This book is an introduction to the economic approach to understanding health care problems. Our approach is based on the identification of scarcity as a major cause of many of today's health care problems. Scarcity can be defined as a deficiency in the quantity or quality of available goods and services as compared with the amounts that people desire. Perhaps the most glaring deficiency in the United States today is the lack of health insurance coverage on the part of roughly 40 million people, many of whom consequently have difficulty obtaining adequate care, especially primary care. Although there are others as well who have inadequate access to care, the size of the uninsured population has become a bellwether of the access problems in the U.S. health care system.
Yet the fundamental difficulty is not merely that there is `not enough` to go around. Side by side with problems of scarcity are problems of `too much.` In 1998 total expenditures on health care in the United States reached over $1.1 trillion, over 13.5 percent of the gross national product (GNP), the dollar sum of all final goods and Services produced. In 1965, health care expenditures were only 5.6 percent of the GNP. Included in these expenditures are high-cost services whose impact on health has been questioned, including large-volume `little ticket` items, such as radiographs and lab tests, which make up about a quarter of all hospital costs (Angell 1985); high-cost procedures, such as coronary artery bypass grafting and transplants, costly intensive care services, and new drugs, whose effectiveness is often still undocumented; and some hospital services for the terminally ill, which consume a disproportionate share of the health care dollar (Zook and Moore 1980; Long et al. 1984). A number of commentators have asserted that a considerable amount of `flat of the curve` medicine, that is, medical care that produces little or no improvement in health, is being practiced (Enthoven 1980). Accusations of `too much,` when uttered side by side with cries of `not enough,` point to the importance of studying the entire resource allocation process in health care.
Economics is the science that deals with the consequences of resource scarcity, and health economics deals with the consequences of resource scarcity in the health care industry. Because of its very broad scope, economics does not provide a body of rigid doctrines about scarce resources. Rather, economics offers an overall viewpoint intended to help in understanding the many problems related to various types of scarcity.
This book focuses on how to do economics; that is, how to think about economic problems in a systematic way. It divides the discipline into three separate areas, which can be regarded as the three main tasks of economics: description, explanation, and evaluation. The exposition of these tasks in a health context is the objective of this book; the performance of these tasks should be regarded as the objective of the reader.
Accomplishing the tasks involves asking specific questions and searching for answers to them. It should be stressed that searching for relevant questions is as critical a part of the process of analyzing economic problems as searching for answers. By formulating a problem in the context of scarcity, a deeper understanding of it can be obtained, and discovery of a solution or a means of accommodation might be the end result.
THREE MAJOR TASKS OF ECONOMICS
The three major tasks of economics covered in this book—description, explanation, and evaluation—will usually not be performed in isolation from one another. Rather, descriptive economics will be used to complement explanations and evaluations of events. But even though these tasks may be intermingled in economic analysis, the specific task being performed should be kept clearly in mind.
Description involves the identification, definition, and measurement of phenomena. By performing this task, we obtain some notion of the existing facts. It should be pointed out that this task basically amounts to fact-finding. There is, at this stage, no explanation of why the facts are what they are and no evaluative pronouncement or judgment. Of course, the selection of which phenomena to describe is usually motivated by an ultimate explanatory or evaluative purpose.
The statement that, for example, in 1992 Americans 65 years and older visited physicians' offices on the average of 5.5 times per year while those in the 15- to 44-year-old age group paid 2.5 visits per year (U.S. Department of Health and Human Services, 1995, 173) falls within the realm of description.
The second task of economics is explaining and predicting certain phenomena. This task involves conducting a cause-and-effect analysis. In undertaking such a task, we are moving one step beyond description; we are now identifying the causes of certain events that have occurred. This task is performed with the aid of models that classify various causal factors (assuming there is more than one) in a systematic framework. Based on this framework, hypotheses are developed about the net effect of each causal factor on the phenomena we want to explain. We do not do any further analysis at this stage. That is, we do not pass judgment on whether the phenomena we have observed are present in the desired amounts.
As an example of an explanation, suppose we want to determine why those in the 65-year-old and above age group utilized more medical care than those in the 15- to 44-year-old age group. First, we would develop a framework that incorporates the major causal factors relevant to this phenomenon. Let us say that our framework contains two essential causal factors: (1) the health status of each group and (2) the price paid by the members of each group for their medical care. Using these causal factors, we might then hypothesize that quantity of medical care demanded will increase when health status is lowered and when consumers pay less for their medical care. These causal factors relate to our example because (1) the health status of the older group is lower and (2) government-sponsored health insurance for the elderly reduces the amount the older group pays for medical care. Assuming these facts to be true, our hypothesis would predict that the older group will demand medical care in greater quantities. Should these increased quantities also be available, then the older group will utilize more medical care.
The third task of economics is evaluation. This task involves judging or ranking alternative phenomena according to some standard. An acceptable standard is first chosen, then used to rank alternative ways of distributing scarce resources. In choosing the standard, one major criterion is acceptability. Standards are easy to come by; however, many are controversial, and the standard chosen should have some degree of acceptability.
Using the standard, alternative quantities of economic variables—that is, alternative uses of scarce resources—can be evaluated. For example, if we choose a standard that says that the more medical care one has the better off one is, then, according to this standard, the older group in our example is better off than the younger group. Furthermore, any measure that raises the utilization of the younger group (by lowering the price paid by this group and by increasing the resources available for use by this group) would, according to our standard, improve the well-being of the younger group (Hemenway 1982)……………….