Health Economics

Topic Objective

• Critically discuss health economics and financial management as applied to hospital environment.

Content • 1. Discuss and elaborate on health economics

and clinical research.• 2. Critically discuss on clinical economics and

clinical decision making.• 3. Discuss and elaborate on corporate and

business finance.• 4. Elaborate health care accounting and

budgeting.• 5. Discuss and elaborate on performance

measurement; clinical and nonclinical.

1. Discuss and elaborate on health economics and clinical

research

.• The evolution of the discipline of

economic evaluation in health care shows that clinicians must play a decisive role if we are to achieve the target of having a more efficient health service.

• Interventions are not efficient or inefficient per se, their efficiency is determined when they are used in clinical practice.

• Even if the practice of personalized medicine may seem challenged by ethical issues, social and individual value judgments are not mutually exclusive.

• Health economics is not the end of clinical freedom but the start of it. Doctors take up a central position in the health care system and they may contribute to finding the right balance between clinical freedom and social responsibility..

• The pressure for health care systems to provide more resource-intensive health care and newer, more costly therapies is significant, despite limited health care budgets.

• It is not surprising, then, that demonstration that a new therapy is effective is no longer sufficient to ensure that it can be used in practice within publicly funded health care systems.

• The impact of the therapy on health care costs is also important and considered by decision makers, who must decide whether scarce resources should be invested in providing a new therapy.

• The impact of a therapy on both clinical benefits and costs can be estimated simultaneously using economic evaluation, the strengths and limitations of which are discussed.

• When planning a clinical trial, important economic outcomes can often be collected alongside the clinical outcome data, enabling consideration of the impact of the therapy on overall resource use, thus enabling performance of an economic evaluation, if appropriate.

Introducing Health Economics

• Economics, Health and Health Economics

• Key Economic Concepts• Exercise• Seminar Allocation

Economics, Health and Health Economics

1. What is “Economics”?2. What is “Health”?3. What is “Health Economics”?

What is “Economics”?

Economics is …• concerned with money?

• the same as accountancy?

• only practised by economists?

• objective?

Economics in a nutshell

• Resources are scarce• What we “want” is unlimited• Therefore involves “choice”• Max. bens/min. resources = efficiency

Pessimist: bottle ½ empty

Optimist: bottle ½ full

Economist: bottle ½ wasted

inefficient!

Economics and Money

ECONOMICS = costs (resource use)

benefits

choice

efficiency

MONEY = store of value

means of exchange

Economics Accountancy

ECONOMICS = costs (resource use)

benefits

choice

efficiencyACCOUNTANCY = monitor of financial

transactions

Only Economists Practice Economics?

ECONOMICS = costs (resource use)benefitsCHOICEefficiency

Weigh-up relative benefits of each course of action and choose the action which maximises well-being.

Economics Objective

All decisions are based on subjective value judgements.Economics makes these explicit.

Topic Versus Discipline

TOPIC = area of studyDISCIPLINE = conceptual apparatusHealth economics is the discipline of economics applied to the topic of health.

What is “Health”?

World Health Organisation:Health is a “state of complete physical, mental and social well-being“Health Economics” is often “Health Care” Economics.

Task of Economics

Descriptive = quantificationPredictive = identify impact of changeEvaluative = relative preference over

situations

What is health

• Health is a multifaceted concept and not easily measurable.

• WHO definition:– Health is a state of complete physical and mental

well-being and not merely the absence of disease or infirmity (WHO, 1948)

• Refer to peoples’ health status (how healthy they are).

What is health

• Important part of human capital– Human capital: value of learning, experience and

ability embodied in workers which increases productivity and income.

– Asset: accumulates and depreciates

• Individual or households can improve their health through use of health care, diet ..– Production of health

• Health Production Functions• Determinants of health

What is health care?

Definition: The prevention, treatment, and management of illness and the preservation of mental and physical well-being through the services offered by the medical and allied health professions.

