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Copyright © 2004 South-Western/Thomson Learning

• Gunja Bahadur G.C.• M.Sc. In Health Economics• Chulalongkorn University Bangkok,

Thailand• M.A. in Economics(Mathematical

Economics,Econometrics) T.U. Kirtipur• Tel phone:977-1-4310895®• 977-9841375628• Email:[email protected]


Concept of health economics and its importance in health services

Meaning of Health Economics:• An introduction to the applications of

economics to health care and medical care issues.

• Discuss the special features of medical care as a commodity; demand for health services; and the economic explanations for health care providers, insurance markets, and technology diffusion.


• we also study policy issues such as universal health insurance and international comparisons. The training helps us to form our own vision of the economics of health care as a health services manager, analyst, or civic leader.


• Health economics is the study of how (scarce) resources are allocated to and within the health economy.

• Health care: goods and services used to

produce health

• Health care system: a collection of services,

people, institutions, regulations, programmes,

functions, products

• Health as a status/outcome


Definitions of Economics• Economics is the social science that studies the

production, distribution, and consumption of goods and services. The term economics comes

from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house

(hold).”• "Economics is the social science which examines

how people choose to use limited or scarce resources in attempting to satisfy their unlimited

wants.”• “The science which studies human behaviour as a

relationship between ends and scarce means which have alternative uses." Lionel Robbins,

1932.


• “A study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.” Alfred Marshall, Principles of Economics


Summary of Definition of Economics:• Economics is a study of human behavior between the

unlimited wants and scarce resource.• The discipline of economics deals with use of scarce resources

to satisfy human wants and needs how best to use the resources available.

• Economics is a social science that studies how individuals and organizations in society engage in- the production• distribution and• consumption of goods and services.


11Ten Principles of Economics


Economy. . .

. . . The word economy comes from a Greek word for “one who manages a household.”


TEN PRINCIPLES OF ECONOMICS

Economics is the study of how society manages its scarce resources.


Principle #1: People Face Tradeoffs.

“There is no such thing as a free lunch!”


Making decisions requires trading off one goal against another.

Principle #1: People Face Tradeoffs.

To get one thing, we usually have to give up another thing.

• Guns v. butter• Food v. clothing• Leisure time v. work• Efficiency v. equity


Principle #1: People Face Tradeoffs

• Efficiency v. Equity• Efficiency means society gets the most that it can

from its scarce resources.• Equity means the benefits of those resources are

distributed fairly among the members of society.


Principle #2: The Cost of Something Is What You Give Up to Get It.

• Decisions require comparing costs and benefits of alternatives.• Whether to go to college or to work?• Whether to study or go out on a date?• Whether to go to class or sleep in?

• The opportunity cost of an item is what you give up to obtain that item.


Principle #2: The Cost of Something Is What You Give Up to Get It.

LA Laker basketball star Kobe Bryant chose to skip college and go straight from high school to the pros where he has earned millions of dollars.


People make decisions by comparing costs and benefits at the margin.

Principle #3: Rational People Think at the Margin.

• Marginal changes are small, incremental adjustments to an existing plan of action.


Principle #4: People Respond to Incentives.

• Marginal changes in costs or benefits motivate people to respond.

• The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs!


Principle #5: Trade Can Make Everyone Better Off.

• People gain from their ability to trade with one another.

• Competition results in gains from trading.• Trade allows people to specialize in what they

do best.


Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.

• A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.• Households decide what to buy and who to work

for.• Firms decide who to hire and what to produce.


Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.

• Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.”• Because households and firms look at prices when

deciding what to buy and sell, they unknowingly take into account the social costs of their actions.

• As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole.


Principle #7: Governments Can Sometimes Improve Market Outcomes.

• Market failure occurs when the market fails to allocate resources efficiently.

• When the market fails (breaks down) government can intervene to promote efficiency and equity.


Principle #7: Governments Can Sometimes Improve Market Outcomes.

• Market failure may be caused by • an externality, which is the impact of one person or

firm’s actions on the well-being of a bystander.• market power, which is the ability of a single

person or firm to unduly influence market prices.


Principle #8: The Standard of Living Depends on a Country’s Production.

• Standard of living may be measured in different ways:• By comparing personal incomes.• By comparing the total market value of a nation’s

production.


Principle #8: The Standard of Living Depends on a Country’s Production.

• Almost all variations in living standards are explained by differences in countries’ productivities.

