Boston University Questrom School of Business
HM820: Strategy, Economics, & Policy in the Health Sector
Instructor | Professor Jim Rebitzer. |
Contact Info: | Office: HAR 637A. 6173837356 (cell). jim.rebitzer@gmail.com (email). Office hours: Prior to class on Wed. from 5-6pm in Hariri 637A. Or by appointment at this zoom link or via meeting ID: 949 0962 5215 |
TA: | Christina Zoldak. cezoldak@bu.edu (email). Office hours by appointment at above zoom link. |
Class Location | Har 406 Wed. 6:30-9:15pm |
Course Description, Objectives, and Competencies
Description
We live in an extraordinary time for the U.S. healthcare system. The health sector accounts for nearly a fifth of the US economy, and revolutionary new treatments regularly produce miraculous results. At the same time, nobody in the health sector seems very happy about things. High healthcare prices and expenditures burden private and public budgets. The combination of high costs and poor public policy makes easy access to good care problematic. Rigid government bureaucracies and large dominant firms introduce political and economic barriers to improving the system. There is even a creeping concern that technology is not delivering what it could. The evolution of the cell phones we carry in our pockets demonstrates that innovation can improve quality while prices fall. Why doesn’t healthcare also get better and cheaper?
The opportunities and problems in the health sector can be overwhelming. Students can better navigate this complexity by learning to apply a few simple economic ideas.
Objectives
The course's primary objectives are:
- To introduce the key economic ideas for understanding the health sector
- To practice applying these ideas to the important strategic, financial, and policy issues faced by payers, providers, policymakers, and innovators.
The specific economic ideas we cover are (1) moral hazard in groups, (2) adverse selection, (3) principal-agent relationships, (4) market power and rent-seeking behaviors, and (5) returns on long-lived investments.
Although the objectives of this course emphasize economic ideas and reasoning, this is not an economics course. Our focus is on providing analytical tools to help students build better careers for themselves and better strategies for their organizations. For those interested in public policy, the economic issues we discuss also offer insights into building a better healthcare system.
Competencies
This course addresses the following core competencies of the Health Sector Management Program and the Questrom School of Business MBA:
- Critical and analytical thinking
- An understanding of the breadth and complexity of the health sector
- Strategies and execution in either health services delivery or life sciences
Prerequisites
HM703 or permission of the instructor. Taking part in the Health Sector Management Program and having experience in the health sector are both useful but not required.
Course Pedagogy
This is a class for managers, not Ph.D. economists. Each session will present cutting-edge theoretical ideas and original empirical research, but our emphasis is on decision-making, strategy, and policy. We will use group discussions, debate, prediction exercises, and other methods to help you hone essential skills for conceiving, persuading others, and implementing effective strategies.
Healthcare is one of those areas where scientific and academic studies are highly relevant for management and policy. Health sector managers, therefore, need to develop some ability to interpret scientific and academic findings. For this reason, each week’s class will include a set of academic studies.
Trigger warning: most of these papers, while useful, are too technical and “mathy” to read in their entirety. Do not be discouraged by this! I will present the key tables, graphs, or other results in class, and we will use these findings to inform our discussions. Over time you might also find the academic studies growing on you. If so, I am happy to have offline or after-class discussions that dive into the original papers in more detail.
I do not expect you to read the studies before class, and we will point out the key takeaways from these studies in class discussion. To test your own understanding of the material, I suggest trying to use the key takeaways discussed in class to answer the discussion questions listed after each class session (see the end of the syllabus for these questions). It may also help to scan the abstract and introduction to relevant academic studies. For this reason, all studies are available on Blackboard.
Course Materials
The course relies on academic research papers and articles from the popular press. The academic research papers often include details beyond the course's scope, so we will only focus on key takeaways from each academic paper in class. Students who have questions about any one study are encouraged to read the original paper, which will be available on the course's Blackboard site.