What is health care?• Important difference between health and

health care– Health care can be traded on the market but

health cannot.

• Demand health care to improve our health– Demand for Health Care

• Health care markets differ from markets for other commodities – Role for Government

Roots of health economicsEmerged as a sub discipline of economics in

the1960s with the publication of two important paper:

1. Kenneth Arrow (1963) “Uncertainty and Welfare Economics of Medical Care” The American Economic Review.

2. Mark Pauly (1968) “The Economics of Moral Hazard: Comment” The American Economic Review.

• Concerned with the health market not with health or health status.

What is health economics?

1. Health economics is the study of how (scarce) resources are allocated to and within the health economy.

• Production of health care (doctors, specialists, or nurses).

• How do we distribute health care across the population?– Based on who can pay or who needs it or

some combination.• How much money should the government spend

on health care?

What is health economics?

2. Demonstrates the magnitude and importance of the health sector

e.g. How fast it might be growing and why3. What makes it different from other markets

and how our analysis may need to adjust4. Models the determinants of health status

and looks and how government policy might improve health status in short and long run

Why is it important?

1. The size of the health economy is large and growing

2. Role of government in the health care markets3. Health care market is difference from other

markets4. Externalities

Why is it important?1. Health economy is large and growing

Figure 1-1 US Health Expenditures Shares, 1960-2003

0

2

4

6

8

10

12

14

16

1960 1965 1970 1975 1980 1985 1990 1995 2000Year

Ex

pe

nd

itu

res

as

a %

of

GD

P

Source: Organization for Economic Cooperation and Development, Health Data 2005.

The size of US health economy• GDP: The market value of final goods and

services produced within the borders of a country in a year.

• 1980s: Rise in shares– Increase in insurance coverage and FFS system– Introduction of more market based policies

• 1990s: Expenditures flattens out– Managed care introduced

• Could just be an decrease in the denominator.

National US Spending on Health Care

Year NHE Growth % GDP

1960 36.7 5.1

1970 73.1 10.6 7.0

1980 245.8 12.9 8.8

1990 696.0 11.0 12.0

1995 990.3 7.3 13.4

2000 1310.0 7.0 13.4

2006* 2077.5 7.3 16.0

Per Capita

Nominal Real

143 483

348 897

1067 1295

2,738 2095

3,698 2427

4,672 2713

6,830 N.A.(In billions of dollars); * = projectionNumerator is increasing

NHE = National Health Expenditures

Out-of-Pocket and Federal Expenditures -Table 1-5 FSG

Total Out-of- Third Federal

Pocket % Party % %

1960 25.0 12.9 52 12.1 48 2.2 9

1970 67.3 25.1 37 42.2 62 15.6 23

1980 233.5 58.2 25 175.2 75 66.1 28

1990 669.6 137.1 20 532.3 80 181.9 27

2003 1614.2 230.5 14 1384 86 507.5 31

(In billions of dollars)

Medical care prices (CPI), 1960-2004

1960 1980 2004

ALL

Hospital services

Presc. drugs

Personal Consumption, 2001

Food and Tobacco 15.3

Housing 14.3

Medical Care 18.2

Hospital and nursing 7.3

Transportation 11.4

Household Operation 10.7

Recreation 8.5

Clothing 5.9

Other 15.6Source: FSG Table 1.2

Personal Expenditures

• Medical care is the largest category. – Most of this is for hospitals/nursing homes– Need to think how policy affects this category

• Uninsured go to emergency rooms

• In 1960 food was 25%, housing 15%, and medical care 5%.

• There has been a big shift in spending patterns. May represent a richer society.

Personal Expenditures

What have we not accounted for in personal expenditures?

• Opportunity cost of your own time – Time spent caring for sick or disabled– Decreased with more spent on nursing home?– Very important in developing countries

US compared to OECD countries

Table 1-1: health expenditures % GDP, OECD• Health expenditures grew rapidly between

1960-1980 for most countries.

