Economics and Financing of Health Care Systems – GW4567M
Week 1.
Video lecture: Is health care really different?
Part a: health economics and expansion of healthcare sector
Health Economics
Folland, Goodman & Stano, 2017:
“Health economics studies the allocation of resources to and within the health sector.
Because this sector has become the largest sector of many countries’ economies and its
share of GDP is expected to continue to grow, we should not be surprised that health
economics has emerged as a distinct specialty within economics.”
• Health economics provides concepts and tools to understand difficult trade-offs involved
in organizing the allocation of healthcare resources, which may help to improve health
policy and health system design.
Does economics apply to health care?
• Yes. Healthcare resources are scarce, produced, and distributed, just like in other sectors.
• Example: Price sensitivity
• The RAND Health Insurance Experiment showed that higher prices reduce healthcare
use (including mental health and medical care).
• Price and demand matter, even in healthcare.
Relevance of health economics
• The way healthcare systems are organized economically affects efficiency and equity.
• Healthcare is a large and growing share of GDP in most countries.
• Healthcare is not a regular commodity – often considered a right, not a privilege.
• Unique features of healthcare markets → market failures (information asymmetry,
externalities, moral hazard, adverse selection) and government failures (inefficiencies in
regulation or financing).
Health care spending is growing faster, than our economies (for most countries).
Financial crisis → less spending on health care.
Still, the expansion is likely to continue...
Cost pressure → nothing is done about the rising expenses.
Cost containments → trying to reduce costs.
For the following reasons...
• Population ageing → higher demand for care.
• Medical science & technology → more treatments available, often costly.
• Shift toward chronic diseases → long-term care needs.
• Rising incomes & welfare → people demand more and better healthcare.
• Expansion of health insurance coverage → lower costs for patients → moral hazard
(overconsumption).
• Flawed incentives in payment and delivery systems.
• Baumol’s “cost disease”:
• Healthcare is labor-intensive, productivity growth is slower than in other industries.
, • Wages rise across the economy, but healthcare cannot match productivity gains →
rising costs.
• Demand remains inelastic (people don’t cut back much even if prices rise).
Interesting questions...
What is the problem with health spending growth?
Why do countries bother about health spending anyway?
• Problem with growth: It can be fiscally unsustainable, crowd out other spending, and
worsen inequality if not managed.
• Why it matters: Health spending affects government budgets, household finances,
productivity, and social stability.
Is health spending growth sustainable?
• Increasing health spending may significantly harm the economy
• Taxes and/or premiums labor costs competitiveness
• Increasing public health spending may crowd out other public services
• Financial sustainability: how to ‘pay’ for spending growth?
• E.g. higher cross-subsidies to guarantee universal access
• Economic sustainability: ensuring value for money
• Important task for health economists!
Part b: health care: right or privilege?
Health care: a right or a privilege?
Universal health coverage (WHO definition): health care is a right.
Ensuring that all people can use the promotive, preventive, curative, rehabilitative and
palliative services they need, of sufficient quality to be effective, while ensuring that the use
of these services does not expose the user to financial hardship.
• Universal coverage is firmly based on the WHO constitution of 1948 declaring health a
fundamental human right and the right to health care is embodied in many countries’
constitutions
Universal coverage: three dimensions
• Population coverage → who is covered? (everyone vs. only insured groups)
• Service coverage → which services are included?
• Financial protection → is access affordable, avoiding financial hardship?
“Ensuring that all people can use the [healthcare] services they need, of sufficient quality to
be effective, while ensuring that the use [...] does not expose the user to financial hardship.”
President Barack Obama signs the Affordable Care Act during a ceremony with fellow
Democrats in the East Room of the White House on March 23, 2010 in Washington, D.C.
(McNamee/Getty Images). Obama care – extend health coverage for those without.
Still not universally accepted...
US presidential candidate Donald Trump, 14 Jan 2016, interview with Bloomberg Politics:
Trump blasted Democratic presidential candidate Bernie Sanders’ ‘medicare-for-all’ plan,
saying access to healthcare is a privilege that should be earned, rather than a right.
“America didn’t become great through handouts.”
Part c: health care’s distinctive features
,Health care: not a regular economic good!
• Adam Smith (1776): Trust in physicians → requires appropriate social and financial
reward.
• George Bernard Shaw (1911): Incentives (prikkel) in medicine can be perverse/wrong if
profit is tied to unnecessary treatment.
• Kenneth Arrow (1963): The health sector has structural characteristics to address risk and
imperfect information, leading to non-market solutions.
Is health care different?
Folland, Goodman and Stano (2017):
“Health care has many distinctive features but is not unique in any of them. What is unique
is the combination of features and even the sheer number of them.”
Distinctive features of health care
• Uncertainty (illness occurrence, treatment success).
• Information problems (patients lack medical knowledge → physician as agent).
• Insurance & third-party payers (moral hazard, adverse selection).
• Large nonprofit role (hospitals, charities).
• Restrictions on competition (licensing, capacity regulation).
• Equity and solidarity (health as a right).
• Government subsidies/public provision (tax-financed care).
• Ethical concerns (life and death decisions).