Preparing for Class and Class Etiquette
Because we will have laptops and phones in the classroom, you may be tempted to surf the web, look at social media, or otherwise distract yourself during class. Distraction is one of the current technological era's core economic and social issues. Out of respect for your education and for your peers, I ask that you resist this temptation. Learning to resist distraction is a key professional skill these days. Allowing yourself to get distracted is unprofessional and will significantly diminish the benefits and enjoyment you get from the class.
Performance Evaluation
- Class participation: 25%
- Exams:
Class Participation
Class participation is assessed in two ways. First, we will track your contributions in class. Secondly, we will assess the quality of your answers to the “exit ticket” questions at the end of each class. The exit ticket can be accessed in this google form. These questions ask you to write briefly about questions raised, key takeaways, or other reflections from class. Answering these questions is optional, but they are a potentially valuable learning tool and a meaningful way to participate in class. Whether or not you fill out the reflection questions, you must submit an exit ticket form on the day of the class for participation credit.
Some of you may have to miss classes because of COVID (or for other reasons). If you have to miss class, please let me know. The best way to make up for missed classes is by having classmates take notes for you and watching the class echo capture video. Please contact the TA or me if you need extra explanations for missed classes.
I hope that students will not miss any classes. Before COVID, I had a rule that students are allowed to be absent for one full session or two half sessions. I still hold to that rule as an aspiration. Also, absences for religious reasons, as defined by BU and Massachusetts state law, will not affect students’ final grades.
Effective classes, however, must also be safe classes. Absent some biomedical miracle in vaccines or viral evolution, I will wear a mask during class this semester. To help us all stay healthy, you might also consider wearing a mask. Whether or not you choose to do so, please follow the COVID guidelines that BU issues carefully. The latest information is here.
Exams
This course requires students to learn complex concepts and tools. We will have two exams to assess that students have absorbed the course’s key insights.
Group Project
Students will work in groups to develop a novel business strategy.
The strategy may be based on a new entrant to the ACA marketplace, Medicare Advantage, or the Medicare Part D market; a change in how an incumbent healthcare provider operates; a change in how an incumbent device-or-drug manufacturer operates; a new pharmaceutical benefits manager; a new technology that could improve outcomes or lower costs; or another type of new entrant into the healthcare sector. The choice of topic is yours, so you can pick a part of the health sector on which you would like to focus. The deliverables for this project are a short presentation to the class on the last day and an accompanying slide deck. More details will be provided once we form groups.
To help me get to know you and also to help me form good groups, please fill out this survey of your background and interests.
Accommodations for Special Needs
We support accommodations for students with special needs. Any student who needs or thinks they need academic accommodations must contact the Office of Disability Services and arrange a confidential appointment with a staff member. Accommodation letters must be delivered to me promptly (if possible, at least two weeks before any major examination). Accommodations are not permitted without an official letter of accommodation.
Diversity, Respect, and Professionalism
Understanding the health sector requires sensitivity to ethics, identity, and culture. We are a very diverse student body, and one of the strengths of a BU education is sharing our varied personal experiences and perspectives—especially as they relate to the course content. Even when we disagree with one another, we have a shared responsibility as classmates and professionals to keep the class environment open to and respectful of diverse experiences and perspectives. Sexual harassment, on or off campus, contradicts these values and violates BU policies.[1]
Academic Misconduct:
Questrom defines academic misconduct as follows:
Academic misconduct is conduct by which a student misrepresents his or her academic accomplishments or impedes other students’ opportunities of being judged fairly for their academic work. Knowingly allowing others to represent your work as their own is as serious an offense as submitting another’s work as your own.
We take academic misconduct seriously and expect students in HM820 to uphold this standard.
Sessions and Topics
Each class session is organized around issues of concern for management and policy. Here is the schedule of class topics, along with relevant economic ideas and readings. Please do the readings before each class.
In addition to readings, the syllabus lists several academic studies relevant to each class. I do not expect you to read the studies before class. A good test of your understanding after each class is to see if you can use the class discussion to form your own answers to the questions presented in the syllabus for each class session. Some students will also want to scan the abstract, introduction, or key tables/figures from these studies. They are all available on Blackboard.
