01 micro he-mbbs - copy

Copyright © 2004 South-Western/Thomson Learning
• Gunja Bahadur G.C.
• M.Sc. In Health Economics
• Chulalongkorn University Bangkok,
Thailand
• M.A. in Economics(Mathematical
Economics,Econometrics) T.U. Kirtipur
• Tel phone:977-1-4310895®
• 977-9841375628
• Email:gunjagc@yahoo.com

Concept of health economics and
its importance in health services
Meaning of Health Economics:
• An introduction to the applications of
economics to health care and medical care
issues.
• Discuss the special features of medical care
as a commodity; demand for health services;
and the economic explanations for health
care providers, insurance markets, and
technology diffusion.

• we also study policy issues such as universal
health insurance and international comparisons.
The training helps us to form our own vision of
the economics of health care as a health
services manager, analyst, or civic leader.

• Health economics is the study of how (scarce)
resources are allocated to and within the
health economy.
• Health care: goods and services used to
produce health
• Health care system: a collection of services,
people, institutions, regulations, programmes,
functions, products
• Health as a status/outcome

Definitions of Economics
• Economics is the social science that studies the
production, distribution, and consumption of
goods and services. The term economics comes
from the Greek for oikos (house) and nomos
(custom or law), hence "rules of the house
(hold).”
• "Economics is the social science which examines
how people choose to use limited or scarce
resources in attempting to satisfy their unlimited
wants.”
• “The science which studies human behaviour as a
relationship between ends and scarce means
which have alternative uses." Lionel Robbins,
1932.

• “A study of mankind in the ordinary business
of life; it examines that part of individual and
social action which is most closely connected
with the attainment and with the use of the
material requisites of wellbeing. Thus it is on
one side a study of wealth; and on the other,
and more important side, a part of the study of
man.” Alfred Marshall, Principles of
Economics

Summary of Definition of Economics:
• Economics is a study of human behavior between the
unlimited wants and scarce resource.
• The discipline of economics deals with use of scarce resources
to satisfy human wants and needs how best to use the
resources available.
• Economics is a social science that studies how individuals and
organizations in society engage in
- the production
• distribution and
• consumption of goods and services.

11Ten Principles of
Economics

Economy. . .
. . . The word economy comes from a Greek
word for “one who manages a household.”

TEN PRINCIPLES OF
ECONOMICS
Economics is the study of how society manages
its scarce resources.

Principle #1: People Face Tradeoffs.
“There is no such thing as a free lunch!”

Making decisions requires trading
off one goal against another.
Principle #1: People Face Tradeoffs.
To get one thing, we usually have to give up
another thing.
• Guns v. butter
• Food v. clothing
• Leisure time v. work
• Efficiency v. equity

Principle #1: People Face Tradeoffs
• Efficiency v. Equity
• Efficiency means society gets the most that it can
from its scarce resources.
• Equity means the benefits of those resources are
distributed fairly among the members of society.

Principle #2: The Cost of Something Is What
You Give Up to Get It.
• Decisions require comparing costs and benefits
of alternatives.
• Whether to go to college or to work?
• Whether to study or go out on a date?
• Whether to go to class or sleep in?
• The opportunity cost of an item is what you
give up to obtain that item.

Principle #2: The Cost of Something Is What
You Give Up to Get It.
LA Laker basketball star
Kobe Bryant chose to
skip college and go
straight from high
school to the pros where
he has earned millions
of dollars.

People make decisions by comparing
costs and benefits at the margin.
Principle #3: Rational People Think at the
Margin.
• Marginal changes are small, incremental
adjustments to an existing plan of action.

Principle #4: People Respond to Incentives.
• Marginal changes in costs or benefits motivate
people to respond.
• The decision to choose one alternative over
another occurs when that alternative’s marginal
benefits exceed its marginal costs!

Principle #5: Trade Can Make Everyone
Better Off.
• People gain from their ability to trade with one
another.
• Competition results in gains from trading.
• Trade allows people to specialize in what they
do best.

