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Summary HPI4001 Economics of Healthcare
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Economics of health careCASE 1: THE ECONOMIC APPROACH OF
HEALTH CARE
The case
Susan, Mike and George just arrived in Malta to attend a conference on the ‘Economics of
health care and innovation’. Although the actual conference starts tomorrow, there is a
preconference session on advanced health economics. Mike, who is an economist, says
that he is not going. “I already know a lot about economics”, he says, “economists always
talk about scarcity, preferences, choices, allocation, efficiency, Pareto-optimality,
competition, utility, costs and benefits and the relationship between those
concepts. Did you know that health economics is partially separated from
mainstream economics and covers a wide range of themes? They will probably tell you
all about it by showing you Williams’ schematic overview of health economics.
Probably, they will also discuss different paradigms or theories within health
economics!”. Mike is anxious to find out the origins, present and future of the
economics of health care. Susan also has no idea of why there is a separate discipline
within economics, which is dedicated solely to the study of health, health care and
insurance.
Problem statement
Different ways to approach economics in healthcare: what are the differences between
health economics and economics in general?
Learning goals
1. What is economics and what is health care economics?
2. What are the differences?
3. What are the origins of healthcare economics: past, present and future?
4. Why is health economics a separate discipline? (special features)
5. Explain important terminology in case.
6. What is William’s schematic overview of health economics?
Vragen
1.What is important from the article of Arrow (1963)? Very difficult article…
What is the Second Optimality Theorem?
Do we have to know the part about insurances?
Aim of case 1
This task is an introductory task. The aim of this task is to introduce you with 2 core
elements:
• Economy as scientific discipline
• The economic approach of health and health care, and the past, present and the future
of ‘health economics’ discipline.
• You have to be able to apply the concept discussed in case 1, to other examples (cases)
WHAT IS ECONOMICS AND WHAT IS HEALTH CARE
ECONOMICS ?
Economics
Edwards: Paradigms and research programmes: is it time to move from health care
economics to health economics?
-Economics is about how societies meet their wants from limited resources, and that all
societies face three fundamental questions: (1) what to produce; (2) how to produce
what is to be produced; and (3) how to distribute what is to be produced between
individual citizens [2]. The two concepts underpinning such an introduction to economics
are, therefore, scarcity and opportunity cost.
Website
1
,Economics of health care
Because of scarcity, people and economies must make decisions over how to allocate
their resources. Economics aims to study why we make these decisions and how we
allocate our resources most efficiently.
*Economics is the social science -> determine the production, distribution and
consumption of goods and services.
Opening lecture
Economics concerns the allocation of scarce resources among competing
demands. If resources are insufficient to meet all demands, they are scarce. Hence
• all resource uses have an opportunity cost;
• health and health care demands appear to be infinite;
• resources available for health care are finite.
Economists study society.
•We believe that society (macro-level) is the result of choices of e.g. individuals
(microlevel). Therefore, economics is a study of choices.
•We assume people make rational decisions. This does not necessarily mean that people
choose the smartest option, but rather that people choose what they think is smartest.
For example: From the perspective of an outsider, smoking is usually a bad decision.
However, if smoking gives you more pleasure now than you care about your future health
loss, smoking is a rational decision. Economists think that when people are free to
choose, society will have highest welfare. Therefore, economists are traditionally
reluctant with regard to interference by the government or by others.
Health economics
Cuyler: Handbook of health economics: Introduction: the state and scope of health
economics
-Health economics is commonly regarded as an applied field of economics.
-It draws from four traditional areas of economics: finance and insurance, industrial
organisation, labour and public finance.
-Policy-oriented research plays a major role.
Edwards: Paradigms and research programmes: is it time to move from health care
economics to health economics?
-Health economics is an applied sub-discipline of economics and is seen as the
study of how scarce health care resources may be used to meet our needs. This
evolutionary pathway has led to health economists adopting a very ‘medical’ model of
health, in which the predominant production function for health is health care.
- Students of health economics are taught that health care is an intermediate good that
has no intrinsic value in itself, but has value in its contribution (along with other inputs
such as environmental and social factors) towards the production of health itself, which in
turn, enables or satisfies other functions such as work, leisure or fulfilment [3]. They are
taught that demand for health care, therefore, is a derived demand for health and
health’s contribution to fulfilment in life. Although this is what is taught, in practice, the
relevant social want at the centre of health economics, it may be argued, has been
‘health care’, rather than ‘health’.
Opening lecture
-Health care economics:
•subject of analysis is the health (medical) care industry, not health.