REMEMBER: To help me get to know you and also to help me form good groups, please fill out this survey of your background and interests.
Strategy, Economics, and Policy in the Health Sector
Session | Dates | Subject |
1 | 1/25 | Does Health Insurance Make You Healthier? Economic Value and Health Insurance - Golden et. al. “Health Insurance and Mortality: Experimental Evidence From Taxpayer Outreach” Quarterly Journal of Economics, 2021.
- Miller et. al. “Medicaid and Mortality…” Quarterly Journal of Economics
- Does health insurance make you healthier? Why does this question matter? Why is this question hard to answer?
- Does health insurance create economic value? How do you know?
- How is economic value in the health sector measured? How is this measure of value similar to or different from other sectors?
- Analyze the sources of economic value in health insurance.
- Explain what economic value means. Explain its strengths and limitations when applied to the health sector.
- Contrast measures of economic value in the health sector with other sectors.
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2 | 2/1 | Insurance Design and The Problem of Moral Hazard - Chandra, Amitabh, Jonathan Gruber, and Robin McKnight. “Patient cost-sharing and hospitalization offsets in the elderly." American Economic Review 100.1 (2010): 193-213.
- Dafny, Leemore, Christopher Ody, and Matt Schmitt. “When discounts raise costs: the effect of copay coupons on generic utilization." American Economic Journal: Economic Policy 9.2 (2017): 91-123.
- Chandra, Amitabh, Evan Flack, Ziad Obermeyer. “The Health Costs of Cost-Sharing” NBER Working Paper No 28439
- Why do insurers charge deductibles, copays, and coinsurance? What are their advantages and disadvantages?
- How much should ordinary people be forced to spend on healthcare?
- How much should insured consumers have to pay out of pocket for the anti-obesity drugs described by Eric Topol? What do drug coupons do in this context?
- Explain the economic concept of moral hazard.
- Analyze how the moral hazard problem shapes commercial insurers' business model.
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3 | 2/8 | Insurance Markets and the Problem of Selection - “Which to Choose: Medicare or Medicare Advantage?” New York Times. Here or here
- Cooper, Alicia L., and Amal N. Trivedi. “Fitness memberships and favorable selection in Medicare Advantage plans.” New England Journal of Medicine 366.2 (2012): 150-157.
- Oster, Emily, et al. “Genetic adverse selection: Evidence from long-term care insurance and Huntington disease.” Journal of Public Economics 94.11-12 (2010): 1041-1050.
- Given the description of traditional Medicare and Medicare Advantage, which sort of patient will select which plan? What implications does this have for the costs of the two programs?
- From an economic perspective, who are the “right” people for commercial insurers to insure?
- Given the problem of adverse selection, will commercial insurance markets insure the right people?
- Given the problem of adverse selection, will Medicare Advantage Programs insure the right people?
- Why do some insurance plans cover gym memberships? Why do insurers have “open enrollment” periods?
- Explain the economic concept of adverse selection.
- Analyze how the problem of adverse selection influences markets for commercial and public insurance.
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4 | 2/15 | Paying Providers 1: Fee for Service and The Problem of Misaligned Incentives - Rebitzer, James B. “Misaligned Incentives: Principal-Agent Problems in Healthcare.” Teaching memo.
- Curto, Vilsa et al. “Health Care Spending and Utilization in Public and Private Medicare” American Economic Journal: Applied Economics 2019 11(2):302-332.
- Clemens, Jeffrey and Joshua D. Gottlieb. “Do Physicians’ Financial Incentives Affect Medical Treatment and Patient Health?” American Economic Review, 2014 104(4) 1320-1349.
- Johnson, Erin M., and M. Marit Rehavi. “Physicians treating physicians: Information and incentives in childbirth.” American Economic Journal: Economic Policy 8.1 (2016): 115-41.
