Lecture 1
1. Explain the relevance of health economics
- The economic organization of healthcare systems has a significant impact on the
efficiency and equity of healthcare allocation
- Healthcare is large and expanding sector of national economies
- Healthcare is not a regular commodity; it is widely considered a right and not a
privilege.
- Specific features of healthcare can easily result in market failure as well as in
government failure.
2. Analyze the causes and consequences of the expansion of the healthcare sector
- Ageing of population although the expected healthy life years are also increasing,
the number of older people is increasing which puts much pressure on health care
sector.
- Advancing medical science and technology is very expensive
- Shift towards chronic diseases
- Increasing welfare people expect and want more
- Expanding health insurance coverage moral hazard
- Flawed (financial) incentives
- Baumol’s cost disease health care is becoming relatively more expensive compared
to products of other industries, because productivity does not increase as much at the
same pace as in other industries while the wages rise at the same level as in the other
industries.
3. Explain what makes healthcare different and infer the implications thereof
Health care has many distinctive features but is not unique in any of them. However, the
combination of these features makes it unique:
- Presence and extent of uncertainty
- Problems of information
- Presence of insurance / risk-bearing third parties
- Large role of nonprofit firms
- Restrictions on competition
- Importance of equity and solidarity
- Government subsidies and public provisions
- Ethical concerns
There are several sources of market failure in health care:
- Uncertainty
- Risk-bearing third party moral hazard
- Asymmetric information agency problems
- Externalities
Government can try to correct or prevent market failure, but can also lead to government
failure, sources:
, - Information problems
- Coordination problems
- Motivation problems
- Special interest groups
Lecture 2
1. recognize the relationship between the demand for health and health care
Demanding health care only generates utility if it improves health of quality of life. This
implies that demand for health care is derived from the demand of health health care is only
one of the inputs in an individual’s health production function: Health = h (health care,
schooling, nutrition, etc.). health care is not only a consumption but also an investment good.
2. identify and interpret basic models of health care demand
- The medico-technical model: doctor in the lead, acting as perfect agent
o Consumer demand determined by medical experts based on objective needs
o Providers act as perfect agents and patients fully comply with decisions
o Only one determinant of health care demand: need individual demand is
perfectly inelastic (vertical line)
o Critique:
Doctors have their own interest, sometimes conflicting
Uncertainty effect medical treatment
Consumers don’t have uniform preferences, don’t fully comply and are
price and income sensitive.
- The neo-classical model: demand determined by consumers who maximize utility
subject to a budget constraint
o Consumers are sovereign and rational maximize utility
o Consumers have predetermined and ordered preferences
o Consumers know with certainty the outcome of their decisions
o Critique:
Consumers still dependent on provider’s judgement (information part
of transaction)
Consumers don’t know with certainty the results of their decisions
Therefore, demand curve does not per se reflect the marginal value of
health services to consumer
- The imperfect agency model: demand is partly consumer-initiated and partly provider-
initiated
o Information is part of the transaction between doctor and patient
o Provider act as an imperfect agent and may use information surplus to pursue
(conflicting) interest
o So, patients demand curve may not reflect how they really value health
services
o Supplier induced demand or underprovision of care can occur
o Different payment systems generate different outcomes
3. identify the determinants of the demand for health care
, - Needs (health status): position of the indifference curve
- Wants (preferences): slope of indifference curve
- Budget: position of budget restriction
- Prices of health care and other goods: slope of budget restriction
4. explain utility theory and its relevance for understanding health care demand
Consumer’s demand is determined by consumers who maximize utility subject to a budget
constraint.
Assumptions:
- Consumers always prefer more above less of the same good marginal utility of
consumption > 0
- Consumers have predetermined and ordered preferences
- Consumers know with certainty the results of their decisions
Optimal consumption is where the indifference curve is tangent to the budget constraint:
- Needs (health status): position of the indifference curve
- Wants (preferences): slope of indifference curve
- Budget: position of budget restriction
- Prices of health care and other goods: slope of budget restriction
5. categorize and evaluate price and income elasticities of health care demand
Price elasticity of demand:
Difficult to compare price elasticities across different health care settings because elasticity
not only depends on slope of demand curve but also on the point on the demand curve.
