Case 1 Advanced health economics
1. What is economics?
• Economics concerns the allocation of scarce resources among competing demands
• If resources are insufficient to meet all demands, for that reason they are scarce
• All resource uses have an opportunity cost
• Health and health care demands appear to be infinite (never-ending). R
• Resources available for health care are finite
• Economists study society
• We believe that society (macro-level) is the result of choices of e.g. individuals (micro-
level). Therefore, economics is a study of choices
• We assume people make rational decisions. This does not necessarily mean that
people choose the smartest option, but rather that people choose what they think is
smartest.
2. What is economics in the healthcare?
Lecture
- Subject of analysis is the health (medical) care industry, not health.
- Health care influences health but also other commodities include; nutrition, shelter,
clothing, sanitation, leisure time, etc).
Culyer – Handbook of health economics (Chapter 1)
The health of health economics
- Health economics is commonly regarded as an applied field of economics. ‘It draws its
theoretical inspiration principally from four traditional areas of economics: finance and
insurance, industrial organisation, labour and public finance.’
- The impact of health economics outside the economics profession has been immense.
It has introduced the common currency of economists (opportunity costs, elasticity,
the margin, production functions) into medical language (indeed, established health
economists are as likely to be as heavily cited in the scientific literatures as in
economics).
- Its policy impact has also been immense. As has been the case with other health-
related professions, the language of health economics has influenced the thinking of
policy makers and health service managers at all levels.
Definition:
• Health economics is a subdisipline of economics, which applies the theories and
methods of economics to all aspects of health and health care.
• Economics: Social science that analyses the production, distribution and
consumption of goods and services
3. How do health economics and normal economics differ from each other?
Why do they exist?
A seminal 1963 article by Kenneth Arrow (see summary), often credited with giving rise
to the health economics as a discipline, drew conceptual distinctions between health and
other goods. Factors that distinguish health economics from other areas include:
• Extensive government intervention
• Intractable (= unmanageable) uncertainty in several dimensions (like uncertainty
for the need for health care and the effectiveness of health care or product)
1
, • Asymmetric information (e.g. The healthcare practitioner who provides healthcare
typically has more knowledge of the service being provided than the patient who
is the consumer).
• Barriers to entry (Physicians and other “learned healthcare professionals”, receive
an extended formal education. This not only ensures competence and protects the
public, but it also reduces competition. For example the case with immunisation
programmes where immunising individuals may prevent contagion and an
outbreak of disease from spreading. An individual’s health not only has a bearing
on his or her well-being as discussed above, but also on the value of his or her
labour to the economy. Having a healthier workforce reduces the amount of
sickness absence and potentially improves labour productivity. These positive
externalities suggest that if healthcare provision was left solely to the private
market, the amount provided would be less than the socially optimal level. Hence,
it is not just fairer but also a more effective use of resources for the state to
subsidise healthcare provision.
• Externalities (are costs and benefits that are not transmitted through prices and is
incurred by a party who was not involved. So the cost or benefits of market
transactions that are not directly reflected in the price buyers (patients) or sellers
(doctors) use to make their decisions.)
• The presence of a third-party agent. In healthcare, the third-party agent is the
physician, who makes purchasing decisions (e.g., whether to order a lab test,
prescribe a medication, perform a surgery, etc.) while being insulated (not
depending on) from the price of the product or service.
Difference: Curley: Health economics isn’t lead by invisible hand other people and
institution regulate things.
3 main differences:
- Health can not be treated on the market
- Health is embodied and depends on health stages of individual
- Health stages is stochastic and can not be predicted
4. Define the term.
Scarcity = Tension between limited resources and unlimited needs. Economics studies
scarcity.
Allocation = Dividing resources in the market. Health economics looks at how to allocate
scarce resources in the most efficient manner in health care.
Efficiency = Minimise the inputs, e.g. resources or costs, required to produce a given
output.
Pareto-optimality = A resource allocation is Pareto Optimal if and only if it is impossible
to increase one person’s utility without simultaneously decreasing another’s.
Competition = Arises when two or more parties strive for a goal which cannot be
shared. (Perfect) competition represents a market structure in which there are (1)
numerous buyers and sellers, (2) perfect information, (3) free entry and exit, and (4) a
homogenous product.
Utility = In economics, utility is a measure of relative satisfaction. In other words, it is a
term referring to the total satisfaction received by a consumer from consuming a good or
service.
Cost-benefit analysis = Critical elements of the cost-benefit analysis drawn from
welfare economic theory include the centrality of individual utility (preferences) in valuing
resource allocations and the proposition that under certain assumptions regarding the
nature of individual utility functions for members of society.
