Introduction to Health

Economics
Ma. Rosario E. Bonagua, MD, MPH, FPAFP
Objectives
 By the end of this module, you should be able to:
 Define what is health economics.

 Appreciate the influence of health economics

in human societies
 Differentiate Economics, Health Economics,
Clinical Economics, and Pharmaco-economics
 Distinguish between two types of economic

evaluation: Equity and Efficiency or Cost

Effectiveness
Overview
 In the planning and management of health
systems, major decisions have to be made.
 Criteria used in decision making is usually a
combination of value and efficiency criteria.
 It may appear noble to think that no person
should be denied appropriate medical care for
reason of lack of money.
 However, it is another matter to mobilize
collective resources to make this thought a
reality
 Health care is something which touches all of
our lives. Everybody visits the doctor and
dentist and many of us have been treated in
a hospital.
 Yet health care seems to be in an almost
permanent crisis - there are shortages of
hospital beds and patients are left to lie in
corridors while politicians argue endlessly
over whether more or less is being spent on
health.
 Why is it that health care is such a
controversial area?
 Why is there never enough money to
give us the level of health care we
want?
 Take a moment: your health affects everything
about you- from how you feel about yourself, to
how you respond to others, your performance
at work and your decision making.
The influence of health on
economic performance
 Healthier populations are more productive
populations in general.
 Note that this is not a prescription to focus
only on the health of those capable of
contributing to an economy; social justice is
an important policy objective for health in
most jurisdictions, requiring that a much
broader view be taken.
 But to the extent that the working-age
groups in a population are healthier (e.g.
longer life expectancy, lower morbidity,
increased ability to cope with daily life and
greater resiliency), both the overall output
and the quality of output in an economy
might be expected to rise.
 Lower absenteeism in the workforce would

be one specific example of this.

Nature of Economics
 Making best use of resources (which are
always scarce and have other uses)
 To satisfy human wants (which are
numerous)
Definition of Economics
 A non-economist may define economics as
the role of money in human affairs-how
people earn a living, what sort of life do they
lead, and how money affects their way of
living and outlook in life.
 Definition of Economics
 On deeper analysis, one should note that it is
not really so much about money that is the
major concern but of things which are implied
in the use of money.
 Economics is a social science which studies
how people attempt how to make use of
resources which are scarce to satisfy their
wants which are numerous, and how this
attempts interact through exchange.
Economics is about …
 Limited resources

 Unlimited “wants”

 Choosing between
which ‘wants’ we can
‘afford’ given our
resource ‘budget’
Economics is about choice

Good ‘B’
Good ‘A’

Budget
Opportunity cost

“The value of forgone benefit which could

be obtained from a resource in its next-
best alternative use.”
Implications of opportunity
cost
 Deciding to do A implies deciding not
to do B (i.e. value of benefits from
A>B).

 Cost can be incurred without financial

expenditure.

 Value not necessarily determined by

“the market”.
Example of opportunity
cost

Possible Health Expenditure in a Year

Paediatric Care Care of Elderly Opportunity Cost
(No Children (No of Elderly of Treating
Treated in ‘000’s) Treated in ‘000’s) Children in Terms
of Elderly Patients
Forgone
0 30 0
1 28 2
2 24 6
3 18 12
4 10 20
5 0 30
Economists view of the
world...

 Pessimist: bottle ½ empty

 Optimist: bottle ½ full
 Economist: bottle ½ wasted

inefficient!
 Efficiency
 Efficiency = maximising benefit for
resources used
 Technical = meeting a given objective
Efficiency at least cost
 Allocative = producing the pattern of
Efficiency output that best satisfies
the pattern of “consumer wants”
 Efficiency and ‘the market’

Price/ Cost

Supply

Demand

Quantity
 Efficiency and ‘the market’
Price/
Cost

Supply

A
Equilibrium
Price PA

Demand

QA Quantity
Topic versus discipline
Topic = area of study

Discipline = conceptual apparatus

Health economics is the discipline of

economics applied to the topic of
health.
 Some misconceptions
 Economics is …
 concerned with money
 the same as accountancy
 only practised by economists
 objective
 Economics and money
 Economics is concerned with…
 costs (resource use)
 benefits
 choice
 efficiency

 Money is…
 store of value
 means of exchange
 Economics and accountancy
 Economics is concerned with…
 costs (resource use)
 benefits
 choice
 efficiency

 Accountancy is concerned with…

 monitoring financial transactions
 The ‘practice’ of economics
 Economics is concerned with…
 costs (resource use)
 benefits
 choice
 efficiency

 Everyone…
 weighs the relative benefits of each course of action
and choose the action which maximises well-being
 Economics and objectivity
 All decisions are based on subjective value
judgements (or judgements of subjective
value!)