Principle #6: Markets Are Usually a Good
Way to Organize Economic Activity.
• A market economy is an economy that allocates
resources through the decentralized decisions of
many firms and households as they interact in
markets for goods and services.
• Households decide what to buy and who to work
for.
• Firms decide who to hire and what to produce.

Principle #6: Markets Are Usually a Good
Way to Organize Economic Activity.
• Adam Smith made the observation that
households and firms interacting in markets act
as if guided by an “invisible hand.”
• Because households and firms look at prices when
deciding what to buy and sell, they unknowingly
take into account the social costs of their actions.
• As a result, prices guide decision makers to reach
outcomes that tend to maximize the welfare of
society as a whole.

Principle #7: Governments Can Sometimes
Improve Market Outcomes.
• Market failure occurs when the market fails to
allocate resources efficiently.
• When the market fails (breaks down)
government can intervene to promote efficiency
and equity.

Principle #7: Governments Can Sometimes
Improve Market Outcomes.
• Market failure may be caused by
• an externality, which is the impact of one person or
firm’s actions on the well-being of a bystander.
• market power, which is the ability of a single
person or firm to unduly influence market prices.

Principle #8: The Standard of Living
Depends on a Country’s Production.
• Standard of living may be measured in different
ways:
• By comparing personal incomes.
• By comparing the total market value of a nation’s
production.

Principle #8: The Standard of Living
Depends on a Country’s Production.
• Almost all variations in living standards are
explained by differences in countries’
productivities.
• Productivity is the amount of goods and
services produced from each hour of a worker’s
time.

Principle #9: Prices Rise When the
Government Prints Too Much Money.
• Inflation is an increase in the overall level of
prices in the economy.
• One cause of inflation is the growth in the
quantity of money.
• When the government creates large quantities
of money, the value of the money falls.

Principle #10: Society Faces a Short-run
Tradeoff Between Inflation and
Unemployment.
• The Phillips Curve illustrates the tradeoff
between inflation and unemployment:
Inflation  Unemployment
It’s a short-run tradeoff!

Economic Models
• Economists use models to simplify reality in
order to improve our understanding of the
world
• Two of the most basic economic models
include:
• The Circular Flow Diagram
• The Production Possibilities Frontier

Our First Model: The Circular-Flow Diagram
• The circular-flow diagram is a visual model of the
economy that shows how dollars flow through
markets among households and firms.

Figure 1 The Circular Flow
Copyright © 2004 South-Western
Spending
Goods and
services
bought
Revenue
Goods
and services
sold
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
Factors of
production
Wages, rent,
and profit
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
•Buy and consume
goods and services
•Own and sell factors
of production
HOUSEHOLDS
•Households sell
•Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
•Firms sell
•Households buy
MARKETS
FOR
GOODS AND SERVICES

• Firms
• Produce and sell goods and services
• Hire and use factors of production
• Households
• Buy and consume goods and services
• Own and sell factors of production

• Markets for Goods and Services
• Firms sell
• Households buy
• Markets for Factors of Production
• Households sell
• Firms buy

• Factors of Production
• Inputs used to produce goods and services
• Land, labor, and capital

Our Second Model: The Production
Possibilities Frontier
• The production possibilities frontier is a graph that
shows the combinations of output that the
economy can possibly produce given the
available factors of production and the
available production technology.

Figure 2 The Production Possibilities Frontier
Copyright©2003 Southwestern/Thomson Learning
Production
possibilities
frontier
A
B
C
Quantity of
Cars Produced
2,200
600
1,000
3000 700
2,000
3,000
1,000
Quantity of
Computers
Produced
D

Our Second Model: The Production
• Concepts Illustrated by the Production
• Efficiency
• Tradeoffs
• Opportunity Cost
• Economic Growth

Figure 3 A Shift in the Production Possibilities Frontier
Copyright © 2004 South-Western
E
Quantity of
Cars Produced
2,000
700
2,100
7500
4,000
3,000
1,000
Quantity of
Computers
Produced
A

Microeconomics and Macroeconomics
• Microeconomics focuses on the individual parts
of the economy.
• How households and firms make decisions and how
they interact in specific markets
• Macroeconomics looks at the economy as a
whole.
• Economy-wide phenomena, including inflation,
unemployment, and economic growth

THE ECONOMIST AS POLICY
ADVISOR
• When economists are trying to explain the
world, they are scientists.
• When economists are trying to change the
world, they are policy advisor.

