Health economics basics

Before Health Economics
Efficiency:
• Term is used by economists to consider the extent to which decisions
relating to the allocation of limited resources maximizes the benefits
for society
• Defined as ‘maximizing well-being at the least cost to society’.
Input Processing Output
2

Technical Efficiency (aka Operational Efficiency or Cost-effectiveness)
• Efficiency where output is expected to be maintained, while at the same
time making cost reductions, or where additional output is
generated with the same level of inputs
• Technical efficiency means providing resources to the maximum number of
fundable services and minimizing the cost of each service without
compromising quality of care (Donaldson and Gerard, 1993)
• It is applied where a choice needs to be made between alternatives that
seek to achieve the same goal, and exists when output is maximized for a
given cost, or where the costs of producing a given output are minimized.
• Technical efficiency is not sufficient in order to establish priorities, both
within health care systems and when comparing the provision of health
care with other publicly funded services
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• Allocative Efficiency
• More concerned with the distribution and allocation of resources in
society.
• Allocative efficiency will occur at an output when marginal benefit
(price) = marginal cost.
• Allocative efficiency refers to the extent to which a socially optimal
point on the production frontier has been reached.
• Allocative efficiency (an economic concept) refers to how different
resource inputs are combined to produce a mix of different outputs.
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Equity
• Concept of justice and fair
• The quality of being fair and impartial
• A program would be regarded as equitable if ‘similar outcomes were
achieved for people with similar needs’ but inequitable and unjust if
‘similar services were provided for people with different needs’
Types
• Horizontal Equity:
• Equal treatment of equal
• Vertical Equity
• Unequal treatment of unequal
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• Heart of discipline of Health Economics
• Efficiency
• Equity
• Economic objectives of health care systems
• Efficiency
• Equity
• In seeking to achieve a more equitable allocation of resources, a level
of efficiency will have to be sacrificed
• In attempting to move to a more efficient health care system,
inequalities in provision or access to services may have to be
compromised.
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Description of decision making process
Policy Design (Control and improvement of decision making )
8

Economics and Economics agents
• Economics: Study of the way in which economic agents take their
decisions regarding the use (allocation) of scarce resources.
• Economic agents: Decision makers in the economy.
• Individuals
• Households
• Enterprises (for profit, nonprofit; production, distribution)
• State
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Decisions
• What to produce/consume?
• How much to produce/consume?
• How to produce/consume?
• Who produces/consumes?
• Answers to these questions depend on the organization of the
economy: central plan, free market, mixed systems.
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Types of Economics
• Micro economics
• Macro economics
• Health economics
• Agriculture Economics
• Development Economics
• Clinical Economics
• Transportation Economics
11