- Why is health care spending per enrollee lower in Medicare Advantage than Traditional Medicare? Does this necessarily reflect misaligned incentives in fee-for-service Medicare?
- Clemens and Gottlieb find that a 2 percent increase in Medicare payment rates leads to a 3 percent increase in care provision. Does this suggest a misaligned incentive problem?
- Do the Johnson et.al. findings on pregnancy suggest a principal-agent problem? A misaligned incentives problem?
- Explain the economics of principal-agent relationships.
- Analyze the alignment of incentives with value creation in traditional Medicare’s fee-for-service payment system.
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5 | 2/22 | Paying Providers 2: Alternative Strategies for Reimbursing Providers - Geruso, Michael and Timothy Layton. 2020. "Upcoding: Evidence from Medicare on Squishy Risk Adjustment" The Journal of Political Economy, 128(3): 984-1026.
- Frandsen, Brigham and James B. Rebitzer. 2014. "Structuring Incentives within Accountable Care Organizations" Journal of Law, Economics, and Organization.
- Gaynor, Martin; James B Rebitzer; Lowell J Taylor. “Physician Incentives in Health Maintenance Organizations”. Journal of Political Economy, August 2024 pg. 915
- Why does Medicare Advantage risk adjust capitated payments to providers?
- Is upcoding in Medicare Advantage a real phenomenon? Is it good or bad for the healthcare system? How might payers or regulators respond to upcoding?
- Every economic transaction must be concerned with quality. Is assessing quality especially hard in healthcare? Explain your answer.
- How effective are Accountable Care Organizations likely to be in controlling costs while preserving care quality?
- What are the pros and cons of group incentive schemes in healthcare.
- Explain how the three sources of incentive misalignment we discuss manifest in healthcare: multi-task problems, incentive misalignment, and noisy performance measures
- Analyze managerial and policy responses to each of these sources of misalignment.
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6 | 3/1 | Midterm Exam |
| 3/4 to 3/12 | No Classes: Spring Break |
7 | 3/15 | Incentives for Innovation 1: Patents and Drug Prices - Conti, Rena et. al. “Infused Chemotherapy Use in the Elderly After Patent Expiration” J Oncol Pract. 2012 May;8(3 Suppl):e18s-23s.
- Howard, David H. et. al “Pricing in the Market for Anticancer Drugs” Journal of Economic Perspectives, 29(1), 2015.
- “The Price of Sovalidi and Its Impact on the U.S. Healthcare system” Senate Report on the pricing of Sovaldi here .
- Cunningham, Colleen, Florian Ederer, and Song Ma. 2019. "Killer Acquisitions" Washington Center for Equitable Growth Working Paper Series.
- Kremer et. al. “Advance Market Commitments: Insights from Theory and Experience” AEA Papers and Proceedings 2020
- The paper by Howard et. al. finds that the price of new on-patent cancer drugs are high and rising. Why are the prices for patented drugs high? Why are they rising over time?
- According to Conti et. al., what effect does entry of a generic drug after patent expiration have on the utilization of a branded drug? What does this result suggest about the value of patent protection to a drug maker? What does this result suggest about the effect of patents on the static and dynamic efficiency of health care?
- Two newly developed drugs treat the same disease. A different company holds the patent to each. Is it a profitable strategy for one company to buy the other and “kill” the competing drug?
- Nobel Laureate Richard Thaler suggests in the podcast that ethical considerations cause drug makers to exercise forbearance in pricing their drugs. This is why, as he puts it “it is easier to profit from a cure for baldness than a vaccine for a deadly disease.” In contrast, a recent congressional report found that in pricing its breakthrough hepatitis C drug, Sovaldi, “Gilead set a price as high as it thought acceptable before significant access restrictions would be imposed” [2] Can these views be reconciled? As a practical matter, can drug makers separate the economics of price setting from the ethics?
- What are advance market commitments? Under what circumstances are they good policy?
- Apply the economic model of monopoly pricing to the problem of price-setting for a patented drug.
