreen
Belgian Health Care System
Hospital Based Physical Rehab Dept.
Managed Care and Hospitals
A Prosthetic/Orthotic Clinic
High Technology: Society's Ability to Pay
National Health Insurance in the US
Health Aides vs. Licensed Practical Nurses
Cardiac Catherization:  Inpatient vs. Outpatient
Coronary Artery Bypass Grafting Surgery
C-sections vs. Natural Childbirths
Antiendotoxin Monoclonal Antibodies
Ronald McDonald House in CT
HMOs for Chronic Psychiatric Patients
Life Line System
Methadone Clinic
Ambulatory Transfusion Service
Medicaid Utilization Threshold program
Health Promotion in Corp. America
Home Care Physicians
Routine Chemistry Test Facility
Computerization of a Nursing Home
Family Health Center
Prescription Drugs
An Evaluation Unit
Total Quality Management
DRG 483 Tracheostomy
Cataract Surgery in an Ambulatory Unit
Diabetic Care
Oregon's Medicaid Rationing Plan

Typical Course Sequence:
Class #
Review Question(s)
Introduction (L), chapters 1 & 2, and (F), chapters 1 & 2.
Demand Analysis (L), chapters 6 & 7, and (F), chapter 4. 1 through 6.
Economic Costs (L), chapter 5. 7 and 8.
Supply: Price Takers (L), chapter 8. 9, 10 and 11.
Supply: Price Makers (L), chapters 10 & 14. 12 through 15.
Health Production (F), chapter 3. 16.
Economic Analysis of Health Care Programs (L), chapter 12. 17 and 18.
Health Insurance (F), chapters 6 through 9, 18 & 26, and Business Week 19, 20 and 21.
Regulation and Competition (L), chapter 13, and (F), chapter 24. 22.
Physicians (F), chapters 10 through 13. 23.
Hospitals (F), chapters 14 through 17. 24.
Pharmaceuticals (F), chapter 22 & Business Week 25.

Review Questions

1.   a.  Briefly, explain the law of demand.  Why are price and quantity demanded inversely related?   Do you think that the law of demand is relevant for health care?   Why or why not?
         b.  Is the desire for medical care driven by "necessity" or economic factors?  What factors influence the demand for medical care?  Discuss the evidence.
         c.  Can demand analysis improve the utilization level of medical care?  How so?
        d.  How do we measure the demand for medical care?  How are demand studies conducted?   What are the data requirements?  Explain fully.
        e.  Is medical care demand independent of supply, i.e., does consumer sovereignty prevail?  Policy implications for efforts to control costs?

2.  a.  Discuss what elasticity measures show, i.e., how and why they gauge the degree of relationship between two variables.
     b.  One important elasticity is the price elasticity of demand.  Explain what it measures, and how it is computed?  Show. Compare and contrast elastic, unit elastic,  and inelastic demand.  What are the determinants of the price elasticity of demand?  How so?
    c. If demand is price elastic, how will total revenues to a firm change if prices are increased or decreased?  What if demand is inelastic?  Why would firms want to make their customers more inelastic?
   d. Explain the role of time costs in determining consumer demand.  How do time costs effect the price elasticity of demand? Why must time costs be accounted for when deciding questions of access for "free" public services?
   e.  For persons who have no health insurance today, what increase in use would you expect for hospital care, physician services and dental care if Congress passes some kind of national health insurance plan covering 80 percent of all medical care costs.  Link to the available evidence concerning the relevant price elasticities.

3.  Given the following demand elasticities:

hospitalization price elasticity  -.2
hospitalization income elasticity  +1.0
hospitalization travel time elasticity  -.1
hospitalization wait time elasticity  -.2

what will happen to hospital admissions if:
  a.  if hospital prices increase by 10%?
  b.  if a recession occurs and incomes decrease by 10%?
  c. if hospital closings increse the travel time to a hospital by an average 10%?
  d. if the amount of time spent waiting for admission decreases by 10%?

4.  In Westchester, as in other areas, there appears to be a shortage of nursing-home beds, resulting in waits for placements and backups in area hospitals that can't discharge
patients.  A subcommittee of the Hudson Valley Systems Agency (HVSA) has reported that Westchester County "needs" 516 more nursing-home beds.  The state Hospital Review and Planning Council (HRPC) authorizes the construction of additional beds,
and utilizes a population-based formula to determine "need." Using demand analysis, discuss whether or not an HRPC approval of bed construction will "solve" the shortage situation.  Are there any likely secondary effects?  What other "economic" solutions
might be considered?

