OUTLINE
(Public) Health Economics
o
What is economics
o
What is health economics
o
Why health economics is important
o
Three basic economic problems in any health care system
o
Health care system : objectives, basic questions
o
Efficiency and equity
o
Wants, demands and needs
o
Is health care different
o
Economic evaluation
WORALUCK HIMAKALASA
MARCH 25, 2015
CONSUMERS PRODUCERS AND GOVERNMENT
WHAT IS ECONOMICS
Limited Resources
Choice
Efficiency
Government
Limited
Unbalance
Unlimited
Resources
Goods and Services
Human Wants
Economics : the study of how people choose to
allocate scarce resources to satisfy their
Behavior
unlimited wants
Producers
Goods and
Services
Consumers
Profit
Maximization
Rational Behavior
Utility
Maximization
THE THREE BASIC ECONOMIC QUESTIONS
ECONOMIC SYSTEM
Economic System
Limited or scarce
resources
Capitalism
• Free - Enterprise System or
Market System
• An economy in which most
economic decisions are made
by private households and
firms.
• The basic coordinating
mechanism is price.
(price theory)
The three basic question
What to Produce?
How to Produce?
Resource allocation
determines the
quantities of various
goods that are
produced.
Which of the available
methods of production is
used to produce each of
the goods
• Labor Intensive
• Capital Intensive
For whom to
Produce?
Who gets a lot, who
gets a little, and why?
HEALTH ECONOMICS : WHAT ?

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.
Mixed Economy
Central Planning
System
• Command Economies
• Most economic
decisions are made
by a central planning
authority
HEALTH ECONOMICS : WHAT ?
Health care resources are limited or scarce at a given
time, and wants are limitless.
o
Health economics is defined in terms of the determination and allocation
of health care resources.
Health care resources are limited or scarce at a given time,
and wants are limitless.
o
Health care resources consist of

Medical supplies : pharmaceutical goods, latex rubber gloves, bed linens

Personnel : physicians, lab assistants

Capital input : nursing home and hospital facilities, diagnostic and
therapeutic equipment and other item that provide medical care services
Source : Morris S. Devlin N. and Parkin D. , Economic Analysis in Health care, West Sussex, England, 2007 p.2
Source : Rexford E. Santerre and Stephen P. Neue, Health Economics : Theories, Insights and Industry Studies, Irwin, Chicago, 2007 p.4
INPUT : Selected Indicators Of Health Expenditure Ratios
WHY HEALTH ECONOMICS IS IMPORTANT
INPUT
 Increasing Health
Care Cost and
Expenditure
o Health care
expenditure as
a percentage
of GDP
o Medical price
index vs.
consumer price
index
PROCESS
OUTPUT
 Difficulties of
Access
o Special problem
: by particular
groups in
society e.g. the
poor
o General
problem : by
reason of
location
 Discrepancy of
Health Levels
o Within a nation
o Among nation
country
Brunei
Cambodia
Indonesia
Lao P.D.R
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
Total expenditure on
health as % of GDP
General government
expenditure on health as
% of total expenditure on
health
Per capita total
expenditure on health
(PPP int. $)
2000
2011
2000
2011
2000
2011
3.0
6.3
2.0
3.3
3.0
2.1
3.2
2.7
3.4
5.3
2.2
5.6
2.9
2.8
3.8
1.8
4.4
4.2
4.1
6.8
86.5
20.5
36.1
35.1
55.8
14.2
47.6
45.0
56.1
30.9
92.0
22.6
37.9
49.4
55.2
15.9
36.9
33.3
77.7
45.2
1,274
59
47
39
282
12
76
954
168
72
1,179
129
132
75
619
23
182
2556
372
227
Source : World Health Statistics 2014
OUTPUT : Probability Of Dying And Life Expectancy At Birth (Year 2012)
Probability of Dying (Per 1000)
country
Brunei
Cambodia
Indonesia
Lao P.D.R
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
Infant
Undermortality
five
mortality
rate
rate
7
34
26
54
7
41
24
2
11
18
8
40
31
72
9
52
30
3
13
23
Between ages 15
and 60 years
Life Expectancy at
Birth (Years)
Healthy life
expectancy (HALE)
at birth
Males
Females
Males
Females
Males
Females
104
212
178
202
172
242
258
68
182
191
71
161
124
163
89
184
138
42
90
69
76
70
69
64
72
64
65
80
71
71
78
75
73
67
76
68
72
85
79
80
68
59
61
56
63
56
57
74
63
62
69
63
64
58
66
58
63
77
68
69
THREE BASIC ECONOMIC PROBLEMS IN ANY
HEALTH CARE SYSTEM

WHAT ?
 What types of medical goods and services should be produced ?