 Economics makes these explicit

What is ‘health’?
 World Health Organisation:
 Health is a “state of complete physical,
mental and social well-being”
 “Health Economics” is often “Health
Care” Economics
 Usually “health” in health economic
(evaluation) is health status according
to some measure
Health status example: EQ-5D
Task of economics
Descriptive = quantification

Predictive = identify impact of

change

Evaluative = relative preference

over situations
A: Value of health
B: Demand for health (Grossman)
 Health economics ‘map’
H. Micro-Economic Appraisal E. Market Analysis

B. What influences A. What is Health?

Health? (other than What is it’s value?
health care)

C. Demand for D. Supply of

Health Care Health Care

G. Planning, budgeting, F. Macro-

regulation mechanisms Economic
Appraisal
Three Concepts Attached to
the Use of Money
 Exchange
 Scarcity
 Choice
 Exchange
 Money is the principal medium of exchange
 Subsistence economy-doomed due to low
productivity and very low level of
consumption
 In modern society, the needs give rise to
specialization in the production of goods and
has replaced self-sufficiency
 This is where money comes in : we convert
goods and services to money and money into
other goods and services we want.
 Scarcity
 The use of money also implies scarcity. Money
itself must be scarce or it will not be useful.
 Scarcity makes it necessary for us to
economize: formally it is the money that we
economize.
 The serious effort to deal with scarcity is the
factor that gave rise to exchange.
 Exchange arises, therefore, in order to alleviate
scarcity and scarcity is necessarily implicit in
exchange.
 Scarcity has two sides:
 the infinite nature of human wants and

 the finite or limited nature of resources

available to produce goods and services.

 What does this mean when related to health

care? We'll examine the wants first.
The wants

 Why do people demand health care? The

simple answer is that they want to be healthy.
This desire to remain healthy has led to a
continuous growth in the demand for health
care.
 However, there are also a number of specific
reasons why the demand for health care has
expanded so dramatically in developed
countries over the last 40 years:
 Changes in the age structure
 Increasing real incomes
 Improvements in medical technology
 Changes in age structure
 Changes in the age structure of the population
have increased the demand for health care.
Countries like Japan and the UK have an ageing
population.
 Elderly people require more health care than
other age groups. For instance, in the UK in
2008/09, 39% of NHS hospital and community
health services expenditure was used for
treating people aged 65 and over, even though
they are only 16% of the total population.
 Only 11% of the population were 65 or older
when the NHS was founded in 1948.
Increasing real incomes

 Increasing real incomes have led to an increase

in people's expectations of health care.
 Many of us are not prepared to put up with the
pain, discomfort and lack of mobility associated
with afflictions like severe osteoarthritis of the
hip - we demand a hip replacement operation.
 In the USA, people suffering from mild
osteoarthritis of the knee often have an
operation rather than give up playing golf.
Improvements in medical technology

 Improvements in medical technology have

continuously increased the range of treatments
possible.
 A good example of this is the way in which the
development of kidney dialysis machines has
largely prevented kidney failure from killing people.
 As well as new and more effective medicines
allowing us to treat conditions which were
previously incurable, many new treatments now
make chronic diseases like asthma manageable
for patients, enabling them to have a good
quality of life.
The resources

 The other side of the scarcity equation relates to the finite

nature of resources. The term 'resources' covers all inputs
used to produce goods and services. Economists also refer
to these as the factors of production. They are divided into
four categories:
 land - the physical resources of the planet including mineral
deposits
 labour - human resources in the sense of people as workers
 capital - resources created by humans to aid production, such
as tools, machinery and factories
 enterprise - the human resource of organizing the other three
factors to produce goods and services.
 We can see all four factors at work in the
production of health care.
 It is fairly obvious that the available quantity

of these factors is limited, therefore there is

some maximum quantity of health care that
can be produced at any one time.
 We can explore this idea theoretically by using
what economists call a Production Possibility
Frontier (PPF).
Choice
 The use of money also implies choice.
 One has to choose between many
commodities which can be purchased with
money but the choices, unfortunately, is not
always made on rationale grounds.
 More often, one buys impulsively or through
force of habit.
Important Definitions
 ECONOMICS is the science that deals with the
consequences of resource scarcity.
 CLINICAL ECONOMICS is specific to the
application of economics to clinical decision
making.
 It asks such questions as “Where will I set up
my practice?”. What equipment will I invest in?’
How much will I charge?, What is the most cost
effective treatment for my patient?
Approaches to studies in clinical economics