•health care influences health but also other commodities include; nutrition, shelter,
clothing, sanitation, leisure time, etc.)
• article of Arrow (1963) is regarded as the birth of health economics
2
,Economics of health care
WHAT ARE THE DIFFERENCES? WHY IS HEALTH ECONOMICS A
SEPARATE DISCIPLINE? (SPECIAL FEATURES)
Maynard: Health economics: an evolving paradigm
-The sub-discipline of health economics has evolved out of its parent discipline in an
uneven manner. This has led to its partial separation from mainstream economics.
Opening lecture
!!!! -Health economics. ‘Market failures’ and that are routed in 4 main characteristics of
health care:
1. demand for health care is a derived demand (for health); Also, health cannot be
traded, it is not regular, it is not predictable.
2. existence of externalities (these refer to costs or benefits of
consumption/production of a good for others than the direct users/cost or benefit that
effects a party who did not choose to incur that cost of benefit eg vaccinations and
second hand smoking);
3. informational asymmetries between health care providers and patients; and
4. uncertainty with respect to both the need for and effectiveness of health
care.
Savedoff: Kenneth Arrow and the birth of health economics
-Uncertainty in the incidence of disease and in the efficacy of treatment leads
competitive markets to generate an inefficient allocation of resources and contributes to
the emergence of non-market institutions (such as trust and norms) that compensate for
these market failures. In demonstrating the kind of market failure that derives from
uncertainty and related problems of information, Arrow helped to generate a vast
literature dealing with problems in markets ranging from health insurance to used cars.
He also opened the way for agency models to be applied to studies of physician
behaviour.
-The article is sometimes cited to demonstrate that health care is not as exceptional as
many people claim and that market mechanisms can play an effective role in the medical
care industry in the same way as they do in other economic activities (including sectors
with an effect on health, such as food and housing). In contrast, it is also cited to
demonstrate that market failures in health care justify the creation or
preservation of non-market institutions. Arrow writes that non-market
institutions can (but not necessarily do) enhance the efficiency of the medical
care system.
Arrow: uncertainty and the welfare economics of medical care
Some characteristics of medical care that distinguish it from usual commodity of
economic textbooks:
1. Nature of demand = irregular and unpredictable
2. Expected behaviour of physician = element of trust in the relationship, there is
a collectivity-orientation: this distinguished medicine from business, where self-
interest on the part of the participants is the accepted norm; no advertising, no
overt price competition, advice must be free from self-interest on behalf of
physician. The physician is relied on as an expert: it is socially expected that his
concern for the correct conveying of information will, when appropriate, outweigh
his desire to please his customers. Departure from the profit motive. A profit
motive creates mistrust and suspicion, and hospitals receive public and private
subsidies.
3. Product uncertainty = uncertainty to the quality of the product.
4. Supply conditions = in competitive theory, the supply of a commodity is
governed by the net return from its production compared with the return derivable
from the use of the same resources elsewhere. There are several significant
departures from this theory in the case of medical care. Most obviously, entry to
3
, Economics of health care
the profession is restricted by licensing. This restricts supply and increases the
cost of medical care. It is defended as guaranteeing a minimum of quality. This
occurs in many sectors.
5. Pricing practices = The unusual pricing practices and attitudes of the medical
profession are well known: extensive price discrimination by income (with an
extreme of zero prices for sufficiently indigent patients) and formerly a strong
insistence on fee for services as against such alternatives as prepayment.
*Often prices are fixed and are not freely determined by hospitals or other care
providers
6. Insurances are present. Another difference between health economics and
economics is that there is the (big importance of) insurance. Important to know
that there is an insurance. That is why health economics is different from other
economics.
Why is an insurance needed?
There are problems of insurance, e.g. moral hazard = when someone takes more risks
because someone else bears the burden of those risks / he doesn’t have to bear all
consequences of those risks. The second problem of insurance is alternative methods of
insurance payment.
*Increasing returns = lower costs per unit of the marginal or additional
output(diminishing returns mean higher costs per unit)
Voor meer, zie Arrow… Niet nodig???
Differences
*extensive government intervention
* uncertainty in several dimensions, e.g. hospital doesn’t know demand, uncertainty in
planning
*barriers to the entry/supply and externalities, e.g. not everyone has access to the
newest treatment/basic treatments + need licensing
* presence of third party agent: doctors decides for patient, patient has something to say
but not everything (insurer can also be third party)
WHAT ARE THE ORIGINS OF HEALTHCARE ECONOMICS: PAST,
PRESENT AND FUTURE?
Past
4
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