Should the most expensive tests (such as angiograms) be performed without regard to cost ?
What treatments (such as balloon angioplasties) should be provided?
 HOW ?

What inputs should be used to produce the medical goods and services ?
Should the hospital use high-tech medical equipment, a large nursing stuff, or both ?
 FOR WHOM ?




Who should receive the medical goods and services ?
Would a person receive care merely because he/she is a citizen, or would he/she recive care
only if he/she worked for a large company that provides health insurance for its employees ?
Source : Rexford E. Santerre and Stephen P. Neue, Health Economics : Theories, Insights and Industry Studies, Irwin, Chicago, 2007 p.3
Source : World Health Statistics 2014
OPPORTUNITY COST
Opportunity cost : example

Choice
Trade-offs
Opportunity cost
Opportunity cost

Is this good value for money
UK : recommendation by the NICE that the NHS (National Health
Service) should fund in-vitro fertilization (IVF) services for infertility

One course of IVF : NHS pays around £2700

The resources devoted to each IVF patient could instead by used to
provide the following.
 One-third of a cochlear implant
the benefits forgone from those same resources
not being used in their next best alternative
 One heart bypass operation
Efficiency
Equity
 Eleven cataract removals
 150 vaccination for measles, mumps and rubella (MMR)
 Half a junior school teaching assistant for a year
 2,000 school dinners
Source : Morris S. Devlin N. and Parkin D. , Economic Analysis in Health care, West Sussex, England, 2007 p.3
HEALTH CARE SYSTEM : OBJECTIVES
Source : Morris S. Devlin N. and Parkin D. , Economic Analysis in Health care, West Sussex, England, 2007 p.4-5
ECONOMIC SYSTEM AND THE BASIC QUESTIONS
Market system
Choice
Trade-offs
Opportunity cost



Efficiency
Equity
What, How
For whom
Economic (or health care) system
Efficiency
Price serves as a rationing mechanism
Goods and services are distributed in market based solely
on each person’s willingness and ability to pay
Problem : financial barrier to obtaining goods and services
Central Planning System


Equity
Ensuring everyone receives an equal share of goods and services
Problem : fewer goods and services may be available for
distribution
EFFICIENCY
Market system
+
Central Planning
System
Mixed system
Efficiency + Equity
 Allocative Efficiency : what is the best way to allocate
resources to different consumption uses?
 What mix of nonmedical and medical goods and services
should be produced in the macroeconomy? What mix of
medical goods and services should be produced in the
health economy?
 Production Efficiency : society is getting the maximum output
from its limited resources
 What specific health care resources should be used to
produce the chosen medical goods and services? A
capital- or labor-intensive manner?
meeting a given
objective at least
cost
producing
exactly what
society wants
Source : Rexford E. Santerre and Stephen P. Neue, Health Economics : Theories, Insights and Industry Studies, Irwin, Chicago, 2007 p.4
WANTS, DEMANDS AND NEEDS
EQUITY
 Equity vs. Equality
 ‘ … equity, like beauty, is in the mind of the beholder… ’
 Want vs. Demand

Demand : the willingness and ability to pay
WANT  DEMAND
(Mclachlan & Maynard, 1982)
 Equity means a fair distribution, with the implication that it may not
Health & Health
Consumers
always be fair to be equal.
services ?????
Pure market system vs. perfect egalitarian system
 Horizontal equity / Vertical equity

Horizontal equity : the equal treatment of equals

Vertical equity : the unequal treatment of unequals
Demand for
Health
Demand for
Health services
Need for
Health services
Demand &
Need ?????
DEMAND FOR HEALTH
DEMAND FOR HEALTH SERVICES
According to Michael Grossman, consumers have a “demand for health”

for 2 reasons :
1. Health is a “consumption” commodity
2. Health is an “investment” commodity

