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Bishwajit Mazumder
Nursing Instructor
Dhaka Nursing College, Dhaka
E. mail: mbishwa@rocketmail.com

Concept of Health Economics

Economics is involved in nearly all contemporary issues facing health care,
such as the growing demand for health care services, prices for pharmaceuticals,
competition among health care organizations, and remuneration for health care
professionals. As a result of scarcity health economics is now taking a center stage in
health management. A sound knowledge of health economics will assist you as an
individual health care provider tounderstand the dynamics of health care in terms of
institutional policies, ways of implementation and how best results can be achieved
within the limits of available resources. Inefficiency in using resources available for
health care has affected coverage and quality of health care delivery in developing
Definition of Economics:
There are several definitions of Economics, some of the definitions I mention
The study of how men and society end up choosing to employ scarce
resources that could have alternative uses (Samuelson)
Economics is the study of how people allocate their limited resources in an
attempt to satisfy their unlimited wants.
Study of how we use scarce resources to produce goods and services to satisfy
our wants

These definitions are similar and clearly related to each other, each has its own special
terms and meaning. There are no significant differences in the definitions.
Basic Concepts in Economics:
Basic concepts in economics to have a clear understanding of health
economics. The basic concepts include; goods, scarcity, opportunity cost, rational
choice, economic resources, utility, demand and supply.

Good is a tangible object that is capable of satisfying human wants.

Materials like cars, clothes, food, cookers can be regarded as goods and health can
also be considered an economic good.
Service is an intangible action that is capable of satisfying human want such
services include water supply, health care, waste disposal, etc. Services satisfy our
wants as much as goods do. Goods such as sphygmomanometers, suction machine are
used to provide services.
Scarcity is a condition in which it is impossible to satisfy all human wants for
goods and services and this forms the central concept in economics. Scarcity is said to
occur when we can not have every good or service that we need or when we want
something that we can not have. Scarcity exists at individual, institutional, community
and government levels.
Opportunity cost:
Opportunity Cost is defined as the value of the second best choice that is
given up when a first choice is made. Every choice one makes is a trade-off between
the benefits and costs of ones decision. Usually one will want to make a choice that
result in the smallest opportunity cost and the greatest possible benefit. If this is the
case then one has made a rational choice

Utilityis the benefit consumers get from the purchase of goods and services. It
helps to determine how much the consumer is willing to pay. Marginal utility is the
additional utility gained by consuming one more unit.
Economic resources:
Economic resourcesare all natural, human, and manufactured resources which
go into the production of goods and services. It is broadly divided into two: Property
resources include land (natural resources) or raw materials and capital. Human
resources include labor and entrepreneurial ability.

Definition of Health Economics:

Health economics is defined as the branch of economics (a social science)
which deals with the provision of healthcare services, their delivery, and their use,
with special attention to quantifying the demands and measuring outcomes for such
services, the social, financial, and opportunity costs of such services, and of their
delivery, and the benefits obtained. More emphasis is given to the costs and benefits
of healthcare to a population than to the individual. It is dynamic in nature and
basedon changing health issues. (Health Economics Core Library Module Librarian
Expert Discussion Meeting, August 6, 2002)
Health economicsis concerned with the utilization of limited resources
(monetary, human, etc.) to cover all the treatments and interventions that improve the
health of a society. For example, the amount of money is limited by a budget, but the
amount of a nurses time is limited by the working hours in a day.
Concepts in Health Economics:
Health as an Economic Good:
Health can be seen as an economic good or service. The nature of healthis
such that it can be seen as a collective good. Collective goods(orsocial goods) are
defined as the public goods that could be delivered asprivate goods, but are usually

delivered by the government for variousreasons, including social policy, and financed
from public funds liketaxes.
Medical Economics:
Often used synonymously with Health economics. Medical economics isthe
branch of economics concerned with the application of economictheory to phenomena
or problem associated typically with cost-benefitanalysis of pharmaceutical products
and cost-effectiveness of variousmedical treatments. Medical economics often use
mathematical modelsto synthesize data from biostatistics and epidemiology for
support ofmedical decision making, both for individuals and for the wider
healthpolicy. This module will not discuss the details of medical economics.