Health and health care
39
Inputs
Health care
Health
Food/shelter
and clothes
Environment
Education
Doctors and
nurses
Technology
Drugs/equipment

• Concept Health economics:
• Health economics is the study of how (scarce)
resources are allocated to and within the health
economy.
• Production of health care (doctors, specialists,
or nurses).
• How do we distribute it across the population?
• Based on who can pay or who needs it or some
combination.
• How much money should the government
spend on health care

• Scarcity
• Choice
• Tradeoff (costs = opportunity costs)
• Compare new costs and new benefits
(marginalism)
• Individual
• Household
• Community, Society

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Why health economics?
• Providing different prospective to deal health
system
• Providing new tools, ideas, knowledge to the
policy makers and researchers
• Providing refined methods for evaluation of
health policy, health system, health outcome
• Economic factors that have greater power to
change the behaviour of the people

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Why is it important?
• The size of the health economy is large and growing in
most countries
• It is important to understand why it is growing. If
the growth is necessary (cost-effectiveness
analysis), if the growth is productive.
• The large role it plays in national policy
• People are concerned with how health care is
delivered and how much it costs because it affects
them. Economists play a role in this policy making.
• Health issues have economic components

05/29/15 44
Why is it important?
Personal Expenditures
• What have we not accounted for in personal
expenditures?
• The opportunity cost of your own time. How
much time do you or your family spend caring
for someone who is sick or has a disability?
• This might have even gone down with more
being spent on nursing home.

Why is there rising spending?
• induced demand
• Creates a demand and people want the latest
drug not the generic, or certain test.
• Asymmetric Information
• When one party know more than the other
• Doctors can recommend procedures and
services with little expected benefit (led to
managed care

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How is the medical care market different
from other markets?
• Presence of Uncertainty
• Demand is irregular and uncertain
• Accidents, can you deny someone lifesaving
care if they don’t have the money?

05/29/15 47
How is the medical care market different
from other markets?
• Large role of not-for-profit providers
• Economists usually assume firms maximize
profits.
• There are many not-for-profit hospitals (85%).
How should economists model their behavior?
• Role of equity and need
• Belief that people ought to get health care
whether or not they can afford it.
• Economists need to take this feature of the good
into consideration.

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How is the medical care market
different from other markets?
• Government subsidies and public provision
• Governments participate in this sector because
of market failures.
• Economists look at role of government
spending and provide fundamental reasons
why government spending is necessary.
• They also question if the spending is cost-
effective.

• The Economic agents in health sector
The economics agents in the health sector basically are
producers, consumers and the roles of government
which can be elaborated by following:
Producers are manpower for health services in the
form of physicians, nurses, technicians and trainers
and infrastructures form of hospitals, PHCs, HPs,
SHPs and clinics. Producers of manpower can also be
categorized as the medical institutes and training
centers.

• Consumers in the form of drugs, supplies, services are
patients, in the form of intermediate consumers are
pharmacists, hospitals, and health facilities and in the
form of manpower are hospital and health facilities.
The roles of government mainly should focus on to
identify the average health service cost for quality
health services in provided in a way of maximum
health care with given input or health care with
minimum health services cost.
For this, the concept of opportunity cost be applied
among both in producers and consumers of health
services.

