900 words Reflection Paper on these two chapters.

CHAPTER 3
DEMAND FOR HEALTH:
THE GROSSMAN MODEL

Bhattacharya, Hyde and Tu – Health Economics

Intro
Previously…
Demand for health care is downward sloping
People choose amount of health care they receive based on price
People choose their health care, but do they choose their own health?
Is health something that happens to us? Or do we choose it?
We use the Grossman model to explore this question

Bhattacharya, Hyde and Tu – Health Economics

The 3 Roles of Health (H)
Health plays three roles in the Grossman model:
A consumption good
An input into production
A form of stock/capital (an investment)

Health as a consumption good

Bhattacharya, Hyde and Tu – Health Economics

Health as a direct input into utility
Health as a consumption good enters directly into utility
Single-period Utility at time t
Ut= U(Ht, Zt)
Ht = level of health
Zt= “home good”
Everything non-health that contributes to utility
E.g. video games, time with friends, movie tickets
**Note: health ≠ health care
Health care is not explicitly in the utility function
i.e. Getting vaccines does not provide utility but staying healthy does
Health as a consumption good

Bhattacharya, Hyde and Tu – Health Economics

Time constraints in the Grossman model
In a single period, there are only 24 hours in a day to contribute to your utility:
Θ = 24 = TW + TZ + TH + TS
Divide total time Θ between:
Working TW
Playing TZ
Improving health TH
Being sick TS
Health as a consumption good

Bhattacharya, Hyde and Tu – Health Economics

Time constraint means time tradeoffs
Time working TW produces income
Buy things that contribute to utility (H, Z) but need to spend time in those activities (TH, TZ)
Time sick TS does not increase utility
Every hour spent sick takes away time to do other utility-increasing activities (loss time)
Health as a consumption good

Bhattacharya, Hyde and Tu – Health Economics

The labor-leisure tradeoff
Given levels of TS and TH, individual chooses how to allocate time between work TW and play TZ.
Optimal point decides on indifference curves
When health improves, more productive time is available for use
Pushes time constraint outward (from U0 to U1)
Can reach higher utilities
Health as a consumption good

Health as an input into production

Bhattacharya, Hyde and Tu – Health Economics

The three roles of health (H)
Health plays three roles in the Grossman model:
A consumption good
An input into production
Of health (H)
Of productive time (TP)
A form of stock/capital (an investment)

Bhattacharya, Hyde and Tu – Health Economics

Producing H and Z
Both Health and Home good Z must be produced with time and market inputs

Ht = H (Ht-1, TtH, Mt)
Zt = Z (TtZ, Jt)
Mt= market inputs for health H
Ex: weights, treadmill

Jt= market inputs for home goods Z
Ex: video games, opera tickets

Today’s health Ht also depends on yesterday’s health Ht-1
This is health’s third role as a stock which we discuss later
Health as an input into production

Bhattacharya, Hyde and Tu – Health Economics

Health affects production by lowering TS
TP= Θ – TS = TW + TZ + TH
Healthier you are, the less time you spend sick
TP is productive time spent on useful activities
Increased productive time can be reinvested into health (TH) or other useful endeavors (TW, TZ)
Only way to reduce sick time (TS) is to improve health
Health as an input into production

Bhattacharya, Hyde and Tu – Health Economics

Production Possibility Frontier
Production Possibility Frontier (PPF): the possible combinations of H and Z attainable, given an individual’s budget and time constraints
Standard economic PPF shows H and Z as substitutes
Wrong! Why?

