Econ 393 A
 

Health Economics

My office hours:
MTW 3-4pm in Maxey 313, or by request. I will also try to have informal "office hours" in the Prentiss dining hall at 6pm on Tuesdays.

Taught Fall Semester of 2004 at Whitman College; note that this is an archive page and that some links may not work.

Complete Course Schedule

(subject to change!)

Note that some of the readings below link to restricted access websites such as JSTOR. Whitman folks should be able to access these from any computer on campus, or from any computer off campus once properly configured with the Whitman proxy server.

Week 1 (starts Monday, August 30)

Wednesday (Part I): Introductions

Wednesday (Part II): Pop quiz

Week 2 (starts Monday, September 6)

Monday (Part I): Paul Wallace, "The health of nations", The Economist, July 17, 2004. (This article was handed out in class on Wednesday.)

Monday (Part II): Refresher on consumer preferences and utility functions; here are some class notes (.pdf). If you could use a refresher on calculus and derivatives, try this excerpt (.pdf) from some of my class notes.

Wednesday (Part I): Refresher on cost-minimization and deriving supply curves. If you want, you can read ahead or print some class notes. (It's 20 pages, and it looks scary, but there's lots of repetition and a good chunck of it should at be familiar to you.)

Wednesday (Part II): How is health care different from potatoes? Spend some time thinking about the similarities and differences between health care and "normal" commodities. Also try to think of "intermediate goods", i.e., goods that have some properties of "normal" commodities and some properties of health care. For example, how does health care compare to car repair, or to environmental goods like clean air, or to education? (These sorts of comparisons are a good way to try to isolate different facets of health economics.)

  • Here is Problem Set #1, on calculus, cost-minimization, and supply curves. You do not have to turn in the homework, or even do the homework, but you should expect similar problems on the exam. I'm happy to talk with you about the problem set; you can also try to make sense of the answer key.

Week 3 (starts Monday, September 13)

Monday (Part I): Uncertainty and certainty equivalence. Here are some lecture notes.

Monday (Part II): Kenneth J. Arrow, "Uncertainty and the Welfare Economics of Medical Care", The American Economic Review, Vol. 53, No. 5. (Dec., 1963), pp. 941-973. Some comments:

  • This article basically started the field of health economics.
  • Don't get bogged down in the details of this article, which is a bit lengthy (and, for my taste, occasionally tedious). And, unless you want to, you don't need to read the math parts of the appendix. (You should at least read what's on p. 969, including the sentence that extends to the next page, but you should also be aware that we'll cover this during the theory part of an upcoming class.)
  • Kenneth Arrow, still alive and kicking at Stanford, shared the 1972 Nobel prize in economics (with John Hicks, a.k.a. Sir John "Hicksian demand curve" Hicks) "for their pioneering contributions to general economic equilibrium theory and welfare theory." The press releases on the Nobel prize website (linked above) are worth a read to get a sense of economic history &etc. Just about anybody who's anybody in economics has won the Nobel prize (which makes some folks wonder if they should stop giving it out or turn it into a prize for social sciences more broadly).
  • Do pay special attention to the material on pp. 941-943 about the Fundamental Welfare Theorems (which Arrow calls the Optimality Theorems). This is what won Arrow a share of the 1972 Nobel prize, and it also won Gerard Debreu (who worked both independently and in collaboration with Arrow) the 1983 Nobel prize in economics "for having incorporated new analytical methods into economic theory and for his rigorous reformulation of the theory of general equilibrium", and I'll do my best to stop you from graduating if you don't internalize it.
  • Also pay special attention to the potential political implications of Arrow's article. Consider the year of publication (1963) and think about what was happening in U.S. politics around that time.

Wednesday (Part I): Uncertainty and certainty equivalence

Wednesday (Part II): Dennis S. Lees and Robert G. Rice, "Uncertainty and the Welfare Economics of Medical Care: Comment", The American Economic Review, Vol. 55, No. 1/2. (Mar. 1965), pp. 140-154. And: Kenneth J. Arrow, "Uncertainty and the Welfare Economics of Medical Care: Reply (The Implications of Transaction Costs and Adjustment Lags)", The American Economic Review, Vol. 55, No. 1/2. (Mar. 1965), pp. 154-158. For the Lees and Rice article, you should skim sections II and III, with a goal of getting the flavor of their argument. The rest of it, and Arrow’s response, make pretty straight-forward reading; during your reading you should think about the political implications of what the authors are writing.