• Rates continued to rise in1990s in US.

• US is the biggest spender. – Twice as much as the UK (national health

insurance).

Questions for you to think about

1. Why do you think health care spending is higher in the US than in other countries?

2. Is the fact that the US population spends more per capita on health care than people in any other developed country evidence of a failure of the US system?



2. Role of government in the health care markets

Role of Government

Participate because of market failures• Demand side

– Provision of insurance– Effort to affect health behavior

• Supply side– Price controls– Restriction of entry/exit– Subsidize research– Tax policy

and much more …

US health care spending, 2003Government is 45 % of total health spending

Source: DHHS, http://www.cms.hhs.gov/statistics/nhe/historical/chart.asp

Percent of health care expenditure

60%

40%

20%

80%

Private Federal State and local



2. Role of government in the health care markets3. Medical Market is difference from other

markets

How is the medical care market different from other markets?

1. Presence of Uncertainty• Demand is irregular and uncertain

– Accidents, can you deny someone lifesaving care if they don’t have the money?


• Supply–hard to understand the product– Asymmetric information

When we are sick we don’t understand the treatment we need and must trust our doctor in their diagnosis.

– Different doctors may suggest different treatments due to uncertainty of outcome.

– Hard to judge qualityGovernments establish licensing requirements to

ensure minimum level of quality


2. Prominence of Insurance– People buy insurance to cover themselves

against the risk of illness.– With third party financing most of the cost of

medical care, individuals are insulated from the full cost of the care they receive.

– Demand for medical care may rise if you don’t pay the full cost.

– Treatment recommendations are adjusted to insurance status.


3. Large role of not-for-profit providers– Economists usually assume firms maximize

profits.– There are many not-for-profit hospitals (85%).

How should economists model their behavior?

4. Role of equity and need– Belief that people ought to get health care

whether or not they can afford it. – Economists need to take this feature of the

good into consideration.



2. Role of government in the health care markets3. Medical Market is difference from other

markets4. Externalities

Externalities• Communicable disease

– A disease that is transmitted through direct contact with an infected individual or indirectly through a vector (e.g. mosquito).

– Significant reduction in their spread account for much of the improvement in health in developed countries• Malaria, TB, vaccine preventable diseases

– Still a significant problem in less developed countries

Externalities

• Individual behaviors (smoking, over eating)– Direct impact on health of person and others– Impacts the cost of health

• premiums –i.e. lung cancer

– Impact on demand for health care

Cause of death

14

4843

77

99

0

10

20

30

40

50

60

70

80

90

Devel oped R egi ons Devel opi ng R egi ons

P er c ent

Communicable Non-communicable Injuries

Source: http://ucatlas.ucsc.edu/health.php

Causes of Death in US, 2000

Source: Mokdad et al, 2004

Activities for MN candidates

What questions do health economics ask?

• What role should the government play in health?

• What health care investments should a developing country make?

• What advertising should be banned?• What is the optimal design for health

insurance?• Why has health care become so expensive?

What questions do health economics ask?

• Does health care early in childhood lead to improved cognition and higher incomes in the future?

• Have Medicare and Medicaid increased utilization and improved health outcomes?

• Do different methods of doctor payment change quality of care, outcomes or costs?

2. Critically discuss on clinical economics and clinical decision making.

• .

3. Discuss and elaborate on corporate and business finance

4. Elaborate health care accounting and budgeting.

5. Discuss and elaborate on performance measurement; clinical and nonclinical

Cost Analysis in Healthcare

DR Kithsiri EdirisingheMBBS , MSc, MD ( Medical Administration )

Managing Director, International Institute of Health Sciences ,

Green Healthcare Pvt Ltd

1. Overview to cost analysis in healthcare

2. Identification of cost centers 3. Allocation of cost to relevant cost

centers 4. Assignment on cost centers

Objectives of Today's presentation

• In a world of limited resources, those that are allocated to the health sector cannot be allocated to other services such as education, transport and environmental protection.