Microeconomics & Macroeconomics
Concept of Microeconomics and Macroeconomics
• Microeconomics studies the economic behavior of individual decision making unit such as
consumer, resource owner and business firm in a free enterprise economy. It explains how
consumers maximize their utility, resource owners maximize their income and firms maximize
their profit or minimize the cost of production.
• Macroeconomics studies aggregates of individual economic units or it is the study of entire
economy. It focuses on current economic output, economic growth, economic fluctuation,
unemployment, inflation and the effects of increasing globalization upon domestic economy (i.e.
influence of foreign economy on domestic economy). Macroeconomics also finds
policies/strategies which promote maximum output, employment and price stability over time.
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Differences between Microeconomics & Macroeconomics
• Microeconomics studies behavior of individual economic units like consumers, resource owners
and business firms. Macroeconomics studies the behavior of whole economy or aggregate
economy.
• Microeconomics seeks how consumer gets maximum utility, producer gets maximum profit and
how factors are rewarded. Macroeconomics seeks how the economy gets maximum output,
employment and price stability.
• Price, revenue, cost, profit etc are examples of microeconomic variables. GDP, PCI, price level,
unemployment rate etc are macroeconomic variables.
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Scope of microeconomics
1. Theory of product pricing
2. Theory of factor pricing
3. Theory of economic welfare
Scope of macroeconomics
1. Theory of income and employment
2. Theory of general price level & inflation
3. Theory of economic growth
4. Theory of macro-distribution
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• Microeconomics assumes free economic policy i.e. no government intervention.
Macroeconomics assumes partial govt. intervention.
• Microeconomics uses method of partial equilibrium. Macroeconomics Uses method of general
equilibrium.
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Application of Microeconomics & Macroeconomics
• To understand working of the economy: It studies and analyzes small economic unit and their
behaviors. This information helps to understand how millions of consumers, producers and
resource owners behave in an economy.
• For efficient allocation of resources: Economic theory explains how efficient allocation of scarce
resources can be made so that both consumers and producers get maximum satisfaction and
maximum profit.
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• Business decision making: Economics helps business executives for making decisions in various
fields. Demand analysis, cost analysis and pricing decisions are very important in business
decision making.
• Formulate public policy: Economics helps government to formulate various economic policies
related to tax, subsidies, tariff, public expenditure etc. These policies help to formulate public
policies which promote employment and economic growth and reduces proverty.
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• For economic welfare: Welfare economics helps in understanding the
conditions for economic efficiency which involves efficiency in
production, efficiency in consumption and efficiency in resource
allocation.
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National Income Accounts
• National income is one of the important development indicators to measures the economic
performance of any economy. It shows the economic condition of any country.
• There are various concepts of national income. allocation. The main concepts of national income
are: Gross Domestic product (GDP), Gross National Product (GNP), Net National Product (NNP),
National Income (NI), and Per Capita Income (PCI).
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• Gross Domestic Product (GDP): GDP is the sum of money value of all final goods and services
produced domestically by a country during one year.
• There are three main approaches to measure national income which are:
Product Approach
GDP = ∑PiQi
Where,
GDP = gross domestic product
Pi = price of ith goods or services
Qi = quantity of ith goods or services produced domestically
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• Expenditure Approach
GDP = C + I + G + (X – M)
Where,
C = consumption expenditure
I = investment expenditure
G = government expenditure
X = export
M = import
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• Income Approach
GDP* = ∑r + ∑w + ∑i + ∑π
Where,
GDP* = gross domestic product which needs adjustment
∑r = sum of all rental income
∑w = sum of all wage income
∑i = sum of all interest income
∑ π = sum of all corporate profit
* Subtract NFIA and add depreciation & net indirect tax
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• Gross National Product (GNP): The total market value of all final goods and services produced by
factors of production owned by citizens of a country inside and outside the country during one
year is known as gross national product. Thus, GNP is the total of GDP and net factor income from
abroad (NFIA).
GNP = C + I + G + (X – M) + NFIA
Where,
GNP = gross national product
NFIA = net factor income from rest of the world
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• Net National Product (NNP): It is the net production of goods and services by the economy during
one year. Net national product is obtained by deducting depreciation from gross national product.
In the production process, we use up some of the capital and this use up capital is depreciation
which is deducted while calculation of net national product.
NNP = GNP – Depreciation
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• National Income (NI): NI is total earnings of all factors of production (land, labor, capital and
organization) in the form of rent, wage, interest and profit. Hence, sum of the income received by
the factors of production in the form of rent, wage, interest and profit is called national income.
But, while distributing remunerations to factors of production, whole NNP is not used.
Government imposes indirect tax in the production process, so producer should pay this tax to
the government. And, sometime, government provides subsidy to the producers, thus, producers
get this subsidy from the government. Thus, we deduct indirect tax and add subsidy to NNP and
then distributed to factors of production.
NI = NNP – IT + S
Where,
IT = indirect tax and S = subsidy
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• Per Capita Income (PCI): Per capita income is an average or per head income of individual of a
country. It is derived by dividing national income of a country by its total population.
PCI = NI / Population
Where,
PCI = per capita income
NI = national income
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Real GDP, Nominal GDP and GDP Deflator
• Nominal GDP is the value of all final output produced in an economy during a given year,
calculated using the prices current in the year which the output is produced.
• Real GDP is the value of the final goods and services produced in an economy during a given year,
calculated using the prices of some base year.
27

Real GDP, Nominal GDP and GDP Deflator
• Nominal GDP is GDP calculated at existing prices. Real GDP is nominal GDP adjusted for inflation.
Real GDP is important to society because it measures what is really produced.
• GDP Deflator = Nominal GDP / Real GDP
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Inflation
• Inflation is one most crucial macro-economic problems for many countries of the world. It is
usually defined as a sustained rise in the general price level of goods and services. It is measured
in terms of annual percentage increase in the general price level.
1. The rise in price takes place in the broad group of goods and services, not in a few goods and
services.
2. The rise in price continues for a relatively long period of time instead of few months or
quarters.
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Inflation
• The rate of inflation is measured by the annual percentage change in the level of prices as
measured by the consumer price index.
Πt = (Pt – Pt-1)/Pt-1 × 100
• Where,
Πt = rate of inflation for period t
Pt-1 = general price level for period t-1
Pt = general price level for period t
Pt – Pt-1 = increase in price level assuming Pt > Pt-1
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Inflation
• Inflation is generally classified on the basis of its rate and causes.
• Rate based classification of inflation refers to the severity of inflation or how high or low is the
rate of inflation. On rate basis classification, there are three types of inflation, namely – moderate
inflation, galloping inflation and hyper inflation.
• Cause-based classification of inflation refers to the factors that cause inflation. On cause basis
classification, there are two types of inflation, namely – demand pull inflation and cost push
inflation.
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Inflation
• Rate Based Classification of Inflation
• Moderate Inflation
When the general level of price rises at a moderate rate over a long period of time, it is called
moderate inflation or creeping inflation. The moderate rate may vary from country to country,
however, it is a single digit rate of annual inflation. During the period of moderate inflation,
people continue to have faith in the monetary system and confidence in the currency as a store of
value.
• Annual Inflation Rate for Nepal in FY 2010 was 9.6 percent.
(Source: NRB)
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Inflation
• Galloping Inflation
• Galloping inflation refers to an inflation that proceeds at an exceptionally high rate. Samuelson
and Nordhaus define it of inflation rate of double or triple digit range of inflation rate.
• Argentina, Brazil, Mexico, Peru and former Yugoslavia had galloping inflation during 1970s and
1980s. The annual average rates of inflation in these countries during 1990-91 were exceptionally
high: Argentina – 416.9 percent, Brazil – 327.6 percent, Peru – 287.3 percent, former Yugoslavia –
123.0 percent; Mexico – 66.5 percent.
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Inflation
• Hyper Inflation
• When general price level rises at more than three-digit rate per annum, the inflation is called
hyper inflation. During the period of hyper inflation, paper currency becomes worthless and
demand for money decreases drastically.
• Germany suffered from hyper inflation in 1922 and 1923 when WPI shot up by 100 million
percent between December 1922 and November 1923.
• It was cheaper to burn currency notes to make tea rather than buying it in the tea shop.
34