- In health care, consumers often don’t pay full market price measure out of pocket
price may be biased due to selection effect how to deal with this:
o Correct for relevant background variables
, o Quasi experimental methods: control and experimental group may not be
comparable at baseline
o Randomized controlled experiments
- Findings:
o RAND: price elasticity vary across health care services, mean: -0,2
o Oregon: estimates slightly smaller than in RAND
Income elasticity of demand:
- If IE < 0: inferior good
- If 0 ≤ IE ≥ 1: necessary goods
- If IE ≥ 1 : luxury good
- At individual level income elasticity for health care is positive and inelastic range,
close to zero (necessary good)
- At country level income elasticity for health care normally exceeds 1 (luxury
good)
- If GDP of a country increases, normally more will be spend on health care while
income at individual level does not increase health care demand as much.
- In countries with generous health insurance, income elasticities of health care
demand are more relevant at the country level. Because people have generous
health insurance, income does not matter as much. If GDP of a country raises, it
has to decide what to do with the money because there is a budget constraint
(spending it on education, infrastructure, health?)
- In low-income countries individual income elasticities of health care demand are
likely to be higher than in high-income countries. In high income countries
elasticity will be quite low. In low countries there is most likely less health
insurance, so they have more budget constraint.
Lecture 3
1. evaluate the information issues in health care markets
Three different agency relationships in which there are information issues:
- Patient (principal) vs provider (agent)
o Consumers cannot easily monitor quality and search for quality information
- Provider (agent) vs payer (principal)
- Patient/insured (agent) vs payer (principal)
- Double agency role provider: with regards to patients; to provide high quality care.
With regard to third-party payers; to economize the use of care
Problems may be exacerbated if there is considerable outcome uncertainty in which case it is
not clear whether the outcome is the result by the actions of the agent.
1. Explain the relevance of health economics
- The economic organization of healthcare systems has a significant impact on the
efficiency and equity of healthcare allocation
- Healthcare is large and expanding sector of national economies
- Healthcare is not a regular commodity; it is widely considered a right and not a
privilege.
- Specific features of healthcare can easily result in market failure as well as in
government failure.
2. Analyze the causes and consequences of the expansion of the healthcare sector
- Ageing of population although the expected healthy life years are also increasing,
the number of older people is increasing which puts much pressure on health care
sector.
- Advancing medical science and technology is very expensive
- Shift towards chronic diseases
- Increasing welfare people expect and want more
- Expanding health insurance coverage moral hazard
- Flawed (financial) incentives
- Baumol’s cost disease health care is becoming relatively more expensive compared
to products of other industries, because productivity does not increase as much at the
same pace as in other industries while the wages rise at the same level as in the other
industries.
3. Explain what makes healthcare different and infer the implications thereof
Health care has many distinctive features but is not unique in any of them. However, the
combination of these features makes it unique:
- Presence and extent of uncertainty
- Problems of information
- Presence of insurance / risk-bearing third parties
- Large role of nonprofit firms
- Restrictions on competition
- Importance of equity and solidarity
- Government subsidies and public provisions
- Ethical concerns
There are several sources of market failure in health care:
- Uncertainty
- Risk-bearing third party moral hazard
- Asymmetric information agency problems
- Externalities
Government can try to correct or prevent market failure, but can also lead to government
failure, sources:
, - Information problems
- Coordination problems
- Motivation problems
- Special interest groups
Lecture 2
1. recognize the relationship between the demand for health and health care
Demanding health care only generates utility if it improves health of quality of life. This
implies that demand for health care is derived from the demand of health health care is only
one of the inputs in an individual’s health production function: Health = h (health care,
schooling, nutrition, etc.). health care is not only a consumption but also an investment good.