Financing mechanism for health programmes in
Nepal
Health financing functions and sources of
revenues:
Functions health care financing are to:
• collecting revenues,
• pooling risks, and
• purchasing services

• through tax measures or by strengthening tax
administration;
• cutting lower-priority expenditures to make
room for more desirable ones;
• borrowing resources, either from domestic or from
external sources;
• getting the central bank to print money to be lent
to the government; or
• receiving grants from outside sources.
Collecting Revenues
Raising revenues:
Revenue collection is the way health systems
raise money from households, businesses, and
external sources.

• Purchasing refers to the many arrangements for
buyers of health care services to pay health
care providers and suppliers.
•Resource allocation and purchasing mechanisms
determine for whom to buy, what to buy, from
whom, how to pay, and at what price. Purchasing
includes the many arrangements used by
purchasers of health care services to pay medical
care providers
Purchasing services
• Resource allocation and purchasing procedures have
important implications for cost, access, quality,
and consumer satisfaction.

Sources of health spending
Information about the nature and sources of health
spending is essential for developing sound national
policies for financing health care.
• Government funding
• Health insurance
• Out of pocket payment

Challenges of Health care financing
in Nepal
•High out-of-pocket payments,
• Higher but still limited revenue-raising capacities,
•Purchasing arrangements pose significant
constraints to universal coverage and
• No risk pooling mechanism
• High poverty and income inequality

Sources of Financing

THE as % of GDP

Trends of public expenditure
Fiscal Year
Expenditure on Health
As % of total Budget As % of GDP
1989/90 4.60 0.93
1990/91 3.84 0.88
1991/92 3.62 0.84
1992/93 3.40 0.64
1993/94 4.85 1.08
1994/95 4.91 1.21
1995/96 5.99 1.44
1996/97 6.19 1.42
1997/98 5.70 1.37
1998/99 5.69 1.34
1999/00 6.09 0.80
2000/01 5.19 0.87
2001/02 4.91 0.79
2002/03 5.05 0.81
2003/04 5.26 0.87
2004/05 6.00 0.98
2005/06 6.34 1.13
2006/07 6.81 1.36
2007/08 6.63 0.52
Decliningtrend

• Evaluation of health programme in
Nepal
• DALY
• QALY

Definition of economic evaluation
• It is a tool for decision making in which cost
and consequences of alternatives are measured
to offer the best alternative.

62
Why Economic evaluation ?
• Economic evaluation informs resource allocation
decisions in health and medicine: How well it does so
depends upon the comparability of consistency of
analyses of diverse health interventions.
• Economic evaluation is a method used to evaluate the
outcomes and costs of interventions designed to
improve health of the people.

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Economic evaluation
• Public health programs and interventions can
be thought of as a production process that
transforms inputs (resources) into outputs
(changes in health outcomes), as illustrated in
this diagram:

05/29/15
Economic evaluation
• In an economic evaluation, analytic techniques are
applied to identify, measure, value, and compare the
costs and consequences of two or more alternative
programs or interventions.
• In the health field, economic evaluations are used to
analyze how efficiently resources have been allocated
and how resources should be allocated to ultimately
maximize welfare.

05/29/15
Economic evaluation
• When applied to public health programs,
economic evaluation is concerned with the
amount of resources used by a program or
intervention, and corresponding level of health-
related outcomes.

05/29/15
Economic evaluation

67
Measuring the costs of the health
programmes
• Financial or recurrent or direct costs: Cost of inputs
consumed in < 1 year
• Capital costs: Cost of inputs consumed in > 1 year
(>$100); depreciation
•
• Economic or opportunity costs: The value of next
best alternative that must be forgone ( e g.
physicians opportunity cost in hospital service vs.
private clinic)
ofcapitalULYyearsUsefullife
UPunitprice
ttalAnnualcapi
)(
)(
cos =

Importance of economic evaluation
of health interventions
• Resources are scarce. Resources are of many types
and all these resources are limited in supply
• Human resources
• Time
• Facilities
• Equipment
• Knowledge
• No country is rich enough to do everything that
can be done from technological point of view.
Need to choose among alternatives.