Market failure = If one or more of efficiency conditions are not fulfilled then we are
faced with a “market failure”. Market failure leads to inefficiency and sub-optimal
outcomes and is a reason for government intervention. Government needs to regulate
the health care market because of market failure. Market failure would cause inequality,
2
1. What is economics?
• Economics concerns the allocation of scarce resources among competing demands
• If resources are insufficient to meet all demands, for that reason they are scarce
• All resource uses have an opportunity cost
• Health and health care demands appear to be infinite (never-ending). R
• Resources available for health care are finite
• Economists study society
• We believe that society (macro-level) is the result of choices of e.g. individuals (micro-
level). Therefore, economics is a study of choices
• We assume people make rational decisions. This does not necessarily mean that
people choose the smartest option, but rather that people choose what they think is
smartest.
2. What is economics in the healthcare?
Lecture
- Subject of analysis is the health (medical) care industry, not health.
- Health care influences health but also other commodities include; nutrition, shelter,
clothing, sanitation, leisure time, etc).
Culyer – Handbook of health economics (Chapter 1)
The health of health economics
- Health economics is commonly regarded as an applied field of economics. ‘It draws its
theoretical inspiration principally from four traditional areas of economics: finance and
insurance, industrial organisation, labour and public finance.’
- The impact of health economics outside the economics profession has been immense.
It has introduced the common currency of economists (opportunity costs, elasticity,
the margin, production functions) into medical language (indeed, established health
economists are as likely to be as heavily cited in the scientific literatures as in
economics).
- Its policy impact has also been immense. As has been the case with other health-
related professions, the language of health economics has influenced the thinking of
policy makers and health service managers at all levels.
Definition:
• Health economics is a subdisipline of economics, which applies the theories and
methods of economics to all aspects of health and health care.
• Economics: Social science that analyses the production, distribution and
consumption of goods and services
3. How do health economics and normal economics differ from each other?
Why do they exist?
A seminal 1963 article by Kenneth Arrow (see summary), often credited with giving rise
to the health economics as a discipline, drew conceptual distinctions between health and
other goods. Factors that distinguish health economics from other areas include:
• Extensive government intervention
• Intractable (= unmanageable) uncertainty in several dimensions (like uncertainty
for the need for health care and the effectiveness of health care or product)
1
, • Asymmetric information (e.g. The healthcare practitioner who provides healthcare
typically has more knowledge of the service being provided than the patient who
is the consumer).
• Barriers to entry (Physicians and other “learned healthcare professionals”, receive
an extended formal education. This not only ensures competence and protects the
public, but it also reduces competition. For example the case with immunisation
programmes where immunising individuals may prevent contagion and an
outbreak of disease from spreading. An individual’s health not only has a bearing
on his or her well-being as discussed above, but also on the value of his or her
labour to the economy. Having a healthier workforce reduces the amount of
sickness absence and potentially improves labour productivity. These positive
externalities suggest that if healthcare provision was left solely to the private
market, the amount provided would be less than the socially optimal level. Hence,
it is not just fairer but also a more effective use of resources for the state to
subsidise healthcare provision.
• Externalities (are costs and benefits that are not transmitted through prices and is
incurred by a party who was not involved. So the cost or benefits of market
transactions that are not directly reflected in the price buyers (patients) or sellers
(doctors) use to make their decisions.)
• The presence of a third-party agent. In healthcare, the third-party agent is the
physician, who makes purchasing decisions (e.g., whether to order a lab test,
prescribe a medication, perform a surgery, etc.) while being insulated (not
depending on) from the price of the product or service.
Difference: Curley: Health economics isn’t lead by invisible hand other people and
institution regulate things.
3 main differences:
- Health can not be treated on the market
- Health is embodied and depends on health stages of individual
- Health stages is stochastic and can not be predicted
4. Define the term.
Scarcity = Tension between limited resources and unlimited needs. Economics studies
scarcity.
Allocation = Dividing resources in the market. Health economics looks at how to allocate
scarce resources in the most efficient manner in health care.
Efficiency = Minimise the inputs, e.g. resources or costs, required to produce a given
output.
Pareto-optimality = A resource allocation is Pareto Optimal if and only if it is impossible
to increase one person’s utility without simultaneously decreasing another’s.
Competition = Arises when two or more parties strive for a goal which cannot be
shared. (Perfect) competition represents a market structure in which there are (1)
numerous buyers and sellers, (2) perfect information, (3) free entry and exit, and (4) a
homogenous product.
Utility = In economics, utility is a measure of relative satisfaction. In other words, it is a
term referring to the total satisfaction received by a consumer from consuming a good or
service.
Cost-benefit analysis = Critical elements of the cost-benefit analysis drawn from
welfare economic theory include the centrality of individual utility (preferences) in valuing
resource allocations and the proposition that under certain assumptions regarding the
nature of individual utility functions for members of society.
Market failure = If one or more of efficiency conditions are not fulfilled then we are
faced with a “market failure”. Market failure leads to inefficiency and sub-optimal
outcomes and is a reason for government intervention. Government needs to regulate
the health care market because of market failure. Market failure would cause inequality,
2