Maximum Z is minimum H
If individual is at minimum H, they are dead and cannot produce any Z
Health as an input into production
An INCORRECT PPF
Problem point

Bhattacharya, Hyde and Tu – Health Economics

PPF in the Grossman model
Point A
Hmin: no productive time
for work, play, or
improvement of health
Point B
“free-lunch zone”
Small improvements in health yield large increases in productive time; can increase Z without giving up H
Health as an input into production
A CORRECT PPF

Bhattacharya, Hyde and Tu – Health Economics

PPF in the Grossman model
Point C
Maximum Z possible
Can’t improve health without taking away Z
If try to increase Z by shifting resources, sick time will increase and outweigh gain in resources for Z
Increases in health will not produce extra time to offset time spent improving health
Health as an input into production
A CORRECT PPF

Bhattacharya, Hyde and Tu – Health Economics

PPF in the Grossman model
Point D
“tradeoff zone”
Increases in H only yield small decreases in sick time
Increases in H, takes away from Z

Point E
Spend all time and money on health
Ignores all home goods
Health as an input into production
A CORRECT PPF

Bhattacharya, Hyde and Tu – Health Economics

Choosing optimal H* and Z*
Someone who values both H and Z chooses a point between C and E in order to maximize their utility
Chooses point F
U2 is unattainable given PPF constraints
At U0, an individual can attain more utility
At F: U1 and PPF are tangent
H* and Z* are optimal levels of health and home goods
Health as an input into production

Bhattacharya, Hyde and Tu – Health Economics

Exotic preferences and indifference curves
If individual only cares about home goods (Z)
Horizontal indifference curves
H* and Z* at point C
Cares only about Health H
Cares only about home good Z
Health as an input into production
If individual only cares about Health
Vertical indifference curves
H* and Z* at point E

Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

The three roles of health (H)
Health plays three roles in the Grossman
Model:
A consumption good
An input into production
A form of stock/capital (an investment)

Bhattacharya, Hyde and Tu – Health Economics

Lifetime of utility
On any day, an individual considers not only today’s utility U(H0,Z0) but all future utility as well!

Health is a stock; some of it carries over each new period
Home good Z is a flow (it lasts for only 1 period)
δ = individual’s discount rate
A person values utility now more than in the future
Ω = individual’s lifespan (total number of periods)
Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

Health depreciates over time
Some of yesterday’s health lasts to today but not
all of it
Ht = H ( (1- γ)Ht-1, TtH, Mt )
γ = rate of depreciation
Recall:
Ht = health at time period t
Ht-1 = health from previous period
TtH = time spent on health in period t
Mt = market inputs for health (like checkups and prescription pills)
Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

MEC curve and investments in health
Marginal Efficiency of Capital (MEC) curve:
indicates how efficient
each unit of health capital
is in increasing lifetime
utility
When level of H is low, small investments have high returns to productive time
Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

Costs to investing in health
Opportunity cost
Forgoes putting money into other investments
r = interest rate of alternative market investment
Depreciation due to aging (γ)
Health must pay a return of at least r + γ
If return is less than
r + γ, then market return beats health investment return
H* = optimal amount of health
Marginal cost balances with marginal benefit of health investment
Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

Predictions of the Grossman model
The Grossman model helps explain why we
observe:
Better health among the educated
Declining health among the aging

Bhattacharya, Hyde and Tu – Health Economics

Health and education

Well-educated individuals are more efficient producers of health
College grads benefits more than a high school dropout.
Explanations?

Bhattacharya, Hyde and Tu – Health Economics

MEC and efficiency of health investment
Better educated are
more efficient at each
level of health
investment
MECC > MECH
H*C is higher than H*H
MECC = college graduate
MECH = high school dropout

Bhattacharya, Hyde and Tu – Health Economics

Predictions of the Grossman model
The Grossman model helps explain why we
observe:
Better health among the educated
Declining health among the aging

Bhattacharya, Hyde and Tu – Health Economics

Depreciation of health
Recall:
Ht = H ( (1- γ)Ht-1, TtH, Mt )
Depreciation γ is not constant
γ increases with age
As γ increases, costs
(r + γ) increase and it takes more resources to maintain same level of health
As a result of increasing depreciation γ over time, optimal health H* also declines over time!

Bhattacharya, Hyde and Tu – Health Economics

Optimal death in the Grossman model
Because of rising depreciation, there are better investments in the market than the individual’s health
H* eventually reaches Hmin
Why would anyone choose Hmin?
How is Hmin utility-maximizing?