Elements of health economics:

A. What is health? What is its value?
Perceived attributes of health; health status indices; value of life; utility
scaling oh health.
B. What influences health( other than health care):
Genetics , occupational hazards ; consumption patterns; education; income;
capital (human and physical), family background, etc.
C. Demand of health care:
Influence of A and B on health care seeking behavior; barriers to care
Seeking; agency relationship; need; altruism; insurance; demand for care and its
D. Supply of health care:
Production costs, alternative production techniques, input substitution;
markets for inputs; remuneration methods and incentives; for profit and nonprofit

E. Market analysis:
Money prices, time prices; waiting lists and non price rationing systems as
equilibrating mechanisms and their differential effects in markets
for physician and hospital services.
f. Micro appraisal:
Cost-effectiveness, Cost-benefit, Cost-utility Analysis of alternative ways of
delivering care (mode, place, timing or amount) at all phases (detection, diagnsis,
treatment, etc.)
G. Planning , budgeting, regulation and monitoring mechanisms:
Evaluation of effectiveness of instruments available for optimizing the
system; interplay of budgeting, manpower allocations, regulation, and their incentive
H Evaluation the whole system level:
Equity and allocated efficiency criteria brought to bear on E and F; interregional and international comparisons of performance; financing methods

Principle of health economic:

The principles of health economics consider supply and demand issues and how the
two might interact given that the standard market solution generally fails due to
problems such

Adverse selection,
Moral hazard,
Asymmetric information
Supplier induced demand.

Adverse selections:
A situation often resulting from asymmetric information in which
individuals are able topurchase insurance at the rates that are below actuarially fair
rates plus loading costs.An event in healthcare whereby one party decides not to
reveal the full extent of their risk profile to the other party (i.e. insurance model).

Moral hazard:
The possibility of consumers or providers exploiting a benefit system unduly
to the disadvantages of other consumers, providers or the financing community as a
whole.An insurance term that represents the disincentives created by insurance for
individual to take measures that would reduce the amount of care demanded. In the
health services literature, it is more commonly used to express the additional quantity
of health care demanded, resulting from a decrease in the net price of care attributable
to insurance.Arises where the attitudes and behavior of a person or organization
change once they are covered for potential costs or losses (e.g. healthcare
consumption may be higher when insured.)
Asymmetric information:
Situations in which the parties on the opposite sides of transaction have
differing amounts of relevant information. Doctors have more knowledge and
information about medicine thanpatients /consumers, the individual may not be the
best judge of his/her own interests, the doctor acts as an agent of the patients demand.
Supplier Induced Demand (SID)
The change in demand associated with the discretionary
influence of providers, especially physicians, over their patients.
Demand that is provided for the self interests of providers rather
than solely for patients interests.
Example: If doctors behaved like some financial advisers or
computer salespersons in the past and maximized profits without
any limit from a professional code

The scope of health economics:

a. Meaning, measurement and valuation of health:
Measurement of health outcomes

e.g., EQ-5D (Brooks, 1996)

Measurement of health gain
(QALYs (Williams, 1985), DALYs (Fox-Rushby, 2002), HYEs (Mehrez and Gafni,

Monetary valuation of health states

Equivalent and compensating variation (Johansson, 1991)
Discrete choice experiments (Ryan and Farrar, 2000)
Non-monetary valuation of health states (Torrance, 1986)
Standard Gamble , Time Trade Off, Rating Scale
Multi-Attribute Utility measures

b. Influences of health and the demand for health:

Mainly jurisdiction of epidemiologists and others
e.g., CSDH (2008), Marmot Review (2010)
Accounting for endogeneity issues
Total health expenditure on population health (Martin et al.,
Doctor supply on health (Gravelle et al., 2008)
Impact of macroeconomic conditions on health
Health living in hard times (Ruhm, 2005)
Technological change and obesity (e.g., Cutler et al., 2003)
c. Demand for health care :
(Derived) demand for health care
Derived from the demand for health (Grossman, 1972)
Impact of health insurance
RAND Experiment (Manning et al, 1987)
Asymmetry of information
Supplier-induced demand (Evans, 1974)
Understanding patient choices
Discrete choice experiments (Burge et al, 2005)
Estimating demand functions
Demand for health insurance (Propper et al., 2001)
d. Supply of health care:
Goals of providers
-Internal firms (Harris, 1977)
-Utility maximisation (Newhouse, 1970)

-Physician income maximisation (Pauly and Reddisch, 1973)

