Economics and the Health Care Sector

Economics & the
Health Care Sector
Prepared by:
Louella Eunice Andrea E. Jamora, RRT

The Demand
for Health Care:
An Introduction

The Demand for Health Care
›› Basically, health care is not different from other goods.
Like other commodities (i.e. food, clothes, shelter) it
is insufficient and thus requires proper allocation.

›› But there are also a number of distinguishing features of
health care compared to other commodities.

First, health care is both consumption good (i.e. people buy
clothes because it makes them feel good, same as when they
consume antibiotics) and investment good (i.e. people buy
food and the consume health because it makes them more
productive).

›› Secondly, health-care costs can be high in relation to income

of the population (like other commodities, buyers tend to buy
less because of the high price).

›› Patients may have an involvement in production and use
of health care. Although, there are instances wherein
patients have a little idea of effectiveness, of the quality, or
of the consequences of having or not having a treatment.

›› Moreover, others still believed that health care may be
different such that:
CONSUMERS

HEALTH
CARE

ORDINARY
COMMODITY

Evaluates

(-)*

(+)

Decides

(-)*

(+)

Pay

(+)

(+)

›Note: *In health care, people often rely on health
professionals for evaluation and decision-making.

›› To give you a background about the Health Care Sector, see the box
below. Analyze how the arrows relate to each of the boxes presented.

Health Care Sector
General Economic Resources

Specific Economic Resources
Supply of Health Services
Health Care Service Utilization
Demand for Health Care
Health Status

Other health-related & socio-economic sectors

›› The gray zone summarizes the
components of the Health Care
Sector.
The supply of the health services
`
came from both general economic
resources (resources that may not be
useful for health services, i.e. land & labor) and specific
economic resources (resources specific to health, i.e.
manpower for health care services).
›› The operation of the health care services depends on both
the demand and supply of health services. Obviously, those
on the supply side cannot be expected to produce/sell
health cares service/s even without demand. It is like saying
that the doctors cannot prescribe medications even if there
are no patients who consult their service.

›› Aside from these components, several authors are unable
to draw a line between aspects of the health sector and nonhealth sectors. The following items were subject to confusion
(which items should be included or excluded?)

›› As a rule of the thumb, those whose primary intention is to
improve health may be included such as:

ᴥ

Health

services

:

Environmental

water, sanitation, pollution control, etc.)

services

(i.e.

ᴥHospitals : Social Welfare Institutions
ᴥEducation & training : Pure medical research

ᴥMedical work : Social work
ᴥ Formally
practitioners

trained

medical

practitioners

:

traditional

medical

Determinants
of Health
Seeking Behavior

Determinants of Health Seeking Behavior
›› Is there really a difference between
demand and need?

ᴥ The analysis for demand for health and medical care is an
evaluation of the consumer behavior or choice. In other
words, this represents what they want.
ᴥ An important purpose of this analysis is to identify the
factors that are influential in determining a person‟s use of
these services. In return, these analyses can help
policymaker, planners and managers to address and
prioritize the need for health care

These determinants of consumer‟s health seeking
behavior can be classified into ECONOMIC variables
and SOCIODEMOGRAPHIC/CULTURAL variables.
The demand for health care has distinguishing
characteristics from ordinary commodities (i.e.
Supermarket goods). One of the most significant is the
presence of uncertainty and information gaps between
the suppliers and consumer. The doctor often have a
direct influence on the patient‟s decision, whether or
not to consume health. The existence of this agency
relationship between doctor and patients is termed
SUPPLIER-INDUCED DEMAND.

Needs can be further classified as:
Two Types of Needs

NORMATIVE NEED

FELT NEED

ᴥ
Assessed by an expert

ᴥ
Assessed by an individual

ᴥ
Compared the actual situation with the
determined standard

ᴥ
Consumer may not be the best judge of
his needs
*Conflict may arise

›› So, where does health care fall? Is health care, needed
demanded?

or

Is health care, needed or demanded?
Health Care can be analyzed in both ways:
ᴥ It may not be demanded but may be considered a normative
need.
This may not reflect what a patient want but may be considered as a
necessity (i.e. early treatment for hypertension).

ᴥ On the other hand it may be demanded but not needed
normatively.
(i.e. as in the case of individuals who underwent cosmetic surgery).