Bhattacharya, Hyde and Tu – Health Economics

Conclusion
Is health something that happens to us or is chosen?
Grossman model says it is chosen
In fact, we even choose when we die
While that may seem far-fetched, Grossman model a useful tool for understanding the roles and tradeoffs of health
Next we use the Grossman model to understand empirical findings about the relationship between socioeconomic status and health

CHAPTER 4
SOCIOECONOMIC DISPARITIES IN HEALTH

Bhattacharya, Hyde and Tu – Health Economics

Intro
Previously…
Grossman model
Individuals make choices about their health based on time constraints, budget constraints, and utility
Optimal amount of health (H*) changes based on decisions about tradeoffs
How does socioeconomic status (SES) affect health and choices about health?
Does health determine SES? Or does SES determine health?
Use empirical evidence to explore these questions

The pervasiveness of health disparities

Bhattacharya, Hyde and Tu – Health Economics

Health disparities are everywhere
Health Disparity: (def) differences in health –incidence, prevalence, mortality, and burden of disease — between specific populations
ex: death rates for all cancer types for both men and women are highest among African Americans1
Ubiquitous worldwide across races, educational attainments, employment grades, and incomes
Broadly across all socioeconomic statuses (SES)

Bhattacharya, Hyde and Tu – Health Economics

Health disparities are everywhere
By education:
College graduates are 25% more likely to survive to age 68 than high school dropouts

By race:
Hispanics report better health status than black individuals
White individuals report better health then both Hispanic and black individuals
Health deteriorates with age across all races, but disparities persist

Bhattacharya, Hyde and Tu – Health Economics

Health disparities across income
Generally: high-income individuals self-report a higher health status than those of lower incomes
For most conditions, the poor exhibit more incidences of disease
Some exceptions like
Bronchitis — no difference
Hay fever — the rich appear to be diagnosed with hay fever more often
May be explainable if richer children visit the doctor more often and hence, are more likely to be diagnosed

Bhattacharya, Hyde and Tu – Health Economics

Disparities even with universal insurance
Even in countries with universal health insurance, health disparities persist

Canada:
Self-reported health status for children at high SES better than children of low SES (Currie and Stabile 2003)

England:
We discuss the Whitehall studies later

Theories to explain health disparities

Bhattacharya, Hyde and Tu – Health Economics

Why do health disparities exist?
Reasons/theories
Early life events
Income levels
Stress of being poor
Work capacity
Impatience
Adherence to medical advice
Policy importance of understanding causes of disparities before addressing them

Bhattacharya, Hyde and Tu – Health Economics

What causes what?
Does bad health cause low SES?
Does low SES cause bad health?
Are there other factors?

Bhattacharya, Hyde and Tu – Health Economics

Hypotheses for health disparities
Efficient producer
Thrifty phenotype
Direct income
Allostatic load
Income inequality
Access to care
Productive time
Time preference (The Fuchs hypothesis)

Bhattacharya, Hyde and Tu – Health Economics

The Grossman model and health disparities
Recall MEC indicates the return on each additional unit of health capital
Different SES groups may have different MECs
Why?
Each hypothesis posits a different reason

Bhattacharya, Hyde and Tu – Health Economics

The efficient producer hypothesis
Hypothesis: better-educated individuals are more efficient producers of health than less well-educated individuals
Grossman predicts that people who are more efficient health producers will have higher H*
Lleras-Muney (2005) find that an additional year of schooling caused ~1.7 year increase in life expectancy in 1920s US
Hence, education improves health
The efficient producer hypothesis

Bhattacharya, Hyde and Tu – Health Economics

Possible causal mechanisms
Possible reasons for positive correlation between health and education?
Lessons in school help students to take better care of themselves
Schooling helps students be more patient when it comes to payoffs of investments (like health)
Better-educated more likely to adhere to treatment regimens
The efficient producer hypothesis

Bhattacharya, Hyde and Tu – Health Economics

Thrifty phenotype hypothesis
Genetic reasons for being inefficient at producing health
Deprivation of resources (food) in utero and early childhood leads to activation of “thrifty” genes that are useful for sparse environmental conditions
These “thrifty” genes good for scarce environments but bad in conditions of abundance
More likely to develop diabetes, obesity, and other disorders later in life
Disparities arise because poorer individuals are more likely to have resource deprivation early in life
The thrifty phenotype hypothesis

Bhattacharya, Hyde and Tu – Health Economics

Thrifty phenotype hypothesis
Use natural experiments to test this hypothesis
A randomized experiment that randomly deprived some children in utero and not others would be pretty unethical!

