Economics of Heart DiseaseCost-Effectiveness, Moral Hazard and Price Elasticity of Demand

Matthew Schumaecker, MD, MBAAssistant Professor of Medicine

VTC School of Medicine

Objectives

• Receive a brief introduction to the basics of health economics

• Understand the concept of cost-effectiveness and learn some cardiac-related examples

• Understand the concept of price elasticity of demand and how it affects the consumption of health products and services

• Understand the economic concept of moral hazard and ways to avoid it in performing tests/procedures

How much do we spend?

How do we compare?

One Perspective

What do we get for this?

What do we get for this?

On the other hand…

Organisation for Economic Cooperation and Development

Cost of Cardiovascular Disease

• $444 billion spent in 2010 for– Heart conditions– Stroke– Peripheral artery disease– Hypertension

• This accounts of 1/6th of all medical expenditures in the US

Cost of Cardiovascular Disease

• Spending increases at CAGR of 5.7%• At the same time, diabetes and cancer have

increased at 8.5% and 7.3%• Spending on research represents only 1% of

total costs

Why so much?

• Free(ish) market system allows patient to choose primary/preventative care.

• Federal law (EMTALA) forbids healthcare organizations from turning away patients based on inability to pay.

• Price inelasticity allows providers to set prices as high as possible. (Reimbursements are another story)

Who pays for this?

• Private insurers• Medicare (Patients > 65 years or on disability)• Medicaid (financially disadvantaged)• Individuals (for uncovered expenses, copays,

co-insurance and those who are uninsured)• Health care providers

Who really pays for this?

You Do!!!

Demand for Cardiology Services

• Projected to grow 20% by 2025• WHY?

– Every day for the next 19 years, 10,000 baby boomers will reach age 65 (Pew)

– People are surviving heart attacks at much higher rates and living longer with congestive heart failure

– Not only is incidence going up, so is prevalence

Supply of Cardiologists

• 10% of cardiologists will retire in the next 10 years (MedAxiom)

• Fellowship training programs are more expensive as new ones are not federally subsidized

• In the 90’s it was felt that there were too many specialists and training spots decreased

• There are currently about 4,200 open positions for cardiologists

Cost Effectiveness of Healthcare

• What do you get per $ spent?

The Numerator: Cost

• Direct costs:– Medicines– Staff– Transport

• Productivity costs:– Loss of productivity

• Intangible costs:– Pain, suffering

• Opportunity cost:– Inability to use resources for another need

The Denominator: QALY

• QALY = Quality adjusted life-year• 1 QALY = (1 year of life x 1 Utility Value)• i.e., 1 year of life saved but bedridden may be

worth 0.5 QALY’s

Determining QALY Weighting

• “Time trade off” – remaining in a state of ill health for a long period of time or living in perfect health for a shorter period of time

• “Standard Gamble” choice between remaining in ill health for a period of time or undergoing an intervention that could kill patient

• “Visual analogue scale” rank health from 1-100

Debate about QALY

• Assigns a dollar value to a year of human life• Underlying assumptions are not universally

recognized– QOL should be measured consistently– Life years and QOL should be considered

independently

Example: Cost-effectiveness of ICD

• Multiple trials (MADIT, SCD-HeFT) have shown that patients with LVEF < 40% live longer with ICD placement than without

Another Example: Statins

Circulation.2011; 124: 146-153

Another Example: Drug Eluting Stents

Moral Hazard

• A situation where one party is more likely to take financial risk because the resulting cost will not be born by the party taking the risk

Moral Hazard Example:The Patient

John Smith is employed and has excellent health care coverage. He does not go to the doctor regularly or pay particular attention to his health. He figures that if something goes wrong, he will deal with it at that time. Besides, there is no cost for him to go to the doctor or Emergency room whenever he needs to

Moral Hazard Example:The Doctor

Dr. Jones is a cardiologist who is seeing a young woman with chest pain. The chest pain does not seem even remotely cardiac in origin. However, he orders a stress test and an echocardiogram because he “wants to be complete” and protect himself from legal action. Besides, he will make quite a bit of money from these two procedures.

Moral Hazard Ex

Price Elasticity of Demand

Examples

Elastic Demand• Apples• Rice• Movie tickets

Inelastic Demand• Gasoline• Electricity

Elasticity and its Relationship to Healthcare

• Primary/Preventative services and pharmacy benefits tend to be more elastic because there is no immediate perceived benefit and there is an immediate loss of money.

• Emergency services tend to be more inelastic because the need is urgent, the perceived benefit is immediate and the loss of money is usually transferred (at least in part) to a third party

http://www.rand.org/content/dam/rand/pubs/monograph_reports/2005/MR1355.pdf

Effect of Insurance

• Theoretically, a fully insured individual should demonstrate a low price elasticity of demand. This has been demonstrated in VA studies

• However, with co-pays and co-insurances, this price elasticity should increase.

http://www.rand.org/content/dam/rand/pubs/monograph_reports/2005/MR1355.pdf

Price Elasticity of Cardiac Services

• There is almost no information available about this.

• As heart issues are deemed to be potentially life threatening, it is assumed that demand for cardiac services is almost completely inelastic.

• However taking a cholesterol pill may be different than getting a heart transplant.

Case Studies

• Analyze the following vignettes and discuss if and how cost effectiveness, moral hazard and price elasticity of demand come into play.

Case Study #1

• Mr B is a 74 year old who had a heart attack when he was 70 years old and now has mild congestive heart failure. He also has stage III colon cancer that has undergone treatment and now appears to be in remission.

• His ejection fraction (EF) is found to be 30% and his cardiologist recommended the implantation of an ICD

• He underwent the procedure successfully without complication

Case Study #2

• Ms. L is a 28 year old who works at a fast food restaurant. She had had health insurance but when premiums went up by $100, she dropped her coverage.

• She smokes cigarettes and is moderately obese• One night she woke up with terrible chest pain and went to

the ED.• She was admitted to the chest pain center. Lab tests were

drawn for heart attack, and she underwent stress testing the next day

• Everything turned out okay• 4 weeks later, Ms. L gets a bill from the hospital for $17,600