Is health care, needed or demanded?
ᴥDemands can be an expression of a felt need.
(i.e. reflected by willingness to pay for the health care service)

In conclusion, the demand for medical care can be regarded as
what the people select from the array of possible choices given their
perception of their health condition and their socioeconomic
circumstances.
ᴥ One of the main purpose of analyzing demand is to identify the
factors that are most influential in determining an individuals‟ use of
health and medical care services. These factors can be classified as
sociodemographic and economic factors/variables.

Economic Variables
1. Income
ᴥHigher Income= higher
expenditures for health;
demand for more modern and
expensive expenditures.
ᴥAn increase in price may reduce
the demand of lower income groups
than the upper income groups.

Economic Variables
2. Price of the commodity
ᴥLower priced goods or providers will
have a higher probability of being
used.
ᴥAn increase in price may reduce the
demand of lower income groups than
the upper income groups.

Sociodemographic Variables
3. Education
ᴥHigher education = more open to
medical care;
increase in preventive methods
and decrease in medical care for
acute illness.

ᴥLevel of education indicates how
a person perceived illness
ᴥ A mother‟s level of education
and literacy is influential factor
in seeking preventive and
curative
services
for
her
children.

4. Marital Status
ᴥSingle people will have a greater
tendency to use more medical
care than married individuals.

5. Age and gender
ᴥSickness reported more often during young childhood and later
stage of adult life:
Early stage of life = Affected by nutritional & infectious diseases
Late Stage of life = Affected by chronic & degenerative

ᴥHigher probability of adults not to report the sickness = self-medicate
ᴥFemales live longer and demand more
ᴥYoung children depend upon to receive medical care and treatment.

6. Locality/Access to health facilities
ᴥBetter access to health facilities
> less time consumed to access healthcare
>increase demand for healthcare.

7. Household Size
ᴥThe greater the household size the greater the demand but is offset by
the effects of the income.

8. Quality and Competition
ᴥ Perceptions of outpatients to doctor who don‟t give prescription for
drug as inferior/ineffective to other provider who does.
ᴥThe preference of generic products over the branded medications, was
often perceived by the public as ineffective in their health condition.

The Supply of
Health Care Services

Factors that affect Supply of Manpower
›› Health services can be looked at the same way as any other

industry that produce and sell goods and services. Usually,
the activities of production are common and are interrelated
to each other.

Standard Production Activities
INPUTS

PROCESS

People
(labor), manpower, facilities
(i.e. hospital beds), equipment
(capital)

Productive technique/
technology and/or method
that may change inputs into
outputs

OUTPUT
End result of production

›› The relationship that exist between the inputs and outputs given the
characteristics of technology is called the PRODUCTION FUNCTION
(PF) of a firm.
In simpler terms, PF is a combination of various inputs required
to produce various levels of outputs in an efficient manner. It should be
remembered that the ultimate output of health industry is HEALTH.
For instance, the Department of Health through the local government,
may allocate an array of resources (INPUTS) among primary, secondary
and tertiary health care services (PRODUCTION PROCESSES) to reduce
morbidity and mortality or increase health days of life (OUTPUTS) of
Filipinos. (This has always been the ultimate target of the DOH, “Health for
all Filipinos)

I intentionally underlined the phrase above. This is because I
want you to become familiar with this term: DECENTRALIZATION

›› DECENTRALIZATION, as mandated by the 1991 Local Government
Code, pertains to the delivery of basic services and the operation and
maintenance of local health facilities will be devolved to the
provinces, cities and municipalities. Thus, each local government is
responsible for a minimum set of health services and facilities in accordance
with established national policies, guidelines and standards. The devolution of
health services conferred to the local government has several functions like:
ᴥFormulation & enforcement of local ordinances ᴥ Operation & maintenance of local health
related to health nutrition, sanitation and other
health concerns.
ᴥ Implementation of health programs in
accordance with national policies & standards.
ᴥ Provision of promotive, preventive, curative
and rehabilitative health programs & services.

facilities (e.g. district and provincial hospitals
under provincial government; rural health units;
health centers and barangay health stations.)
ᴥ Monitoring and evaluation of the
implementation of various health services.
ᴥProvision of funds for health at the local level.

