Understanding and Scope of Health Economics

1. 1
Health Economics: An Overview
Abdur Razzaque Sarker
MHE (Health Economics), MSS (Economics)
Health Economics and Financing Research Group
ICDDR,B
and
PhD Fellow in Strathclyde University, UK
Email: arazzaque@icddrb.org

2. What is Health Economics?
Health Economics study areas
Positive analysis
Normative analysis
Focus on some important issues
2
By the end of this module you
will be able to:

3. 3
Science about how best limited resources can be
utilized to satisfy unlimited need on the basis of
individuals’ or society’s own choice.
What is Economics?

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Science about how best limited resources (optimal)
can be utilized to satisfy (unlimited) need of health on
the basis of individuals’ or society’s own choice.
What is Health Economics?

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Health Economics, therefore, is the study of how scarce
productive resources (health care and health) are allocated
among alternative uses for the care of sickness and the
promotion, maintenance and improvement of health.
What is Health Economics?

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Why Health Economics?
 Health economics is concerned with the formal analysis
of costs, benefits, management and consequences of
health and health care
 Interested in understanding demand and supply of
health and health care, as well as issues of equity and
efficiency.
To understanding where funding does and should come
from.

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Country GDP per capita
(Int$ 2005)
Life expectancy
at birth
Health expenditure
As percentage
of GDP
Per capita (Int$ 2005)
Nepal 1050.6 67.1 5.8 69.4
Bangladesh 1286.0 66.6 3.4 47.7
Pakistan 2369.0 66.9 2.6 62.7
Vietnam 2682.0 74.6 7.2 210.7
India 2993.3 64.1 4.2 131.7
Economic level, life expectancy and health expenditure
Selected Asian Countries
Selected North American and European Countries
Country GDP per capita
(Int$ 2005)
Life expectancy
at birth
Health expenditure
As percentage of GDP Per capita (Int$
2005)
USA 41,735 78.7 16.2 7410.0
Italy 26,526 81.4 9.5 3027.0
U.K. 31,985 80.1 9.3 3399.0
Sweden 32,183 81.4 9.9 3690.0

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POSITIVE ANALYSIS
Aims at explaining and predicting behaviour of individuals
and organisations. For instance, how income and price of
health input influence individuals consumption of health.
NORMATIVE ANALYSIS
Aims at describing how the society should look like. For
instance, application of ethical principle (Inequality,
Inequity).
Economic analysis

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F. Health economic evaluations E. Market analysis
B. Determinants of
health
A. Value of health
C. Demand for
health care
D. Supply of health
care
G. Health care organisation
and
financing
H. System level evaluation
Source: Culyer och Newhouse, 2000, Lindgren, 1993.
Study Areas in Health Economics

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A. Value of health
How health can be measured?
Examples:
Quality adjusted life years
Disability adjusted life years

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1,0
0,9
0,8
0,7
0,6
0,5
0,4
0,3
0,2
0,1
Death
Full health
0,0

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QALY weight
Sickness
absence
days
Sex
Men Women
18-24
yr
25-34
yr
35-44
yr
45-54
yr
55-64
yr
18-24
år
25-34
yr
35-44
yr
45-54
yr
55-64
yr
0 0.9112 0.9082 0.8950 0.9012 0.9267 0.8646 0.8903 0.8835 0.8711 0.8628
0-7 days 0.8941 0.8900 0.8776 0.8721 0.9027 0.8572 0.8764 0.8707 0.8482 0.8461
8-30
days
0.8458 0.8282 0.7990 0.7892 0.8503 0.8139 0.8203 0.8236 0.7898 0.7866
31-90
days
0.7354 0.7046 0.7221 0.7431 0.7525 0.6701 0.7153 0.7064 0.7128 0.7172
90-365
days
0.8283 0.5131 0.5710 0.6391 0.6998 0.6974 0.6184 0.6520 0.6064 0.6086

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B. Determinants of health
Some examples:
• Age
• Gender
• Social status
• Education
• Family condition
• Environment
• Social policy

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C. Demand for health care
Demand function for doctor’s visit
= ƒ (price per visit, coinsurance rate, price of
other goods, income, time price, health status,
Age, education, …..)

