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Health Economics: An Overview

Abdur Razzaque Sarker MHE (Health Economics), MSS (Economics)

Health Economics and Financing Research Group

ICDDR,B

and

PhD Fellow in Strathclyde University, UK

Email: razzaque.sarker@gmail.com

What is Health Economics?

Health Economics study areas

Positive analysis

Normative analysis

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

Economic level, life expectancy and health expenditure

Selected 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 7410.0

Italy 26,526 81.4 9.5 3027.0

U.K. 31,985 80.1 9.3 3399.0

Sweden 32,183 81.4 9.9 3690.0

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POSITIVE ANALYSIS

Aims at explaining and predicting behaviour of individuals and organisations. For

instance, how income and price of health input influence individuals consumption of

health.

NORMATIVE ANALYSIS

Aims 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

Sex

Men 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 doctors

Nr of other health personnels

Nr of beds

Output variables

Nr of surgery

Nr of out-patients

Nr of in-patients

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In-patients

Out-patients

E

E´

O

E = Effective

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

Health care triangle

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Citizen Provider

Delivery

Third-party insurer

or purchaser

Source: Reinhardt, 1990

G. Health care organisation and financing

Financing 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

& employers

Individuals,

households &

employees

Foreign & domestic

NGOs & charities

Foreign govt

& companies

Source Mechanism Collection agents

Direct & indirect taxes

Compulsory insurance

contributions & payroll

taxes

Voluntary insurance

premiums

Medical savings

accounts

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 insurance

funds

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 equity

The 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.org

http://www.healtheconomics.com/Database.cfm

http://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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