Provider behaviour
-Doctor performance under pay for performance (Gravelle et al., 2010)
-Provider behaviour and prospective reimbursement (Ellis and
McGuire, 1986)
Costs and relative efficiency
-Cost frontiers for hospitals (Linna, 1998)
Health care labour markets
-Determinants of GP wages (Morris et al., 2011)
-Supply of nursing labour (Antonazzo et al., 2003
e. Market equilibrium:
-Role of price and non-price factors (Gravelle et al., 2002)
-Rationing by waiting (Gravelle and Siciliani, 2008)
Market failures
-Why health care is different (Culyer, 1971)
-Caring externalities (Jacobssen et al., 2005)
Impact of market structure
-Competition and prices (Propper, 1996)
-Monopsony in the labour market for nurses (Hirsch and Schumacher,
f. Economic evaluation:
Formalised role in regulatory bodies in many countries. Generally agreed
set of basic principles with variations by country in specifics
Increasingly sophisticated analytical techniques
Decision modelling decision trees, Markov models,
microsimulations, and much, much more!
Economic evaluation alongside clinical trials
Dealing with uncertainty
g. Planning, budgeting, monitoring and evaluation:
Resource allocation formula
Methods for computing weighted capitations (Chernichovsky and
van de Ven, 2003)
Using economic evaluation
Cost-effectiveness league tables (Drummond et al, 1993)
Policy evaluation
Impact of health policy on waiting times (Propper et al., 2008)

Regulation in health care

Regulating prices and profits in the pharmaceutical industry (Bloom
and van Reenen, 1998)
h. Evaluation at the whole system level:
Inequality measurement
Welfare foundations of inequality measures (Fleurbaey and
Schokkaert, 2009)
Gain coefficient as a measure of total health inequality (Le Grand,
Concentration index for the measurement of socioeconomic-related
health inequality (Wagstaff, 2000)
Decomposition of the concentration index (Wagstaff et al., 2003)
Health achievement index (Wagstaff, 2002)
Impact of spending on health (Nolte and McKee, 2004)

Importance of Health Economics

Resources in the health sector like other sectors are not enough to satisfy
mans health wants. The main function of health economics is to apply economic
theory to practical problems of rationing the use of resources for effective health care
services. In response to peoples needs and demand. There is increasing attention on
health economics globally as result of renewed cost-consciousness within the health
system and the shift from exclusively humanistic approach to one incorporating an
increasing use of managerial techniques and quantitative research methods. Countries
all over the world are faced with increased burden of health care and pubic fund
available to the health sector are often short of what is required. Youre your
experience and observation you probably would have made, resources required for
health services and needs constitute a significant proportion of family, community and
government expenditure.


This situation is a common feature in developing countries. Costs of medical

care is increasing due to heavy disease burden, technological changes and increasing
cost of required inputs for health care. In view of the problem of scarcity, health
economics has become an important area of health for which need some level of
understanding. Countries need healthy citizens to develop. As a person you will
remember how unproductive you were when you were ill.

WhyNeed Health Economics for Nursing manager?

1. Economics helps managers focus on key issues. Economics helps managers wade
through the deluge of information they confront and identify the data they need.
2. Economics outlines strategies for realizing goals given the available resources. One
of the primary tasks of economics is to explore carefully the implications of rational
decision making.
3. Economics gives managers ground rules for strategic decision making. When rivals
are not only competing against them but watching what they do, managers must be
prepared to think strategically (i.e., be prepared to use the insights of game theory).
4. Economics gives managers a framework for making sense of costs. Managers need
to understand costs, as good decisions are unlikely without this understanding.
5. Economics gives managers a framework for thinking about value. The benefits of
the goods and services successful organizations provide to customers exceed the costs
of producing those goods and services. Good management decisions require an
understanding of how
customers perceive value.
6. Most important, economics sensitizes managers to fundamental ideas that affect the
operations of every organization. Effective management begins with the recognition
that consumers are sensitive to price differences, that organizations compete to
advance the interests of their stakeholders, and that success comes from providing
value to customers.

Special Challenges for Healthcare Managers:

Five issues face healthcare managers more than other managers: These are as bellowThe central roles of risk and uncertainty


