Health economics


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Health economics

  1. 1. 1www.drjayeshpatidar.blogspot.comHEALTH ECONOMICSDEFINITIONHEALTH A “state” of complete physical, mental and social well-being and not merely an absenceof disease or infirmity.-WHO definition It is a state that would enable an individual to lead a socially and economically productivelife.-Operational definitionECONOMICS: It deals with human relationships within the specific context of production, distribution &consumption including ownership of resources (goods and services). Economic considerations play a key role in all aspects of living:- agriculture, housing,industry, trade including health sector Study of Wealth:- Adam Smith(Father of Economics)ECONOMICSThe world “economics” literally means “house-keeping”. It deals with the humanrelationship in the specific context of production, distribution, consumption, ownership ofresources, goods and services, Economics and sociology overlap in many areas.FOR THE “COMMAN MAN”Economical means:- Less costly/cheap Saving Producing more result with less resources Producing some result with same resourcesHEALTH ECONOMICS
  2. 2. It is the discipline of economics applied to the health care. Broadly defined, economicsconcerns how society allocates its resources among alternative uses. Scarcity of theseresources provides the foundation of economic theory. It provides a useful conceptual basis for many health-related disciplines and as aframework for health policy. Essence of economic thinking is that it I the study of choices between alternative use ofscarce resources. Health economic is a branch of economic concerned with issues related to scarcityin the allocation of health & health care. Broadly, health economics study thefunctioning of the health care system at the private & social causes of healthaffecting behaviors such smoking.A seminal 1963 articles by KENNETEH ARROW, obtain credited with giving rise to thehealth economic as discipline, drew conceptual distinctions between health & other causes.Factors that distinguish health economics for others area include extensive govt. interventions,intractable uncertainty several dimensions, asymmetric information‟s, and externalities.Government tends to regulate the health care industry heavily and also tend to be the largest payor within the market. Uncertainty is intrinsic to health, both in patient outcomes and financialconcerns. He knowledge gap that exists between a physician and a patient creates a situation ofdistinct advantage for the physician, which is called asymmetric information. Externalities arisefrequently when considering health and health care, notably in the context of infectious disease.For example, making an effort to avoid catching a cold, or practicing safe sex, affects people otherthan the decision maker.Health Economics deals with- Allocation of resources between various health activities. Quality of resources used in health-care Organization of healthcare institutions. The efficiency with which the resources are allocated & used for health-care purpose. The effects of comprehensive health services on individual and society.
  3. 3. It covers the medical industry as a whole and also extends the economic analysis to costingof disease ,benefits of a health programmes and returns from investmentsIMPORTANTANCE OF HEALTH ECONOMICS1. It is a relatively new concept.2. Resources crunch compels to make choices.3. To study the pattern of allocation of budget is effectiveness and efficiency.4. To study health expenditure vs health status.5. To minimize wasteful expenditure.Scope of health economics:The scope of health economics is neatly encapsulated by Alan William‟s “Plumbingdiagram” dividing the discipline into eight distinct topics:-1. What influences health? (other than health care)2. What is health & what is its value3. The demand for health care?4. The supply of health care5. Micro-economics evaluation at treatment level6. Market equilibrium7. Evaluation at whole system level8. Planning, budgeting & monitoring mechanisms.WHY STUDY HEALTH ECONOMICS? Application of economic principle proved powerful addition to the decision-makingprocess in the health sector. Medical (Health) care services are growing both in quantity & quality ,with resourcesbeing devoted increasing day by day. Empirical need (elaborate & complete) for development of theory & testing; in order tounderstand economic behaviour.Predict &controlMacroeconomics
  4. 4. It is a study of aggregate national income and expenditure, aggregate demand andconsumption, aggregate investment level in both private & government sectorsMicroeconomics:It is a study of individual economics unitsCharacteristics of Health Need are:-Uncertainanity:-Accidental: - Unplanned eventUrgent:-Can‟t be postponedEssential:-No substituteConsumer Rationality:-Doesn‟t hold true in cases ofConsciousness of illnessMental illnessHead injury Externalities:-Third party paymentSpill-overTaxesWANTSWants are unlimited; therefore, problem of choiceReadability of wants:-PrimarySecondarySuperfluousTYPES OF DEMAND Derived Effective Utility compensatedUnlike other Goods & Services:-Health has a value in use, where as no value in exchange (because, it can‟t be); hence, HealthCare is a derived demand. Therefore, Markets exist in health care. Price elasticity of demandIncome elasticity of demandFactors influencing health demands. Consumer‟s Income, Price of health care (relative), consumption pattern, Taste & Preference of the consumer,
  5. 5. Perception about health needs &health care.Health care needs & wants do not become demands- WTP vs. ATPTo understand more about demand, supply & the factors affecting them, one should be Familiarwith the following terms: GDP GNP POVERTY POVERTY LINEMany health variables& health seeking Behavior, correlate better with the per capita GDP orGNP, as these serve as a general measure of Human Welfare i.e. Health in a broad sense. GNP: It is the gross income generated within the country & income received from abroad. GDP: It is the gross income generated within the country excluding the money fromabroad. POVERTY LINE: it is defined in terms of minimum percent capita consumption level ofpeople As per the Planning Commission “Poverty line” corresponds to the caloric intake ofpeople. It is the cut off point, below which people are unable to purchase food sufficient toprovide 2400 Cal in rural & 2100 Cal in urban area. The GDP & GNP give us the idea about the performance of economy.PUBLIC HEALTH ECONOMICS India has hit rock bottom in public health spending. We stand at 171, out of 175 countries in public health spending. The GOI spends just 0.9%of GDP on public health.WHO states that at least 5% of GDP should be spent on public health? Most of the less developed countries spend 2.3% of GDP on health ,whereasIndia‟s expenditure is merely 1/3 of poorer countries average! The rest is spent by people from their own resources. Only 17% of public health expenditure is borne by the govt. This makes the public health system in India, grossly inadequate to meet the publicdemands.This expenditure is declining since last two decades. The consequence of this dismally lowallocation is deteriorating quality of public health.
