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Summary HPI4001 Economics of Healthcare all cases
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Summary of all cases of the course HPI4001 Economics of Healthcare, Maastricht University
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Case 1 the economic approach of health careWhat is economics?
Social science that analyses the production, distriuution and consupption of goods and services. It is
the science of efectve allocation of scarc r sourc s. Study of choices under conditons of scarcity.
Unlimited needs, limited resources (lecture, 2018)
Economics is about how societes meet their wants from limited resources. Society face three
fundamental questonss
1. What to produces
2. How produce what is to be produced
3. How distribute what is to be produced between individual citiens (Edwarts, 2001)
What is health economics?
Lecture What is health economics (2018)
- Applied feld of economics
- Covers more than just healthcare, look at other factors as well (especially on costs)
- Study the choices/behaviour of individuals, healthcare providers, public and private
organiiatons, and governmental in health decision-making.
- Study of how (scarce) resources are allocated to and within the healthcare system
- Bridges the gap between the theory of economics and practce of health care.
Health economics draws it theoretcal inspiraton from four traditonal areas of economicss
1. Finance and insurance
2. Industrial organisaton
3. Labour
4. Public fnance
Multdisciplinary – cost-efectveness studies and determinant of populaton health
Possible questons in health economicss
How do we distribute healthcare within the populatonn
How much money should the government spent on healthcaren
How to efciently allocate scarce healthcare resourcesn
Diferent from other economics, characteristcss
1. Demand for healthcare is a d riv d d pand (for health)
2. Existence of xt rnaliti s (these refer to cost or benefts of consumpton/producton of a
good for others than the direct users) smoking/vaccinatonn other people have a beneft
or disadvantage – positiv or n aativ xt rnaliti s
3. Inforpation asypp tri s between healthcare providers and patents doctors know much
more than the patents.
4. Unc rtainty with respect to both the need for and efectveness of healthcare
5. Extensive aov rnp nt int rv ntion
6. Barri rs to nt r (license for physicians)
7. Presence of a third-party aa nt physician who makes purchasing decision while being
insulated (geïsoleerd) from the price of the product of service.
combinaton is specifc
Government interference in health cares
1. Presence of externalites (e.g. passive smoking, vaccinaton) smoking bans
2. Market power (monopoly) > drug price regulaton
3. Nature of goods (collectve goods such as public health program) natonal vaccinaton
program
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, 4. Nature of goods (transiton costs, informaton asymmetry) patent
5. Uncertainty insurance
3 main diferences why health economics is not lead by the invisible hand (market)
Health cannot be treated on the market
Health is embodied and depends on health stages of individual
Health stages is stochastc (toevallige uitkomsten) and cannot be predicted
Methodological tools to assist resource allocaton processs
1. Cost-efectveness
2. Cost-utlity
3. Cost-beneft
4. Budget-impact
5. Resource utliiaton
contnuous to strive and create new approaches for the future such as improving management of
scarce resources through managed and integrated care environment.
What is healthcare economics?
The subject of analysis is the health (medical) care industry, not health
Healthcare infuences health but also other commodites including, nutritonns, sanitaton, leisure
tme etc.
smaller than health economics (part of it)
Arrow J. (2001) Uncertainty and the Welfare Economics of Medical Care
Economist usually uses a copp titiv pod l – fow of services that would be ofered and purchased
and the prices that would be paid form them if each individual in the market ofered or purchased
services at the going prices. Presumed that the induvial acts and decisions donnt have any infuence
on the prices and that the going prices were such that the amount of service which were available
equalled the total amounts which other individuals were willing to purchase, with no imposed
restrictons on supply or demand.
Optipality th ori s
1. First optipality th or p if a compettve equilibrium exists at all, and if all commodites
relevant to cost or utlites are in fact prices in the market – the equilibrium is necessarily
optmal due to Pareton there is no other allocaton of resources to services which will make
all partcipant in the market beter of. The interest in the compettve model stems partly
from its presumed descriptve power and partly from its implicatons for economic efciency.
However, if you make someone happier someone else will be less happier – but always look
to the pareto optmum.
2. S cond optipality th or p if there are no increasing returns in producton, and if certain
other minor conditons are satsfed, then every optmal state is a compettve equilibrium
corresponding to some inital distributon of purchasing power.
The market of medical care is diferent than other economic markets becauses
1. Th natur of d pand (d riv d-d pand) the demand for medical care is not that steady in
origin, as for food or clothing. It is irr aular and unpr dictaul . Illness is not only risky but a
costly risk on itself (losing income), apart from the cost of medical care.
