Health economics

HEALTH ECONOMICS
MS. ANCY CHACKO
IIND YEAR M.Sc NURSING
GOVT. COLLEGE OF NURSING
ALAPPUZHA

WHAT IS ECONOMICS?
 Economics is the science of scarcity. It
analyses how choices are structured
and prioritized to maximize welfare
within constrained resources.
 Economics is the study of distribution
of scarce resources commonly known
as goods and services across a
population

WHAT IS ECONOMICS?
 The Economics is the science that
deals with the consequences of
resources scarcity.
 The discipline of economics deals with
use of scarce resources to satisfy
human wants and needs how best to
use the resources available.

MODELS
• to establish cause and
effect in a scientific
mannerPOSITIVE
ECONOMICS
• establishing the means
by which socially
desirable outcomes
can be achieved
NORMATIVE
ECONOMICS

WHAT IS HEALTH?
. According to World
Health Organization's
(WHO) constitution
health is 'a state of
complete physical,
mental and social well
being and not merely
the absence of disease
or infirmity'
“Health" in health
economic (evaluation) is
health status according
to some measure.

Health economics is the study of distribution of
health care. It is a branch of economics concerned
with issues related to efficiency, effectiveness, value
and behavior in the production and consumption of
health and health care.

It is the allocation of resources within the health
system in the economy, as well as functioning of
health care market.

Health economics is concerned with the formal
analysis of costs, benefits, management, and
consequences of health and health care. It is the
branch of economics concerned with the application
of economic theory to phenomena and problems
associated with health and health care.

Health economics is the study of how scarce
resources are allocated among alternative uses for the
care of sickness and the promotion, maintenance and
improvement of health, including the study of how
health care and health-related services, their costs
and benefits, and health itself are distributed among
individuals and groups in society. It can, broadly, be
defined as 'the application of the theories, concepts
and techniques of economics to the health sector'.

CONCEPTS IN HEALTH
ECONOMICS
 Resources
 Scarcity opportunity of cost
efficiency
production of health
 health care market

CONCEPTS IN HEALTH
ECONOMICS
Macro-
economics
economy
level of
outputs
level of
national
income
general
price
level

CONCEPTS IN HEALTH ECONOMICS
Microeconomics
•Microeconomics is the study of economic
behavior of individual decision making units
such as: consumers, resource owners and
business firms in a free enterprise economy.
•This can be measured by conducting market
surveys, pilot and feasibility studies.

CONCEPTS IN HEALTH
ECONOMICS
Health Microeconomics
Health microeconomics is concerned with how
individuals choose, minimize costs or maximize profit or
utilities within a given health care system within a set of
rules and prices.

Meaning and scope of health economics
Determinants of health
Demand for health and health care
Supply of health care
Health care markets

The relationship between economic growth
and health
Health sector budgeting and planning
National health systems
Equity in health outcomes and in health care
International health.

Medical
advances
Due to
increase in
life
expectancy
Changes in
family
structure and
norms
Advances in
health
research
Higher
expectation
among
people
public
awareness
NEED FOR
HEALTH
ECONOMICS

IMPORTANCE OF HEALTH ECONOMICS
• To formulate health services
• To establish the true costs of delivering health
care or to estimate all real costs like the use of
patients' time, loss of output elsewhere in the
system etc

IMPORTANCE OF HEALTH ECONOMICS
• To evaluate the relative costs and benefits of
particular policy options
• To estimate the effects of certain economic
variables like user charges, time and distance
costs of accessibility, etc on the utilization of
health services

• Health and economic
development
• Organization and
economic development
• To identify and measure
health and diseases ,basic
needs. To identify
determinants of growth and
economic development,
elements of health
expenditure by use of macro
economics
• To determine the economic
characteristics of health care
and Health related activities
HEALTH POLICY ISSUES RELEVANCY OF ECONOMICS

• Finance aspects
of health sector
• Demand analysis
• To find out the source of
health care financing; social
accounting system, self
financing insurance etc.
• To analyze the determinants
of demand, individual and
supplier induced behavior,
time, cost ,health payment
system etc