 2 ways clinical economist study and report their

understanding of the world around them:
 Descriptive or Normative studies-those that

focus on the identification, definition and

measurement of phenomena.
 These are fact-finding studies to determine

the nature and obtain estimates of their

magnitude. It does not explain nor judge, it
only gives straight data such as:
 In the year 2009, the Philippines spent 116
Billion pesos in health care. However, of the
total amount, 48% was paid out of household
out-of-pocket expenses.
 In 2017, the Philippine Health Insurance
Corporation paid 17.8 Billion pesos in claims
reimbursement.
 Of this amount, 11.5 Billion pesos were for
drugs and medicines.
Explanatory or Positive studies tries to attempt to
explain or predict certain phenomena and analyze
cause and effect, use causal models to classify
various causal factors. Ex.: C-section
 Increase Ob-Gynes in locality= C-section

 Good Effect: decrease price

 Bad effect: increase C-section just because there are

many obstetrician or it is more profitable

 PHARMACO-ECONOMICS usually refers to the
economic evaluation of pharmaceutical products
and services.
 It focuses on the comparison of costs of
pharmaceuticals vis-à-vis their value in terms of
improving length and quality of life and helps
establish value for money.
Economics in Health
 Health economics is a broad term that encompasses
the medical care industry and beyond such as the
analysis of the cost of disease, and benefits of control
programs
 a branch of economics concerned with issues related
to scarcity in the allocation of health and health care.
 Broadly, health economists study the functioning of
the health care system and the private and social
causes of health-affecting behaviors such as smoking.
 also includes the interaction between the
environment and health and also the
effect of income and wealth distribution
on health.
 the study of how scarce resources are
allocated among alternative uses for the
care of sickness and the promotion,
maintenance and improvement of health.
 Four main areas:
1. Analysis of health care system
2. Economic evaluation of health care
technology
3. Pharmaceutical economics
4. Measurement and management of
efficiency and quality in health care
provision
The scope of health
economics
 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.
 The demand for health care is a derived
demand from the demand for health.
 Health care is demanded as a means for
consumers to achieve a larger stock of
"health capital."
 The demand for health is unlike most other
goods because individuals allocate resources
in order to both consume and produce health.
Economics of Health Care
 2 sets of tools in economics in relation to
health care:
 Equilibrium – supply and demand

 Optimization technique-welfare criteria:

whether society is better or worse off

 Important features of economic
evaluation
 “The comparative analysis of alternative
courses of action in terms of both their
costs and consequences in order to assist
policy decisions” (Drummond et al)

1. Costs and consequences – efficiency

2. Comparison – technical efficiency
3. Assist - not replace - decision making
 Place of economic evaluation in
the wider ‘evaluation cycle’
Economic
Evaluation
needs outcome
assessment evaluation

1. Can it work (efficacy)?

program 2. Does it work (effectiveness)? impact
planning evaluation
3. Is it worth doing (efficiency)?

program
implementation evaluability
assessment
process
evaluation
 Characteristics…
 Economic evaluation has 2 characteristics
1. inputs and outputs (costs and consequences)
2. choice between at least 2 alternatives
ConsequencesA
Programme A
CostsA

Choice

CostsB
Comparator B
ConsequencesB
 …determine forms of
evaluation
2. Are at least 2 alternatives compared?

1. Are both costs (inputs) and consequences (outputs) examined?

NO YES

Examines only Examines only

consequences costs
NO 2 PARTIAL EVALUATION
1A PARTIAL EVALUATION 1B
• Outcome • Cost description. • Cost-outcome description.
description.
3A PARTIAL EVALUATION 3B 4 FULL ECONOMIC EVALUATION
• Efficacy or • Cost analysis.
YES
effectiveness • Cost-minimisation analysis.
evaluation. • Cost-effectiveness analysis.
• Cost-utility analysis.
• Cost-benefit analysis.
The supply of health care

 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:
 Cost minimisation analysis

 Cost benefit analysis

 Cost-effectiveness analysis

 Cost-utility analysis
Cost minimisation analysis

 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).
 This form of analysis is indicated only when the
outcomes are shown to be identical, in this case,
no matter how they are measured, they are
shown to be different and therefore they must be
valued.
Attribute Treatment X Treatment Y

Cost (£) £25,000 £15,000

Effectiveness (survival 1.5 years 1.0 years

in years)