• Productivity is the amount of goods and services produced from each hour of a worker’s time.


Principle #9: Prices Rise When the Government Prints Too Much Money.

• Inflation is an increase in the overall level of prices in the economy.

• One cause of inflation is the growth in the quantity of money.

• When the government creates large quantities of money, the value of the money falls.


Principle #10: Society Faces a Short-run Tradeoff Between Inflation and Unemployment.• The Phillips Curve illustrates the tradeoff

between inflation and unemployment:Inflation Unemployment

It’s a short-run tradeoff!


Economic Models

• Economists use models to simplify reality in order to improve our understanding of the world

• Two of the most basic economic models include:• The Circular Flow Diagram• The Production Possibilities Frontier


Our First Model: The Circular-Flow Diagram

• The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.


Figure 1 The Circular Flow

Copyright © 2004 South-Western

Spending

Goods andservicesbought

Revenue

Goodsand servicessold

Labor, land,and capital

Income

= Flow of inputs and outputs

= Flow of dollars

Factors ofproduction

Wages, rent,and profit

FIRMS•Produce and sellgoods and services

•Hire and use factorsof production

•Buy and consumegoods and services

•Own and sell factorsof production

HOUSEHOLDS

•Households sell•Firms buy

MARKETSFOR

FACTORS OF PRODUCTION

•Firms sell•Households buy

MARKETSFOR

GOODS AND SERVICES



• Firms• Produce and sell goods and services• Hire and use factors of production

• Households• Buy and consume goods and services• Own and sell factors of production



• Markets for Goods and Services• Firms sell• Households buy

• Markets for Factors of Production• Households sell• Firms buy



• Factors of Production• Inputs used to produce goods and services• Land, labor, and capital


Our Second Model: The Production Possibilities Frontier

• The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.


Figure 2 The Production Possibilities Frontier

Copyright©2003 Southwestern/Thomson Learning

Productionpossibilitiesfrontier

A

B

C

Quantity ofCars Produced

2,200

600

1,000

3000 700

2,000

3,000

1,000

Quantity ofComputers

Produced

D


Our Second Model: The Production Possibilities Frontier

• Concepts Illustrated by the Production Possibilities Frontier • Efficiency• Tradeoffs• Opportunity Cost• Economic Growth


Figure 3 A Shift in the Production Possibilities Frontier

Copyright © 2004 South-Western

E

Quantity ofCars Produced

2,000

700

2,100

7500

4,000

3,000

1,000

Quantity ofComputers

Produced

A


Microeconomics and Macroeconomics

• Microeconomics focuses on the individual parts of the economy.• How households and firms make decisions and how

they interact in specific markets• Macroeconomics looks at the economy as a

whole.• Economy-wide phenomena, including inflation,

unemployment, and economic growth


THE ECONOMIST AS POLICY ADVISOR

• When economists are trying to explain the world, they are scientists.

• When economists are trying to change the world, they are policy advisor.


Health and health care

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Inputs

Health care

Health

Food/shelter and clothes

Environment

Education

Doctors and nurses

Technology

Drugs/equipment


• Concept Health economics:

• Health economics is the study of how (scarce) resources are allocated to and within the health economy.

• Production of health care (doctors, specialists, or nurses).

• How do we distribute it across the population? • Based on who can pay or who needs

it or some combination.• How much money should the government

spend on health care


• Scarcity• Choice• Tradeoff (costs = opportunity costs)• Compare new costs and new benefits

(marginalism)• Individual• Household• Community, Society

Copyright © 2004 South-Western/Thomson Learning05/02/23 42

Why health economics?

• Providing different prospective to deal health system

• Providing new tools, ideas, knowledge to the policy makers and researchers

• Providing refined methods for evaluation of health policy, health system, health outcome

• Economic factors that have greater power to change the behaviour of the people


Why is it important?

• The size of the health economy is large and growing in most countries

• It is important to understand why it is growing. If the growth is necessary (cost-effectiveness analysis), if the growth is productive.

• The large role it plays in national policy• People are concerned with how health care is

delivered and how much it costs because it affects them. Economists play a role in this policy making.

• Health issues have economic components


Why is it important?Personal Expenditures

• What have we not accounted for in personal expenditures?

• The opportunity cost of your own time. How much time do you or your family spend caring for someone who is sick or has a disability?• This might have even gone down with more

being spent on nursing home.


Why is there rising spending?

• induced demand• Creates a demand and people want the latest

drug not the generic, or certain test.