• Supply analysis
• Health man
power
• To determine the physical
resources and costs,
estimation of short term
And long term cost curve
• To determine the labour
market and demand for &
supply of health
workers,remuneration and
other determinants of
behavior ,productivity etc

•Financial
management
•Budgeting system and
accounting ,inventory
managment

Major Tasks of Economics In Health
(Care)
Descriptive
Quantification
Explanatory or
Predictive
Evaluative

FEATURES OF HEALTH ECONOMICS
 Health and medical care is considered as
economic goods
 Health is a private or a public good
 Measurement of health is also considered in
economics
 Stock of health
 Investment aspects of health

FEATURES OF HEALTH ECONOMICS
 Loss due to ill health
 Resource costs of different diseases, effects
of health and medical care provision
 Planning of health and medical care
 Choice of technology in health care system,
etc.
 Provision of equity in health outcomes and
health care;

AREAS OF HEALTH
ECONOMICS
 Economic aspects of relationship
between health status and productivity
 Financial aspects of health care
services

AREAS OF HEALTH
ECONOMICS
 Economic decision making in health
and medical care institutions
 Planning of health development and
such other related aspects

FACTORS INFLUENCING HEALTH
ECONOMICS
 Extensive government intervention
 Intractable uncertainty in several dimensions
 Information asymmetric
 Barriers to entry
 Externalities and the presence of a third-party agent

TOOLS USED IN ECONOMIC ANALYSIS
Economic
Variables
Relationships
between
Economic
Variables
Graphical
Representation
of
Relationships
The Direction
of the
Relationships

ECONOMIC EVALUATION
 Economic evaluation is the comparative analysis of
alternative courses of action in terms of both their
costs and consequences in order to assist policy
decisions

Steps in Economic Evaluation
Deciding Upon the Study
Question
Assessment of Costs and Health
Effects
Adjustment of timing
Adjustment for uncertainity
Making a decision

TYPES OF ECONOMIC
EVALUATION
Cost
minimization
Analysis
(CMA
Cost-
effectiveness
Analysis
(CEA)
Cost-utility
Analysis
(CUA)
Cost-benefit
Analysis
(CBA).

Cost analysis
Cost analysis is a resource tool for
financial management in hospital or
department. It is an economic
evaluation technique that involves the
systematic collection, categorization,
and analysis of program or
intervention costs, and cost of illness.

When to Use Cost Analysis?
Cost analysis can be used as an evaluation
method when
-Only one program is being assessed,
-Information about program effectiveness is
not available, or the interventions being
assessed and compared are equally
effective.

Objectives of Cost Analysis
 To assess the efficiency and
effectiveness of function and their cost
implication.
 To improve the policy relevance and
utility through assessment, planning
and avoidance of wasteful expenditure
in the hospital.
 To allow researchers to achieve cost
minimization for the programs under
consideration.

Purposes of Cost Analysis
 A tool for planning and cost projection
 To assess the efficiency of a
programme
 To assess the priorities
 Accountability
 To assess equity

Principles of Cost Analysis
 Make explicit the analytic perspective
 Describe the anticipated benefits
 Specify the components of costs
 Discount to adjust for differential
timing
 Perform a sensitivity analysis
 Calculate measurement of efficiency

1. Identify and define the problem
2. Defining the alternatives
3. Defining the audience
4. Define the perspective
5.Define time frame
6. Determine the time frame and
analytic horizon
7. Choose a format/methodology

 Define program, treatment, or technology to
be analyzed
 Develop a framework for cost analysis of
program
 Describe objectives of analysis
 Select type of cost analysis
 Design methodology of cost analysis

 Apply principles of cost analysis
 Describe study outcomes
 Development of cost inventory
 Preparation of cost summary

 Measurement/evaluation of resources used
 Calculate cost analysis results : total cost,
average costs, and marginal costs
 Sensitivity analysis and discounting