2. The complexities created by insurance

3. The perils produced by information asymmetries
4. The problems posed by not-for-profit organizations
5. The rapid and confusing course of technical and institutional change
Lets look at each of these challenges in more depth.
Risk and Uncertainty
Risk and uncertainty are defining features of healthcare markets and
healthcare organizations. Both the incidence of illness and the effectiveness of
medical care should be described in terms of probabilities. For example, the right
therapy, provided the right way, usually carries some risk of failure. A proportion of
patients will experience harmful side effects, and a proportion of patients will not
benefit. As a result, management of costs and quality presents difficult challenges.
Because risk and uncertainty are inherent in healthcare, most consumers
have medical insurance. As a result, healthcare organizations have to contend with the
management problems insurance presents. First, insurance creates confusion about
who the customer is. Customers use the products, but insurance plans often pay most
of the bill. Moreover, most people with private medical insurance receive coverage
through their employer (in large part because the tax system makes this arrangement
advantageous). Although economists generally agree that employees ultimately pay
for insurance via wage reductions, most employees do not know the costs of their
insurance alternatives (and unless they are changing jobs, have limited
interest in finding out). As a result of the employer plan default, employees remain
unaware of the true costs of care and are not eager to balance cost and value. If
insurance is footing the bill, most patients choose the best, most expensive treatment
a choice they might not make if they were paying the full cost of care.
Information Asymmetries
Information asymmetries are common in healthcare markets and create a
number of problems. An information asymmetry occurs when one party in a
transaction has less information than the other party. In this situation, the party with


more information has an opportunity to take advantage of the party with less
information. Recognizing that he or she is at a disadvantage,
the party with less information may become skeptical of the other partys motivation
and decline a recommendation that would have been beneficial to him or her. For
example, physicians and other healthcare providers usually understand patients
medical options better than patients do.
From a managers perspective, asymmetric information means that providers have a
great deal of autonomy in recommending therapies. Because providers
recommendations largely define the operations of insurance plans, hospitals, and
group practices, managers need to ensure that providers do not have incentives to use
their superior information to their advantage.
Not-for-Profit Organizations
Most not-for-profit organizations have worthy goals that their managers take
seriously, but these organizations can create problems for healthcare managers as
well. For example, not-for-profit organizations usually have multiple stakeholders.
Multiple stakeholders mean multiple goals, soorganizations become much harder to
manage, and managers performance becomes harder to assess. The potential for
managers to put their own needs before their stakeholders needs exists in all
organizations but is more difficult to detect in not-for-profit organizations because
they do not have a simple bottom lineFor example, the trustees of a not-for-profit
organization may have to get approval from a court to sell or repurpose its assets.
Because of these special circumstances, managers of not-for-profit organizations can
always claim that substandard performance reflects their more complex environment.
Technological and Institutional Change:
This fifth challenge makes the others pale in comparison. The healthcare
system is in a state of flux. Virtually every part of the healthcare sector is reinventing
itself, and no one seems to know where the healthcare system is headed. Leadership is
difficult to provide if you dont know where you are going. Because change presents a
pervasive test for healthcare managers, we will examine it in greater detail.

Method of Health Economics:


Cost analysis:
Cost analysis refers to the systematic collection, categorization, and analysis of
intervention/program costs, side effects costs (or externalities), and illness costs. CDC
economists have explored the costs of different types of cancers, hospital-acquired
infections, communicable diseases, and even the costs of an outbreak investigation for
local health departments.
Economic evaluation:
Economic evaluations provide a systematic approach for assessing and comparing
two or more interventions or programs in terms of their respective costs or benefits
and includes cost-effectiveness, cost-benefit, and cost-utility analyses. CDC
economists recently performed economic evaluations on screening options for
diabetes, diagnostic options for HIV and TB, vaccine strategies, TB treatment
regimes, and injury prevention programs.

Decision and transmission modeling:

Decision and transmission modeling includes developing and testing various
models such as simple regression models, Markov decision choice models, agentbased models, simulations, and theoretical mathematical models. CDC economists
have performed modeling on vaccine strategies, HIV diagnosis and treatment
alternatives, and state public health resource allocation options.
Health and health care are affected by the economic environment and economic


Decisions about how health care is funded, provided and distributed are
strongly influenced by the economic environment and economic
Global, national and local policy responses to health issues are
increasingly being informed by economic models
Modelling in economics:

In economics, a model is a theoretical construct that represents economic

processes by a set of variables and a set of logical and/or quantitative

relationships between them

Useful because:
Expression of concepts in formal language promotes clarity
Implicit assumptions easier to detect
Derive all implications of explicit assumptions
Promotes logical coherence
Gravelle, H. Connecting health and economics. Centre for Health Economics,
York, 2011.

