Health economics

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Health economics is a branch of economics concerned with issues related to scarcity in the allocation of health and health care.

Four factors that are important to Health Economics: Government Intervention, Uncertainty, Asymmetric Knowledge, and Externalities.[1] Governments tend to heavily regulate the Healthcare industry and also tend to be the largest payor within the market. Uncertainty is intrinsic to health, both in patient outcomes and financial concerns. The knowledge gap that exists between a physician and a patient creates a situation of distinct advantage for the physician, which is called Asymmetric Knowledge. Finally, there are many effects that happen between two parties without monetary compensation, called externalities, within healthcare, from catching a cold from someone to practicing safe sex.

The scope of health economics is neatly encapsulated by Alan William's "plumbing diagram"[2] dividing the discipline into eight distinct topics:

  • what influences health? (other than health care)
  • what is health and what is its value
  • the demand for health care
  • the supply of health care
  • micro-economic evaluation at treatment level
  • market equilibrium
  • evaluation at whole system level; and,
  • planning, budgeting and monitoring mechanisms.

What influences health? Health of a country or the residence of that country is greatly dependent not only on the geographic location but the legal and economic stabilities of the nation. With healthcare industry having such a major impact on the economy of a nation(roughly 10%), it becomes the indispensable attention of all governments.

A stable legal policy not only aids in the on time improvement of the industry but its impact on the society as well.The exclusive government body focussed on the industry enhances the research and development along with the underpinning infrastructure required.

Contents

[edit] What is health and what is its value?

[edit] Health care demand

The demand for health care is a derived demand from the demand for health, more generally. Health care is demanded as a means for consumers to achieve a larger stock of "health capital." The demand for health is unique, because individuals allocate resources in order to both consume and produce health.

Michael Grossman's 1972 model of health production has been extremely influential in this field of study and has several unique elements that make it notable. The model views each individual as both a producer and a consumer of health, as measured in "health stock" or health capital, the flow of which is known as health status. It acknowledges that health care is both a consumption good that yields direct satisfaction and utility, and an investment good, which yields satisfaction to consumers indirectly (more productive, fewer sick days, higher wages, etc.) Since individuals in this model demand health care only as a result of their desire to increase their health stock, health care demand is a derived demand. The model takes into account health production (investments in health such as time spent exercising, money spent on medical care, etc.) as well as the production of non-health goods against the overall utility that results from ones investments. These factors are used to determine the optimal level of health that an individual will demand, taking into account the marginal cost of health capital and depreciation rates.

The optimal level of investment in health occurs where the marginal cost of health capital is equal to the marginal benefit resulting from it (MC=MB). With the passing of time, health depreciates at some rate δ. The general interest rate in the economy is denoted by r. The marginal cost of health capital can be found by adding these variables: MC_{HK}=r+\delta\,. The marginal benefit of health capital is the rate of return from this capital in both market and non-market sectors. In this model, the optimal health stock can be impacted by factors like age, wages and education. As an example, \delta\, increases with age, so it becomes more and more costly to attain the same level of health capital or health stock as one ages. Age also decreases the marginal benefit of health stock. The optimal health stock will therefore decrease as one ages.[3]

When studying Health Care, it is beneficial to reference the fundamental laws of Supply and Demand. Health Care, just like anything else, is a finite resource. This is to say, Health Care is a scarce resource - whether one lives in a society in which Health Care is privitized or publicized. In either scenario, demand for Health Care will be high. Logically, demand will increase more if Health Care is made a Public Good (see Universal Health Care). There are positives and negatives to such a system. The most obvious positive is the fact that everyone can receive care.

However, what also must be noted is the fact that Universal Health Care will cause a spike in the Demand for it. Being a scarce resource, sacrifices are usually made. This is the main reason why there can be such long waits in a public Health Care system - quality health care is diverted to those who can afford to wait in line the longest.

This is not to say that a privatized Health Care policy does not have its flaws. Health insurance in the United States is largely a case of market failure. A large reason for this is asymmetrical information. Someone applying for health insurance knows more about their health than the insurance company does (see adverse selection and moral hazard). People who have health care may act more recklessly than if they didn't have it resulting in higher costs for the insurance company. Someone who applies for health insurance as an individual will usually pay higher rates than group plans for an equal level of insurance. Statistically, people who apply individually are more likely to need health care than those with group plans. Healthy people can't get health care via a group plan are more likely to go without any insurance at all. The higher rates for individuals and the low risk of a healthy person needing medical treatment that costs more than their deductible makes insurance more expensive than its worth. Thus individuals are perceived as more risky, individual plans are made more expensive and the rate of healthy people falls further as they decide that it isn't worth the expense.

[edit] The supply of health care

[edit] Micro-economic evaluation at treatment level

A large focus of health economics, particularly in the UK, is the microeconomic evaluation of individual treatments. In the UK, the National Institute for Health and Clinical Excellence (NICE) appraises certain new and existing pharmaceuticals and devices using economic evaluation.