Total cost (TC)
• The total cost of a program or an
intervention is derived by adding all the
costs incurred in producing a given level of
output. It includes the cost of all the
personnel, the supplies, and the equipment
that were identified in the cost inventory.
TC = Quantity of resource 1 X value of that
resource 1 + ....+
Quantity of resource n X value of that resource
n

Average cost (AC)
• The average cost is the cost per unit of
output (e.g., cost per patient treated or
cost per child immunized). AC is
computed by dividing the total cost by
the number of participants or other
relevant intervention units. The formula
is
AC = TC / Q ; Q= Units of output

Marginal cost (MC)
The marginal cost is the resource cost associated with
producing one additional or one less unit within the
same intervention/program
MC = Change in total costs/change in quantity produced
Or
MC = (TC' -TC) / (Q' Q)
TC' = Total costs a higher output level TC = Total
costs at lower output level Q' = Higher level of output
Q = Lower level of output

Cost-of-Illness
Method (COI) Non Market
Valuation Methods

 Hedonic pricing
The hedonic method is based on the principle
that the prices that consumers pay or receive
depends on characteristics of the person that
can be objectively measured.
W = f (q,e,ex,a,g)
WhereasW= the wage rate; q =a measure of
qualification; e= experience; ex = measure of
experience; a= age; g=gender

Averting behavior method
The value of a small change in health status can
be measured by the amount of money a
person is willing and able to spend on some
controlling or preventive device or defensive
(averting) action.This amount of money
represents the person's valuation of safety
against a perceived risk.

 This is direct method, uses primary surveys
that ask persons to place values on an
intervention to attain a level of health
outcome.

Cost-of-illness
analysis
Cost-benefit
Analysis (CBA)
Cost-
effectiveness
Analysis (CEA)
Cost-utility
Analysis (CVA)
Cost-
minimization
Analysis
Cost-
consequence
Analysis

TYPE OF ANALYSIS COST OF
INTERVENTION
OUTCOME CONCERN
Cost benefit analysis Monetary units Valued In cash terms Net cost: benefit
ratio
Cost effectiveness
analysis
Monetary units Qualitative non-
monetary units eg:
reduced morbidity
or years of life
gained or saved
Cost per unit of
consequence or cost
per years of life
gained/saved
Cost utility analysis Monetary units Valued as Utility
Eg: Quality adjusted
life year (QALY)
Cost per unit of
consequence or cost
per QALY
Cost-minimisation-
analysis
Equivalent outcome
in all respect
The least cost
alternative

 Cost-benefit analysis is a practical way of
assessing the desirability of projects, where it
is important to take a long view (looking at
the repercussion in the future as well as in the
near future and a wide view in the sense of
allowing side effects of many decisions) Le. it
implies the enumeration and evaluation of all
the relevant cost and benefits.
-Prest andTerkey

 Cost BenefitAnalysis (CBA) is an economic
evaluation technique that measures all the
positive (beneficial) and negative (costly)
consequences of an intervention or program
in monetary terms.

 CBA is a practical approach of appraising the
desirability of an intervention involving public
expenditure in terms of net social gain
society.
 CBA is the use of analytical techniques
involving a monetary assessment to identify
the total costs and benefits of a specific
intervention

Benefits
 Direct Benefits
 Indirect Benefits
 Intangible Benefits
Benefits (B) > Costs (C) or Net Benefits
(NB) = B -C > O.

 Cost BenefitAnalysis is used for
determining priorities among various
alternative programs or
interventions.
 It provides an estimate of the
potential value of undertaking a
course of action, i.e. instituting a new
program or intervention or revising
the old one.
 It can also be used to compare
health-related interventions to those
in other economic sectors.

 It enables policy makers to determine
whether the value of its positive
consequences exceeds the value of
societal resources required to implement
the program.
 It estimates and totals up the equivalent
money value of the benefits and costs of
projects to establish whether they are
worthwhile. .
 It is a powerful and relatively easy tool for
deciding whether to make a change or not.