• Asymmetric Information• When one party know more than the other• Doctors can recommend procedures and services

with little expected benefit (led to managed care


How is the medical care market different from other markets?

• Presence of Uncertainty

• Demand is irregular and uncertain• Accidents, can you deny someone lifesaving

care if they don’t have the money?



• Large role of not-for-profit providers• Economists usually assume firms maximize profits.• There are many not-for-profit hospitals (85%).

How should economists model their behavior?• Role of equity and need

• Belief that people ought to get health care whether or not they can afford it.

• Economists need to take this feature of the good into consideration.



• Government subsidies and public provision• Governments participate in this sector because

of market failures.• Economists look at role of government

spending and provide fundamental reasons why government spending is necessary.• They also question if the spending is cost-

effective.


• The Economic agents in health sectorThe economics agents in the health sector basically are producers, consumers and the roles of government which can be elaborated by following:

Producers are manpower for health services in the form of physicians, nurses, technicians and trainers and infrastructures form of hospitals, PHCs, HPs, SHPs and clinics. Producers of manpower can also be categorized as the medical institutes and training centers.


• Consumers in the form of drugs, supplies, services are patients, in the form of intermediate consumers are pharmacists, hospitals, and health facilities and in the form of manpower are hospital and health facilities.The roles of government mainly should focus on to identify the average health service cost for quality health services in provided in a way of maximum health care with given input or health care with minimum health services cost.For this, the concept of opportunity cost be applied among both in producers and consumers of health services.


Financing mechanism for health programmes in Nepal

Health financing functions and sources of revenues:

Functions health care financing are to:

• collecting revenues,

• pooling risks, and

• purchasing services


• through tax measures or by strengthening tax administration;• cutting lower-priority expenditures to make room for more desirable ones;• borrowing resources, either from domestic or from external sources;• getting the central bank to print money to be lent to the government; or• receiving grants from outside sources.

Collecting Revenues

Raising revenues:

Revenue collection is the way health systems raise money from households, businesses, and external sources.


• Purchasing refers to the many arrangements for buyers of health care services to pay health

care providers and suppliers.•Resource allocation and purchasing mechanisms determine for whom to buy, what to buy, from whom, how to pay, and at what price. Purchasing includes the many arrangements used by purchasers of health care services to pay medical care providers

Purchasing services

• Resource allocation and purchasing procedures have important implications for cost, access, quality,

and consumer satisfaction.


Sources of health spending

Information about the nature and sources of health spending is essential for developing sound national policies for financing health care.

• Government funding

• Health insurance

• Out of pocket payment



Challenges of Health care financing in Nepal

•High out-of-pocket payments,

• Higher but still limited revenue-raising capacities,

•Purchasing arrangements pose significant

constraints to universal coverage and

• No risk pooling mechanism

• High poverty and income inequality


Sources of Financing


THE as % of GDP


Trends of public expenditureFiscal Year

Expenditure on HealthAs % of total Budget As % of GDP

1989/90 4.60 0.931990/91 3.84 0.881991/92 3.62 0.841992/93 3.40 0.641993/94 4.85 1.081994/95 4.91 1.211995/96 5.99 1.441996/97 6.19 1.421997/98 5.70 1.371998/99 5.69 1.341999/00 6.09 0.802000/01 5.19 0.872001/02 4.91 0.792002/03 5.05 0.812003/04 5.26 0.872004/05 6.00 0.982005/06 6.34 1.132006/07 6.81 1.362007/08 6.63 0.52

Dec

linin

g tr

end


• Evaluation of health programme in Nepal

• DALY• QALY


Definition of economic evaluation

• It is a tool for decision making in which cost and consequences of alternatives are measured to offer the best alternative.

Copyright © 2004 South-Western/Thomson Learning62

Why Economic evaluation ?

• Economic evaluation informs resource allocation decisions in health and medicine: How well it does so depends upon the comparability of consistency of analyses of diverse health interventions.

• Economic evaluation is a method used to evaluate the outcomes and costs of interventions designed to improve health of the people.

Copyright © 2004 South-Western/Thomson Learning05/02/23

Economic evaluation

• Public health programs and interventions can be thought of as a production process that transforms inputs (resources) into outputs (changes in health outcomes), as illustrated in this diagram:


Economic evaluation

• In an economic evaluation, analytic techniques are applied to identify, measure, value, and compare the costs and consequences of two or more alternative programs or interventions.

