Health Economics
Draft Syllabus for Economics 445
Spring, 2013

Instructor:  Edward Green,
Teaching Assistant:  Wiroy Shin,
Lectures:  TuTh 4:15–5:30 p.m., in 160 Willard
Office hours (Green):  F 1:30–2:30 p.m., in 415 Kern
Office hours (Shin):  Tu 1:30–3:30 p.m., in 505 Kern

Course Description

This course principally covers two topics.

The focus of the course reflects the following goals regarding an advanced course, intended particularly to serve economics majors.

  1. Equip students to think coherently and independently about some important issues of public policy.1
  2. Apply the analytical framework of the discipline, rather than being predominantly a descriptive survey of an industry or sector of the economy.
  3. Minimize duplication of other couses in Economics and other departments.2

The tentative plan is to cover the following list of specific topics and associated readings. This plan will be adjusted, if necessary, as the course progresses. Several further readings, as well as lecture notes by the instructor, may be provided.

PART I: Economics of health expenditure

Weeks 1–2 (01.08–01.17) Level and growth of income, health expenditure, public-health investment, life expectancy and mortality: cross-country and U.S. evidence

World Health Organization [26], World Health Organization [25], Organization for Economic Cooperation and Development [18], National Center for Health Statistics [15], National Center for Health Statistics [16]

Week 3 (01.22–01.24) Role of technical progress in extending life expectancy and explaining secular expenditure growth

Cutler and McClellan [9], Cutler and Miller [10] Smith et al. [22], Chernew and Newhouse [7]

Week 4 (01.29–01.31) The human-capital model of health expenditure

Keiding [13]

Week 5 (02.05–02.07) Value of life, with cost-benefit application to medical technology

Ashenfelter [3], Cutler and McClellan [9]

Week 6 (02.12–02.14) Formulating and calibrating an optimizing-decision model of health expenditure

Hall and Jones [11]

Week 7 (02.19–02.21) Measuring the price of healthcare

Newhouse [17], Smith [21], Aizcorbe and Nestoriak [2]

Week 8 (02.26–02.28) Discussion, paper assignment, and midterm exam

PART II: Economics of health insurance and finance

Weeks 9–11 (03.12–03.28) Expected utility, risk aversion, the welfare gain from insurance, moral hazard and adverse selection, insurance-market failure

Rothschild and Stiglitz [20], Breyer et al. [5], Lakdawalla and Sood [14]

Weeks 12–13 (04.02–04.11) The U.S. system of employment-based, tax-subsidized, health insurance

Kaiser Family Foundation and Health Research and Education Trust [12], Burman and Gruber [6] Sommers [24], Bhattacharya and Vogt [4]

Week 14 (04.16–04.18) The life-cycle-saving model, Ricardian equivalence, and finance of old people’s health expenditure

Social Security and Medicare Boards of Trustees [23], Aiyagari [1]

Week 15 (04.23–04.25) Time-consistent health insurance

Cochrane [8]

Course website, e-mail and communication

The course website is at

E-mail messages to the instructor and TA should be marked by beginning the subject line with ‘ECON 445’. The e-mail client will use this tag to filter the message to a separate folder for the course.

Please see the instructor if you have concerns or comments about the course. In special circumstances, you may contact the Director of Undergraduate Studies in Economics or provide feedback via a comment box that the Department maintains in 303 Kern.

Availability of course resources

The data and readings listed above are available on the Web (including the electronic resources facility of the PSU library).

A zip file of the course readings will be made available to registered students. If some further readings are assigned or recommended during the course, they will also be made available.

Many of the course readings are copyright-protected documents for which PSU has a site license. A student is responsible not to transfer or distribute (including by web posting) copyright-protected material, whether it is obtained from the PSU library or from the course website.

Calculus and computing

A few of the readings involve calculus. However, knowledge of calculus is not a prerequisite for this course. In most cases, calculus notation is used merely as a symbol for the slope of a line, and this fact is apparent from the accompanying verbal explanation in the text. In such a case, a student is expected to be able to reformulate the author’s argument as an informal, graphical argument regarding the slope. On the few occasions where an author makes more ambitious use of the calculus, students are not held responsible to understand the details.

Calibration of the demand model to be formulated in week 6 will involve studying and using (not writing) a computer program for numerical optimization. Prior programming experience is not necessary.

Various course-administration tasks (e.g., decrypting the readings) will also require computer programs to be run. Each student will need to install the Python (version 3) software on his or her computer. This is free—both open-source and available without charge—software. Links to download sites will be provided on the course website.

Books on microeconomics and health economics

There is no required textbook for this course.

A microeconomics textbook will be a useful reference. A recommended, open-access text, a section of which is the assigned reading for week 11, is R. Preston McAfee, Introduction to Economic Analysis.. Another, less technical textbook is David Friedman, Price Theory: An Intermediate Text.

Pauly et al. [19] is a collection of articles on various topics in health economics, written by distinguished researchers. While those articles were written for health professionals, their exposition should be accessible to students in this course.

Coursework and Grading

The course grade will be based on the average of grades on a midterm exam, a final exam, and a paper. (Letter grades will be converted to the usual numerical scale, and the mean of those numbers will be converted back to the student’s course grade.)

The paper will be on an assigned topic pertaining to the material in the first half of the course. The assignment tentatively will be made in week 8, a draft will be submitted in week 10, peer comments will be provided in week 12, and the final draft will be due in week 13. Each student will be responsible to provide peer reviews to several other students. It is expected that each student will take this responsibility seriously. A student who is negligent in this respect may incur a course-grade penalty.

