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Health Economics: An Overview

Abdur Razzaque SarkerMHE (Health Economics), MSS (Economics)

Health Economics and Financing Research GroupICDDR,B

andPhD Fellow in Strathclyde University, UK

Email: arazzaque@icddrb.org

What is Health Economics?Health Economics study areasPositive analysisNormative analysisFocus on some important issues

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By the end of this module you will be able to:

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Science about how best limited resources can be utilized to satisfy unlimited need on the basis of individuals’ or society’s own choice.

What is Economics?

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Science about how best limited resources (optimal) can be utilized to satisfy (unlimited) need of health on the basis of individuals’ or society’s own choice.

What is Health Economics?

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Health Economics, therefore, is the study of how scarce productive resources (health care and health) are allocated among alternative uses for the care of sickness and the promotion, maintenance and improvement of health.

What is Health Economics?

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Why Health Economics? Health economics is concerned with the formal analysis

of costs, benefits, management and consequences of health and health care

Interested in understanding demand and supply of health and health care, as well as issues of equity and efficiency.

To understanding where funding does and should come from.

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Country GDP per capita (Int$ 2005)

Life expectancy at birth

Health expenditure

As percentage of GDP

Per capita (Int$ 2005)

Nepal 1050.6 67.1 5.8 69.4Bangladesh 1286.0 66.6 3.4 47.7Pakistan 2369.0 66.9 2.6 62.7Vietnam 2682.0 74.6 7.2 210.7India 2993.3 64.1 4.2 131.7

Economic level, life expectancy and health expenditureSelected Asian Countries

Selected North American and European Countries

Country GDP per capita (Int$ 2005)

Life expectancy at birth

Health expenditure

As percentage of GDP Per capita (Int$ 2005)

USA 41,735 78.7 16.2 7410.0Italy 26,526 81.4 9.5 3027.0U.K. 31,985 80.1 9.3 3399.0Sweden 32,183 81.4 9.9 3690.0

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POSITIVE ANALYSISAims at explaining and predicting behaviour of individuals and organisations. For instance, how income and price of health input influence individuals consumption of health.

NORMATIVE ANALYSISAims at describing how the society should look like. For instance, application of ethical principle (Inequality, Inequity).

Economic analysis

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F. Health economic evaluations E. Market analysis

B. Determinants of health

A. Value of health

C. Demand for health care

D. Supply of health care

G. Health care organisation and financing

H. System level evaluation

Source: Culyer och Newhouse, 2000, Lindgren, 1993.

Study Areas in Health Economics

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A. Value of health

How health can be measured?

Examples: Quality adjusted life years Disability adjusted life years

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1,0

0,9

0,8

0,7

0,6

0,5

0,4

0,3

0,2

0,1

Death

Full health

0,0

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QALY weight

Sickness absence days

SexMen Women

18-24 yr

25-34 yr

35-44 yr

45-54 yr

55-64 yr

18-24 år

25-34 yr

35-44 yr

45-54 yr

55-64 yr

0 0.9112 0.9082 0.8950 0.9012 0.9267 0.8646 0.8903 0.8835 0.8711 0.8628

0-7 days

0.8941 0.8900 0.8776 0.8721 0.9027 0.8572 0.8764 0.8707 0.8482 0.8461

8-30 days

0.8458 0.8282 0.7990 0.7892 0.8503 0.8139 0.8203 0.8236 0.7898 0.7866

31-90 days

0.7354 0.7046 0.7221 0.7431 0.7525 0.6701 0.7153 0.7064 0.7128 0.7172

90-365 days

0.8283 0.5131 0.5710 0.6391 0.6998 0.6974 0.6184 0.6520 0.6064 0.6086

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B. Determinants of health

Some examples:

• Age• Gender• Social status• Education• Family condition• Environment• Social policy

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C. Demand for health care

Demand function for doctor’s visit= ƒ (price per visit, coinsurance rate, price of other goods, income, time price, health status, Age, education, …..)