• Reducing health costs and improving the health of the population by setting up a more effective health network are strategic moves for a country that wishes to increase the efficiency of the health system.

• Economic analysis of health systems are complex and the related indicators are difficult to measure, such as quality of care and health status in line with financial data that are often more precise and of limited comparability.

Source : Brailer & Van Horn, 1993

Cost Analysis of Healthcare services

Reading – books

• Cost Analysis Of Primary Health Care ; W.H.O. Creese, A. &

Parker, D. (1994) • Analysis of hospital costs: a manual for managers; W.H.O.

Shepard, D.S., Hodgkin,D., Anthony,Y.(2000):

• Public Hospitals in Developing countries, Kutzin, J. and

Barnum, H. ,1993

• Costing Health Services, Jones. I.R.(1998)

• Health Economics in Developing countries, Witter, S. ,Ensor,

T.. Jowett, M. & Thomson, R. (2000)

Reading – Research in Sri Lanka

• De Silva, A.H., (1992) Cost Analysis of Patient Care At The Lady Ridgway

Hospital For Children;

• Samarasinghe, D. & Akin,J.S. (1995) Health strategy and financing study

in Sri Lanka;

• De Silva,A. Dlpatadu, K.C.S. Samarage, S.M.& Das, A.M. (1997)

Assessment of the prospects of paying wards in government hospitals as

complementary financing for Hospitals

• Edirisinghe,K (2002), Cost Analysis of Hospital Services , District Hospital

Dompe;

Significance of Cost Information

A vital a management tool for

1. Planning

– Forecasting & Budgeting

– Allocation of funds

– Prioritize interventions

2. Monitoring

– Assess accountability

– Measure efficiency

– Measure effectiveness

Within programmes and between .

1. Accountability

– To asses how much has been spent and what is the effect and the

finances available to the manager

– As controlling monitory system as a that finances are spent as intended.

2. Assessing efficiency

– The unit cost can be compared within the organizational units or with

other similar units of local or international cost profiles.

3. Assessing effectiveness - Cost effective analysis / Cost benefit analysis /

Cost utility analysis

.

Significance of Health Cost Information

4. Assessing equity

– Good indicator in a district to asses equity when compared with other

districts and national figures.

5. Assessing priorities

– Future Health care cost can be assed for by policy making and planning

6. Considering cost recovery

– in health reforms such as User fees, social insurance, public private

mix services

7. Management information system

– Dynamic environment this is the most vital tool

– Source : Creese, A. & Parker, D. (1994), Cost Analysis Of Primary Health Care ; W.H.O

Methods of Cost analysis

1. Classification by Input cost data – the resource inputs are calculated in relation to service

provision or output. – Ex : Cost of OPD care , Inward care etc. – This is the best method due to the intangibility of

healthcare services 2. Classification by Function / Activity

– Asses the cost of each activity or function– Ex : Cost per tetanus toxoid in an antenatal clinic.– Ex : Cost per training programme

Methods of Cost analysis

3. Classification by level of health care provision

– National, Provincial, Divisional & local etc.

4. Classification by source of funding

- National or Provincial.

5. Classification by currency

- local or foreign.Source : Creese.A, Parker D.( 1994 ) :Cost Analysis Of Primary Health Care ; W.H.O.

Fundamental rules in cost analysis in Healthcare

1. The cost must be relevant to the particular situation.

2. The cost categories must not overlap (avoid repetition of cost )

3. The cost categories chosen must cover all possibilities.

4. Assumptions made for unavailable data must be realistic.

Unit Cost Analysis

Unit Costing – using input cost data

1. Study the service units in the hospital

2. Identification of Service units that are Key

Result Areas

– KRAs – Wards , Critical care , Out door care

3. Categorization of cost centers as :

– Directly related services of the each unit

• Clinical services of wards

– Indirectly related services of the unit that are common

to other units as well

• Utility

• Administration

• Supportive units -

Utility cost • Diet – (Patients / Staff)

• Linen and laundry

• Sanitation

– Waste disposal –STP / incineration

– Water supply

– Ward cleaning

• Landscaping- The laborers according to a roster prepared by the overseer perform this task.