5.  You are the professional manager of a government funded weight loss clinic located in downtown White Plains.  Your funding agency is very concerned about your low utilization rate, low revenues, and incessant requests for additional funds to cover operating losses.  The funding agency informs you that this year you will receive not one penny over your budget allocation. Using demand analysis, how might you improve your clinic's
performance?  How will such economic factors like the price elasticity of demand and time costs influence your new plan? Are there equity considerations that might also apply?

6.  You are the CEO (Chief Economic Officer) of a Medi-Quik walk-in physician's group practice.  Currently, per visit charges average $40, and you serve 450 patients weekly.  Waiting time at your very busy clinic is estimated to be 1 hour, i.e., about a $20 time cost for your typical client.  Your physicians would like to raise their fees to $60 and ask for your advice. Assuming that the price elasticity of demand is -.5, what will be
the new weekly patient total?  What role might changing time costs play if any?

7.   a. Explain how the economic concept of costs differs from the accounting concept.
       b. Explain the difference between Fixed Costs and Variable  Costs.
       c. Explain the following short run cost concepts: i. Average Total Cost   ii. Average Variable Cost iii. Average Fixed Cost   iv. Marginal Cost
       d. How are Average Total Cost and Marginal Cost related?
       e. Explain what "long run" cost data refer to.

8.   a.  The issue of economies of scale in hospitals is an important one.  Why?
      b.  Why is it difficult to measure the extent of economies of scale in hospitals?  How is it measured?
      c.  Briefly discuss the evidence as to economies of scale in the hospital sector.  What about economies of scope?

9. a.  What are the characteristics of a competitive markets?
    b.  In the Westchester area, prevailing fees for a routine dental cleaning/checkup appear to be about $100 per visit. Assuming that the market for dental services is competitive, explain and graphically illustrate (using the supply/demand model) why the fee is $100.  Why not $20?  $180?  In your illustration, assume that the current level of checkups is 2 million annually. Explain completely the graphical illustration.
   c.  Governor Pataki has just learned how much dentists in Westchester charge for routine visits, and he is very concerned that many dentists may not be making enough to live on. In the interest of protecting these dentists, he decrees that from now on dentists cannot charge less than $180.  Will this decree help or harm the area's dentists?  Analyze using the supply/demand model.

10.   a.  What are the two rules of thumb that a provider should follow if it wants to maximize profits/minimize losses?   Why?  Is Marginal Revenue equal to the price a firm charges?  Why or why not?  When?  What's the maximum amount any firm should be willing to lose?  Why?  Are these rules of thumb relevant for nonprofits trying to maximize service levels?  Why or why not?
      b.  What is meant by allocative efficiency?  What is meant by technological efficiency?

11.  You are an MD whose specialty is Fingernail fungus syndrome (FFS). In the NY Metropolitan area there are lots of other physicians licensed to treat the condition.  Your outpatient cost structure, which just so happens to be identical to all your peers' (competitors') is below.

Qs    Total Costs
0       1000
10      8000
20     14000
30     18000
40     20000
50     35000
60     60000
70    140000

    a.  Derive the Marginal Cost and Average Total Cost at differing patient volume levels.  Which is most efficient?  Why?
    b.  If government reimburses providers $600 per treatment, and regulations prohibit additional charges, what level of Qs should each MD provide? What level of profits will they earn?  Is the price a "fair" one that promotes efficiency in production?  Would a lower price increase the quantity supplied?  Higher price?  Why or why not?  Would the behavior of for-profit providers differ from non-profit providers?  If so, how?
   c.  The government decides that it would like each provider to treat 10 more patients per period, and hence ups the reimbursement rate.  If the reimbursement rate is increased to $700, what would be each provider's new production level?  Profits?  Efficiency?  For-profits vs. Non-profits?
    d.  The government decides that its reimbursement scheme should reflect marginal costs, not average total costs, and hence it lowers the reimbursement rate to $300.  What is the best output level for provider now?  Profits?  Efficiency?  What will happen over time?

12.  a.   Define price discrimination.
       b. What are the necessary conditions for price discrimination?
       c.  Briefly explain how a firm should decide how much to charge and how much to produce for differing markets.