Natural experiments use environmental shocks that naturally create control and treatment groups
Ex: earthquakes, famine, snowstorms

Good natural experiment eliminates selection bias
The thrifty phenotype hypothesis

Bhattacharya, Hyde and Tu – Health Economics

The Dutch famine study
Natural experiment: Dutch famine in WWII (Rosebloom et al. 2001)
Holland suffered a famine due to a German blockade of food
Created two baby groups:
Those in utero during famine
Those conceived after famine

Two groups are similar, except for in utero deprivation
So hopefully no selection bias!

Findings:
Babies in utero during famine had higher rates of diabetes and obesity in adulthood
The thrifty phenotype hypothesis

Bhattacharya, Hyde and Tu – Health Economics

The direct income hypothesis
Hypothesis: disparities exist because rich people have more resources to devote to health
Rich individuals have an expanded PPF because of extra financial resources
Expanded PPF = higher H* that can be obtained
The direct income hypothesis

Bhattacharya, Hyde and Tu – Health Economics

Allostatic load hypothesis
Hypothesis: Prolonged or repeated stress is unhealthy and can cause an increased rate of aging
In the Grossman model, aging is represented by rate of depreciation of health capital δ

High stress load leads to a higher δ
The allostatic load hypothesis

Bhattacharya, Hyde and Tu – Health Economics

The Whitehall study
Whitehall study by Marmot at al. (1978, 1991)
Compares health status of British civil servants
British civil servants relatively homogenous in background and share workplace environments
All British citizens have the same access to health care through the National Health Service
Findings:
Disease morbidity and mortality rates highest for low-grade civil servants
Low-grade civil servants reported more stressful work and home environments
The Allostatic Load Hypothesis

Bhattacharya, Hyde and Tu – Health Economics

Income inequality hypothesis
Hypothesis: Health disparities are caused by an unequal distribution of income
Related to the allostatic load hypothesis
More equal societies are less stressful and therefore healthier

Policy implications?
If theory is true then policy makers should aim at reducing inequality within a community
The health status of a society may decline even if average income rises if income becomes more concentrated
The Direct Income Hypothesis

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Bhattacharya, Hyde and Tu – Health Economics

Access to care hypothesis
Hypothesis: Those with high incomes can afford more generous health insurance compared to those of low income
But health disparities persist in countries with universal health insurance
Canadian youth (Currie and Stabile 2003)
British civil servants (Marmot et al. 1978, 1991)
both countries have equal access to health care!
The access to care hypothesis

Bhattacharya, Hyde and Tu – Health Economics

Productive time hypothesis
SES differences are caused by disparities in health
Bad health leads to lower productive time and therefore less time to produce income

Oreopoulos et al. (2008) and Black et al. (2007) study siblings growing up in same household
Those with worse health during infancy have higher mortality rates, lower educational achievement, and lower adult earnings
The productive time hypothesis

Bhattacharya, Hyde and Tu – Health Economics

The Fuchs hypothesis
Bad health does not cause low SES, and low SES does not cause bad health
A third factor – time preference — causes both!
Health and SES both determined by willingness to delay gratification
People who are willing to delay gratification are more willing to invest in things like education and health
People willing to delay gratification have high discount factors δ
The Fuchs hypothesis

Bhattacharya, Hyde and Tu – Health Economics

Conclusion
Each theory has supporting evidence and each can explain some socioeconomic health disparities
Key takeaways:
Better-educated people generally have better health even with the same resources
Health events early in life affect health into adulthood
Stress plays an important role in creating health disparities
Equalizing access to care does not eliminate health disparities
There is a two-way relationship between health and SES

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