  6. 6. The Primary Health Care system meant to serve the poorest and marginalized population,today, is in a pathetic condition Only 38%PHCs have all the critical staff. Only 31% have all the critical supply. In spite of the high MMR, 8 out of 10 PHCs have no essential obstetric care kit. Only 34% PHCs have delivery services. And only 3% offer MTP services. There is no obstetrician in 7 out of 10 CHCs. There is no pediatrician in 8 out of 10 CHCs. Only 28% PHCs have one woman doctor. Only 18% PHCs have an ambulance in working condition. In urban areas the dominance of private sectors denies access to poorer sections of thesociety A growing proportion of people can‟t afford health care services, when they fall ill. The proportion of such people unable to afford health care almost doubled, increasing from10 to 21% in urban and from 15 to 24% in rural areas in the last decade. 40% of the hospitalized people are forced to borrow money or sell their assets to cover thehospital expenses. Irrational medical prescription is on the rise. Due to irrational prescribing, 63% of moneyis spent on unnecessary drugs. The pharmaceutical companies have increased, yet, only 20% population have access theessential drugs. There is proliferation of brand names with over 70,000 brands marketed in India. Many drugs are sold with 200 to 500% profit margin. Increasing number of unethical practices( “cut practices”) The introduction of “user charges”.All the above facts are leads toOver 2 crore Indians being pushed Below Poverty Line, every year. The “ Planning Commission” review of country‟s health system show that :- There is 1 doctor for 1800 population and1 bed for 1123 people. Every year about 15,000 graduate and 5,000 P.G. doctors are produced; but, 1/5th of them„leave‟ this country, every year.All these are having deleteriorous effect on quality of health services.Scarcity is there, in all walks of life. No one can buy or be provided with everything forindefinite period of time.Scarcity is because of improper allocation of the available resources and inadequate funding.
  7. 7. 7www.drjayeshpatidar.blogspot.comWe need to allocate these resources in such a way that the demands are met with, effectively& efficiently.COST TRENDS.The economic growth and social development are inter-related, particularly with regard tohealth. The economic development enhances health status. The higher the level of GDP per capita,the higher the life expectancy. Like education, Health is both satisfaction of a need andinvestment. Moreover, people are more energetic & productive when they are in good health thusimprove health status should lead to more growth & grater wealth.This is one of the reasons why economics want health expenditure to be considered andinvestment. Further it is believed that better health would reduce the total volume of sickness inthe community & consequently the need for health services would decline. The state of healthservice is thus seen not only as a wealth producing services but also a partially self-liquidatingservice. It has been, however observed that expenditure on health is consuming the nationalincome at an increasing rate and, if this trend continues, several countries may be spending some10 % of their national income on health.There are various reasons for such increasing trends on the cost of health services. Some ofthem are:1. Changing demographic profile of the community.2. Changing epidemiological picture of health & disease.3. Changing in socio-economic policies of the government.4. labor Intensive capture of health services5. Better quality of health services.6. Extensive healthcare services coverage.7. Higher public expectations.8. Organization & structure of health care services (Health care delivery system)9. Availability of newer & costly technologies.10. Natural escalation of cost with time.11. Poor management of health services12. Multiple agencies financing & delivering parallel and uncoordinated health services.