2. identify and interpret basic models of health care demand
- The medico-technical model: doctor in the lead, acting as perfect agent
o Consumer demand determined by medical experts based on objective needs
o Providers act as perfect agents and patients fully comply with decisions
o Only one determinant of health care demand: need individual demand is
perfectly inelastic (vertical line)
o Critique:
Doctors have their own interest, sometimes conflicting
Uncertainty effect medical treatment
Consumers don’t have uniform preferences, don’t fully comply and are
price and income sensitive.
- The neo-classical model: demand determined by consumers who maximize utility
subject to a budget constraint
o Consumers are sovereign and rational maximize utility
o Consumers have predetermined and ordered preferences
o Consumers know with certainty the outcome of their decisions
o Critique:
Consumers still dependent on provider’s judgement (information part
of transaction)
Consumers don’t know with certainty the results of their decisions
Therefore, demand curve does not per se reflect the marginal value of
health services to consumer
- The imperfect agency model: demand is partly consumer-initiated and partly provider-
initiated
o Information is part of the transaction between doctor and patient
o Provider act as an imperfect agent and may use information surplus to pursue
(conflicting) interest
o So, patients demand curve may not reflect how they really value health
services
o Supplier induced demand or underprovision of care can occur
o Different payment systems generate different outcomes
3. identify the determinants of the demand for health care
, - Needs (health status): position of the indifference curve
- Wants (preferences): slope of indifference curve
- Budget: position of budget restriction
- Prices of health care and other goods: slope of budget restriction
4. explain utility theory and its relevance for understanding health care demand
Consumer’s demand is determined by consumers who maximize utility subject to a budget
constraint.
Assumptions:
- Consumers always prefer more above less of the same good marginal utility of
consumption > 0
- Consumers have predetermined and ordered preferences
- Consumers know with certainty the results of their decisions
Optimal consumption is where the indifference curve is tangent to the budget constraint:
- Needs (health status): position of the indifference curve
- Wants (preferences): slope of indifference curve
- Budget: position of budget restriction
- Prices of health care and other goods: slope of budget restriction
5. categorize and evaluate price and income elasticities of health care demand
Price elasticity of demand:
Difficult to compare price elasticities across different health care settings because elasticity
not only depends on slope of demand curve but also on the point on the demand curve.
- In health care, consumers often don’t pay full market price measure out of pocket
price may be biased due to selection effect how to deal with this:
o Correct for relevant background variables
, o Quasi experimental methods: control and experimental group may not be
comparable at baseline
o Randomized controlled experiments
- Findings:
o RAND: price elasticity vary across health care services, mean: -0,2
o Oregon: estimates slightly smaller than in RAND
Income elasticity of demand:
- If IE < 0: inferior good
- If 0 ≤ IE ≥ 1: necessary goods
- If IE ≥ 1 : luxury good
- At individual level income elasticity for health care is positive and inelastic range,
close to zero (necessary good)
- At country level income elasticity for health care normally exceeds 1 (luxury
good)
- If GDP of a country increases, normally more will be spend on health care while
income at individual level does not increase health care demand as much.
- In countries with generous health insurance, income elasticities of health care
demand are more relevant at the country level. Because people have generous
health insurance, income does not matter as much. If GDP of a country raises, it
has to decide what to do with the money because there is a budget constraint
(spending it on education, infrastructure, health?)
- In low-income countries individual income elasticities of health care demand are
likely to be higher than in high-income countries. In high income countries
elasticity will be quite low. In low countries there is most likely less health
insurance, so they have more budget constraint.
Lecture 3
1. evaluate the information issues in health care markets
Three different agency relationships in which there are information issues:
- Patient (principal) vs provider (agent)
o Consumers cannot easily monitor quality and search for quality information
- Provider (agent) vs payer (principal)
- Patient/insured (agent) vs payer (principal)
- Double agency role provider: with regards to patients; to provide high quality care.
With regard to third-party payers; to economize the use of care
Problems may be exacerbated if there is considerable outcome uncertainty in which case it is
not clear whether the outcome is the result by the actions of the agent.