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Other goods

Number of visits

Income Health condition Time-price Insurance

Demand curve

Healthy

Sick

Vf Vs V0 V1

OG

Factors that influence demand for health care

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Time-price

Cost Yr 2005 Yr 2006-----------------------------------------------------------------------------One hour 10 $ 10 $Visit fee 25 $ 30 $Travel 5 $ 5 $-----------------------------------------------------------------------------Total costs 40 $ 45 $Total nr visits 7 6-----------------------------------------------------------------------------

Total price elastricity = % change in nr visits/ % change in total price = - 1,5

Visit fee elasticity = % change in nr visits/ % change in visit fee = - 1,0

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Difference between Grossman’s and traditional approach to demand For health

1. It is not medical care per se that consumer wants, but rather health. Medical care demand is a derived demand for an input to produce health ( the demand for healthcare is derived from the demand of health)

2. The consumer does not merely purchase health passively from the market. Instead, the consumer produces it, spending time on health-improving efforts in addition to purchasing medical inputs.

3. Health lasts for more than one period. It does not depreciate instantly, and thus can be treated like the capital good that it is.

4. Health can be treated both as consumption and investment good.

Health care or health

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Initial health status

Investment in health

Depreciation of health

Uncertainty

Health capital

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Regression model for demand for health

Health = Constant + initial health status + investment in health + depreciation of health + uncertainty + error

Health = Constant + (father’s occupational status + etnicity)+ (education + physical excercise in leisure time) + age + indivdual’s occupational status + error

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D. Supply of health care

All that influence the production of health services that makes health better.

Some examples: Private/public health care Labour market for health professionals Waiting period Establishment of health centres Law (equity in health care)

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E. Market analysis

Production and consumption of health care in a non-regulated market.

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F. Health Economic evaluation

Cost of illness studies Cost-effectiveness analysis Cost-benefit analysis Cost-utility analysis

Decision rules for effective resource allocation

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Data Envelopment Analys (DEA)

Input-output in a hospital Input variables

Nr of doctorsNr of other health personnelsNr of beds

Output variablesNr of surgery Nr of out-patients Nr of in-patients

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In-patients

Out-patients

E

E´

O

E = EffectiveE´= Not effective Effectivitety measurement = OE´/OE

Health care Health care triangletriangle

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Citizen ProviderDelivery

Third-party insureror purchaser

Funding

Alloc

ation

Source: Reinhardt, 1990

G. Health care organisation and financing

Financing equationFinancing equation

TF + SI + UC + PI = P X Q= W X Z

TF = Sum of taxation SI = Social insurance contributions UC = Out of pocket and user

charges PI = Insurance premium (voluntary

or private) P = Price of the service Q = Quantity of the service W = Quantity and mix of inputs Z = Price of inputs

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Firms,corporate

entities & employersIndividuals,households &employees

Foreign & domesticNGOs & charities

Foreign govt& companies

Source Mechanism Collection agents

Direct & indirect taxes

Compulsory insurance

contributions & payroll

taxesVoluntary insurance premiums

Medical savingsaccounts

Out-of-pocket payments

Loans, grants &donations

Central, regional &local government

Independent public body or social security agency

Private not –for- profit or

for profit insurancefunds

Providers

Revenue collection

Source: Kutniz, 2000

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H. System level evaluation

For example:Health expenditure =ƒ (factors that influence demand, factors that influence supply)

Equity concepts Market mechanism is considered fair/Nozick. Maximising greatest happiness for greatest numbers, but

ignores distributional aspects /Utilitarianism. Goods are distributed so that the position of the least well

off in society is maximized/ Rawls Equal shares of a distribution of a commodity which means

equality in health and health care/ Egalitarianism

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Equity in health care

Principle of being fair to all, with reference to a defined and recognized set of values.

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Horizontal equityThe principle that says that those who are in identical or similar circumstances should be treated equally

Vertical equity The principle that says that those who are in different circumstances should be treated differently. Population s that are equally ill ought to be treated same; those that are sickest ought to get more.

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http://www.healtheconomics.com/http://www.healtheconomics.org/http://www.oecd.orghttp://www.healtheconomics.com/Database.cfmhttp://www.worldbank.org/

Important websites

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Health Economics Journals

Journal of Health Economics Health Economics Journal of Health Economics Journal of Health Care Finance Health Care Financing Review Health Policy and Planning American Journal of Public Health

And many journals in the area of Public Health

THANK YOU

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Email: razzaque.sarker@gmail.com