Chapter 7

• Health economics


  The application of economic theory, models and empirical techniques to the analysis of decision-making by individuals, health care providers and governments with respect to health and health care
• Health economics is based on economic theory, but also comprises a body of economic theory developed specifically to understand the behaviour of patients, doctors and hospitals, and analytical techniques developed to facilitate resource allocation decisions in health care
• Health care is a major component of government spending, investment and employment and the economic performance of the health care system is linked to the overall economic performance of a country and its citizens
• Demand of healthcare


  Derived from health, affected by determinants of health (income status and work activity) and by nature of health itself
• Ever since they turned their attention to health and health care, economists have asked whether health care is different from other goods and services
• What makes health care special?

  The roles of uncertainty and information are central to answering this question
• Arrow argues that the special economic problems of medical care can be explained as adaptations to the existence of uncertainty in the incidence of disease and the efficacy of treatment
• Differences between health care markets and the perfectly competitive model

  • Externalities
  • Heterogeneous services
  • Public goods
  • Altruistic behaviour and beliefs
  • Equity objectives
  • Restricted entry
  • Incomplete markets for insurance
• Moral hazard in insurance


  The way in which having insurance changes people's incentives and actions
• Ex ante moral hazard


  Actions that increase the risk of illness
• Ex post moral hazard


  Increase in the use of health care
• Principal-agent relationship


  The agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act
• In healthcare, the doctors are the agents for the patients who are principals
• What makes health care special

  • Uncertainty about the incidence of disease, both its diagnosis and its prognosis
  • Uncertainty about the likelihood of recovery after treatment, in other words, the effectiveness of care
• Reputation goods


  Consumers can draw on the experiences of those around them, such as family and friends, to judge the benefits of consumption
• Equity in health


  Fairness in the distribution of health across individuals
• Horizontal equity


  Equal treatment of individuals who are equal in relevant respects
• Vertical equity


  Unequal treatment of individuals who are unequal in relevant respects
• Equity principles


  • Equal health
  • Equal health gain
  • Equal health value of additional health
  • Maintaining existing distributions
  • Allocation according to need
  • Equal per capita resources
• Equality


  Each individual or group of people is given the same resources or opportunities
• Efficiency


  Achieving greatest health benefit in minimum resources and cost
• Technical efficiency


  Producer is achieving a maximum output from a given input combination with no wastage
• Allocative efficiency


  Efficient allocation of inputs between firms and between outputs
• Pareto efficiency


  A point of resource allocation where no further improvements in resources reallocation can be made, it is a point at which it is impossible to make someone better off without making another worse off
• All the points on the production possibilities frontier are efficient but not necessarily equitable
• Equity-efficiency tradeoff


  Conflict between maximizing economic efficiency and maximizing the equity (or fairness) of society
• Funding types for healthcare

  • Direct payments by users
  • Private health insurance
  • Social or state insurance, including earmarked payroll taxes
  • General taxation
• Most countries make some use of direct, out of pocket, payments by patients
• Incentives used by healthcare systems to influence consumer decisions

  • Financial incentives (cost sharing, co-insurance rates, deductibles)
  • Limit coverage available
  • Limit consumer choice of provider
  • Delegation of consumer choice to providers using non-price rationing