Types of economic problems in the health sector:

The health sector consists of organized public and private health services
(from surgery to health promotion programmes to dentistry), the policies and
activities of health departments and ministries, health-related non-government
organizations and community groups, and professional associations (WHO 1998).
Economics is the study of scarcity and the means by which we deal with this problem.
Because resources are essentially limited, choices need to be made about how they are
to be used. Economics, as a discipline, is concerned largely with how we make these
choices in the context of scarcity. One of the key assumptions generally made in
economics is that individuals will make these decisions rationally. This means that
given good information they will choose to do things, such as utilize health services
that will be in their best interests, where best interests is defined as maximizing their
utility given the resources they have at their disposal.
Health and Economic Development:


Development has been variously defined. The modern view of development

perceives it as both a physical reality and state of mind in which society has, through
some combination of social, economic and institutional processes, secured the means
for obtaining a better life.
The definition of a better life may vary from one society to another. Development in
all societies, however, must consist of at least the following three objectives:
1. To increase the availability, distribution and accessibility of life-sustaining
goods such as food, shelter, health, security and protection to all members of
2. To raise standards of living, including higher incomes, the provision of more
jobs, better education and better health, and more attention to cultural and
humanistic values so as to enhance not only material well-being, but also to
generate greater individual community and national esteem.
3. To expand the range of economic and social opportunities and services to
individuals and communities by freeing them from servitude and dependence
on other people and communities and from ignorance and human misery.

Health Implications of Economic Development:

The associations between health and national development are complex. The
interaction is a two-way phenomenon with health being both influenced by and
influencing economic development. Improved health has been considered solely a
result of economic growth, a part of the product of growth rather than one of its
causes. Some development experts have maintained that health should have low
priority in development funding and have tried to justify their opinions with
comments such as only a rich nation can afford the programs to assure its
populations health, or a poor nation can not afford improved health. The
concern of development planners is accentuated by the fact that during the
demographic transition, lower death rates are often associated with sustained high
birth rates which results in rapid population growth.
While the supply of labor may increase as a result of improved health and reduced
death rates, there may be no corresponding gain in per capita output. Thus, if


economic growth is too slow to absorb the additions to the labour force associated
with expanded health programs, greater unemployment, both open and disgusted, may
result. Thus, improved health in poor societies can be postulated to produce larger
populations, greater poverty and ultimately deterioration in health. However, other
development planners and economists are more optimistic regarding the impact of
health and nutrition programs on economic growth. There are three different ways by
which improved health programs can accelerate development.
Improved health may increase productivity or efficiency of the labour force leading to
greater output and reduced cost per unit of output. Better health conditions may serve
to open new regions of a country of settlement and subsequent development.
Attitudinal changes towards achievement and entrepreneurship may be lined to health
and nutrition programs. This linkage has a significant importance to stimulate
entrepreneur ship in poor countries. It has been apparent that where conditions are
worst, relatively simple and low cost health programs can produce dramatic
reductions of debility and disability of the labour force. In these situations major
increments in productivity are most readily apparent. For instance, in the Philippines
at one time a survey of major enterprises indicated a daily absenteeism rate of 35
percent, attributed largely to malaria.
Measurement of Economic Development:
The measurement of development has presented social scientists with a
problem of finding the suitable tools and techniques to do so and of interpreting the
results of such measurements. Several suggestions have been presented for measuring
development. One line of research has suggested the use of so-called social indicators.
The purpose of these is to measure the well-being of the population by examining
factors such as health and nutritional status, level of education, housing conditions
and so forth. However, it is easier to calculate GNP, per capita incomes and growth
rates. As a result, in most reports these variables are used as indicators of
Development. Economic Development, in addition to a rise in per-capita income,
implies fundamental changes in the structure of the economy characterized by:


1. Rising share of industry, along with the failing share of agriculture in GNP and
increasing percentage of people who live in cities rather than the countryside
2. Passing through periods of accelerating, then decelerating population growth,
during which the age structure of the country changes dramatically.
3. Changes in consumption patterns as people no longer spend all their income on
necessities, but instead move on to consume durables and eventually to leisure-time
products and services.
4. Meeting the needs of the present without compromising the ability of future
generations to meets their own needs (sustainability)
5. Participation (mainly) by the citizens of the country in the process as well as the
benefit, While economic development and modern economic growth involve much
more than arise in
per capita income, there can be no development without economic growth

Health economics is a important discipline that is now gaining much
attention in developing countries in view of the growing health burden, need for
higher health expenditure in the midst if inadequate fund. To have development
countries must have citizens that are productive and to be productive one need to be in
good health. It is therefore imperative that health brings about development.
Development also result in more money made available for health care. Economic
development can however have negative effects on health that result from change in
lifestyle that are detrimental to health.


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