• In the health field, economic evaluations are used to analyze how efficiently resources have been allocated and how resources should be allocated to ultimately maximize welfare.


Economic evaluation

• When applied to public health programs, economic evaluation is concerned with the amount of resources used by a program or intervention, and corresponding level of health-related outcomes.


Economic evaluation


Measuring the costs of the health programmes

• Financial or recurrent or direct costs: Cost of inputs consumed in < 1 year

• Capital costs: Cost of inputs consumed in > 1 year (>$100); depreciation

•

• Economic or opportunity costs: The value of next best alternative that must be forgone ( e g. physicians opportunity cost in hospital service vs. private clinic)

ofcapitalULYyearsUsefullifeUPunitpricettalAnnualcapi

)()(cos


Importance of economic evaluation of health interventions

• Resources are scarce. Resources are of many types and all these resources are limited in supply• Human resources• Time• Facilities• Equipment• Knowledge

• No country is rich enough to do everything that can be done from technological point of view. Need to choose among alternatives.


Importance of economic evaluation..

• Economic evaluation allows clear identification of alternatives.

• In economic evaluation, we must explicitly define the alternatives. Many of these alternatives may be totally ignored in the analysis unless we make the attempt to list them.

• Example: to examine interventions for reducing morbidity due to chronic lung disease, one alternative often overlooked is the reduction in cigarette smoking.

69


Economic evaluation types

• Cost minimization analysis• Cost-effectiveness analysis• Cost-benefit analysis• Cost-utility analysis

• For each of the above economic evaluation types, one can conduct average or incremental cost and/or effectiveness analysis.

70


Comparisons• CEA differs from cost benefit analysis (CBA) and

cost utility analysis (CUA) in that: • CEA expresses outcomes in natural units (e.g., "cases

prevented" or "number of lives saved"), whereas • CBA assigns dollar values to the outcomes

attributable to the program, and • CUA is a specialized form of CEA that includes a

quality-of-life component associated with morbidity using common health indices such as quality-adjusted life years (QALYs) and disability-adjusted life years (DALYs).


Cost-minimization analysis

• Very special type of economic evaluation. This can be done only when two or more alternatives will provide exactly the same outcome.

• Example: two drugs can be used to lower the level of blood cholesterol. No other side-effects or any other costs associated with the drugs.• Drug A costs $200/month; Drug B costs $150/month.

Both reduces cholesterol level by the same amount. Which one should we select? Why?

• Home versus hospital-based treatment for psychiatric patients is another example.

72


Introduction: CEA• Cost Effectiveness Analysis (CEA) is a type of economic

evaluation that examines both the costs and health outcomes of alternative intervention strategies.

• CEA compares the cost of an intervention to its effectiveness as measured in natural health outcomes (e.g., "cases prevented" or "years of life saved").

• CEA results are presented in a cost-effectiveness ratio, which expresses cost per health outcome (e.g., cost per case prevented and cost per life year gained).


Importance of CEA

• CEA is applied in the areas where effect or outcome is measured in non monetory terms (it is used clinical arena as well as to evaluate health policies, programs, and interventions.


Importance of CEA

• Decision makers are often faced with the challenges of resource allocation. Resources are scarce; therefore, they must be allocated judiciously.

• CEA is used to identify the most cost-effective strategies from a set of options that have similar results.

• CEA could be used by the decision maker to provide empirical results that account for the costs and consequences associated with alternative programs.


When can we use CEA

• CEA is useful when the primary objective of the study is to identify the most cost-effective strategy from a group of alternatives that can effectively meet a common goal and are often competing for the same resources.

• CEA results might not be generalizable to all populations. Because each population has specific characteristics (e.g., prevalence of disease, or access to care), each might have different program costs, productivity losses, and medical expenses. It is useful for target programmes.


When can we use CEA

• CEA can provide solid justification for a program. Empirical evidence might be needed to provide backing for the increased level of program funding or a switch from one to the other.

• CEA can be used when a need exists to identify and isolate programs that are wasting resources.


Examples

• There are four health related programs say A1 A2 A3 A4

• Program A1 saved 500 lives at 1000 US$• Program A2 saved 1000 lives at 8000 US$• Program A3 saved 200 lives at 900 US$• Program A4 saved 200 lives at 500 US$• There are the problems of choice or priority

setting or decision-making among the programs• Which program is more effective?