QoL weight (utility) 0.8 0.6

QALYS 1.2 0.6

Benefit (£) £120,000 £105,000

 If the outcomes are shown to be
identical for both treatments then it is
only necessary to measure the costs and
to select the least cost treatment – here
it would be treatment Y.
Cost Benefit Analysis
 In cost-benefit analysis (CBA), costs and
benefits are both valued in cash terms. One
cost that may outweigh the benefits is
medical licensing.
 Research conducted by economists suggests
medical license requirements harm the
efficiency of the health care market.
 It constrains inputs, inhibits innovation, and
increases cost to consumers while largely
only benefiting the physicians themselves
 It is seen as a specialized form of CEA and once
again the incremental costs are compared to the
incremental benefits, however in this case both the
costs and benefits are measured in monetary units.
 Incremental benefit of X compared to Y is
P120,000 - P105,000 = P15,000
 Incremental cost of X compared to Y is P25,000 -
P15,000 = P10,000
 Incremental cost benefit of X is P15,000 - P10,000
= P5,000
 Incremental cost benefit of X > 0; therefore it is
cost-beneficial
Cost Effective Analysis
 Cost effectiveness analysis (CEA) measures
outcomes in 'natural units', such as mmHg,
symptom free days, life years gained
 This type of analysis is used to compare
treatments where the outcomes are
measured in the same units but have been
achieved to differing degrees. – it is the most
commonly used type of analysis.
Cost Effective Analysis
 The aim is to compare the additional (or
incremental) costs with the additional
(or incremental) benefits of the two
options to see which is the most cost
effective option.
 Incremental cost of X compared to Y is £25,000 -
£15,000 = £10,000
 Incremental improvement in survival for X
compared to Y is 1.5 – 1.0 – 0.5 yrs
 Cost effectiveness ratio for X is £10,000/0.5 =
£20,000/year of life saved
Cost Utility Analysis
 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).
 This is the final and most complex form of
economic evaluation. It is carried out where the
outcomes are achieved to differing extents and
where they are measured in different units making
them difficult to compare – often between groups
of individuals in different clinical categories.
 In order to provide a common denominator to permit
measurement of outcomes across a range of different
clinical groups with varying outcomes, a common outcome
has been devised that measures quality adjusted life
years or QALYs
 QALYs following X = 1.5 x 0.8 = 1.2 QALYs
 QALYs following Y = 1.0 x 0.6 = 0.6 QALYs
 Incremental increase in QALYs following X = 1.2 – 0.6 = 0.6
QALYs
 Incremental cost of X compared to Y is P25,000 - P15,000 =
P10,000
 Incremental cost utility ratio for X = P10,000/0.6 =
P16,666/QALY
 Treatment X is cost effective
Cost of Illness
 A final approach which is sometimes classed
as 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.
Cost of Illness
 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.)
Economic Evaluation
 The two objectives that are of prime importance in
economic evaluation are those of equity and
efficiency.
 EQUITY or fairness may be defined in terms of:
1. A minimum standard in which everyone is
entitled to a minimum quantity of health
services
2. Full equality or equal treatment for everyone in
addressing equal needs, and
3. Equality of access which ensures that the
personal cost to each person when availing of
healthcare or goods remains equal (socialized
scheme)
 National Health Systems and Equity Schemes
Scheme Inputs Achievable? Sustainable? Type of
Equity
Equal use 100% from Yes No No equity. Some
(communism) people diseases are
more costly than
others

Use proportional Rich contribute Yes No (shrinking Progressive

to need more % of pool of young (Ideal)
(socialized income up to workers
medicine) 70% (shrinking
contribution)
Minimum All pay the same Yes Yes Borderline
package minimum 200 regressive (the
(Philhealth) pesos poor have to
share with the
rich to get the
same package
National Health Systems and Equity Schemes

Scheme Inputs Achievable Sustainable Type of

? ? Equity
Free Market Fee for Yes Yes None. (The poor
(No public service stay poor, the rich
health, USA) remain rich; or
the poor may opt
to sacrifice health
to buy food or
pay the rent-
possible death vs.
the purchase of
food , payment
of rent or pursue
education)
National Health Systems and Equity Schemes

Scheme Inputs Achievabl Sustainabl Type of Equity

e? e?
Free Market All people Yes Yes Borderline
with forced contribute the progressive (poor
health account same % of are forced to
(Singapore) income invest in their
health which
means cutting
back on
education, food,
etc.)
Efficiency

 Or cost effectiveness, refers to getting the most out

of a limited or given amount of resources; it
involves achieving a certain level of output at
minimum cost (benefit vis-à-vis cost)
 Technical efficiency means determining the right
quantities of different inputs and the least
expensive combination of inputs required to achieve
an expected outcome.
 Allocative efficiency on the other hand undertakes
the best combination of activities to achieve the
greater net benefit.
Health care markets
 The five health markets typically analyzed
are:
 Healthcare financing market

