Basics health economics

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Health Economics: An Overview
Abdur Razzaque Sarker
MHE(Health Economics) MSS (Economics)
PhD Fellow, Stathclyde University, UK
Assistant Scientist and Health Eonomist
Health Economics and Financing Research Group
icddr,b
Email: arazzaque@icddrb.org
razzaque.sarker@gmail.com

• What is Health Economics?
• Health Economics study areas
• Focus on some important issues
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By the end of this module you
will be able to:

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ECONOMICS is the study of how individuals and
societies choose to allocate scarce productive
resources among competing alternative uses and
subsequently to distribute the 'products' from these
uses among the members of a society.
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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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
Number of doctors
Number of other health personnels
Number of beds
Output variables
Number of surgery
Number of out-patients
Number 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
Funding
Allocation
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
25razzaque.sarker@gmail.com

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H. System level evaluation
For example:
Health expenditure =ƒ (factors that influence demand, factors that influence supply)

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Some common terms use in Health Economics

Perspective
 Point of view from which the costs and effective (or benefit)
are recorded and assessed.

Perspectives

 The societal perspective is the broadest possible perspective,
because it includes all costs (no matter who incurs them) and all
consequences (both good and bad), regardless of who experiences
them.
 If several perspectives are included in the analysis, the results
must be presented separately for each study perspective.

Equality Vs Equity

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 careEquity 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.
Equity in health careEquity in health care

Efficiency……!!!!!!!!!

Elements of Efficiency
Do not waste
resources
Do not waste
resources
Produce each
output at least cost
Produce each
Produce the types and
amounts of output that people
value most
value most
 These are the three main elements of efficiency

Do not waste
resources
Do not waste
resources
Produce each
Produce each
value most
value most
Production
Efficient Resource Allocation
ConsumptionConsumption

Do not waste
resources
Do not waste
resources
Produce each output
at least cost
Produce each output
at least cost
Produce the types and amounts of
output that people value most
Produce the types and amounts of
output that people value most
Production
Efficient Resource Allocation
ConsumptionConsumption

Do not waste
resources
Do not waste
resources
Produce each
Produce each
value most
value most
Technical Efficiency Cost-effective
efficiency Allocative Efficiency
 Technical efficiency requires that for any given amount of output, the amount of inputs used to
produce it is minimized (e.g. hospital…??)
 It requires that, in addition to technical efficiency being attained, inputs be combined so as to
minimize the cost of any given output
 Resources be used to produce the types and amounts of outputs which best satisfy people

Allocative Efficiency
Example…!!
 If mothers of young children want counseling services for
behavioral problems instead of frequent well-child check-ups,
then allocative efficiency might be improved by changing the
mix of primary care services even if the well child examinations
were being provided cost effectively
 If producers are supplying too much or too little of any good
or service relative to consumers' wishes it leads to allocative
inefficieny

Doing the right
things
Doing the right
thingsDoing things rightDoing things right
Do not waste
resources
Do not waste
resources
Produce each
Produce each
value most
value most
Technical Efficiency Cost-effective
efficiency Allocative Efficiency
 Efficiency means both 'doing things right' (technical efficiency
and cost-effectiveness), and 'doing the right things' (allocative
efficiency)
 Pareto Efficiency..?????

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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

Basics health economics

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