• Communication- Telephone and the postal services

• Ambulance service

• Security

Administrative services • Medical Administration

– Quality and risk management

• General administration, establishment functions &

supervising functions.

• Financial management.

• Management of Drug supplies.

• Medical records

Supportive units

• Investigation units • Blood bank • Medical records• Sterilization

Unit Costing – using input cost data

4. Define the costs centers and costs

– EX . Inward patient care - Summation of costs of all

wards

5. Define the unit of measurement

– Monthly cost in rupees

– EX. Total Inward care cost for a month in RS.

( Total cost of all wards per month )

6. Calculate for each cost center – Man power cost – Equipment cost – Supplies – Cost of the infrastructure

7. Define capital and recurrent cost for each: – Man power cost

• Capital – initial training • Recurrent

– Direct - monthly salary – Indirect – hourly cost

– Equipment cost • Medical / non medical • Capital

– Depreciation of the purchased cost /replacement cost

• Recurrent – maintenance cost– Supplies cost or month – Power – Watt Hours & cost

» Watts per hour X cost of watt hour

– Supplies • Retail price of the supplies • medical / non medical

– Cost of the Infrastructure • Capital - depreciated price / monthly rental ( per

SQFT) of the building or the cost separately the land price and depreciated value of the building

• Recurrent – Electricity , water , maintenance &other

• Allocate the cost to cost centre per month – Directly related cost – Indirectly related cost

• Calculate the unit cost per month

8. Allocation of cost in to Cost Centers– Directly related cost – Indirectly related

Cost approximation & Allocation to a cost centre

• Realistic , simple & logical assumption • Indirectly related cost – By number of tests– Number patients – Number of hours spent

9. Calculation of Monthly unit cost

Unit cost of patient care = Consolidated cost items of the respective cost centre

Total inpatient days / patient visits / number of tests of the cost center

Private sector Healthcare costs

Important indices needed for cost analysis in Private hospitals

1. Census 2. Revenue 3. Service charge /taxations4. Cost of sales 5. Manpower cost 6. Administrative expenses

1. Patient census

• Revenue driven by census • IPD

– Adult / Paediatric /Nursery / General wards / special

Avg. Daily Inpatient Census = Patient Days / 30.4 In-Patient census = Avg. length of stay x No. of admissions

• OPD– GP/ Specialist Clinics/ A&E - Number of visits

2. Revenue

• Census – IPD/ OPD

• Utilization – Labor/OT/ICU/ Dialysis/NICU

• Ancillary Services – Utilization– Lab/Physio/Eye/Audimetry/EEG/Cardiology/Xary/

MRI…..etc.

• Sales of Medicines and Consumables– Pharmacy

3. Economic Service Charge

• Economic Service Charge – 1 0.25% of Gross Revenue

4. Cost of Sales

Service Margin• Room Services 70%• Procedures (OR) 70% • Medical Supplies 30% • Pharmacy 18% • Radiology 75% • Laboratory 70%• Physiotherapy 90% • Others 85%

5. Manpower Cost

• Total Number of Employees per department & cost • EPF & ETF • Staff Benefit cost

– Provident Fund – Contribution – Gratuity – Health/P.A Insurance – Housing For nurses – Travel / Car Allowance Uniforms/Shoes Training/CME

Programs Bonus Overtime Others Benefits/Basic Pay

6. Administrative cost

• Contract services • Utilities and tanked water • Insurance • Communications • Office supplies• Repair & Maintenance • Traveling and entrainment• Marketing