Sources of market failure in health care
Market failure: individuals’ pursuit of self-interest leads to outcomes that can be improved
upon from a societal point-of-view
• Uncertainty (illness risk cannot be perfectly insured).
• Risk-bearing third parties → moral hazard (overuse of care when insured).
• Asymmetric information → agency problems (physician decides for patient).
• Externalities → vaccination, public health measures.
Non-market institutions in health care (Governments or institutions intervene to correct
these failures)
• Professional licensure (professional standards).
• Non-profit organizations
• Restrictions on provider advertising (reduce misinformation).
• “Any-willing-provider” laws
• Social health insurance
• Supply regulation (e.g. of entry and capacity)
• Price regulation
• Quality regulation
• Public provision of health care (e.g. NHS)
Market failure vs. government failure
The government can try to correct market failures by public provision, redistribution, and
regulation, but ...
... the fact that it cán intervene in the healthcare system does not always mean that it will
, actually succeed in doing so!
• Sources of government failure:
• Information problems
• Coordination problems
• Motivation problems
• Special interest groups
Fear of government failure? Resistance of Obamacare.
What role should markets and governments play in health care?
• Universal access: how to realize/organize solidarity?
• between low & high risk people?
• between high & low income people?
• Efficiency: how to organize an efficient provision and financing of health services and
systems?
How to avoid market and government failure?
→ Policymakers navigate between Scylla (market failure) and Charybdis (government
failure).
Why health economics?
Health economics provides concepts and tools to understand the difficult trade-offs
involved in organizing the allocation of scarce resources in the healthcare sector, which may
help to improve health policy and health system design.
Lecture 1. Course overview | Is health care really different?
Market access & Health Economics Journey | Guest speaker
Health care is changing every year. Adaption is needed.
Market access is needed to effectively introduce new medicine/drugs.
Video lecture: Demand for health care
Part A: Three models of health care demand
What’s the relation between demand for health and health care?
• Demanding health care is not for fun! It only generates utility if it improves health or
quality of life
• This implies that the demand for health care is derived from the demand for health
• In fact, health care is only one of the inputs in an individual’s health production function:
Health = h (Health care, Schooling, Nutrition, Prevention, Safety, ...)(where do we spend our
money on?)
• Health care is not only a consumption but also an investment good (in further health)
What determines our demand for health care?
Three basic models:
1. The medico-technical model
Professional view, price does not matter.
• Consumer demand is determined by medical experts based on objective needs
• Assumptions:
health care providers act as perfect agents on behalf of their patients
patients have uniform preferences and fully comply with the decisions made by their
Week 1.
Video lecture: Is health care really different?
Part a: health economics and expansion of healthcare sector
Health Economics
Folland, Goodman & Stano, 2017:
“Health economics studies the allocation of resources to and within the health sector.
Because this sector has become the largest sector of many countries’ economies and its
share of GDP is expected to continue to grow, we should not be surprised that health
economics has emerged as a distinct specialty within economics.”
• Health economics provides concepts and tools to understand difficult trade-offs involved
in organizing the allocation of healthcare resources, which may help to improve health
policy and health system design.
Does economics apply to health care?
• Yes. Healthcare resources are scarce, produced, and distributed, just like in other sectors.
• Example: Price sensitivity
• The RAND Health Insurance Experiment showed that higher prices reduce healthcare
use (including mental health and medical care).
• Price and demand matter, even in healthcare.
Relevance of health economics
• The way healthcare systems are organized economically affects efficiency and equity.
• Healthcare is a large and growing share of GDP in most countries.
• Healthcare is not a regular commodity – often considered a right, not a privilege.
• Unique features of healthcare markets → market failures (information asymmetry,
externalities, moral hazard, adverse selection) and government failures (inefficiencies in
regulation or financing).
Health care spending is growing faster, than our economies (for most countries).
Financial crisis → less spending on health care.
Still, the expansion is likely to continue...
Cost pressure → nothing is done about the rising expenses.
Cost containments → trying to reduce costs.
For the following reasons...
• Population ageing → higher demand for care.
• Medical science & technology → more treatments available, often costly.
• Shift toward chronic diseases → long-term care needs.
• Rising incomes & welfare → people demand more and better healthcare.
• Expansion of health insurance coverage → lower costs for patients → moral hazard
(overconsumption).
• Flawed incentives in payment and delivery systems.
• Baumol’s “cost disease”:
• Healthcare is labor-intensive, productivity growth is slower than in other industries.
, • Wages rise across the economy, but healthcare cannot match productivity gains →
rising costs.
• Demand remains inelastic (people don’t cut back much even if prices rise).
Interesting questions...
What is the problem with health spending growth?
Why do countries bother about health spending anyway?
• Problem with growth: It can be fiscally unsustainable, crowd out other spending, and
worsen inequality if not managed.
• Why it matters: Health spending affects government budgets, household finances,
productivity, and social stability.
Is health spending growth sustainable?
• Increasing health spending may significantly harm the economy
• Taxes and/or premiums labor costs competitiveness
• Increasing public health spending may crowd out other public services
• Financial sustainability: how to ‘pay’ for spending growth?