Week 4 (starts Monday, September 20)

Monday (Part I): Moral hazard and the prisoners' dilemma.

Monday (Part II): Mark V. Pauly, "The Economics of Moral Hazard: Comment", The American Economic Review, Vol. 58, No. 3, Part 1. (Jun. 1968), pp. 531-537. And: Kenneth J. Arrow, "The Economics of Moral Hazard: Further Comment", The American Economic Review, Vol. 58, No. 3, Part 1. (Jun., 1968), pp. 537-539.

  • Here is Problem Set #2 on expected value and insurance. You do not have to turn in the homework, or even do the homework, but you should expect similar problems on the exam. I'm happy to talk with you about the problem set; you can also try to make sense of the answer key.

Wednesday (Part I): We're (finally!) going to finish up the material on deriving supply and demand curves, with a focus on Marshallian and Hicksian demand curves. The handout is the same one from before (on cost minimization etc)

Wednesday (Part II): Discuss implications re: Pauly. There is no other reading

Week 5 (starts Monday, September 27)

Nobel Prize Week!

Monday: George A. Akerlof, "The Market for "Lemons": Quality Uncertainty and the Market Mechanism", The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp. 488-500. (Do not get bogged down in the mathematical example that Akerlof does; instead, I recommend the example on p. 190 of the textbook.) Akerlof shared the 2001 Nobel Prize in economics (with A. Michael Spence and Joseph E. Stiglitz) "for their analyses of markets with asymmetric information"; the Nobel committee calls Akerlof's Lemons paper "the single most important study in the literature on economics of information". A historical side note: Akerlof's paper was rejected three times before it was finally published by the QJE. For details and other stories, read Joshua S. Gans and George B. Shepherd, "How Are the Mighty Fallen: Rejected Classic Articles by Leading Economists", The Journal of Economic Perspectives, Vol. 8, No. 1. (Winter, 1994), pp. 165-179.

  • Here is Problem Set #3 on demand curves. You do not have to turn in the homework, or even do the homework, but you should expect similar problems on the exam. I'm happy to talk with you about the problem set; you can also try to make sense of the answer key.

Wednesday: Michael Rothschild and Joseph Stiglitz, "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information", The Quarterly Journal of Economics, Vol. 90, No. 4. (Nov., 1976), pp. 629-649. Stiglitz shared the 2001 Nobel Prize in economics (with George A. Akerlof and A. Michael Spence) "for their analyses of markets with asymmetric information". Rothschild did not get a part of the Nobel prize, but he did (like me) go to Reed College. [Note: This article is difficult. Here’s what you should do with it: First, read sections I.1 through I.5; pay particular attention to the definition of equilibrium in I.4. Throughout, you should focus on the ideas, but if the math makes sense then so much the better. (It should all be pretty familiar, just with different variables than you’re used to.) Next, read the first paragraph of section II, the one dealing with the three principal conclusions. Finally, having examined the set-up and the punch line, do your best to understand I.6, which is the heart of the article. We’ll talk about this a bunch in class, so don’t drive yourself to distraction over it.

Week 6 (starts Monday, October 4)

Heresy

Monday (Part I): Amos Tversky and Daniel Kahneman, "The Framing of Decisions and the Psychology of Choice", Science, New Series, Vol. 211, Issue 4481 (Jan. 30, 1981), pp. 453-458. This article is available from JSTOR, but only from the computers by the Penrose reserve desk. I have hard copies for anyone who needs one.

Monday (Part II): Matthew Rabin and Richard H. Thaler, "Anomalies: Risk Aversion", Journal of Economic Perspectives, Vol. 15, No. 1 (Winter, 2001), pp. 219-232. This is a fabulous article; it is not yet available on JSTOR, but I have placed a PDF in the Course Documents section of Blackboard.