  8. 8. 8www.drjayeshpatidar.blogspot.comCOMMON TERMINOLOGY1. FIXED COST (FC) – Theses are the costs that the organization will have to bear, even ifthere is no programme or activity. This is a recurring cost which does not increase over thetotal cost even if the programme or activity is at its maximum level. Such cost includes costof building, or space or its rental, taxes, insurance, salaries, equipments and somemaintenance, etc. However, in the long run, some of the fixed costs are variable, e.g. theequipment becoming old, decayed or beyond economical repair, asked for replacement.2. VARIABLE COST (VC) - The cost actually incurred to undertake any programme oractivities is called variable cost.It also includes the cost of manpower employed specifically for theactivity. This cost increases as per the increases in per unit of the activity or programme,materials and supplies consumed, cost is equal to average variable cost.3. AVERAGE COST - The total cost include for the activities or the programme to producecertain outputs. The average cost is equal to average fixed cost plus average variable cost.Average fixed cost (AFC) = Total fixed cost (TFC) / Units of output produced.Average cost (AC) = Average fixed cost (AFC) + Average variable cost (AVC)4. TOTAL FIXED COST (TFC)- It is defined as the sum total of all the fixed costs incurredfor the activity or programme.5. TOTAL VARIABLE COST (TVC)–It is defined as the sum total of all the variables costsincurred in the activity or programme.
  9. 9. 9www.drjayeshpatidar.blogspot.com6. TOTAL COST (TC) – It is defined as the sum total of all the cost incurred to producecertain outputs. Thus, the total cost equals the sum of total fixed costs and total variablecosts.Total cost (TC) = Total fixed cost (TFC) + Total variables cost (TVC)7. MARGINAL COST (MC)- It is defined as the extra cost incurred to produce one or moreunit, or to achieve one more positive result. The MC of the nth unit of output equals TC of nunits minus TC (n-1) units. Thus, MCn = TCn – TCn-1.8. MARGINAL BENEFIT (MB)- it is defined as extra benefit achieved by increasing themagnitude of the programme by one unit.9. OPPORTUNITY COST- it is defined as the value of the most desirable alternativeswhich are forgone when another courses of action is taken.10.CAPITAL COST : It is a fixed cost and is borne irrespective of the workload of the healthcenter , e.g. building cost or major equipment cost etc.11.OPERATIONAL OR RECURRENT COST: It is changing and is related to the type ofactivity in an health institution, like1. Salaries and allowances of health staff2. Medicines and drug cost3. Maintenance and repair cost4. Transport and training cost.12.MARGINAL COST: It reflects the changes in the total cost at a given scale of outputwhen a little more or little less output is produced.13.SOCIAL COST: It is the cost of health activity to the society.14.UNIT COST: It is also known as average cost. It is the total cost divided by the number ofunits produced.15.OPPORTUNITY COST: It is the value of next best alternative in achieving the objective.OTHER TYPES OF COST
  10. 10. Past & Future Controllable & Uncontrollable Escable & Unescable Incremental & Sunk Money & Opportunity Cash & Book Fixed & Variable Direct & IndirectECONOMIC EVALUATION OF HEALTH CARE PROGRAMME Aims:-To aid decision-makers with their difficult choices in allocating health care resources,setting priorities and moulding health policy. Definition:-Comparative analysis of the alternative courses of action in terms of their costs andconsequences.METHODS & TECHNIQUESTHERE are many methods and techniques, which have been derived from the field ofeconomics, successfully applied in the health management, some of them are discussed here;COST ACCOUNTING - It is defined as a set of procedure for determine the cost ofthe product or services and various activates involved in the manufacture and sales, forplanning and measuring performance. Therefore, the functions of the cost- account are;(a) To determine and analysis the cost which help in evaluating the operating efficiencyat each stage.(b) Accumulation and utilization of cost data and(c) Aid to management to arrive at the cost of production, work order, processes etc.In health sector, the application of cost-accounting is not as easy as it does not allow thecomparisons of the cost and benefit in given problems. There are many situation and programmeswhich are using the resources jointly, viz., teaching, training, and provision of medical care. It isfurther quite difficult to find out the proportional expenditure in different categories. In healthmanagement, the cost accounting methods are required to be standardized for each programme
  11. 11. 11www.drjayeshpatidar.blogspot.comand broken down by the type and resource such as staff equipment, drugs, etc. the costaccounting as per unit of service organization such asprimary health centre is feasible and it would be possible only it essential records are wellmaintained.COST BENEFIT ANALYSIS- It is a method of comparing the cost of providing service withthe gain accruing or likely to accrue from it or, in other words, it pertains to the ratio of the benefitto he cost. It is often not possible to measure benefits of a particular programme accurately interms of monetary gains, disease prevented or overcome , death prevented, birth avoid, etc…Thus, it is a technique of measuring various alternatives. In practice, it is mainly used to justify aparticular health service or programme. The main problem in cost –benefit analysis is that thecosts and benefits are likely