13.  a.  What is an oligopoly?
       b.  Why do certain industries have only a few firms?
       c.  Why can't oligopolies utilize the same rules of thumb for running their businesses as other types of businesses?   What is meant by "mutual interdependence?"
       d.  Explain the Kinked-Demand Model of Oligopoly demand.  What does it imply about a firm's revenues if it lowers or raises its price?
       e.  Explain the limit-pricing, noncollusive Oligopoly model, i.e., the price leadership model.  How do oligopolies compete with one another?  Why?

14.  Young Dr. Frankenstein is a podiatrist practicing in New Rochelle. His current clientele consists entirely of cash and carry patients who pay $60 per visit.  Dr. Frankenstein estimates that his (marginal cost=average cost) per patient is $30.  He also estimates that his private paying patient demand is as follows:

Price  #Patients/week
100    10
90     20
80     30
70     40
60     50

    a.  Assuming that he can see at most 50 patients, is Dr. Frankenstein maximizing his profits?  Why or why not?  What profit will he earn?
    b.  Dr. Frankenstein's rent just went up by $1000 per week.  How should he adjust his pricing/production levels in order to maximizing profits?
    c.  Assume that Medicare can provide Dr. Frankenstein with a virtually unlimited number of patients, who each will "pay" $50 apiece, should he alter his patient mix in order to profit maximize?  Why or why not?  Profits?

15.  You are the chief Economics officer (cEo) for the HIP HMO plan.  Your chief competitors are relatively few in number.  Your firm would like to increase market share in the health insurance field.  Historically, your firm has been able to earn a sizable margin over costs, and has competed for new clients by offering more services, quality, etc.  Now your firm is thinking about an aggressive wave of price cuts to attract new clients.  Should your firm depart from its past strategy for competing for new business?  Why or why not?  What factors should be considered?

16.  a.  What is a health production function?  How can they be estimated?  Be specific.  What kinds of data would be needed, and how could they be analyzed?  Briefly describe multiple regression analysis.  What kinds of info are provided by the "function"?
       b.  Often, government utilizes indicators of "need" to decide whether or not certain areas will receive greater/lesser public investments in health.  Are such "need" standards likely to result in an optimal allocation of health resources, if the objective is to improve the nation's health by the greatest amount?  Why or why not?
    c.  How can a health production function be utilized to allocate resources for health care expenditures?
    d.  Estimates of how much, if at all, increased health care expenditures have improved the Nation's health vary widely.  How come?

17.  a.  Describe Cost-Minimization Analysis.  What questions does it provide answers for?
What kinds of information do you need to conduct such an analysis?
     b.  Describe Cost-Effectiveness Analysis.  What questions does it provide answers for?  What kinds of information do you need to conduct such an analysis?
     c.  Describe Cost-Benefit Analysis.  What questions does it provide answers for?  What kinds of information do you need to conduct a cost/benefit study?  What are the likely problems that may be encountered?
     d.  Why is the question of "what is a life worth" a key question in Cost-Benefit analysis?  How does one estimate the value of a life?  Discuss.
     e.  Environmental factors are important determinants of public health.  Explain how cost-benefit analysis could be used to find the optimal level of air pollution, if the objective is to reduce loss of life due to air pollution.  What kinds of information would the study need.  What problems might your study encounter?
     f.  Explain how cost-benefit analysis could be used to assess whether or not routine mammograms should be provided to women between the ages of 40 and 50, assuming that the expected benefit is a reduction in the mortality rate of women.  What problems might your study encounter?
     g.  What's the diffeence between cost-effectiveness analysis and cost-benefit analysis?  Is one easier to apply than the other?  Is one superior to the other?  How so?

18.  Assume that most health production function studies estimate the following elasticities:

       i.  the elasticity of adult mortality with respect to medical care spending is -.1
       ii. the elasticity of adult mortality with respect to increased safety regulation spending is -.2
       iii.the elasticity of adult mortality with respect to increased crime control spending is -.3

       NOTE:  these elasticities show that a 1% increase in medical care spending leads to a
       .1% decrease in mortality, a 1% increase in safety spending leads to a .2% decrease
       in mortality and a 1% increase in crime control spending leads to a .3% decrease in

       If the total amounts currently spent on medical care, safety compliance and crime control are $1000, $300 and $500 billions, respectively:
       a.  find the current marginal benefit/marginal cost levels for medical care spending,
       safety regulation and crime control.
       b.  which kind of spending is most effective in reducing mortality?
       c.  should any of the above spending levels be increased or decreased?  Why or why not?