 Physician and nurses services market

 Institutional services market

 Input factors market

 Professional education market

Free Market
 One way in which the problem of scarcity can be
overcome is to let people buy the health care
they want.
 This is what happens with most cosmetic
surgery.
 "A man can have a facelift, a nose
correction and his eyes tightened up.
 His whole face can be rebuilt for a third of the
cost of the front end of an expensive car re-
spray"
 All these treatments and more are available if you
want to buy them and have the money to pay for
them. This kind of health care is sold just like any
consumer good.
 People buy the treatment because they gain
satisfaction from it, in just the same way that they
would gain satisfaction from a car, a cell phone or a
new dress.
 As consultant plastic surgeon David Sharpe puts it
"There's nothing wrong with having plastic surgery,
even if you don't need it. It's like buying a Porsche.
You don't need one. It just makes you feel better".
 The market for cosmetic surgery shows
that it is possible to buy and sell health
care.
 To understand how such a market might
work as a resource allocation system, we
need to look at the different elements
involved in any market
Who are the buyers and sellers?

 So a market for health care must involve two

groups: the buyers and the sellers, who
interact to trade health care.
 Who would the buyers and sellers be in such
a market?
 We all want good health and so most of us
would be prepared, if necessary, to purchase
medical treatment to cure an illness.
 This suggests that everybody is potentially a
buyer (or consumer) of health care. More
precisely, at any moment, a buyer would be
anybody who was ill or who wanted preventative
medical treatment such as a vaccination or who
wanted guidance about their health.
 The sellers would be those people who could
provide medical and health care services, such as
doctors, nurses, physiotherapists, dentists and
chemists-pharmacists.
PhilHealth
National Health Insurance:
 a government-operated system of insurance

that provides medical services to persons

disabled by sickness or accident
 pays the bill for the physician, hospitals and

other providers of health services

 access to health care is a basic right of
citizenship
PhilHealth
Reasons for a National Health Insurance:
 “Stability” - it protects people from financial
loss caused by the high cost of medical care
 “Risk pooling” - by combining the risks of

many people into a single group, financial risk

associated with health care is more
manageable
PhilHealth
 “Altruism”- a situation where an
individual derives utility from the act of
providing to others
 promotes good health
PhilHealth
Health Insurance Cost:
Year 2018 First Semester (Jan-June)
Collection : 55.3 Billion
Payment : 48.8 Billion
No of Claims : 4.8 Million
AVPC : 10,006
Cause for the increase in cost:

 twin increases in benefit ceiling

 advances in medical technology
 increased utilization of health care
ECONOMIC EVALUATION OF
HEALTH CARE TECHNOLOGY

- function of the Health Technology

- Health Technology include all intervention
used to promote health, prevent and treat
disease and improve rehabilitation and
long-term care
- also cover activities of all healthcare
professionals and include the use of
healthcare and health promotion
procedures, diagnostics and care settings
 Health Technology Assessment (HTA)

-considers the effectiveness, appropriateness and

cost of technologies. It does by asking four
questions:
1. Does the intervention work?
2. For whom?
3. At what cost?
4. How does it compare with the alternatives?
ECONOMIC EVALUATION OF HEALTH
CARE TECHNOLOGY

 adoption of Clinical Practice Guidelines

(CPG) to guide providers on accepted
clinical protocols for common cases
 adoption of the PNDF in drug
reimbursement
 clearinghouse of drugs for inclusion to
PhilHealth’s Positive List
PHARMACEUTICAL ECONOMICS

Drug Price Reference Index Study:

 identify the top 100 drug claimed at PHIC

 determine the reference prices

 basis for drug reimbursement

Objectives:
 reduce drug cost of PHIC

 create more competition on the market

 consumer empowerment
 MEASUREMENT AND MANAGEMENT OF
EFFICIENCY AND QUALITY IN HEALTH CARE
PROVISION

 Quality Assurance (QA) or Quality Improvement

(QI)
a formal set of activities to review and affect the
quality of services provided. Includes
assessment and corrective actions to remedy
deficiency of services
 Utilization Review

 A formal evaluation of the necessity, cost

appropriateness and efficiency of the use
of medical services, procedures
 Peer Review
process where the quality of health care
provided is reviewed by colleagues
 Health Economics is mostly concerned
with cost-effectiveness - achieving
effective health outcomes for the best
total cost
 The most cost-effective way to treat a
patient is to heal them quickly and move
them out of the health care system
 Health care should be evaluated primarily for
their impact on clinical outcome and patient
care;
 Eeconomic evaluation should be a secondary
evaluation for health care services that are
clinically equivalent.
Good Health and Good Day!!!

Thank you
for your
attention.