ECONOMICS OF HEALTH AND HEALTHCARE EXAM
Measuring health can be done in two different ways:
1. Length of life
Life expectancy
Survival
Mortality
2. Quality of life
Health or well-being score
Morbidity
3. Combined
Healthy life expectancy, disability-adjusted life expectancy
In health economics there are three puzzles:
1. Why does health change over time?
Why did life expectancy increase?
Why is it not higher now?
Are there limits to life expectancy?
2. Why does health differ between countries?
Higher income, higher life expectancy
Why does income matter so much and why do it seem to matter more
amongst poor countries than among richer countries
3. Why does health differ within countries?
What can we do about such differences?
Are we succeeding in closing the gap?
Health is an important component of welfare. Health determines economic
potential. Production of health is a resource allocation problem. Health is
determined by behavior that economic seeks to understand.
Health is produced but not traded. There is no decentralized market mechanism
to allocate resource efficiently to those who value health most, capture value of
health in a price. We must purposefully allocate resources to health and lack a
signal of the value of health to guide us. We need to value health explicitly rather
than rely on market signal of its value.
Assumptions health production
Health is not given but produced
- Production is at the level of an individual
- Health is produced using a number of factors. We can influence some of
these factors, such as medical care.
- There is utility maximization under constraints and utility is a function of
health produce health as efficiently as
possible.
This is the health production function curve.
There are diminishing marginal returns to
health. The initial health is the starting point.
o Nutrition: influences the production
of health= health is more effective if
you eat better. Good food may
decrease your demand for health
and good food influences your
health starting point.
, There are preferences or constraints
(income/time)
Health demand: per se education, you know how to obtain health better. The
effective price goes down, produce health more efficiently.
Pollution: not per se demand for health. But demand for medical care. We use
medical care to improve our health.
Why does not everyone achieve full health?
Why is there no standard recipe for maximizing health?
Everyone’s background is different, there is freedom of choice (preferences),
income differences (constraints), differences in starting points and differences
in how effective medical care is for you.
What may be good for one person might not necessarily be good for someone
else.
It is extremely difficult to untangle the links between work, earning, health and
education without guiding frame.
Income has influence on: production functions, constraints, preferences.
If income is higher: probability of a healthy start increases higher
initial health status, more food security medical care more effective,
able to purchase more health.
o You shift right along the curve
Health and income influence each other.
At a population level:
- Environment, culture, level of technology, infrastructure
o In poorer countries more traffic injuries.
Externalities
Spillovers from one person’s actions to other people
- Negative: costs borne by others (big cars)
- Positive: benefits for others (vaccines)
Can the government limit the influence of income on health?
- Constraints: public provision or subsidization of health care limits the
impact of the allocation through the price mechanism
- Production function: government intervention, by introducing basic care
package.
- Difference in income may cause differences in:
o Production functions, constraints, preferences.
Healthincome
Individual
, - Ability to work. The effect differs according to situation.
Government intervention
- Income compensation
- Can you buy insurance/ direct compensation for missed earnings through
social security
- Ensuring access to health care
o Decreasing waiting times.
Interventions aimed at long-term effects are harder to capture because of its
nature, and are limited by legitimacy concerns, ability, and need.
Health at the family level
- Spouses, parents, children, healthy habits, fetal origins, informal care for
parents and spouses.
Health income (at a national level)
- Improvements in health increases human capital.
- The population level effect may differ from individual effects.
The role of technology
- As a mediator:
o Rich people have access to better care. Magnitude depends on other
factors
- As a confounder:
o Technology also influences income inequality
Global:
- Levels of medical technology is given within a country but varies
internationally
- Levels of medical technology is a function of income
Health and production of medical care are a function of knowledge.
Education has impact on the production function. Education as the great
equalizer? Or education as a confounder?
o The effect of income on health is influences by background and by
personal situation.
There is no market for health. The market is not going to tell you the market
price, like with other goods.