Inflation
• Caused – Based Classification of Inflation
• Demand-Pull Inflation
Demand pull inflation occurs when the aggregate demand exceeds aggregate supply at existing
price level. It is mainly caused due to demand raising factors. It is also called demand-side
inflation.
• Causes for Demand-Pull Inflation
1. Increase in money supply (Ms)
2. Increase in disposable income (Yd)
3. Increase in government expenditure (G)
4. Increase in credit creation (Cr)
5. Depreciation of exchange rate (e)
35

Inflation
• Cost-Push Inflation
Cost push inflation occurs when the aggregate demand exceeds aggregate supply
due to cost rising factors or supply reducing factors. It is also called supply-side
inflation.
• Causes for Cost-Push Inflation
1. Increase in price of raw materials or supply shock (Pr)
2. Increase in wage rate (W)
3. increase in interest rate (r)
4. Increase in profit (Π)
5. Increase in tax (t) 36

Inflation
• Cost of Inflation
High degree of inflation is always problem to the economy.
1. Reduction in production
2. Worsen on the distribution of income
3. Adverse effect on saving
4. Fall in government revenue
5. Adverse effect on BOP
6. Decrease in confidence on local currency
7. Social and moral degradation
8. Political instability 37

Health Economics
Definition
• The discipline of economics applied to topic of Health
• It is the logical and explicit framework to aid health care workers,
decision makers, government, and society to make choices on how
best to use resources
• Economics that studies the supply and demand of health care
resources and the impact of health care resources on a population.
The Mosby Medical Encyclopedia (1992)
38

Health Economics…. cont
• Health economics can be defined broadly as the application of
the theories, concepts and techniques of economics to the
health sector. It is thus concerned with such matters as:
• Allocation of resources between various health-promoting activities
• Quantity of resources used in health delivery
• Organization and funding of health institutions
• Efficiency with which resources are allocated and used for health
purposes
• Effects of preventive, curative and rehabilitative health services on
individuals and society.
39

Health Economics
• Healthcare is limited by the total amount of resources available as well as
through competition with other areas
• There are three main theories which have been proposed to assist the
allocation of resources
• The Utilitarian Theory- healthcare should be distributed so as to maximise
the health of society (e.g. increase life expectancy; reduce infant mortality)
without regard to how that good is actually distributed.
• The Egalitarian Theory - everyone has a claim to the amount of healthcare
resources giving everyone equal health rights.
• The Rawlsian Theory – each person has an equal right to the system. So
when making choices, those who are least advantaged should have
maximum benefit.
40

Elements of Health
Economics
• Source and explanation:
http://helid.digicollection.org/en/d/Jh0197e/4.html
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Why do people demand healthcare ?
• Increasing real income
• Increase in income cause increase in people’s expectations of health
care: less prepared to put up pain, discomfort, lack of mobility, ..
• Improvement in medical technology:
• Technology increases range of possible treatments
• Population aging
• Health care demand increases with the ageing
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Use of HEALTH ECONOMICS
• To understand and apply principle of demand and supply of health
care.
• To understand about
• how health care market is different health care market.
• How health care is financed.
• Principle of Insurance of health care.
• To understand and apply principle of efficiency
• To make health care system more efficient.
• To make health care system more equitable.
44

You can go through this online book to
understand more about health economics
http://helid.digicollection.org/en/d/Jh0197e/4.html
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Health economics basics

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