- Assess the strengths and limitations of this model of drug pricing.
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8 | 3/22 | Incentives for Innovation 2: Why Not Better and Cheaper? - Guest Speaker: Robert Rebitzer. Manatt Consulting
- Readings
- Rebitzer, James B. and Robert S. Rebitzer “Introduction and Overview,” from Chapter 1 of Why Not Better and Cheaper? Healthcare and Innovation.
- Rebitzer, James B. and Robert S. Rebitzer. “Dilemmas and Opportunities,” from Chapter 7 of Why Not Better and Cheaper?
- Budish, Eric, Benjamin N. Roin, and Heidi Williams. 2015. "Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials" American Economic Review, 105(7): 2044-2085.
- A mechanical engineer discovers a way to reduce the need for knee replacements by teaching obese patients to walk differently. Is this cost-reducing invention likely to be profitable?
- The cell phones in your pockets illustrate that technological innovation outside the health sector makes products better and cheaper. Does this pattern generally hold for innovation in the health sector?
- Describe the incentives for innovation created by patents. Using examples, analyze when these incentives align with value creation and when they are misaligned.
- The odds of developing a successful cure are better for treatments focused on early-stage cancer than late-stage cancer. Will the patent system push drug makers to invest more in drugs for early or late-stage cancer?
- Explain how incentives, social norms, and competition influence the direction of innovation in the U.S. health sector.
- Explain the strengths and weaknesses of patents as a system for stimulating innovation.
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9 | 3/29 | Incentives for Innovation 3: Cost Effectiveness and Technology Adoption - Speaker: Mark Fleissner, PhD and Questrom MBA. Launching New Drugs
- Readings
- Chandra, Amitabh and Jonathan Skinner, “Technology Growth and Expenditure Growth in Health Care” Journal of Economic Literature 2012 50(3) 645-680.
- McCabe, Christopher, Karl Claxton, and Anthony J. Culyer. “The NICE Cost-Effectiveness Threshold” PharmacoEconomics, 2008;
- Can patent buyouts by the government create economic value over and above the value created by the patented innovation itself?
- Does health insurance (commercial or public) influence incentives to develop new medical technologies?
- Chandra and Skinner analyze prescribing decisions and technology utilization. They focus on two types of technologies. Type 1 technologies (which are clearly beneficial for almost all who use them) and Type 2 technologies (which are clearly beneficial for only a fraction of the folks who use them and have small and variable benefits for others). What are examples of Type 1 and Type 2 technologies?
- In the U.S., the FDA determines which drugs are safe and effective, but individual physicians largely control which of these are used by their patients. In the U.K. things are different. A state agency (NICE) calculates the average cost-effectiveness of technologies, and it will not cover treatments whose cost-effectiveness is below a threshold.
- How will this difference in physician decision rights influence technology adoption? How will this difference influence innovation incentives?
- How should NICE set the threshold?
- Compare the UK and US approaches to technology adoption.
- Analyze the economic consequences of these two national approaches to technology adoption and future innovation.
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10 | 4/5 | Incentives for Innovation 3.5: Alternatives to Patents +
Physician Salaries and Human Capital Investments
- Chen, Pauline “The Gulf Between Doctors and Nurse Practitioners” New York Times, June 27 2013.
- Outterson, Kevin, et al. “Repairing the Broken Market for Antibiotic Innovation” Health Affairs 34, no. 2 (2015).
- Kremer, Michael “Patent Buyouts: A Mechanism for Encouraging Innovation,” The Quarterly Journal of Economics, 1998, 112(4)
- Gottlieb et. al. Who Values Human Capitalists’ Human Capital? Healthcare Spending and Physician Earnings. July 27, 2020
- Chan, David C. and Yiqun Chen. “The Productivity of Professions: Evidence from the Emergency Department.” NBER WP 30608, October 2022.
- Our medical system relies on effective antibiotics, but drug-resistant bugs are evolving. In this environment, is the invention of a new type of antibiotic likely to be profitable?