Effective Program

Programs Effects Cost Ratios

A1 500 1000 2

A2 1000 8000 8

A3 200 900 4.5

A4 200 500 2.5

The central use of CEA is the estimation of cost effectiveness ratio (CER).


Example: Sterilization Services

ProcedureTotal costNRs Total cases Cost per case

Mini Lap 1887500 3020 625

Laparoscopy 485100 630 770

Vasectomy 974400 2030 480


Example: STDs Case management

ApproachTotal cost

Total cured cases

Cost per cured case

Clinical 20700 230 (500) 90

Syndromic 82560 480 (500) 172

Etiological 153450 495(500) 310


Example: For example surgical correction of stone of gal bladder in HospitalApproach Total cost Total

proceduresCost per surgical

procedureProcedure A 207,000 23 9000

Procedure B 825,600 48 17200

Procedure C 1,534,500 50 30600


One hypothetical example

• Treatment A yields a life expectancy of one year at the cost of $100. Treatment B yields a life expectancy of 5 years at a cost of $1000. Which of these two strategies is more cost-effective?

• Treatment A= $100/1 year• Treatment B=$1000/5 years=$200/1 year• Should we recommend treatment A for adoption in

this country? • For recommending a policy, we should ask if the

treatment is worthwhile at a higher cost or not.

83


Cost-benefit analysis

• When we can not express the effects or consequences of health interventions in terms of one single outcome, we need to value all the possible effects.

• In reality, most interventions create multiple effects, not just one, and it is difficult to identify which one should be considered as the most important one.

84


Cost-benefit analysis

• When we can not express the effects or consequences of health interventions in terms of one single outcome, we need to value all the possible effects.

• In reality, most interventions create multiple effects, not just one, and it is difficult to identify which one should be considered as the most important one.

85


Cost-benefit analysis…• Example: consider two health interventions.

One saves a number of lives today. For that we can find the years of life saved. Other project simply prevents disability but does not save any lives.

• Value both the outcomes in money terms. What is the dollar value of the lives saved and disabilities prevented?

86


Cost-benefit analysis…

• Since it can handle many different types of outcomes, one can use cost-benefit analysis to test whether doing nothing is better than introducing a new program.

• The analysis is very flexible and can be applied to compare health interventions with non-health interventions as well.

87


Cost benefit analysis

Benefit cost ratioNRs in Million Cost Benefit

Benefit cost ratio

General Surgical ward 2.3 3.2 1.39General Medical ward 1.2 1.25 1.04Mental health ward 0.8 0.5 0.63


Cost-utility analysis

• Another measure of value other than money is “utility” or satisfaction or wellbeing.

• Utility is a measure of satisfaction or desirability of an outcome measured by individual’s or society’s “preference structure”.

• Preference structure: subjective value of the outcome.

89


Cost utility analysis

• Outcome: QALYs- positive measurement (how much improvement in quality adjusted life years)


Cost utility analysis

Cost in million QALY GainCost per QALY gain

Mental health 580,000,000 52,000 11,153.85

Occupational health 230,000,000 18,000 12,777.78 Reproductive health 510,000,000 58,000 8,793.10


05/02/23

ExamplesPrograms

Prevented outcomes

Total costs ACER MCER ICER

Independent programs

Program A 10 $150 $15

Expanded program A 12 $200 $25

Mutually exclusive programs

Program A 10 $150

Program B 20 $300 $15

ACER= $150/10= $15; MCER= ($200-$150)/(12-10)= $25ICER= ($300-$150)/(20-10)= $15• Select minimum costs


05/02/23

Effectiveness of the health programs

• Natural unit can be measured in terms of QALYs or DALYs• QALYs- positive measurement (how much improvement in

quality adjusted life years)• DALYs- negative measurement (how much reduction in

disability adjusted life years)


05/02/23

DALYs: Disable adjusted life years

• DALY measures the gap between population‘s current health status and some reference ideal i.e. the burden of disease.

• The DALYs - measure of the years of lifetime lost to premature death and years lived with disability of specified severity and duration.

• One DALY means one year of healthy life lost. • DALY covers the key social preferences such as:The

duration of time lost due to premature death at each age ,• The value of time lived (i.e. productivity) at different ages,

Disability and time preference.


Quality Adjusted Life Years (QALYs)

• Years of survival, adjusted for quality of lifeQuality adjustment based on “utility”

0 = death 1 = perfect health

• Allows trade-off between length of life with quality of life

1 QALY = 1 year in perfect health1 QALY = 2 years with utility of 0.5


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