19.  a.  Why do people desire health insurance?
       b.  Why do private insurers typically not insure events with either extremely low or extremely high probabilities, and those events with small costs?
      c.  Can we measure the adequacy of health insurance coverage by the percent of medical care expenses that are covered?  If insurance policy B covers more medical care but is otherwise identical to policy A, can we say that B is a better policy? Explain.
      d.  Compare community rating to experience rating.  Which rating system is more desirable?  Why so?  Should the government mandate that all insurers practice one or the other?  Why so?
      e.  Discuss adverse selection.  Can a competitive insurane industry operate efficiently in the presence of adverse selection?  Why so?
      f.  Discuss moral hazard.  What are the implications for efficency?
      g.  Discuss preferred risk selection.  How do insurers limit the risks arising from adverse
selection and moral hazard?
      h.  Discuss the reasons why public health insurance may be more efficient in meeting health needs than private insurance.  Possible negatives?
      i.  Discuss Medicare's financial situation and the equity and efficiency concerns regarding the program.  What are the proposed reforms to make the system solvent and more equitable and efficient?

20.  a.  Describe how managed care effects providers' incentives, fees and overall utilization.  How about patient incentives?
      b.  What are the primary cost saving features of managed care?
      c.   How will the expansion of managed care produce competitive effects throughout the health care system?  What is the evidence regarding the performance of managed care insurers?

21.  Insurance companies usually would like to assess premiums on an experience-rated basis, with high cost groups paying high premiums, and low cost groups paying low premiums.  Sometimes, govt. policy has forced insurers (e.g. BC/BS) to utilize community rating as a rate setting device, forcing uniform premiums for all clients.  Such uniform rates are designed to insure that high cost clients will be more able to afford insurance.  Analyze the welfare aspects of this policy, i.e., is it "fair" to all parties?  What might happen if new insurance competitors enter the market and are allowed to offer policies to the existing clients of established insurers?  What would competition do to the rates paid by each group, and to the profits of the established and new insurers?  Would it make much of a difference if the new competitors were required to practice community rating also?

22.  a.  Explain the public interest view of regulation.  How does regulation improve the efficiency of industries?
      b.  Explain the industry interest view of regulation.  Does regulation improve efficiency?
      c.  Explain the public choice view of regulation.  Does regulation improve efficiency?
      d. Why has market competition become the dominant factor affecting hospitals and health professionals, replacing regulation?
      e.  Why might competition negatively effect the quality of care for the public?  What kinds of safeguards might ensure high quality care?  How has heightened competition effected the quality of care?

23.  a.  Is the physician services market a competitive one?  Evidence?
       b.  Why is the Federal government concerned about Medicare Part B's costs?  Aren't the costs borne by the elderly, and if not, why not?
       c.  Medicare continues to pay physicians with a fee-for-service (FFS) reimbursement method.  Why was/is the FFS inefficient?   Why was/is FFS inequitable?
      d.  Describe the recent reform of Medicare Part B physician payments utilizing Relative Value Scales (RVS).  Will the new payment mechanism improve efficiency and equity?  How so?  Should balance billing be allowed?
     e.  Evaluate some of the other proposals, like PPOs, capitation, etc. that have been advocated for containing Medicare Part B costs.  Are they likely to improve efficiency, decrease costs, or be adopted?

24.  a. Discuss the past performance of the hospital services market.  Has it performed efficiently?  Why has it performed the way that it has?  Has regulation improve hospital performance?  Evidence?
       b.  What are Diagnostic Related Groups (DRGs)?  How do hospital incentives change if reimbursement changes from a retrospective basis to a prospective basis.
       c.  What are some of the concerns regarding the switch to DRGs? In what ways might DRGs improve the performance of hospitals?  Have they?

25.  a.  Is the prescription drug industry a competitive one?  Why so?
       b. Discuss the barriers to entry in the pharmaceutical industry.
       c. Discuss patent laws specific to pharmaceuticals.
       d. Compare US pharmaceutical prices, profits and product innovation with that of other countries.

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