On average, in OECD countries, the spending is 5000 US dollars per person per
year. This is 9,5-10% of GBP spend on health.
Two fundamental questions addressed by health economics:
1. Are we spending too much or too little on health and healthcare?
2. Is rapidly rising health spending unaffordable and threatening economic
prosperity or does it reflect that prosperity?
First, we must value health. There is no market mechanism, so health has to be
valued.
Market mechanism:
A good is produced by someone and consumed by another= trade.
Forces of demand and supply determine market price. With perfect competition,
and no distortions, the market achieves:
, o Equilibrium price: where demand = supply, where marginal benefits
equal marginal costs
o MSB=MSC.
If this holds, there is an efficient allocation of resources to
production of a good.
For health the market is missing. Health is produced, but not traded. There is no
market exchange.
o No efficient allocation of resources to health production
o There is no market signal of the value of health.
Centralized allocation implies a value of health. There are opportunity costs. If
the market is working perfectly, you are maximizing welfare. The price will then
give you a signal of the value of health.
There is no trade in health, but there is a trade in healthcare. But does this
remove need for explicit valuation of health?
- No, most healthcare spending is not market determined
- AND, healthcare markets are highly distorted. Healthcare markets don’t
work perfectly
o There is imperfect competition MSB > MSC
o Adverse selection MSB>MSC
o Moral hazard MSC>MSB
o Positive externalities MSB>MSC
To determine the efficient allocation of resources to production of health and
healthcare, we need to know the value of health.
There is market failure, you do not know the real price of healthcare.
What is the total spending of healthcare spending the market is not efficient.
The government determines the health spending
taxation.
The level of health spending is determined
centrally by governments. imperfect
competition
o Economies of scale. Larger more
efficient.
Imperfect information:
o Moral hazard
o Adverse selection
Externalities: positive. Vaccinated others benefit.
Efficient allocation of resources within health system
Compare health produced by marginal spending across healthcare programs.
Cost effectiveness analysis.
Measuring health can be done in two different ways:
1. Length of life
Life expectancy
Survival
Mortality
2. Quality of life
Health or well-being score
Morbidity
3. Combined
Healthy life expectancy, disability-adjusted life expectancy
In health economics there are three puzzles:
1. Why does health change over time?
Why did life expectancy increase?
Why is it not higher now?
Are there limits to life expectancy?
2. Why does health differ between countries?
Higher income, higher life expectancy
Why does income matter so much and why do it seem to matter more
amongst poor countries than among richer countries
3. Why does health differ within countries?
What can we do about such differences?
Are we succeeding in closing the gap?
Health is an important component of welfare. Health determines economic
potential. Production of health is a resource allocation problem. Health is
determined by behavior that economic seeks to understand.
Health is produced but not traded. There is no decentralized market mechanism
to allocate resource efficiently to those who value health most, capture value of
health in a price. We must purposefully allocate resources to health and lack a
signal of the value of health to guide us. We need to value health explicitly rather
than rely on market signal of its value.
Assumptions health production
Health is not given but produced
- Production is at the level of an individual
- Health is produced using a number of factors. We can influence some of
these factors, such as medical care.
- There is utility maximization under constraints and utility is a function of
health produce health as efficiently as
possible.
This is the health production function curve.
There are diminishing marginal returns to
health. The initial health is the starting point.
o Nutrition: influences the production
of health= health is more effective if
you eat better. Good food may
decrease your demand for health
and good food influences your
health starting point.
, There are preferences or constraints
(income/time)
Health demand: per se education, you know how to obtain health better. The
effective price goes down, produce health more efficiently.
Pollution: not per se demand for health. But demand for medical care. We use
medical care to improve our health.
Why does not everyone achieve full health?
Why is there no standard recipe for maximizing health?
Everyone’s background is different, there is freedom of choice (preferences),
income differences (constraints), differences in starting points and differences
in how effective medical care is for you.