-Source: National Objectives for Health
Philippines 1999-2004

›› The highly skilled MANPOWER is the most important input in the
supply of health services. However, unlike other inputs, manpower
takes a long time to produce (long years of study, licensure
examination, years of specialization). Professionalization may have
increased the numbers of highly trained personnel and reduced
uncertainty about competence, but it is essentially anti-competitive.
Thus, trade-off between supply and high-quality manpower should not
exist.

››There are several factors that make the examination of
productive activities somewhat problematic. Before we analyze
these factors, here‟s the major findings of the 1990 census which
is designed to determine the regional distribution and place of
work of selected health professionals:
ᴥ 87% of physicians work in the hospitals while the rest work in other establishments
(school, industry, etc.). A large majority work in urban areas (93%)

ᴥ 74% of dentists practice in private hospitals, clinics, laboratories, 10% in public
facilities, 3% in school. 91% work in urban areas.
ᴥ 78% of nurses work in hospitals, clinics and laboratories while the rest in other
workplaces.
ᴥ75% of midwives work in hospital facilities. In contrast to other health professionals,
they are evenly distributed in the country.
ᴥ As for the other health providers (medical technologists, sanitary inspectors,
nutritionists, pharmacists, herbolarios and hilots) little is known about their numbers.

›› Generally speaking, the supply of manpower has been influenced by a
number factors. These are often influenced by certain government policies
in the country namely:

ᴥThe Commission on Higher Education (CHED)
-regulate
the
admission
and
other
curricular
requirements
of
medical, nursing, dental and other medical schools. These schools are producing a
large group of future health professionals.
Can you find out how many RT schools are there across the country?
ᴥProfessional Regulation Commission (PRC)
-it is in charge of licensing examinations to practice. There are even private
institutions that set up their own boards to certify their specialists (i.e. PMA
– Philippine Medical Association). However a significant number of health
professionals were lost due to immigration and overseas employment.
If this continues, our country may experience “BRAIN-DRAIN” and we
would not be surprised to find out that most of the good doctors, nurses
and RRT‟s practicing abroad are Filipinos.

The Supply of
Hospital Services

The Supply of Hospital Services
››Different health providers in the Philippines (both private
and government) offer a variety of health services across the
country.
Health
facilities
may
range
from
preventive, curative and rehabilitative care. Hospitals of
various categories (primary, secondary and tertiary) and rural
health units (RHU) are usually owned and operated by the
government while the private health facilities (as its name
implies) are owned and managed privately (single
corporations/organizations).

››Like the supply of health
professionals,
there
are
government policies that affect the
growth of hospitals:
1. License
No hospital whether public or private will
operate without a license issued by the
Bureau of Licensing and Regulation of
DOH

2. Provision of Technical Standards
As a requirement, they should meet the prescribed technical standards
(i.e. number and type of personnel, operating and good quality
equipment, etc.)

3. Quality Assurance Standards
Includes technical aspects, interpersonal aspects and social aspects of
quality of health care.
ᴥ Technical Aspects: Accuracy of diagnosis, efficacy of treatment,
excellence according to professional standards, necessity of care,
appropriateness, continuity of care, consistency

ᴥ Interpersonal Aspects: Patient satisfaction, acceptability of care, time
spent

with the provider, attitudes of provider and treatment, amenities

ᴥSocial Aspects: Efficiency and Acceptability
Example: International Standards Organization (ISO)

4. Revenues of Hospital
-10% of private hospital beds should be allotted for charity patients
-Emergency cases should be treated by private hospitals even when
they are unable to pay bills (this provision prevents private hospitals to
require money deposit from patient in ER)

-35% of government tax from the hospital‟s net income

5. Availability of credit for financing the construction of
private hospitals
 Development bank of the Philippines grants loans to members of the
medical profession or to corporations organized by medical
practitioners for establishment of new or improved existing hospitals
and medical clinic.
 Medical care act provides hospitals especially in the rural areas. On
the other hand, special financing are given to hospitals with bed
capacities of 100 especially in areas identified as „BED DEFICIENT‟.
 Social security system provides loans for hospitals development as
well.

