Introduction to Health Economics


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Introduction to Health Economics

  1. 1. INTRODUCTION TO HEALTH ECONOMICS Assignment No. 1 University of Glamorgan Enrolment No. 04155084 23 November 2009
  2. 2. Introduction to health Economics. Assignment 1. 04155084 Assess the potential contribution(s) which an understanding of health economics may offer to the discipline of Primary Care. Word Count: 1,963 (excluding bibliography) 2
  3. 3. Introduction to health Economics. Assignment 1. 04155084 Introduction Health Economics The simplest way to describe health economics is by saying that it is the economics applied to health. However, it is not just this, health economics is also a way of thinking (Mooney, 2003). As with general economics, health economics is based on the principle that resources are scarce relative to the demands made on them. All Health Systems in the world, and the NHS is not an exception, have the problem of how best to allocate limited resources (Klein, 1995) and choices in how to allocate resources are inescapable. Health economics tries to minimize the problem first increasing awareness that choices have to be made but also providing tools to help taking rational decisions on how to allocate scarce resources. Resources are things that contribute to the production of an output. In healthcare the principal output is “health”, which it is a difficult output to define (Salek, 1999). In the year 2000, the total UK NHS expenditure was £ 67 billion. This money was financed through direct taxation (85%), National Insurance (13%) and though other means such as patient charges (2%). In the same year, the NHS represented 16.3% of the total public expenditure. In terms of GDP, the UK health expenditure corresponded to about the 6.7% of the GDP in 1998 (lecture notes, M Longo, 2004). Two key concepts in health economics: 1. Opportunity cost Opportunity cost is the benefit foregone when taking actions (Jefferson et al., 1996). Because the resources are scarce, when we use these resources in a particular way we have to be aware that there is an opportunity foregone to obtain benefits if using the 3
  4. 4. Introduction to health Economics. Assignment 1. 04155084 resources in another different way (Mooney et al., 1980, Salek, 1999). As Mooney states: “opportunity costs entails sacrifice” (Mooney, 2003). 2. Efficiency Salek defined efficiency as maximising the benefits from available resources. In health, economics efficiency means obtaining as much health as possible from the resources available (Salek, 1999). Primary Care Despite the vast majority of patient contacts with the NHS take place in primary care settings (over 90% of health care episodes begin in primary care), community services receive just 10.2% of the total NHS budget. The main proportion of the NHS budget is spent on hospital services (53%) and medication (13.1%) (lecture notes, M Longo, 2004). Primary care services are organized differently to the other services in the NHS. General Practitioners (GPs), who are ‘gatekeepers’ to the hospital sector, are independent contractors that provide a service to the NHS. This means that despite the financing of primary care services is public, the provision is private (Donaldson, 1993). This setting has been changing slowly in the last few years and more and more GPs are becoming salaried employees (Oldham and Rutter, 1999). The rest of the personnel working in Primary Care are employed either by the GPs owning the practices (e.g. receptionists, practice nurses) or directly by the NHS (e.g. midwifes, health visitors, community nurses). Main problems and issues Primary Care faces today: • Changing technology and new techniques in primary care (as in the rest of the NHS) that creates new demand instead of satisfying it. This is creating more and more pressure on existing scarce resources and it is raising costs in the NHS. 4
  5. 5. Introduction to health Economics. Assignment 1. 04155084 • Constant changes in the organisation of Primary Care. Just a few years after Local Health Boards (LHBs) and Primary Care Trust (PCTs) were introduced in Wales and England there are indications that a new reform may be happening in the near future. This is likely to cause motivation problems amongst primary care workers (Groves, 1999) and there is no evidence that this continuous changes are benefiting patients or increasing the quality of the services provided. • Loss of independent contractor status by GPs as more GPs are employed directly by the NHS though LHBs and PCTs. This, that is seen as an opportunity by some GPs is perceived as a threat for some others (Oldham and Rutter, 1999). • New GP contract very focused into achieving targets. These targets are being used as outcomes but many GPs have complained about them, as some are quite arbitrary and not always correlate with what is the best evidence-based clinical practice. It is usual to use proxies for health output but it can be difficult to choose which ones correlate better with the final output that is “health”. 5
  6. 6. Introduction to health Economics. Assignment 1. 04155084 Contributions of health economics to primary care Health economics can help answering some of the more difficult questions primary care is facing. What should be the objective of the primary care system? The objectives of the primary care system should be to provide the most efficient, effective and equitable services for the population that serves. However, these objectives are nearly impossible to achieve at the same time and it becomes evident that choices will be needed. Health economics can help by giving a structured framework that allows these choices to be made. Health economics can help providing the economic sustainable primary care able to be the most efficient, effective and equitable system possible with the existing resources. Therefore, the objective of primary care should be to maximise health from available scarce resources. Can the primary care system meet all needs? When the NHS was created in 1948, the NHS founders had the noble objective of meeting all needs of the population, years later it became clear that this was impossible to achieve. The NHS founders made a fundamental mistake, they though that needs were finite. However, needs are not finite because needs are dynamic, relative and subjective. This is also applicable to primary care. The resources available in the primary care system will never be able to meet all needs of the population. Changing technology and new techniques in primary care creates new demand instead of satisfying it. For example in 1948 there was not need for cervical cancer screening in primary care simply because we did not have the technology to be able to identify cancerous cells, now cervical screening is essential in any primary care setting. 6
