Chapter 12
Value Judgments and Economic Evaluation
12.1INTRODUCTION
12.2VALUES AND STANDARDS IN ECONOMIC EVALUATIONS
For purposes of economic evaluation, there are 2 ways of deriving a system of values and then developing a ranking of alternative uses of resources. In first method, called delegatory or top down, a value system is imposed on members of society (may be a dictator who settles on some value system based on his or her values).
2nd method is called participatory or bottom up. 1 assumption is that everyone’s values must be taken into account in ranking alternative ways of using resources. The value systems themselves can take the form of specific laws handed down by a deity or can be formulated in terms of general concepts such as fairness, liberty, and equality.
Even when we could settle on a single value system, we still face the
problem of translating the chosen value system into a gauge or ranking scheme
to assess alternative ways of using resources, e.g., the goal of “equality” can
be interpreted in many ways—as equality of health
status or as equality of medical care
utilization.
12.3EFFICIENT OUTPUT LEVELS
12.3.1 Individual Valuations of Commodities or Activities
12.3.2 Values in a selfish market
Assume initially 2 individuals, A and B, in market. Each has a specific schedule of marginal valuations (MVs). Table 12-1, p. 273. Fig. 10-1, p. 273.
A’s valuation of his own consumption is referred to as the private (or internal) valuation of his consumption.
Implicit assumption of analysis is consumer valuations are expressed in terms of a commodity, medical care. But it is usually health that is valued.
Initial assumption about cost of producing medical care: each level of output is produced at minimum cost. Assumption sometimes referred to as technical efficiency assumption. Assume minimum MC constant at $35/unit as output increases.
12.3.3 Socially optimum quantity of medical care
Is where the MVs of A and B equal MC (MVA = MVB = MC). Optimal level of medical care is 7 units. This measure of efficiency –distribution of output based on utility—is called allocative efficiency.
12.3.4 Optimal output with altruism
Table
12-2, p. 276. Fig. 12-2, p. 277.
Benefits to be obtained from others’
consumption are termed external benefits,
and values that people place on these benefits are termed external values. We now can
arrive at a measure of what value society places on B’s medical care. This value can be called social value and is made up of all individuals’ private and
external values for specific commodities.
Table 12-2, society has a marginal valuation of $80 for 1st
unit of B’s medical care (= sum of MVB and
), $60 for second, etc… These valuations are shown in Fig. 12-2 as MSVB, which is
vertical sum of MVB and.
Fig. 12-2, optimum level of output is 8 units of medical care. Some kind of transfer of funds from A to B for purposes of increasing B’s consumption of medical care is consistent with economic efficiency.
12.3.5 Alternative Delivery Arrangements
12.3.5.1 “Free” and Unlimited Care
Assume B is given medical care for free. She would consume 6 units. Optimally, B should consume 3 (where MSVB = MC). Since someone must bear burden and since MC > MSV for all units B consumes beyond 3, there is net social loss for these units.
12.3.5.2 Competitive Market, No Philanthropy
A will consume right amount for herself, but B’s consumption will be less than socially efficient amount.
12.3.5.3 Competitive Market with Philanthropy
It is in the interests of each private donor to initially offer less than the value he or she places on output hoping that someone else will pick up the tab. If everyone behaves in this way, total amount given will be less than socially optimal amount.
12.4 OPTIMAL HEALTH INSURANCE
Assume 900 people who are members of a large group and 100 people who are members of a small group. All individuals have initial wealth level of $1000. 10% prob. of getting sick. If sick, medical costs are $200/patient. Utility function for each person is as shown in Table 10-1.
Assume one insurer who provides insurance at cost. Loading cost of large group policy is $30 and for small group policy is $60. Objective is maximizing overall utility of all members.
Each individual faces an expected loss of $20 (10% times $200) and can get insurance at a cost that includes expected loss ($20) and appropriate loading cost. For members of large group, full premium is $50. For members of small group, premium is $80. For members of large group, E(U) if insured is U($950) = 97. If not insured, E(U) = .9(100) + .1(57) = 95.7 < 97 so they will get insurance.
For members of small group E(U) if insured is U($920) = 92.8. If not insured, E(U) = 95.7 > 92.8 so they will not get insurance. So when there is a social cost of insuring, there is also an optimal degree of insurance coverage.
12.5EXTRA-WELFARISM
If health really is a socially recognized goal, then health services cannot be evaluated strictly in terms of their market value. The distribution of health services must be evaluated on a social basis.
Extra-welfarism is concerned with how health is distributed among all members of society.
Fig. 12-3, p. 283. 2 individuals, A and B. A has self-assessed health status h1 and B has self-assessed health status h2. H shows maximum amount of health that can be produced with resources available for health care.
A’s health can be increased up to hx (with no change in B’s health) and B’s health can be increased up to hy (with no change in A’s health).
Assuming principle that health resources should be distributed according to need. There are a number of different ways to express “need”:
· Equal health status: More resources provided to A so that in the end both A and B are equally healthy. (450 line from origin to point on H).
· Maximizing total health, regardless of its distribution: Maximize hx + hy, regardless of initial values of health (h1 + h2). (Any point on H).
· Maximizing additional health/dollar of expenditure. Starting from existing distribution (h1 + h2) so that additional health status (hx – h1 for A and hy – h2 for B)/additional dollar of expenditure would be equalized at the margin.
12.6CONCEPTS OF EQUITY
3 types of distributional equity: intergenerational equity, vertical equity, and horizontal equity.
Intergenerational equity concerns distribution of payments among different generations. For example, since Medicare part A is financed largely through flow of payroll taxes, the working-age generation is largely financing the care of generation of retirees.
Vertical equity concerns economic burdens experienced by different income groups. For instance, flat tax charged to all individuals regardless of income level. For example, fixed premium for Medicare enrollees means that since lower income groups pay the same rate as higher income groups do, this premium amounts to a higher portion of income of lower income group.
Horizontal equity concerns degree to which equals are taxed equally. For example, tax on specific commodities such as alcohol, tobacco products. It has been argued that since these individuals are likely to be less healthy and use health care system more they should pay higher taxes.
12.7GOALS OF HEALTH POLICY
12.7.1 Efficiency
Specific goals that must be met for optimal health policy: (1) no unreasonable demand barriers, (2) technical efficiency, and (3) adequacy of supply. Putting these together with requirement that efficiency criteria must be met yields a 4th, higher level goal, which we call economic efficiency or allocative efficiency.
12.7.1.1 Demand Barriers are impediments
obstructing to the reception of care.
Price is prime impediment. Time
costs and travel costs can also make accessing medical care more difficult.
12.7.1.2 Adequacy of Supply refers to ability of
sufficient resources to provide care at efficient level (given level of
quality).
12.7.1.3 Technical Efficiency is a measure of
cost of producing a given level and quality of output.
12.7.1.4 Quality of care has not yet been incorporated into general body of health economists and so is still treated as additional consideration.