Introduction to Economic Analysis in Health Care

Importance of Health Care Economics

Health is important as a society and as individual
One of the way to prevent the impact of ill health &

disease Availability of health care can determine the quality of our lives and our prospects for survival. Economics analysis gives a guideline for analysing important issues in health care and to identify solutions to common problems

Importance of Health Care Economics Contd..

The healthcare sector of the economy is very large

( USA spending crossed $ 1000 billion , research says

that, healthcare spending in 2014 will be $3600 billion

which is 1/4th5 of all US Economic activity .

Thus healthcare is an important component of spending , investment and employment in every developed country

Importance of Health Care Economics Contd..

Decisions regarding how healthcare is funded ,

provided and distributed are strongly economic environment and economic constraints . Global, national and local policy responses to healthcare are increasingly being informed (influenced) by economic ideas and methods of analysis To avoid being deceived by economists To understand the productivity , efficiency and value of money in modern healthcare systems .

Health Economics Definition

Health economics is the application of economic theory , models and empirical ( experimental) techniques to the analysis of decision making by individuals , healthcare providers and government with respect to health and health care . Although it is solidly based in economic theory but it also comprises a body of theory developed specifically to understand the behaviour of patients , doctors and hospitals developed to facilitate resource allocation in health care

Health Economics Definition

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 healthcare and health-related services, their costs and benefits, and

health itself are distributed among individuals and

groups in society.

Economics defined
Economics is the social science that examines how

people choose to use limited or scarce resources in attempting to satisfy their unlimited wants." "Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses. Economics deals with allocation of the scarce resources which have alternate uses in order to obtain the maximum benefit.

Economics defined
The definition is based upon the following three facts: Unlimited wants Scarce Resources Alternative Use of Resources The focus of economic analysis is decisions and choices about the production and consumption of economic good.

Health care as an economic good

(Using the previous definition) Health care is an economic good because - The resources that are used to produce health care services such as human resource , capital & raw materials are scarce and have alternative use - Our wants for health care what we choose to consume , in absence of constraint on our ability to pay have no bounds ( Wants are also increasing ) - No healthcare system, anywhere in the world has achieved levels of spending sufficient to met all its clients wants for health care .

Health care as an economic good

Choices has to be made about What quantity and mix of health care is to be produced? How to produce it ? Who pays for it ? And How is it distributed ?
Basic economic questions

Healthcare is not available in endless supply the more healthcare we choose , the more of something else has

to be sacrificed . As health care is important for the welfare

of human beings , these choices but be carefully made.

HEALTH & HEALTH CARE

Health economics & health care are not same Ultimate goal of health care is to improve health but

there are other determinants which help in improvement of health. Health economists may not be just interested in the supply of treatment that hospitals provide and its impact on the health of patients but also of the impact of the housing , unemployment, lifestyle on the health of the population as a whole

Deciding who gets what in Health care ( Distribution of Health care )

Health care as an economic good is not the same as other goods and services . Economics is concerned with What to produce ? How to produce and to whom it should be produced ? Should such issues be decided differently in healthcare ? Options Allow market forces to determine who gets what Allow government to intervene in healthcare and decide who gets what

Allow market forces to determine who gets what

Firms decide how much to produce , and how to

produce guided by the profit motive . (Suppliers )

Consumers decide how much to purchase and from

where to purchase guided by their own view of interest

Simple economic model of supply and demand predict

how firms and customers behave in such markets (eg of supply & demand)

Allow market forces to determine who gets what

In a private market , not everyone who wants a service

receives it Those who receives it are both willing and able to pay for it Unobserved wants are not met because potential consumers are not willing or able to turn them into effective demand

Allow government to intervene in healthcare and decide who gets what

Government intervenes in a greater degree than other

economic goods Regulates who may provide services What producers can charge or what profits they earn Decide about subsidizing partially or fully funded through tax or directly providing public hospital. In UK , National Health Service, govt dominates funding and provisions of health care so supply is essentially fixed in each time by political decisions Effective demand is higher than it would be if patients had to pay .

 Here supply curve is vertical , indicating that supply is

fixed . No price system to reconcile supply and demand , demand exceeds supply Who obtains health services is determined by factors other than price e.g. by waiting lists Main difference No distinction between wants , demands and needs , there are observed unmet needs

WHY IS HEALTH CARE DIFFERENT ?

Demand characteristics - Demand for healthcare is uncertain :-We do not know when we become ill , which healthcare we will require , which ill health( disease) arises or at what cost. - There is uncertainty about how a given state of ill health will respond to healthcare. Recovery is also uncertain.

WHY IS HEALTH CARE DIFFERENT ?

Customers cannot test the product before consuming

it . They have difficulty judging the quality of healthcare even after experiencing it . We cant shop

around
(Asymmetry of information):Difficult for patients to

obtain knowledge is appropriate for their condition medical knowledge is complex. Consumers know less than their seller and place their trust in the provider .

WHY IS HEALTH CARE DIFFERENT ? Contd

There are interdependencies between consumers

action , the healthcare seeking behaviour of one consumer affects the likelihood of becoming infected of others .eg if a person is affected by tuberculosis , if he takes the medicines he will get cured and simultaneously prevent it from spreading to others .

Supply characteristics
Entry into the industry is restricted by medical licensing Advertising and overt competition are virtually absent in

medical markets Imperfect agency: Advice given by physicians is supposed to be completely divorced from self-interest ( not by the financial interests of the provider). Relationship between doctor & patient is often presented as a principal agent problem. If doctors made these decisions in manner fully consistent with patients preference , unaffected by the consequences for themselves , then they would be acting as perfect agents . Economists say that doctors cannot or do not act as perfect agents

 Providers with goals other than profit maximization

dominate provision . Social and ethical factors are important in determining their behaviour Doctors sometimes charge different fees to different people

JUDGING THE USE OF HEALTH CARE RESOURCES

We judge the use of healthcare resources using the

criteria of efficiency & equity Efficiency : is the allocation of scarce resources that maximizes the achievement of aims . Equity is fairness in the distribution and finance of health and health care between people