Economic evaluation is the comparison of two or more alternative courses of action in terms of both their costs and consequences (Drummond et al.). Economists usually distinguish several types of economic evaluation, differing in how consequences are measured:

In cost minimisation analysis (CMA), the effectiveness of the comparators in question must be proven to be equivalent. The 'cost-effective' comparator is simply the one which costs less (as it achieves the same outcome). In cost-benefit analysis (CBA), costs and benefits are both valued in cash terms. Cost effectiveness analysis (CEA) measures outcomes in 'natural units', such as mmHg, symptom free days, life years gained. Finally cost-utility analysis (CUA) measures outcomes in a composite metric of both length and quality of life, the Quality Adjusted Life Year (QALY). (Note there is some international variation in the precise definitions of each type of analysis).

A final approach which is sometimes classed an economic evaluation is a cost of illness study. This is not a true economic evaluation as it does not compare the costs and outcomes of alternative courses of action. Instead, it attempts to measure all the costs associated with a particular disease or condition. These will include direct costs (where money actually changes hands, e.g. health service use, patient co-payments and out of pocket expenses), indirect costs (the value of lost productivity from time off work due to illness), and intangible costs (the 'disvalue' to an individual of pain and suffering). (Note specific definitions in health economics may vary slightly from other branches of economics.)

[edit] Market equilibrium

[edit] Health care markets

The five health markets typically analyzed are:

Although assumptions of textbook models of economic markets apply reasonably well to health care markets, there are important deviations. Insurance markets rely on risk pools, in which relatively healthy enrollees subsidize the care of the rest. Insurers must cope with "adverse selection" which occurs when they are unable to fully predict the medical expenses of enrollees; adverse selection can destroy the risk pool. Features of insurance markets, such as group purchases and preexisting condition exclusions are meant to cope with adverse selection.

Insured patients are naturally less concerned about health care costs than they would if they paid the full price of care. The resulting "moral hazard" drives up costs, as shown by the famous RAND Health Insurance Experiment. Insurers use several techniques to limit the costs of moral hazard, including imposing copayments on patients and limiting physician incentives to provide costly care. Insurers often compete by their choice of service offerings, cost sharing requirements, and limitations on physicians.

Consumers in health care markets often suffer from a lack of adequate information about what services they need to buy and which providers offer the best value proposition. Health economists have documented a problem with "supplier induced demand", whereby providers base treatment recommendations on economic, rather than medical criteria. Researchers have also documented substantial "practice variations", whereby the treatment a patient receives depends as much on which doctor they visit as it does on their condition. Both private insurers and government payers use a variety of controls on service availability to rein in inducement and practice variations.

The U.S. health care market has relied extensively on competition to control costs and improve quality. Critics question whether problems with adverse selection, moral hazard, information asymmetries, demand inducement, and practice variations can be addressed by private markets. Competition has fostered reductions in prices, but consolidation by providers and, to a lesser extent, insurers, has tempered this effect.

[edit] Competitive equilibrium in the five health markets

While the nature of healthcare as a private good is preserved in the last three markets, market failures occur in the financing and delivery markets due to two reasons: (1) Perfect information about price products is not a viable assumption (2) Various barriers of entry exist in the financing markets (i.e. monopoly formations in the insurance industry)


[edit] Ideological bias in the debate about the financing and delivery health markets

The healthcare debate in public policy is often informed by ideology and not sound economic theory. Often, politicians subscribe to a moral order system or belief about the role of governments in public life that guides biases towards provision of healthcare as well. The ideological spectrum spans: individual savings accounts and catastrophic coverage, tax credit or voucher programs combined with group purchasing arrangements, and expansions of public-sector health insurance. These approaches are advocated by health care conservatives, moderates and liberals, respectively.

[edit] Evaluation at a whole system level

[edit] Planning, budgeting, and monitoring mechanisms

[edit] Other issues

[edit] Medical economics

Often used synonymously with Health Economics Medical economics, according to Culyer,[4] is the branch of economics concerned with the application of economic theory to phenomena and problems associated typically with the second and third health market outlined above. Typically, however, it pertains to cost-benefit analysis of pharmaceutical products and cost-effectiveness of various medical treatments. Medical economics often uses mathematical models to synthesise data from biostatistics and epidemiology for support of medical decision making, both for individuals and for wider health policy.

[edit] References

  1. ^ Phelps, Charles E. (2002) Health Economics 3rd Ed. Addison Wesley. Boston, MA
  2. ^ Williams A (1987) "Health economics: the cheerful face of a dismal science" in Williams A (ed.) Health and Economics, Macmillan: London
  3. ^ Grossman, Michael. "On the Concept of Health Capital and the Demand for Health." Journal of Political Economy. March-April/1972. 80(2): 223-55
  4. ^ A.J. Culyer (1989) "A Glossary of the more common terms encountered in health economics" in MS Hersh-Cochran and KP Cochran (Eds.) Compendium of English Language Course Syllabi and Textbooks in Health Economics, Copenhagen, WHO, 215-234

[edit] Further reading

[edit] See also

[edit] External links