- What is a subscription pricing model for drugs? What are its advantages and disadvantages?
- What are the advantages and disadvantages of auctions relative to patents in creating innovation incentives?
- Why are doctors paid so much? Why do they earn more than other professions? Why do they earn more in the U.S. than in other countries?
- According to the economic model of human capital, how much should doctors be paid?
- To what extent can providers substitute mid-level providers for physicians?
- Minute Clinics are an innovative, low-cost way of delivering retail medical care. According to Galperin, how did physician organizations respond to Minute Clinics? Why were Minute Clinics started by pharmacies not doctors’ practices or hospitals?
- How does Medicare set its fees? What role do costs play? What role do influence activities play?
- Explain the tradeoff between static and dynamic efficiency in the patent system.
- Understand how Kremer’s patent buyout proposal alters this tradeoff?
- Explain the human capital model and critically assess its usefulness for understanding why physicians are highly paid.
- Explain the economic concept of rent-seeking and critically assess its usefulness for understanding why physicians are highly paid.
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11 | 4/12 | Rent Seeking 1: Supply of Physicians, Fee Setting in Medicare, Minute Clinics
Second half of class is for work on your project. I am available for meetings as well.
- Chan, David C and Dickstein, Michael J. “Industry Input in Policy Making: Evidence from Medicare” The Quarterly Journal of Economics, Vol. 134, August 2019, p. 1299-1342.
- Galperin, Roman V. 2020 “Organization Powers: Contested Innovation and Loss of Professional Jurisdiction in the Case of Retail Medicine” Organizational Science, 31(2): 508-534
- Minute Clinics are an innovative, low-cost way of delivering retail medical care. According to Galperin, how did physician organizations respond to Minute Clinics? Why were Minute Clinics started by pharmacies, not doctors’ practices or hospitals?
- How does Medicare set its fees? What role do costs play? What role do influence activities play?
- Explain the economic concept of rent-seeking.
- Critically assess the role of rent-seeking in explaining why physicians are highly paid.
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| 4/19 | No Class: Monday Schedule |
12 | 4/26 | Group Presentations - Design a new business opportunity in the health sector - perhaps inspired by ideas from this class.
- Evaluate your proposals using ideas from this class.
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13 | 5/3 | Rent Seeking 2: Mergers and “confusopolies” Review of Class and Final Class Evaluation. - Cooper, Zack et. al. “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured” The Quarterly Journal of Economics 134.1 (2018): 51-107.
- Dafny, Leemore, Mark Duggan and Subramaniam Ramanarayanan, 2012. “Paying a Premium on Your Premium? Consolidation in the US Health Insurance Industry, American Economic Review, 102(2): 1161-85.
- Rosenthal, Jaime A, Xin Lu and Peter Cram. “Availability of Consumer Prices from US Hospitals for a Common Surgical Procedure.” JAMA Internal Medicine 173.6 (2013): 427-432
- Hospital mergers create market power and possibilities for more efficient integration. Based on the Boston Globe article on Mass General Brigham, did the merger do much to promote efficiency enhancing integration of operations?
- What effect is the merger of Mass General and Brigham likely to have had on prices? On value creation? On profits?
- Did the merger of Mass General and Brigham likely create economic value by creating a countervailing power to Blue Cross Blue-Shield’s market power in insurance markets?
- The New York Times and Wall Street Journal articles illustrates how hospitals create “shopping problems” because their prices are not transparent. What effect do these shopping problems have on prices, value creation, and profits?
- What are policy responses to the problems created by horizontal mergers? What are policy responses to the shopping problem?
- Use the economic ideas of market power and bargaining power to assess the effect of horizontal mergers on prices, profits, and economic value.
- Explain how the lack of price transparency creates search frictions that benefit sellers.
- Explain the economic significance of search frictions for prices, value creation, and profits for insurers and hospitals.
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| 5/10 | Final Exam: Har 406 6-8pm |