 CBA adopts a broad societal perspective
as it includes all costs and all benefits
 CBA measures the outcomes in
monetary terms.
 It assess the desirability of
program/intervention

 To assess the economic efficiency
 To decide whether to implement a specific
program
 To select among competing/alternative options

Principles of Cost Benefit
Analysis
• There must be a common unit of
measurement. All the benefits and costs of
the program/project must be measured in
terms of their equivalent money value
• The CBA valuations should represent
consumers or producers valuation.
• The valuation of benefits and costs should
reflect preferences reveled by choices

Analysis
• The benefits are usually measured by
market choices.
• The marginal benefit should be equal to
the market price.
• The gross benefits of an increase in
consumption are an area under the
demand curve.

Analysis
• Some measurements of benefits require
the valuation of human life. These values
can be used to estimate personal costs in
terms of increased risk or of reduced risk.
• The alternatives must be explicitly
specified and considered in the evaluation.
• The impacts of the programmes must be
defined

Analysis
• The discounted present value of benefits
should exceed the discounted present
value of costs.
• Compare alternative programmes in terms
of the expected benefits and cost ratio of
each programme to determine which
should receive priority for funding

Advantages of Cost Benefit
Analysis
• It helps to allocate scarce resources to
programs that maximize societal economic
benefit
• It studies the full economic impact of all
potential outcomes of an intervention.

Advantages of Cost Benefit
Analysis
• It makes possible to compare different
programs having different health
outcomes, or health programs to non
health programs.
• lt allows analysts to examine its
distributional aspects; who will receive
these benefits and who will bear the costs.

Drawbacks of Cost Benefit Analysis
• It measures costs and outcomes in
monetary terms and not disease specific
• There is difficulty in assigning monetary
values to all pertinent outcome including
changes in the length or quality of human
life.
• The results of CBA are only as good as the
assumptions and valuations on which they
are based.

Ratio
approach
Net benefit
approach.
Approaches
of Cost
Benefit
Analysis

Procedural Steps in
Cost-Benefit Analysis
Defining the Discount Rate
Defining the Time Frame and Analytic Horizon
Defining the Perspective
Defining the Audience
Identifying Interventions
Defining the Problem

Identifying Intervention
Outcomes
Health
Outcome
Non-health
Outcome
Intangible
Outcome

Cost-effectiveness analysis
• Cost-effectiveness analysis is an
economic study design in which
consequences of different interventions
are measured using a single outcome,
usually in 'natural' units (for example, life-
years gained, deaths avoided, heart
attacks avoided or cases detected).
Alternative interventions are then
compared in terms of cost per unit of
effectiveness.

Cost-effectiveness
analysis
Cost-effectiveness analysis as tool
decision-makers can use to assess
and potentially improve the
performance of their health systems. It
indicates which interventions provide
the highest 'value for money' and
helps them choose the interventions
and programmes which maximize
health for the available resources.

Cost-effectiveness
analysis
Cost Effectiveness Analysis (CEA)
is a type of economic evaluation
that examines both the costs
and health outcomes of
alternative intervention
strategies.

Aim of Cost Effectiveness
Analysis
• To maximize the level of benefits-
health effects-relative to the level of
resources available

Objectives of Cost Effectiveness
Analysis
To compare alternative programs with a
common health outcome
To assess the consequences of
expanding an existing program.

Purposes of Cost Effectiveness
Analysis
To identify the
most cost-effective
intervention from a
group of
alternatives
To provide
empirical
justification for a
program

Purposes of Cost Effectiveness
Analysis
To identify and exclude
programs that is wasting
resources.
To provide general
information on the relative
costs and health benefits of
different alternatives
To evaluate the
interventions in terms of
efficacy (cost effective ratio),
absolute health gain and
affordability (absolute cost)

Drawbacks of Cost Effectiveness
Analysis
• The data regarding direct costs such as doctors' or
nurses' time and supplies used; indirect costs such
as a portion of administrative costs, the cost of
equipment are usually not readily available.
• It does not facilitate comparisons across different
diseases when different outcomes have been
used.
• Cost-effectiveness is the only one criterion for
judging whether an intervention is effective or not.