›› Little is known about the impact of these policies on the

growth of private hospitals. As a consequence, for those
who cannot afford the hospital‟s services, the burden of
financing is shifted to the paying patients. On the other
hand, private hospitals have the option to modify their tax
status (35% deduction from net income) by establishing
teaching schools. In this way, they could take advantage of
tax deduction of educational institutions (i.e. DLSUMC is a
teaching hospital).

The only thing that is permanent in this
world is “CHANGE”.
This famous line is absolutely TRUE and
definitely APPLICABLE to health. The
process of change in both economic and
health is often paralleled to development
and is referred to as DEMOGRAPHIC
TRANSITION.

A theory of demographic transition was
developed to explain the movement of birth
and death rates. Basically this theory
originated in Europe and in the United States
before the Industrial Era.
Nowadays, it is used as a framework to
understand and analyze demographic
trends.
According to this theory, there are four
stages that will best describe demographic
transition. You may refer to the graph on the
next slide…

Stages of Demographic Transition
STAGE
1

B
i
r
t
h
And
D
e
a
t
h

STAGE
2

STAGE
3

40

20

r
a
t
e
s

LEGEND:

TIME
Represents birth/fertility rate
Represents death/mortality rate

STAGE 4

4 Stages of Demographic Transition
STAGE 1
ᴥOccurs before the so-called Industrial Era
ᴥBoth mortality and Fertility rates are very high
ᴥMost people depends on agrarian for their source of living
ᴥPopulation declined due to insufficient food supply and high
incidence of diseases

STAGE 2
ᴥClosely interrelated to what we
described as demographic transition
nowadays.
ᴥMortality rates declines while
maintaining high levels of fertility rates.
ᴥIt is the phase where the population
growth booms because during these
times, children are exposed to industrial
jobs thus improving their family‟s
income.
ᴥAs a consequence, children also helped
raised their quality of health and
improve their quality of life.

STAGE 3
ᴥThe phase wherein the
fertility rates starts to decline
ᴥPeople have become more
aware of the effects of
raising too much children in
the family
ᴥMortality rates become
stable at this phase

STAGE 4
ᴥ Towards the end of this phase, the gap between birth and death rates
were eliminated.
ᴥMortality levels decreased because of better economic development.
ᴥ People began to appreciate the sufficient supply of food secondary to
improved transportation and globalization.
ᴥSociety has become more organized
because of civil order and adapted
contraceptive beliefs.
ᴥThus, the gap was eliminated
secondary to industrialization,
urbanization and better educational
opportunities.

›› However recent research proves that birth and death rates
respond to a variety of factors and this theory could serve as a
partial explanation of demographic changes.
Nowadays, demographic transition, is a convenient term used
for the process by which the population has improved from low
level to a high level health. This has been obvious in the case of
infant deaths.
ᴥ Most of the infant deaths are caused by communicable and
infectious diseases like respiratory and diarrheal diseases.
However in the high levels, infant death rates are reduced.
Parents were more educated and were more concerned
with the health of their children.
ᴥ In addition, there also has been high incidence of accidents
among young and middle adults.

On the other hand, mortality rates among older individuals
brought about by infectious and communicable diseases like
tuberculosis were less compared to chronic and degenerative
diseases like cancer, heart disease and UTI.

Reviewing the population‟s history, the population of
developed countries had grown very slowly.
Two reasons maybe possible: (1) high birth rates were
equated with high death rates; (2) lower birth and death rates. The
speed at which birth rates follow the fall in death rates, is believed
to depend on greater child survival which causes the parents to
desire less children and also policies about population control (In
fact a very good example of which is China they implemented a ‘one child
policy’).
When this happen, only then can a population begin to
stabilize. Perhaps, this is a justification why the Philippine
Government has been investigating on population control
program. But because of the influence of the Church in our state,
the government has never mandated it‟s people on which policy
to follow. The government believes that the people should make
their choice on matters like this.

››

Is there any relation between
demographic/health development?

economic

and

-Yes of course, because economic development promotes
better health by providing resources for better nutrition,
housing and sanitation and other health services.
In the end, this transition will bring lower mortality (death
rates) and triggers Demographic development. The idea may
be simple but the process may bring other complicating
factors.

Reference:
Austria, Maria Michelle V., 2003-2004. Module on Health
Economics with Taxation and Land Reform. De La Salle
Health Sciences Campus

Economics and the Health Care Sector

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