  • These two articles fit into a general theme that was expressed nicely by Mark J. Machina (in a difficult optional reading, Choice Under Uncertainty: Problems Solved and Unsolved, Journal of Economic Perspectives, Vol. 1, No. 1 (Summer, 1987), pp. 121-154): "Fifteen years ago [in 1972], the theory of choice under uncertainty could be considered one of the 'success stories' of economic analysis: it rested on solid axiomatic foundations, it had seen important breakthroughs in the analytics of risk, risk aversion, and their applications to economic issues, and it stood ready to provide the theoretical underpinnings for the newly emerging 'information revolution' in economics. Today choice under uncertainty is a field in flux: the standard theory is being challenged on several grounds from both within and outside economics."
  • Kahneman (a psychologist!) shared the 2002 Nobel Prize in economics "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty". Tversky almost certainly would have shared in the prize had he not died in 1996. (Nobel prizes are not awared posthumously.) Instead, Kahneman shared the Nobel prize with Vernon L. Smith, who won "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms."
  • The semi-regular "Anomalies" column in the Journal of Economic Perspectives is sort of like the X-Files for economics. This particular column is based largely on the following article, which is an optional reading: Matthew Rabin, Risk Aversion and Expected-Utility Theory: A Calibration Theorem, Econometrica, Vol. 68, No. 5 (Sep., 2000), pp. 1281-1292. Another optional reading (I like the Science article better) is Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, Journal of Economic Perspectives, Vol. 5, No. 1 (Winter, 1991), pp. 193-206.
  • A side comment on the Allais paradox: note that Maurice Allais, who won the 1988 Nobel Prize in economics "for his pioneering contributions to the theory of markets and efficient utilization of resources", was also responsible for an ongoing astronomical puzzle known as the Allais Effect. See An Invisible Hand?, The Economist, August 19, 2004.

Wednesday: We'll discuss the reading from John A. Nyman, The Theory of Demand for Health Insurance (Stanford Univ. Press, 2003). You can pick up a copy outside my door (Maxey 313) if you didn't get the handout in class. The first chapter in the reading (chapter 2) provides an excellent overview of the conventional approach to insurance, so it should be a pretty quick read; pay particular attention to the anomalies discussed at the end of the chapter. The second chapter in the reading (chapter 3) is just there for you to skim so that you can see what a cutting-edge/alternative approach to insurance theory looks like.

  • Question: What anomalies does Nyman identify and how serious of a threat do you think they pose to conventional theory?
  • Question: On another heretical (but otherwise unrelated) issue, Victor R. Fuchs, one of the giants in the field of health economics, has this to say on p. 135 of Who Shall Live? Health, Economics, and Social Choice (expanded edition, World Scientific: 1998): "It should be noted that although major-risk [i.e., catastrophic] insurance in various forms is now available from private insurance companies, the demand for it is less than overwhelming. If major-risk insurance is really what people desire in the way of medical care coverage, why don't they buy it now? And why do union leaders and representatives of other groups seek more coverage? I believe one reason is because people want an easy, convenient, systematic way of paying for medical care. It is a great mistake to view the purchase of health insurance as simply the result of the desire to avoid risk." What do you make of this argument?
  • Question: At what point should a theory be abandoned as being inconsistent with empirical evidence? (A wonderful book here is Thomas S. Kuhn's famous essay on The Structure of Scientific Revolutions.)

Week 7 (starts Monday, October 11)

Monday: No class (four-day break)

Wednesday: Pharmaceuticals (class presentations): Andrew, Bill

  • Today (Wednesday, October 13) is the last day to withdraw from classes or the College without record.

Week 8 (starts Monday, October 18)

Monday: Pharmaceuticals (class presentations): Brett, Derek, Grant

Wednesday: Pharmaceuticals (class presentations): Jeremy, Jesse, Jill

Weeks 9 (starts Monday, October 25)

Monday: Discuss exam and debates

Wednesday: Pharmaceuticals (class presentations): Julia, Kathryn, Katie

Week 10 (starts Monday, November 1)

Monday: Pharmaceuticals (class presentations): Keith, Laura B., Laura M.

Wednesday: Pharmaceuticals (class presentations): Quincy, Rusty, Shawnee

Week 11 (starts Monday, November 8)

Monday: Pharmaceuticals (class presentations): Spencer, Suraya, Will

  • Today (Monday, November 8) is the last day to withdraw from classes or the College with W grades; today is also the close of the P-D-F registration period.

Wednesday: Class visit from Sarah Michelson, Whitman alum who worked at Amgen!

Week 12 (starts Monday, November 15)

Monday: In-class debate prep

Wednesday: Katie's presentation; class feedback; class visit from Cindy Waring to discuss Whitman's health care policy.

Week 13 (starts Monday, November 22)

No class (Thanksgiving break)

Week 14 (starts Monday, November 29)

Monday: Social Security and Medicare overview.

Wednesday: Topic #2 (Laura M/Suraya v. Bill/Derek on Wednesday, December 1): Resolved, that the United States should adopt the Kerry/Edwards plan for catastrophic coverage as a step towards a government-centered health care system such as Canada’s single-payer system.