• IT Related Expenses – software / hardware

• Provision for Doubtful Debt 0.25% of Gross Revenue

• Stock Adjustment/Write Off

• Depreciation Buildings 5.0% Equipment 12.5%

• Others

Others

• Credit Card Commission • Bank Commission and Charges Donations • Rent-Equipment• Rent-House • Rent-Motor Vehicles• Legal Fees - Trade Related / Non-Trade Related • Prof.Fee-Non Advisory Miscellaneous Expenses • Audit Fees • Management fee • Accreditation

Importance of Financial management

• Capital intensive - infrastructure , equipments

• High Labour intensive – high cost

• Obedience of Doctors for

finance policies & other

relation with suppliers

• Part time HR & its effects

• Lack of qualified Medical

administrators

• Equipments – Depreciation of equipments in

3 to 5 years – Rarely reach break even level– High obsolescence rate

• New regulations

• High risk in the service levels

• Unpredictability in the

demand levels

1. Profit is the end result of long chain of management process

2. Profit is a rate of return to the investor

3. Profit is the essence of many financial transactions

4. It should be clearly planned , implemented and monitored and evaluated

5. In true sense of a market economy profit can make organization healthy

and but should not draw “Sick “ to the “Graveyard “

End is profit

Important financial measurements of the hospitals

• Financial objectives are achieved through – Increase revenue – Reduce current expenses – Managing current assets – Managing current liabilities

• Monitoring the achievement is essential though the financial measurement of the hospital

Important financial measurements of the hospitals

1. Average length of stay 2. Age of the plant 3. Bad debts 4. Case mix 5. Free patient ratio 6. Competition 7. Debt utilization 8. Intensive care index 9. Ownership 10. Labor yield

11. Occupancy

12. Days sales outstanding

13. Inventory turnover

14. Current ratio

15. Profitability ratio

16. Pre-tax profit to sales

17. Pre- tax profit to investment

Financial measurements of the hospitals

1. Average Length of Stay

• Revenue of proportional to the average number the patient stay in the hospital

• High revenue in first 48 hours and gradually decline

• End up in just a room rent • Faster turnover of patients = efficient asset

utilization • Ideal ALS = 3 days max. 06 days

• Older equipments / hospital – lower depreciation – lower operating costs – higher profitability compared to a new hospital

• Dominate market with low cost structure • But older equipments/ hospitals needed

replacement , servicing , frequent breakdown and higher maintenance cost

2. Age of the plant

• Sound credit policy to avoid :– Investment cost of funding – Over due of payment of loans – Cost of bad receivables – Average length of the receivables

3. Bad debts

• Average revenue per patient day • Average revenue per bed day• Average profitability per patient or bed day • All these will differe with case mix

– Cardiac / Maternity / General surgical / medical / Pediatric/ Eye / ENT /

• Case mix index ( CMI)• Ratio of High value cases / low value cases• Profitability may vary even with 100% occupied hospitalTherefore the most important indicator is the CMICompare CMI / ALS/ OCCUPANCY RATE with Financial Results

4. Case Mix Index

• Hospitals making profits can do many things to upgrade its

market share , hence to dominate in the competition

– Opening a cardiac centre in a nursing home

• Hospital at breakeven state and working below breakeven

level are very vulnerable to competition

• Therefore new hospital should establish in areas where other

competitors are at Break even stage or below

4. Competition

• Higher the debt / equity ratio , higher the risk for the hospital

• Young hospitals debt is a killer in the first few years, due

increase operational cost in first few years

• Hospital working above break even stage should go debt for

expansion

5. Debt Utilization

• Intensive care beds will give more revues and profits

• Ratio of Intensive care patient days / total inpatient days is a

very good indicator

• Higher the ICPD/ TIPD better hospital performance

6. Intensive Care index

• Hospital ownership directly affects its efficiency

• Proprietorship organizations are better than corporate and other ownerships

• Personal attention • Centralized decision making • High level of control over operationsDerden's vs, Asiri