Importance of economic evaluation..
• Economic evaluation allows clear identification of
alternatives.
• In economic evaluation, we must explicitly define
the alternatives. Many of these alternatives may be
totally ignored in the analysis unless we make the
attempt to list them.
• Example: to examine interventions for reducing
morbidity due to chronic lung disease, one
alternative often overlooked is the reduction in
cigarette smoking.
69

Economic evaluation types
• Cost minimization analysis
• Cost-effectiveness analysis
• Cost-benefit analysis
• Cost-utility analysis
• For each of the above economic evaluation
types, one can conduct average or incremental
cost and/or effectiveness analysis.
70

Comparisons
• CEA differs from cost benefit analysis (CBA) and
cost utility analysis (CUA) in that:
• CEA expresses outcomes in natural units (e.g., "cases
prevented" or "number of lives saved"), whereas
• CBA assigns dollar values to the outcomes
attributable to the program, and
• CUA is a specialized form of CEA that includes a
quality-of-life component associated with morbidity
using common health indices such as quality-adjusted
life years (QALYs) and disability-adjusted life years
(DALYs).

Cost-minimization analysis
• Very special type of economic evaluation. This
can be done only when two or more alternatives
will provide exactly the same outcome.
• Example: two drugs can be used to lower the level
of blood cholesterol. No other side-effects or any
other costs associated with the drugs.
• Drug A costs $200/month; Drug B costs $150/month.
Both reduces cholesterol level by the same amount.
Which one should we select? Why?
• Home versus hospital-based treatment for
psychiatric patients is another example.
72

Introduction: CEA
• Cost Effectiveness Analysis (CEA) is a type of economic
evaluation that examines both the costs and health
outcomes of alternative intervention strategies.
• CEA compares the cost of an intervention to its
effectiveness as measured in natural health outcomes (e.g.,
"cases prevented" or "years of life saved").
• CEA results are presented in a cost-effectiveness ratio,
which expresses cost per health outcome (e.g., cost per case
prevented and cost per life year gained).

Importance of CEA
• CEA is applied in the areas where effect or
outcome is measured in non monetory terms (it
is used clinical arena as well as to evaluate
health policies, programs, and interventions.

Importance of CEA
• Decision makers are often faced with the challenges of
resource allocation. Resources are scarce; therefore,
they must be allocated judiciously.
• CEA is used to identify the most cost-effective
strategies from a set of options that have similar
results.
• CEA could be used by the decision maker to provide
empirical results that account for the costs and
consequences associated with alternative programs.

When can we use CEA
• CEA is useful when the primary objective of the study is to
identify the most cost-effective strategy from a group of
alternatives that can effectively meet a common goal and are
often competing for the same resources.
• CEA results might not be generalizable to all populations.
Because each population has specific characteristics (e.g.,
prevalence of disease, or access to care), each might have
different program costs, productivity losses, and medical
expenses. It is useful for target programmes.

When can we use CEA
• CEA can provide solid justification for a
program. Empirical evidence might be needed
to provide backing for the increased level of
program funding or a switch from one to the
other.
• CEA can be used when a need exists to identify
and isolate programs that are wasting resources.

78
Examples
• There are four health related programs say A1 A2
A3 A4
• Program A1 saved 500 lives at 1000 US$
• There are the problems of choice or priority
setting or decision-making among the programs
• Which program is more effective?

79
Effective Program
Programs Effects Cost Ratios
A1 500 1000 2
A2 1000 8000 8
A3 200 900 4.5
A4 200 500 2.5
The central use of CEA is the estimation of cost effectiveness ratio (CER).