What may be good for one person might not necessarily be good for someone
else.
It is extremely difficult to untangle the links between work, earning, health and
education without guiding frame.
Income has influence on: production functions, constraints, preferences.
If income is higher: probability of a healthy start increases higher
initial health status, more food security medical care more effective,
able to purchase more health.
o You shift right along the curve
Health and income influence each other.
At a population level:
- Environment, culture, level of technology, infrastructure
o In poorer countries more traffic injuries.
Externalities
Spillovers from one person’s actions to other people
- Negative: costs borne by others (big cars)
- Positive: benefits for others (vaccines)
Can the government limit the influence of income on health?
- Constraints: public provision or subsidization of health care limits the
impact of the allocation through the price mechanism
- Production function: government intervention, by introducing basic care
package.
- Difference in income may cause differences in:
o Production functions, constraints, preferences.
Healthincome
Individual
, - Ability to work. The effect differs according to situation.
Government intervention
- Income compensation
- Can you buy insurance/ direct compensation for missed earnings through
social security
- Ensuring access to health care
o Decreasing waiting times.
Interventions aimed at long-term effects are harder to capture because of its
nature, and are limited by legitimacy concerns, ability, and need.
Health at the family level
- Spouses, parents, children, healthy habits, fetal origins, informal care for
parents and spouses.
Health income (at a national level)
- Improvements in health increases human capital.
- The population level effect may differ from individual effects.
The role of technology
- As a mediator:
o Rich people have access to better care. Magnitude depends on other
factors
- As a confounder:
o Technology also influences income inequality
Global:
- Levels of medical technology is given within a country but varies
internationally
- Levels of medical technology is a function of income
Health and production of medical care are a function of knowledge.
Education has impact on the production function. Education as the great
equalizer? Or education as a confounder?
o The effect of income on health is influences by background and by
personal situation.
There is no market for health. The market is not going to tell you the market
price, like with other goods.
On average, in OECD countries, the spending is 5000 US dollars per person per
year. This is 9,5-10% of GBP spend on health.
Two fundamental questions addressed by health economics:
1. Are we spending too much or too little on health and healthcare?
2. Is rapidly rising health spending unaffordable and threatening economic
prosperity or does it reflect that prosperity?
First, we must value health. There is no market mechanism, so health has to be
valued.
Market mechanism:
A good is produced by someone and consumed by another= trade.
Forces of demand and supply determine market price. With perfect competition,
and no distortions, the market achieves:
, o Equilibrium price: where demand = supply, where marginal benefits
equal marginal costs
o MSB=MSC.
If this holds, there is an efficient allocation of resources to
production of a good.
For health the market is missing. Health is produced, but not traded. There is no
market exchange.
o No efficient allocation of resources to health production
o There is no market signal of the value of health.
Centralized allocation implies a value of health. There are opportunity costs. If
the market is working perfectly, you are maximizing welfare. The price will then
give you a signal of the value of health.
There is no trade in health, but there is a trade in healthcare. But does this
remove need for explicit valuation of health?
- No, most healthcare spending is not market determined
- AND, healthcare markets are highly distorted. Healthcare markets don’t
work perfectly
o There is imperfect competition MSB > MSC
o Adverse selection MSB>MSC
o Moral hazard MSC>MSB
o Positive externalities MSB>MSC
To determine the efficient allocation of resources to production of health and
healthcare, we need to know the value of health.
There is market failure, you do not know the real price of healthcare.
What is the total spending of healthcare spending the market is not efficient.
The government determines the health spending
taxation.
The level of health spending is determined
centrally by governments. imperfect
competition
o Economies of scale. Larger more
efficient.
Imperfect information:
o Moral hazard
o Adverse selection
Externalities: positive. Vaccinated others benefit.
Efficient allocation of resources within health system
Compare health produced by marginal spending across healthcare programs.
Cost effectiveness analysis.