Week 15 (starts Monday, December 6)

Monday: Debates #3 (Grant/Keith v. Julia/Shawnee on Monday, December 6): Resolved, that the United States should adopt the Bush/Cheney plan for Medical Savings Accounts (MSAs) as a step towards an individual-centered health care system.

Wednesday: Debate #4 (Spencer/Andrew v. Kathryn/Will on Wednesday, December 8): Resolved, that the United States should make prescription drugs significantly more affordable for third-world countries by changing patent laws, international treaties, and/or providing subsidies.

Final's Week (starts Monday, December 13)

Final Exam Period: our final exam period will go from 9am-12pm on Monday, December 13. We'll do:

  • Topic #1 (Laura B/Jesse v. Quincy/Rusty on Monday, November 29): Resolved, that the state of Washington prohibit smoking inside buildings and vehicles open to the public and places of employment.
  • Topic #5 (Brett/Katie v. Jill/Jeremy on Monday, December 13 at 9am): Resolved, that the United States should take steps to significantly reduce the rate of growth of Medicare spending.
  • Class evaluations

Pharmaceutical Presentations

Starting after four-day we'll have class presentations on various topics related to pharmaceuticals (or on other topics if you've got my approval. Your deliverables (i.e., what I expect you to do and what I will grade you on) are (1) producing an annotated bibliography of relevant articles, with the annonations being one-paragraph or so descriptions of the articles that could be of use to those interested in further study, and (2) leading a 20-35 minute class discussion on your topic. (This might involve your doing a proof on the board or otherwise presenting some information for 10-15 minutes, and then having a discussion about a reading that you'd assigned.) A reasonable approach might look like this:

  • By the beginning of week 3: Pick a topic.
  • By the beginning of week 4: Complete background reading and other groundwork and track down secondary readings from the library/Summit/etc as necessary.
  • By the beginning of week 5: Complete secondary readings, write your anotated bibliography, and draft the outline of your presentation.
  • By the beginning of week 6: Finish the outline of your presentation, determine the readings you’ll assign, and meet with me to discuss your plan.
  • By the beginning of week 7: Put the finishing touches on everything and be ready to go!

Below are some ideas and leads in the area of pharmaceuticals; I'm sure there are lots that I'm leaving out. Pick a topic that looks interesting to you and then email me to let me know what it is. First come, first served.

Pharmaceuticals and the developing world. Interesting issues here include (1) intellectual property issues, e.g., should poor countries be able to make AIDS drugs for their people without paying royalties? [Laura B]; (2)the potential for rich countries to boost demand for drugs that deal with malaria and other diseases that primarly affect the developing world [Andrew]; (3) what the Gates Foundation, PATH, and other governmental and non-governmental organizations are doing [Kathyrn]; and (4) pharmaceuticals in free trade agreements [Will] A good place to start is Michael Kremer, "Pharmaceuticals and the Developing World", Journal of Economic Perspectives 16(4): 67-90 (2002). This article is not available on JSTOR (because of the moving window), but I have put a PDF in the Course Documents section of Blackboard. A less-academic take comes from Tina Rosenberg, Look at Brazil, New York Times, January 28, 2001. (The cover of the NYT Magazine teases this article as "How to Solve the World's AIDS Crisis".) You can get this article from the link above, although I wouldn't be surprised if it doesn't work. (If it doesn't, use the link to Academic Universe from the library webpage and do a guided search. Ask me if you need more help.)

Pharmaceutical pricing in the developed world. Here's a curious fact for you: it turns out that when brand-name prescription drugs go off-patent, meaning that other companies can make generic versions, the company making the brand-name drug often raises its price. What's going on there? [Spencer] And while we're at it: Are drugs really cheaper in Canada or Europe than in the U.S.? [Jill] And how do HMOs use drug formularies to bargain with manufacturers? (For that matter, how do HMOs decide which drugs to cover?) [Jeremy] And how does the CPI (Consumer Price Index, a measure of inflation) deal with prescription drugs? [Brett] Two good articles to start out with (both in the Course Documents section of Blackboard) are (1) Ernst R. Berndt, "Pharmaceuticals in U.S. Health Care: Determinants of Quantity and Price", Journal of Economic Perspectives, 16(4):45-66 (2002) and (2) Nancy T. Gallini, "The Economics of Patents: Lessons from Recent U.S. Patent Reform", Journal of Economic Perspectives, 16(2):131-154 (2002).