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Other goods
Number of visits
 Income
 Health
condition
 Time-price
 Insurance
Demand curve
Healthy
Sick
Vf Vs V0 V1
OG
Factors that influence demand for
health care

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Time-price
Cost Yr 2005 Yr 2006
-----------------------------------------------------------------------------
One hour 10 $ 10 $
Visit fee 25 $ 30 $
Travel 5 $ 5 $
-----------------------------------------------------------------------------
Total costs 40 $ 45 $
Total nr visits 7 6
-----------------------------------------------------------------------------
Total price elastricity = % change in nr visits/ % change in total price
= - 1,5
Visit fee elasticity = % change in nr visits/ % change in visit fee
= - 1,0

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Difference between Grossman’s and traditional approach to demand
For health
1. It is not medical care per se that consumer wants, but rather
health. Medical care demand is a derived demand for an input
to produce health ( the demand for healthcare is derived from
the demand of health)
2. The consumer does not merely purchase health passively from
the market. Instead, the consumer produces it, spending time on
health-improving efforts in addition to purchasing medical inputs.
3. Health lasts for more than one period. It does not depreciate
instantly, and thus can be treated like the capital good that it is.
4. Health can be treated both as consumption and investment
good.
Health care or health

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 Initial health status
 Investment in health
 Depreciation of health
 Uncertainty
Health capital

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Regression model for demand for health
Health = Constant + initial health status + investment in health +
depreciation of health + uncertainty + error
Health = Constant + (father’s occupational status + etnicity)+
(education + physical excercise in leisure time) + age
+ indivdual’s occupational status + error

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D. Supply of health care
All that influence the production of health
services that makes health better.
Some examples:
 Private/public health care
 Labour market for health professionals
 Waiting period
 Establishment of health centres
 Law (equity in health care)

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E. Market analysis
Production and consumption of health care in a
non-regulated market.

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F. Health Economic evaluation
 Cost of illness studies
 Cost-effectiveness analysis
 Cost-benefit analysis
 Cost-utility analysis
Decision rules for effective resource allocation

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Data Envelopment Analys (DEA)
Input-output in a hospital
Input variables
Nr of doctors
Nr of other health personnels
Nr of beds
Output variables
Nr of surgery
Nr of out-patients
Nr of in-patients

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In-patients
Out-patients
E
E´
O
E = Effective
E´= Not effective Effectivitety measurement = OE´/OE

25. Health care triangleHealth care triangle
25
Citizen Provider
Delivery
Third-party insurer
or purchaser
Funding
Allocation
Source: Reinhardt, 1990
G. Health care organisation and financing

26. Financing equationFinancing equation
TF + SI + UC + PI = P X Q= W X Z
 TF = Sum of taxation
 SI = Social insurance contributions
 UC = Out of pocket and user
charges
 PI = Insurance premium (voluntary
or private)
 P = Price of the service
 Q = Quantity of the service
 W = Quantity and mix of inputs
 Z = Price of inputs
26

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Firms,
corporate entities
& employers
Individuals,
households &
employees
Foreign & domestic
NGOs & charities
Foreign govt
& companies
Source Mechanism Collection agents
Direct & indirect taxes
Compulsory insurance
contributions & payroll
taxes
Voluntary insurance
premiums
Medical savings
accounts
Out-of-pocket payments
Loans, grants &
donations
Central, regional &
local government
Independent public
body or social security
agency
Private not –for- profit or
for profit insurance
funds
Providers
Revenue collection
Source: Kutniz, 2000

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H. System level evaluation
For example:
Health expenditure =ƒ (factors that influence demand, factors that influence sup

29. Equity concepts
 Market mechanism is considered fair/Nozick.
 Maximising greatest happiness for greatest numbers, but
ignores distributional aspects /Utilitarianism.
 Goods are distributed so that the position of the least well off in
society is maximized/ Rawls
 Equal shares of a distribution of a commodity which means
equality in health and health care/ Egalitarianism
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Equity in health careEquity in health care
Principle of being fair to all, with reference to a
defined and recognized set of values.

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Horizontal equity
The principle that says that those who are in
identical or similar circumstances should be
treated equally
Vertical equity
The principle that says that those who are in
different circumstances should be treated
differently.
 Population s that are equally ill ought to be
treated same;
those that are sickest ought to get more.

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http://www.healtheconomics.com/
http://www.healtheconomics.org/
http://www.oecd.org
http://www.healtheconomics.com/Database.cfm
http://www.worldbank.org/
Important websites

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Health Economics Journals
 Journal of Health Economics
 Health Economics
 Journal of Health Economics
 Journal of Health Care Finance
 Health Care Financing Review
 Health Policy and Planning
 American Journal of Public Health
And many journals in the area of Public Health

33. THANK
YOU
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Email: razzaque.sarker@gmail.com