7. Ownership

• Hospital HR cost 40%• Salaries are proportional to skill possessed by

the employee• Yield could be measured

– Revenue per employee ( MO in the OPD)– Profit per employee– Patient days per employeeIf these ratios are high good HR management & vice

versa

8. Labour Yield

• More revenues from IPD than OPD• IPD/ OPD Higher the ratio higher the

performance• Very high level may indicate high referrals and

may a risky

9. IPD /OPD mix

• Indication of the capacity utilization of the hospital through its beds

• Actual number of patient bed days / available patient bed days for the calendar year

• Case mix index needed to be considered

10. Occupancy

• Measure of control • Check on the quality of the accounts

reversible's • Higher ratio = over due accounts• Overdue accounts – bad debt losses-

collection of expenses- tie-up funds• This will lead to short term liquidity problem

11. Day Sales outstanding

• Second largest cost • Make various items available • Maintain the minimum stock hence the cost • More stocks

– Carrying cost – Storage of material and pilferage – Unnecessary investment

• Ratio of sales /stocks is good indicator • Higher the ratio higher the efficiency of the operations

12. Inventory Turnover

• Ratio of current asset / current liabilities ,the traditional belief is 2: 1 is good

• Idea is to make the assets could be made cash before liabilities mature

• This along is not enough – This should be supported by days sales outstanding, inventory

turnover ratio, amount in cash in total current assets – These will together determine the liquidity position of the hospital

13. Current ratio

• Measure of control • Check on the quality of the accounts

reversible's • Higher ratio = over due accounts• Overdue accounts – bad debt losses-

collection of expenses- tie-up funds• This will lead to short term liquidity problem

14. Day Sales outstanding

• Pre tax profit / Sales• Pre tax profit/ Investment 1. Pre tax profit / Sales• How well the organization has managed its costs and

generated revenues • Controlled Sales are exogenous and market determinant • Cost are endogenous and controlled by the management• This is a very good indicator of performance of the

management


2. Pre tax profit / Investment • How well the organization has utilized its facilities and

investment during a given period • Can study with the occupancy rates and case mix index • They tend be higher in profitable organizations


Thank you!

Few definitions in Health Costs

• Fixed costs

– Cost that are does not change with the volume of out put

• Rent , Security , Janitorial

• Variable costs

– Cost that are directly related volume of output and vary significantly

• Drugs, Supplies , food

• Semi-variable costs

– Cost that does not change immediately with volume but change after

some time

• Staff cost

Few definitions in Health Costs

• Total cost of production

– Fixed cost + Variable cost + semi variable cost

Measuring Health Cost performance

Cost Effective Analysis• Cost effectiveness analysis is defined as “the ratio of net

change in the health care cost to the ratio of net change in health care outcomes.

CFA = Net change in healthcare cost / Net change in healthcare outcomes

• EX: Anti-malaria programme – Healthcare total cost before the programme intervention

= X – Healthcare total cost after programme intervention = Y – Patient outcomes health

• number of cases / deaths of malaria averted N • number of life years gained by health care programs M

• Ratio of net change in cost = X – Y• Ratio of net change in outcomes = N or M• CEA = X – Y / N or M

Cost utility analysis

• This is a similar to cost effectiveness analysis but it considers the alternative strategies to improve the quality of life as well as morbidity.

• Net change in health outcomes = Disability adjusted life years ( DALY) is taken as a measure and compared between alternative strategies for intervention !

Source : Witter, S. ,Ensor, T.. Jowett, M. & Thomson, R. (2000) Health Economics in Developing countries

Cost benefit analysis

• This is more expanded version than cost effectiveness analysis. Here the monetary values of benefits of a project are compared with monetary costs of the project. It enables comparisons between projects and is vital in decision-making.

• Project cost Vs Project outcomes Source : Jones, .I.R. (1998): Costing Health Services

Thank You !

Health Economics

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