to spread over time, and are usually not measured at the same time.As time passes, the value of benefit thus decreases with the decreases in its monetary value. Toovercome this problem, the economists use the value of discount rate for convenience. The scopeof this method in health management is limited.COST- EFFECTIVENESS ANALYSIS – it is a method pertraining to the best ratio ofbenefits and cost. I.e. finding the least costly way of reaching an objective or getting on thegreatest value for given expenditure, cost effectiveness analysis concentrates on one majoroutcome or benefit. Such as health improvement or reduction of incidence of one particulardiseases in terms of effectiveness, rather than valuing it in terms of money. In this method,effectiveness has to be kept constant while different option are considered and compared, to seekwhich alternative is likely to be most effective. The cost-effectiveness analysis does not saywhether or not a particular policy is worth pursuing. To find out the answer to this question, onemust weigh the total cost of the programme against total benefits.MARGINAL ANALYSIS – The terms marginal benefits have already been defined. Thebasic piece of economic theory is the “Law of Diminishing marginal Benefit” which states thatonce a certain level of operation has been reached, than increased cost per positive result or, in
  12. 12. 12www.drjayeshpatidar.blogspot.comother words, decreased success rate per unit of expenditure on the programme. The marginalanalysis approach is useful in knowing whether. The exiting deployment of resources in a particular health programme withassociated benefits can be shifted to some other programme, i.e., with a lowmarginal benefit to another with higher marginal benefit, Additional funds are required to be spent, and where they should be directed toachieve greater additional benefits, The resources are required to be reduced, It helps the planner in allocation of resources between the health programmes.METHODS FOR COST CONTAINMENT - in order to reduce the cost, one is required todistinguish between „down-sizing‟ and „right-sizing‟. „Down-sizing‟ is reducing fixed costs,while „right-sizing‟ is identifying the right number of people to conduct the right activities. Thefollowing methods may be applied for cost containment (fig...1)
  13. 13. 13www.drjayeshpatidar.blogspot.comA) Directive method- it is also called as „top-down‟ method. It ensures certaincoherence in rapid decision making and implementation. It takes lessertime.B) Participatory method- it is also called as „bottom up method‟. It involve people‟sparticipation and identifies the hidden costs and function deficiencies. Ittakes into consideration the people‟s experience which perpetuates thesaving, but is usually slow and takes a longer time.Whatever method is applied, a significant reduction is seen after the first few month ofimplementation, but the costs will be gain to increases again which is slow in the participatorymethod than the directive method. In order to succeed in the long run, the use of the skills of thepersonnel and critical analysis of the activities, which consume most of the resources, is a most.AREAS OF COST CONTAINMENT – THE HEALTH ECONOMIST MUST IDENTIFYthe areas which consume most resources and apply one of the above or both the methodssimultaneously to contain the costs. Some of the areas for the cost containment are manpower,building/space, equipments and instruments, supplies and materials, transport, administration andestablishment, meeting, training, research, technical complexities, and time frame „delay‟HEALTH INSURANCE Principle:-Sharing of risks A group of person put together current funds, financial or in kind, to minimize futureuncertain risk. Money needed for health care for this group become much more predictable.Risk for the group as a whole eliminated.WHY NO NATIONAL HEALTH INSURANCE IN INDIA? Provision of health care is free or almost free. Requires a lot of organizational capacity(Trust for administrating funds) Young & healthy people may not be interested in joining the scheme.ISSUES / PROBLEM Moral hazard:-Over use of services by patients (Solution:-Deductible, Co- insurance,Group insurance). Adverse Selection:- Insurance market to be adversely affected, person not revealing theirfull risk profile (Solution:- Compulsory universal coverage, long term policies) Underutilization:- Preventive Care (Solution:- IEC, Cashless hospitalization)
  14. 14. Risk selection (skimming):- No insurance for sick & elderly (Solution:- CommunityRating) Insurance Cartelization:-Excess profits, Poor quality, Premium pricing (Solution:-Regulatory Control).TYPES OF HEALTH INSURENCE Private based Public basedUHISJan Aryogya Community based (NGO)ACCORD, TamilnaduSEWA, GujratSWRC, RajasthanBUDGET & BUDGETING CONTROL: Budget: Systematic economic plan for a specified period of time. It indicates, in what way& for what purpose various health resources are to be utilized. Budgeting control: It designates the spending authority to ensure that the budget is spentjudiciously for various aspects of health programmes.HEALTH FINANCING SYSTEM: It refers to the raising of resources to pay for goods or services related to health. Now days, health financing is facing a lot of problems due to lack of funds, unequaldistribution and rising health care costs.HEALTH FINANCING CAN BE FROM1. Public sources (General taxation)2. Private (NGOs, corporate sectors)3 .External sources (International agencies)4 .Individuals and households (User charges)5 .Insurance (Public, Private & community based)