Pharmaceutical research in the U.S. Is the FDA approval process too strict? [Bill] Is it good to have fewer restrictions for the development of "orphan drugs" that are targeted at rare diseases (or, as Victor Fuchs puts it, is that like subsidizing guard rails on roads that are very seldom traveled in order to prevent the "rare accident")? [Keith] Are patent lengths too long, too short, just right? [Quincy] What are the implications of the saying that "if aspirin cured cancer, drug companies wouldn't care"? [Suraya]

Pharmaceutical companies: life-saving heroes or blood-sucking corporate criminals? Interesting issues here include the structure of the pharmaceutical industry, the extent of monopoly power in that industry, and the question of whether or not big pharma generates big profits. For the blood-sucking viewpoint, you could do worse than to start with Marcia Angell (former editor in chief of the New England J of Medicine), The Truth About the Drug Companies, New York Review of Books, July 15, 2004. (I have a hard copy that includes some pictures of evil that you can't see online; she also has a new book out by the same title.) [Julia] For the life-saving heroes viewpoint, you might start with the argument that "normal" profit calculations overstate the rate of return for pharmaceuticals because of the treatment of their R+D expenses; this is discussed on pp. 362-63 of the text, which references a book called Competitive Strategies in the Pharmaceutical Industry that you can get through Summit. (Ask me how to do this if you don't know.) [Rusty's got the extra-normal profits part of this; Katie's also going to work on this.]

The Medicare drug bill. This was passed by Congress and signed by President Bush last year, and it's going to cost over half a trillion dollars over the next ten years, so it would be great if we at least understood it. Do we have a volunteer to explain it to the rest of us? Side bonus: There's more political intrigue in this topic than you can shake a stick at: a House vote held open for 3 hours while the President did some late-night arm-twisting, a bribery attempt (or maybe not?), the gagging of Medicare's chief actuary, who wanted to tell Congress that the bill would cost substantially more than the $395 billion White House estimate...what more could you want? [Laura M. Also, Grant is going to look at John Kerry's health plan...]

The economics of antibiotic resistance. This is a brand-new field of study, pioneered by UW professor Gardner Brown and his dissertation student Ramanan Laxminarayan (both of whom sometimes respond to my emails :) A good place to start is the book that Ramanan edited (Battling Resistance to Antibiotics and Pesticides: An Economic Approach, RFF Press, 2002), which you can find in Penrose. I think this is a pretty mathematical topic, but the book will tell you for sure. [Derek]

The benefits of pharmaceuticals. The costs of pharmaceuticals are fairly easy to calculate, but what do we know about the benefit side? Of particular interest here might be the recent research (mentioned in the article from The Economist, pp. 9-12) showing that statins actually do extend life expectancies. ("This finding appears to overturn the convention wisdom that the value of medical spending is questionable, and to vindicate the vast sums poured into health care.") A good place to start here would be the book cited in the article: David M. Cutler, Your Money or Your Life: Strong Medicine for America's Health Care System (2004). This book is available in Penrose, or I can lend you my copy. (It's a good read.) [Shawnee's got this one, but there's probably room for someone else.]

Debates

Listed with pro v. con teams

Topic #1 (Laura B/Jesse v. Quincy/Rusty on Monday, November 29): Resolved, that the state of Washington prohibit smoking inside buildings and vehicles open to the public and places of employment. [Note: This was the subject of an attempted initiative to the people in 2004 (Initiative 890), and the specifics of that initiative should be the focal point here. The principal impact of the measure would be to prohibit smoking in bars and restaurants.]

Topic #2 (Laura M/Suraya v. Bill/Derek on Wednesday, December 1): Resolved, that the United States should adopt the Kerry/Edwards plan for catastrophic coverage as a step towards a government-centered health care system such as Canada’s single-payer system.

Topic #3 (Grant/Keith v. Julia/Shawnee on Monday, December 6): Resolved, that the United States should adopt the Bush/Cheney plan for Medical Savings Accounts (MSAs) as a step towards an individual-centered health care system.

Topic #4 (Spencer/Andrew v. Kathryn/Will on Wednesday, December 8): Resolved, that the United States should make prescription drugs significantly more affordable for third-world countries by changing patent laws, international treaties, and/or providing subsidies.

Topic #5 (Brett/Katie v. Jill/Jeremy on Monday, December 13 at 9am): Resolved, that the United States should take steps to significantly reduce the rate of growth of Medicare spending. [Note: According to the Social Security and Medicare Board of Trustees, Medicare current consumes 2.7% of GDP; this figure is projected to increase to almost 14% of GDP in 2078.]

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