Benefits of Cost Effectiveness
Analysis
• This method is easy to understand and more
readily suited to decision making.
• It provides empirical results for the decision
makers to compare the costs and consequences
associated with alternative programmes.

MEASURES FOR COST-EFFECTIVENESS
cost
effectiveness
ratio (CER)
net health
benefits
(NHB)

COST EFFECTIVENESS RATIO (CER)
 Average cost-effectiveness ratio (ACER)
 Marginal cost-effectiveness ratio (MCER)
 Incremental Cost-Effectiveness Ratio (ICER)

NET HEALTH BENEFITS (NHB)
It is the difference between the health outcome and
cost divided by rate of substitution of money for
health.
NHB = E-C/A.

ELEMENTS OF CEA
 A clear study perspective, time frame, and
analytic horizon
 An explicitly defined study question
 Relevant assumptions underlying the study
 Detailed descriptions of the interventions
 Existing evidence of the interventions' effectiveness
 Proper identification of all relevant costs
 A comprehensive discussion of the results

PROCEDURAL STEPS IN COST-EFFECTIVENESS
ANALYSIS
 Defining the Problem
 Adopting a Research Strategy
 Specify Audience
 Define Perspective
 Specify the Time Frame Work
 Prepare the Analytic Horizon
 Decide the Type of Study Design
 Identify the Outcome Measures or Variable
 Search for Available Alternatives
 Identify the Types of Costs to be included in CEA
 Analysis

 Utility is the value or worth of a level of health
as measured by the preferences of an
individual or society. Cost-utility analysis is
one form of cost-effectiveness analysis,
which allows the comparison of different
health outcomes by measuring them all in
terms of a single unit-(QALY)
(Maurice McGregor).

It weighs costs and. quality adjusted health
outcome of each intervention in order to take
the decision for the programme to be
implemented.

quantity of life years /
QALY
disability-adjusted life
years /DALY

Health rating method
Time trade-off method
Standard gamble method
Health index method

 The World Health Organization defines disability-
adjusted life years (DALY) as 'a health gap
measure that extends the concept of potential
years of life lost due to premature death to
include equivalent years of healthy life lost by
virtue of being in states of poor health or
disability'. In other words, one DALY is one lost
year of healthy life.
 DALY is a combined measure of years in
disability and years of life lost due to premature
death (from the disability).

 Years of Life Lost (YLL): YLL is the number of
years of life lost due to premature death.
 Years Lived with Disability (YLD): YLD is the
number of healthy years lost due to disability
from the condition until remission or death.

 To measure health care costs and interventions
 To evaluate the effect of a nursing intervention
on patient outcomes when one of these
outcomes is QOL
 To compare use of a nursing process
management with a disease process
(hypertension) management
 To assess cost utility for both medical
interventions and nursing interventions
 To compare current practice and the change in
practice need

 It is used for comparing interventions to
achieve one quality adjusted life year.

 Cost minimization analysis is a specific
type of analysis in which the outcomes
of the two or more healthcare
interventions are assumed equal.
Therefore economic evaluation is based
solely on comparative costs and result
is least cost alternative

 Cost consequences is a form of cost
effectiveness analysis comparing alternative
interventions or programs in which the
components of incremental costs (e.g.,
additional therapies, hospitalization) and
consequences (e.g., health outcomes adverse
effects) are computed and listed, Without
aggregating these results (e.g., into a cost-
effectiveness ratio).

 Cost consequences analysis is a means to
estimate whether the value of results
obtained is worth the investment. In a cost-
consequences analysis, instead of combining
the costs and effects, all the costs and
outcomes are reported separately.

 Simple to use and evaluates the entire
program of care
 Allows decision makers to impute their own
values to the different costs and
consequences Incorporates several outcome
measures and easy to interpret the findings
 Used to evaluate practice guidelines and
disease state management programs.

There is a difficulty of comparing outcomes
between different interventions in order to
prioritize them.

Health economics

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