Initial and final term-paper drafts, and take-home exams, will be submitted by e-mail. None of these submissions will be accepted late, and no exam may be postponed, unless there is a valid excuse as specified below. When a final term-paper draft has not been submitted on time, a grade for the paper will be assigned on the basis of the preliminary draft.

Academic Integrity

Students must observe the CLA policy regarding academic integrity, which also specifies the procedure to be followed when a student is charged with violating the policy. The student resource web page for this policy is\underscore resources.shtml.

Given that the grade in this course is based in part on a research paper, plagiarism is a major issue regarding academic integrity. You should follow the advice provided in “Understanding and avoiding plagiarism” on the student-resources webpage.

Your use of citations should be based on a common-sense standard. If you mention a fact that has been prominently discussed in class, and that is documented in a reading listed on this syllabus, or posted on the course website, then you do not need to provide a citation. In that case, there is common knowledge between the author and the audience (that is, between the student and the instructor) of the source. Otherwise, source material for a paper, either directly quoted or paraphrased, must be cited. When in doubt, cite.

Valid Excuses for Absence

During the course, many possible situations may arise that would result in your inability to attend class, attend exams, or perform at a minimally acceptable level during an examination. Illness or injury, family emergencies, certain University-approved curricular and extra-curricular activities, and religious holidays can be legitimate reasons to miss class or to be excused from a scheduled examination.

The Economics Department policy regarding absence, including the student’s responsibility to document an excuse, is found at\#valid.

Disability Access

The Pennsylvania State University encourages qualified people with disabilities to participate in its programs and activities and is committed to the policy that all people shall have equal access to programs, facilities, and admissions without regard to personal characteristics not related to ability, performance, or qualifications as determined by University policy or by state or federal authorities. A student who anticipate needings any type of accommodation in this course or has questions about physical access is responsible to confer with the instructor as soon as possible.


R. Aiyagari. Intergenerational linkages and government budget policies. Federal Reserve Bank of Minneapolis Quarterly Review, 11: 14–23, 1987.
A. Aizcorbe and N. Nestoriak. Changing mix of medical care services: Stylized facts and implications for price indexes. Technical report, Bureau of Economic Analysis, 2010.
O. Ashenfelter. Measuring the value of a statistical life: Problems and prospects. Economic Journal, 116: C10–C23, 2006.
J. Bhattacharya and W. B. Vogt. Employment and adverse selection in health insurance. Technical report, National Bureau of Economic Research, 2006.
F. Breyer, M. K. Bundorf, and M. V. Pauly. Health care spending risk, health insurance, and payment to health plans. In M. V. Pauly, T. G. Mcguire, and P. P. Barros, editors, Handbook of Health Economics, volume 2. Elsevier, 2011. URL
L. Burman and J. Gruber. Tax credits for health insurance. Technical report, Urban Institute, 2005.
M. E. Chernew and J. P. Newhouse. Health care spending growth. In M. V. Pauly, T. G. Mcguire, and P. P. Barros, editors, Handbook of Health Economics, volume 2. Elsevier, 2011. URL
J. Cochrane. Time-consistent health insurance. Journal of Political Economy, 103: 445–473, 1995.
D. Cutler and M. McClellan. Is technological change in medicine worth it? Health Affairs, 21: 11–29, 2001.
D. Cutler and G. Miller. The role of public health improvements in health advances: The 20th century U.S. Demography, 42: 1–22, 2005.
R. E. Hall and C. I. Jones. The value of life and the rise in health spending. Quarterly Journal of Economics, 122: 39–72, 2007.
Kaiser Family Foundation and Health Research and Education Trust. Employer health benefits: 2012 summary of findings, 2012.
H. Keiding. Demand behavior. In Theoretical Health Economics, chapter 4. unpublished, 2011. URL
D. Lakdawalla and N. Sood. Health insurance as a two-part pricing contract. Technical report, National Bureau of Economic Research, 2006.
National Center for Health Statistics. Health, United States, 2011. Centers for Disease Control, 2012a. URL
National Center for Health Statistics. Health data interactive, 2012b. URL
J. P. Newhouse. Medical care price indexes: Problems and opportunities. Technical report, National Bureau of Economic Research, 2001.
Organization for Economic Cooperation and Development. OECD health data 2012, frequently requested data, 2012. URL
M. V. Pauly, T. G. Mcguire, and P. P. Barros, editors. Handbook of Health Economics, volume 2. Elsevier, 2011. URL
M. Rothschild and J. Stiglitz. Equilibrium in competitive insurance markets: An essay on the economics of imperfect information. Quarterly Journal of Economics, 90: 629–649, 1976.
S. Smith. A new approach to price measures for health care. Survey of Current Business, 89: 17–20, 2009.
S. Smith, J. P. Newhouse, and M. S. Freeland. Income, insurance, and technology: Why does health spending outpace economic growth? Health Affairs, 28: 1276–84, 2009. doi: 10.1377/hlthaff.28.5.1276.
Social Security and Medicare Boards of Trustees. A summary of the 2012 annual social security and medicare trust fund reports, 2012.
B. Sommers. Who really pays for health insurance? the incidence of employer-provided health insurance with sticky nominal wages. International Journal of Health Care Finance and Economics, 5: 89–118, 2005.
World Health Organization. Global health observatory data repository, 2012a. URL
World Health Organization. World Health Statistics, 2012. World Health Organization, 2012b. URL \url{}.

Rapid growth of health expenditure and constrained availability of health insurance are widely regarded as being the most urgent U.S. health-policy issues today.
For example, topics such as the assessing the degree of market power of large pharmaceutical firms and considering how optimally to licence and regulate health care providers draw on economic principles taught in several Economics courses having to do with competition policy and regulation.

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