• E.g. higher cross-subsidies to guarantee universal access
• Economic sustainability: ensuring value for money
• Important task for health economists!
Part b: health care: right or privilege?
Health care: a right or a privilege?
Universal health coverage (WHO definition): health care is a right.
Ensuring that all people can use the promotive, preventive, curative, rehabilitative and
palliative services they need, of sufficient quality to be effective, while ensuring that the use
of these services does not expose the user to financial hardship.
• Universal coverage is firmly based on the WHO constitution of 1948 declaring health a
fundamental human right and the right to health care is embodied in many countries’
constitutions
Universal coverage: three dimensions
• Population coverage → who is covered? (everyone vs. only insured groups)
• Service coverage → which services are included?
• Financial protection → is access affordable, avoiding financial hardship?
“Ensuring that all people can use the [healthcare] services they need, of sufficient quality to
be effective, while ensuring that the use [...] does not expose the user to financial hardship.”
President Barack Obama signs the Affordable Care Act during a ceremony with fellow
Democrats in the East Room of the White House on March 23, 2010 in Washington, D.C.
(McNamee/Getty Images). Obama care – extend health coverage for those without.
Still not universally accepted...
US presidential candidate Donald Trump, 14 Jan 2016, interview with Bloomberg Politics:
Trump blasted Democratic presidential candidate Bernie Sanders’ ‘medicare-for-all’ plan,
saying access to healthcare is a privilege that should be earned, rather than a right.
“America didn’t become great through handouts.”
Part c: health care’s distinctive features
,Health care: not a regular economic good!
• Adam Smith (1776): Trust in physicians → requires appropriate social and financial
reward.
• George Bernard Shaw (1911): Incentives (prikkel) in medicine can be perverse/wrong if
profit is tied to unnecessary treatment.
• Kenneth Arrow (1963): The health sector has structural characteristics to address risk and
imperfect information, leading to non-market solutions.
Is health care different?
Folland, Goodman and Stano (2017):
“Health care has many distinctive features but is not unique in any of them. What is unique
is the combination of features and even the sheer number of them.”
Distinctive features of health care
• Uncertainty (illness occurrence, treatment success).
• Information problems (patients lack medical knowledge → physician as agent).
• Insurance & third-party payers (moral hazard, adverse selection).
• Large nonprofit role (hospitals, charities).
• Restrictions on competition (licensing, capacity regulation).
• Equity and solidarity (health as a right).
• Government subsidies/public provision (tax-financed care).
• Ethical concerns (life and death decisions).
Sources of market failure in health care
Market failure: individuals’ pursuit of self-interest leads to outcomes that can be improved
upon from a societal point-of-view
• Uncertainty (illness risk cannot be perfectly insured).
• Risk-bearing third parties → moral hazard (overuse of care when insured).
• Asymmetric information → agency problems (physician decides for patient).
• Externalities → vaccination, public health measures.
Non-market institutions in health care (Governments or institutions intervene to correct
these failures)
• Professional licensure (professional standards).
• Non-profit organizations
• Restrictions on provider advertising (reduce misinformation).
• “Any-willing-provider” laws
• Social health insurance
• Supply regulation (e.g. of entry and capacity)
• Price regulation
• Quality regulation
• Public provision of health care (e.g. NHS)
Market failure vs. government failure
The government can try to correct market failures by public provision, redistribution, and
regulation, but ...
... the fact that it cán intervene in the healthcare system does not always mean that it will
, actually succeed in doing so!
• Sources of government failure:
• Information problems
• Coordination problems
• Motivation problems
• Special interest groups
Fear of government failure? Resistance of Obamacare.
What role should markets and governments play in health care?
• Universal access: how to realize/organize solidarity?
• between low & high risk people?
• between high & low income people?
• Efficiency: how to organize an efficient provision and financing of health services and
systems?
How to avoid market and government failure?
→ Policymakers navigate between Scylla (market failure) and Charybdis (government
failure).
Why health economics?
Health economics provides concepts and tools to understand the difficult trade-offs
involved in organizing the allocation of scarce resources in the healthcare sector, which may
help to improve health policy and health system design.
Lecture 1. Course overview | Is health care really different?
Market access & Health Economics Journey | Guest speaker
Health care is changing every year. Adaption is needed.
Market access is needed to effectively introduce new medicine/drugs.
Video lecture: Demand for health care
Part A: Three models of health care demand
What’s the relation between demand for health and health care?
• Demanding health care is not for fun! It only generates utility if it improves health or
quality of life
• This implies that the demand for health care is derived from the demand for health
• In fact, health care is only one of the inputs in an individual’s health production function:
Health = h (Health care, Schooling, Nutrition, Prevention, Safety, ...)(where do we spend our
money on?)
• Health care is not only a consumption but also an investment good (in further health)
What determines our demand for health care?
Three basic models:
1. The medico-technical model
Professional view, price does not matter.
• Consumer demand is determined by medical experts based on objective needs
• Assumptions:
health care providers act as perfect agents on behalf of their patients
patients have uniform preferences and fully comply with the decisions made by their