Demand of Health
 it makes the consumer feel better
Demand of Health Services
 derived demand
 The quantity of good or service which an individual or group
desires at the ruling price or other relevant factors.
Quantity Demanded for
Health Services
prices of substitutes and complements, tastes and
and quality of care)
medical care
1. Normative need : occurs where people have a standard of health care
below that which the health care expert defines as desirable. This
desirable standard may vary between experts.
2. Felt need : occurs where people want health care; ie., it relates to the
individual’s perceptions as regards health care, which clearly may
conflict with others’ views of their wants, e.g. hypochondriacs.
3. Expressed need : is felt need converted into demand by seeking health
care from a doctor.
4. Comparative need : occurs where on group in society with given health
characteristics does not receive health care whereas others with
identical characteristics are in receipt of care.
f (out-of pocket price, real income, travel and time costs,
preferences, rate of health depreciation, stock of health,
 using a variety of means: diet, exercise, lifestyle choices and
NEED FOR HEALTH SERVICES
=
CONSUMERS PRODUCERS AND GOVERNMENT
Limited Resources
Government
Producers
Goods and
Services
Consumers
Profit
Maximization
Rational Behavior
Utility
Maximization
COMPETITION
IS HEALTH CARE DIFFERENT
PERFECTLY COMPETITIVE MARKET
 Market structure
Kenneth J. Arrow, “Uncertainty and the Welfare Economics of Medical
1. Many buyers and many sellers in the market
Care”, American Economic Review, Vol. 53, 1963, p. 941 – 73
2. Homogeneous Product
3. Freedom of entry or exit
4. Free mobility
Special characteristics
of the medical-care market
5. Perfect knowledge
IS HEALTH CARE DIFFERENT (cont.)
Special characteristics of the medical-care market
 The
Government
intervention
nature of demand : Irregular and Unpredictable
 Expected
behavior of the physician : Agency Relationship
HEALTH CARE SYSTEM : OBJECTIVES
Scarcity
Choice
Trade-offs
Opportunity cost
 Product
Uncertainty : recovery from disease is as unpredictable as its
incidence
 Supply
conditions : entry to the profession is restricted by licensing
 Pricing
practices : extensive price discrimination by income
: occur when a third party receives some benefit or suffers
some loss without explicitly choosing to do so
Efficiency
 Externalities
Source : Kenneth J. Arrow, “Uncertainty and the Welfare Economics of Medical Care”, American Economic Review, Vol.53, 1963 p.941-73
Economic Evaluation
Equity
ECONOMIC EVALUATION
Measurement of cost and consequences in economic evaluation
Type of Study
Measurement/valu
ation of costs in
both alternative
“ The comparative analysis of alternative courses of action in
terms of both their costs and consequences”
(Drummond et al, 2005)
Economic evaluation is not
Cost minimization
analysis (CMA)
Monetary units
Identification of
consequences
Measurement/valuation of
consequences
None
None
Cost-effectiveness Monetary units
analysis (CEA)
Single effect of interest,
common to both
alternatives, but achieved to
different degrees
Natural units (e.g. life-years
gained, disability-days
saved, points of blood
pressure reduction etc.)
Cost-utility analysis Monetary units
(CUA)
Single or multiple effect, not Healthy years (typically
necessarity common to both measured as qualityalternatives
adjusted life-years)
Cost-benefit
analysis (CBA)
Single or multiple effect, not
necessarily common to both
alternatives
“choosing the cheapest”
Monetary units
Monetary units
Source : Drummond et al.(2005)
I. COST (MINIMIZATION) ANALYSIS (CMA)
I. COST (MINIMIZATION) ANALYSIS : EXAMPLE
 Involves comparison between two or more alternative interventions
 Lowson et al.(1981) ; the comparative costs of three methods of providing
whose outcomes are assumed to be exactly the same
 Therefore economic evaluation is based solely on comparative costs.
 The option that has the lowest costs will be preferred
 Highly constrained and infrequent
long-term oxygen therapy in the home : oxygen cylinders, liquid oxygen,
and the oxygen concentrator
 the relative effectiveness of the three methods was not a contentious
issue
 Cost Analysis
 Cost-of-illness e.g. economic cost of obesity (BMI ≥ 25 kilogram/metre2),
alcohol consumption, HIV/AIDS, drug abuse, …
II. COST - EFFECTIVENESS ANALYSIS (CEA)
 In CEA, outcomes are measured in natural or physical units