  7. 7. Introduction to health Economics. Assignment 1. 04155084 Genetic tests to detect the risk of having a cancer or other illnesses are just around the corner, this will create new needs. Needs are moving fast away from us, it is true that resources are also increasing, but needs are increasing faster (lecture notes, D Cohen, 2004). Health economics can help in deciding to which needs we employ our scarce resources. On what basis can the primary care services choose how to utilise scarce resources? Health economics can help primary care choose how to distribute scarce resources in the way, which most people can benefit. Scarce resources can be distributed following a health economics framework. Health economics can provide tools to help taking rational decisions; some of these tools are the methods of economic evaluation. There are four main methods of economic evaluation: • Cost benefit analysis (CBA). This economic analysis intends to determine the value of interventions that have different therapeutic outcomes by assigning monetary value to costs and therapeutic benefits. The CBA deals with the question of “whether” and “how much”. Two basic principles are used: do only things where benefits exceed costs and do not do things where costs exceed benefits (Mooney, 2003). The CBA has the difficulty of trying to give monetary value to benefits and health consequences, which makes this study restrictive in the questions it can address. • Cost effectiveness analysis (CEA). This economic analysis is used to compare interventions that are similar, have similar outcomes and therefore can be measured in identical units. The different interventions are compared in terms of cost per unit. Once it has been decided to do an intervention or project, the CEA tries to address the question of “how” to achieve an objective at the lowest cost or which is the most effective way to achieve an objective. It has the advantage over CBA of being able to measure different outcomes but 7
  8. 8. Introduction to health Economics. Assignment 1. 04155084 the CEA is not very useful when the consequences of the interventions are very different (Jefferson et al., 1996). • Cost minimisation analysis (CMA). In this economic analysis, the interventions compared are considered to have the same consequences and only the inputs are taken into consideration (Drummond et al., 1997). • Cost utility analysis (CUA). This sophisticated economic analysis is used to compare interventions that produce different consequences in terms of quantity and quality of life (Jefferson et al., 1996). It is a variation of the CEA but takes into consideration patient choices and preferences for the effects of an intervention. It uses a multidimensional measure of health called QALY (quality-adjusted-life-year). The CUA has also some problems; the main one is that assumes that health is just about health maximisation, ignoring that there are other issues like equity. How can primary care assess if the current balance of activities is right? Primary care can assess if the current balance of activities is right by performing continuous evaluation. Health economics can help providing tools to help evaluating and deciding where to employ available resources. One of these tools is Programme Budgeting and Marginal Analysis (PBMA). PBMA is a framework that allows comparisons between programmes (diseases groups, patient groups, etc) in terms of expenditure over the time making managers and policy makers decide which areas are priorities and which one are not. Once priorities are established, the focus is on the marginal benefits of expanding an area compared with the marginal sacrifices of reducing another area (Mitton and Donaldson, 2001, Cohen, 1994). Some people may argue that it is not ethical to decide how to use resources employing economical tools but those people should be able to provide a better and fairer way to 8
  9. 9. Introduction to health Economics. Assignment 1. 04155084 justify the choices they are making. Health economics may not provide perfect solutions but at least gives and structured framework that allows taking them (MPH lecture notes, D Cohen, 2003) Can primary care be run based on rules from the free market? The free markets are ruled by forces of supply and demand. In the free markets, the output is distributed by the wiliness or ability of the consumer to pay. Health economics can help analyse some of the rules of the free market. Some of the characteristics of the health care system in general and primary care in particular make the free market very difficult to work in these settings. Some of these peculiarities are (Donaldson, 1993): • Uncertainty about the risk of contracting an illness. Because the unpredictable nature of the illness, the consumer can not plan for the future consumption of health care. In a free market, the market will respond by generating insurance mechanisms with high premiums to cover for this uncertainty. These premiums may not be affordable for some parts of the population. • Externalities. An externality appears when one person’s action affects another person. This effect is absolutely free and unwanted. An example of positive externality is the immunity protection that unvaccinated people get from vaccinated people. In a free market for health, the cost and benefits of these externalities can not be accounted for using the rules of supply and demand. • Information asymmetry between providers (health professionals) and consumers (patients). In a free health care market, it is very difficult for patients to know which is the best product on offer. Health care professionals have a double role as providers and advisers and this can create a conflict of interest. 9
  10. 10. Introduction to health Economics. Assignment 1. 04155084 • Access to medical training is restricted. This means that the number of suppliers (doctors and nurses) is regulated and limited, making difficult to increase supply in an ideal free market. Because the failures of the market in the allocation of health care, it is usual in most of the countries that the government intervenes in the regulation of the health care market. 10
  11. 11. Introduction to health Economics. Assignment 1. 04155084 Bibliography Cohen, D. (1994) 'Marginal analysis in practice: an alternative to needs assessment for contracting health care', BMJ, 309, 781-5. Donaldson, C. (1993) Economics of health care financing : the visible hand, Macmillan, London. Drummond, M. F., O'Brien, B., Stoddart, G. L. and Torrance, G. W. (1997) Methods for the economic evaluation of health care programmes, Oxford University Press, Oxford. Groves, T. (1999) 'Reforming British primary care (again)', BMJ, 318, 747-748. Jefferson, T., Demicheli, V. and Mugford, M. (1996) Elementary Economic Evaluation in Health Care, BMJ Books, London. Klein, R. (1995) 'Priorities and rationing: pragmatism or principles?' BMJ, 311, 761-762. Mitton, C. and Donaldson, C. (2001) 'Twenty-five years of programme budgeting and marginal analysis in the health care sector, 1974-1999', J Health Serv Res Policy, 6, 239-48. Mooney, G. H. (2003) Economics, Medicine and Health Care, Prentice Hall Europe, Hemel Hempstead. Mooney, G. H., Russell, E. M. and Weir, R. D. (1980) Choices for health care, Macmillan, London. Oldham, J. and Rutter, I. (1999) 'Independence days', BMJ, 318, 748-749. Salek, S. (1999) Pharmacoeconomics and outcome assessment: a global issue, Euromed Communications Limited, Surrey. 11