Example: Sterilization Services
Procedure
Total cost
NRs Total cases Cost per case
Mini Lap 1887500 3020 625
Laparoscopy 485100 630 770
Vasectomy 974400 2030 480

Example: STDs Case management
Approach
Total
cost
Total cured
cases
Cost per cured
case
Clinical 20700 230 (500) 90
Syndromic 82560 480 (500) 172
Etiological 153450 495(500) 310

Example: For example surgical
correction of stone of gal bladder in
Hospital
Approach Total cost Total
procedures
Cost per
surgical
procedure
Procedure A 207,000 23 9000
Procedure B 825,600 48 17200
Procedure C 1,534,500 50 30600

One hypothetical example
• Treatment A yields a life expectancy of one year at
the cost of $100. Treatment B yields a life expectancy
of 5 years at a cost of $1000. Which of these two
strategies is more cost-effective?
• Treatment A= $100/1 year
• Treatment B=$1000/5 years=$200/1 year
• Should we recommend treatment A for adoption in
this country?
• For recommending a policy, we should ask if the
treatment is worthwhile at a higher cost or not.
83

Cost-benefit analysis
• When we can not express the effects or
consequences of health interventions in
terms of one single outcome, we need to
value all the possible effects.
• In reality, most interventions create multiple
effects, not just one, and it is difficult to
identify which one should be considered as
the most important one.
84

Cost-benefit analysis
• When we can not express the effects or
consequences of health interventions in
terms of one single outcome, we need to
value all the possible effects.
• In reality, most interventions create multiple
effects, not just one, and it is difficult to
identify which one should be considered as
the most important one.
85

Cost-benefit analysis…
• Example: consider two health interventions.
One saves a number of lives today. For that
we can find the years of life saved. Other
project simply prevents disability but does
not save any lives.
• Value both the outcomes in money terms.
What is the dollar value of the lives saved
and disabilities prevented?
86

Cost-benefit analysis…
• Since it can handle many different types of
outcomes, one can use cost-benefit analysis to
test whether doing nothing is better than
introducing a new program.
• The analysis is very flexible and can be applied
to compare health interventions with non-health
interventions as well.
87

Cost benefit analysis
Benefit cost ratio
NRs in Million
Cost Benefit Benefit cost
ratio
General
Surgical ward 2.3 3.2 1.39
General
Medical ward 1.2 1.25 1.04
Mental health
ward 0.8 0.5 0.63

Cost-utility analysis
• Another measure of value other than money is
“utility” or satisfaction or wellbeing.
• Utility is a measure of satisfaction or
desirability of an outcome measured by
individual’s or society’s “preference
structure”.
• Preference structure: subjective value of the
outcome.
89

Cost utility analysis
• Outcome: QALYs- positive measurement
(how much improvement in quality adjusted
life years)

Cost utility analysis
Cost in million QALY Gain
Cost per QALY
gain
Mental health 580,000,000 52,000 11,153.85
Occupational
health 230,000,000 18,000 12,777.78
Reproductive
health 510,000,000 58,000 8,793.10

05/29/15
Examples
Programs
Prevented
outcome
s
Total costs ACER MCER ICER
Independent programs
Program A 10 $150 $15
Expanded
program
A 12 $200 $25
Mutually exclusive programs
Program A 10 $150
Program B 20 $300 $15
ACER= $150/10= $15; MCER= ($200-$150)/(12-10)= $25
ICER= ($300-$150)/(20-10)= $15
• Select minimum costs

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Effectiveness of the health programs
• Natural unit can be measured in terms of QALYs or DALYs
• QALYs- positive measurement (how much improvement in
quality adjusted life years)
• DALYs- negative measurement (how much reduction in
disability adjusted life years)

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DALYs: Disable adjusted life years
• DALY measures the gap between population‘s current health
status and some reference ideal i.e. the burden of disease.
• The DALYs - measure of the years of lifetime lost to premature
death and years lived with disability of specified severity and
duration.
• One DALY means one year of healthy life lost.
• DALY covers the key social preferences such as:The
duration of time lost due to premature death at each
age ,
• The value of time lived (i.e. productivity) at different ages,
Disability and time preference.

05/29/15
Quality Adjusted Life Years
(QALYs)
• Years of survival, adjusted for quality of life
Quality adjustment based on “utility”
0 = death
1 = perfect health
• Allows trade-off between length of life with
quality of life
1 QALY = 1 year in perfect health
1 QALY = 2 years with utility of 0.5

THANK YOU

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