e.g. diseases cured, diseases prevented, lived saved,
Years of lives saved, heart attacks avoided, case detected …
 Cannot be used to compare interventions - most suitable when
interventions with the same health aims are being compared
 Result : Ratio

cost per unit of effect (e.g. cost / LY gained)

effect per unit of cost (e.g. heart attacks avoided / cost)
III. COST - UTILITY ANALYSIS (CUA)
II. COST - EFFECTIVENESS ANALYSIS : Example
Cost-Effectiveness Analysis of Hypertensive Elderly Service: Outpatient
Department and Primary Care Unit of Hua Hin Hospital in Prachuap Khiri
Khan Province, Thailand (Sasithorn Suratannon et al., 2009)
 Effectiveness : the average reduction in the systolic blood pressure
 Results

Outpatient Department
 C/E ratio = 75.05 Bt/mmHg

Primary Care Unit
 C/E ratio = 32.60 Bt/mmHg
III. COST - UTILITY ANALYSIS : Example
Cost / QALYs
( 1990, £ )
 In CUA, the outcomes are measured in healthy years, to which a value
has been attached
 CUA is multidimensional and incorporates considerations of quality of
life as well as quantity of life using a generic outcome
 Generic outcome, e.g.
 quality-adjusted life-years (QALYs)
 Healthy years equivalent (HYE)
 Disability-adjusted life-years (DALYs)
 Useful for health treatments or programs that extend life only at the
expense of side-effects (e.g. chemotherapy for certain types of cancer)
 Result: Cost per healthy years (e.g. cost/QALY)
Cholesterol and diet therapy
220
Neurological intervention for head injury
240
GP advice to stop smoking
270
Hip replacement
1,180
Coronary artery bypass graft (CABG), severe angina
2,090
Kidney transplant
4,710
Breast cancer screening
5,780
Heart transplantation
7,840
Home haemodialysis
17,260
Hospital haemodialysis
21,790
Neurosurgical malignant intracranial tumor
107,780
IV. COST - BENEFIT ANALYSIS (CBA)
 CBA requires program consequences to be valued in monetary units,
so as to make them commensurate with the costs
 Useful for comparing interventions with many diverse outcomes most appropriate for economic evaluation of intersectoral
interventions
 Result : Net benefit or cost-benefit ratio.
 CBAs rarely used in health care
Health economics plays, or should play, an important role in policy and
IV. COST - BENEFIT ANALYSIS : Example
Rubella vaccination program
 young children aged of 2 years

Cost :
$ 6,000,000

Benefit : $ 46,000,000
Net Benefit = $ 40,000,000
B/C ratio = 7.7
 only girls aged of 12 years

Cost :
$ 3,000,000

Benefit : $ 73,600,000
Net Benefit = $ 70,600,000
B/C ratio = 24.5
REFERENCES
operational decisions regarding, among others:
 the appropriate role of government, markets and the private sector in the
health sector;
 resource allocation and mobilization that affect the equity and efficiency of
public spending on health;
 resource transfer mechanisms to hospitals and health care providers and the
incentive systems that underlie them;
 health system organizational structures and linkages between the levels;
 health facility organizational structures; and
 mechanisms to change behaviors of the population and health system
providers in order to achieve better health.
Source: worldbank.org
Drummond, M. F. et al. (2005) Methods for the Economic Evaluation of Health Care
Programmes. Oxford : Oxford University Press.
Gray, Alistair M. et al. (2010) Applied Methods of Cost-effectiveness Analysis in
Healthcare. Oxford : Oxford University Press.
Kenneth J. Arrow. (1963) “Uncertainty and the Welfare Economics of Medical Care”.
American Economic Review, Vol.53. p.941-73.
Morris S. Devlin N. and Parkin D. (2007) Economic Analysis in Health care. West Sussex,
England.
Muennig, P. (2008) Cost-effectiveness analyses in health : a practical approach. Imprint
San Francisco : Jossey-Bass.
Rexford E. Santerre and Stephen P. Neue. (2007) Health Economics : Theories, Insights and
Industry Studies, Irwin, Chicago.
Thailand Health Profile Report 2008 - 2010
World Health Statistics 2014
รายงานภาระโรคและการบาดเจ็บของประชากรไทย พ.ศ. 2554