2. Exp ct d u havior of th physician there is an element of trust because the consumer
(patent) cannt test the ‘pproductn on beforehand. Diferent ways why it is diferents
a. Advertsing and overt price competton are virtually eliminated among physicians.
b. Advice given by physicians as to further treatment by himself or other is supposed to
be completely divorced from its self interest.
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, c. Treatment is dictated by the objectve needs of the case and not limited by fnancial
consideratons – while the ethical compulsion is surely not as above.
d. The physician is relied on as an expert in certfying to the existence of illness –
socially expected that his concern for the correct conveying of informaton and not
outweigh his desire to please his customers.
3. Product unc rtainty uncertainty to the product is in medical care more intense than in other
important markets. Recovery from disease is as unpredictable as its incidence. There is no
possibility to learn from earlier experiences. There is a special quality to the uncertainty, it is
very diferent on the two sides of the transacton. Medical knowledge is complicated, so both
partes consider the gap of the informaton possessed between physician and consumer to
be big.
4. Supply conditions in compettve theory, the supply of a commodity is governed by the net
return from its producton compared with the return derivable form the use of the same
resources elsewhere. Signifcant departures from this theory
a. Entry to the provision is restricted by licensing – that restricts supply and therefore
increases the cost of medical care.
b. The cost of medical educaton is high these days. Thus, the private benefts to the
entering student considerably exceed the costs.
c. Extent of individual preferences concerning the social welfare – feature of limitaton
on entry to subsidiied educaton. However, both the quality and quantty of the
supply of medical care are being strongly infuenced by social nonmarket forces.
5. Pricina Practic s The unusual pricing practces and attudes of the medical profession are
well known, extensive price discriminaton by income and formerly a strong insistence on fee
for services as against such alternatves as prepayment. Since price competton is frowned
upon, usually the prices are ipplicit and xplicitly fx dd
Copparison with th copp titiv pod l und r c rtainty
1d Nonpark taul coppoditi s – the difusion of communicable diseases provides an obvious
example of nonmarket interactons. From a theoretcal viewpoint the issues are well
understood. Beyond this special area there is a more general interdependence, the concern
of individuals for the health of others. The economic side of this can be seen in donatons to
health care insttutons.
2d Incr asina r turns – problems associated with increasing returns play some role in allocaton
of resources in the medical feld, partcularly in areas of low density or low income. Hospitals
show increasing returns up to a pointn specialists and some medical equipment consttute
signifcant indivisibilites.
3d Entry – the most striking departure from compettve behaviour is restricton on entry to the
feld. If entry were governed by ideal compettve conditons it may be that the quantty on
balance is increased, the average quality would probably fall since subsidy and selected entry
draw highly qualifed individuals (who will be missed out upon now). The exclusion of many
imperfect substtutes for physicians makes this practce a good one.
In the compettve model without uncertainty consumers are presumed to be able to
distnguish between diferent level of quality of the commodites they buy. Licensing
(authoriiaton) makes sure that people of poor quality (to who a patent would never go in
the frst place) never becomes a doctor. It might be however that too many people are
excluded.
4d Pricina – price discriminaton is not compatble with the compettve model, however the fact
that it can exist indicates that the big amount of physicians seems to resemble a collectve
monopoly. Price discriminaton is a source of nonoptmality. Hypothetcally it means that
everyone would be beter of if prices were made equal for all and the rich compensated the
poor for the changes in relatve positons.
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, Copparison with th id al copp titiv pod l und r unc rtainty
In this secton the operatons of the actual medical care market will be compared to those of an ideal
system in which not only the usual commodites and services but also insurance policies against all
risks are available.
1d Th th ory of id al insuranc – the assumpton is made that each individual act as to
maximiie the expected value of a utlity functon. Costs of medical care reduce our income. It
is furthermore assumed that individuals are normally risk-averters. In utlity terms this means
that they have a diminishing marginal utlity of income. If a large company provide insurance
against all health care costs against a reasonable fair, most people will take this opton to
reduce the risk and thus gain welfare. Even if the premium is slightly unfair most people will
stll pay it, provided it is not too unfair. The last one is more probable to be true since
insurers usually generate more costs than the medical ones of their clients.
2d Proul ps of insuranc
ad Moral haiard – widespread insurance increases the demand for health care. People
use more healthcare because they have an insurance.
ud Alternatve methods of insurance payment – three diferent methods of covering the
costs that medical care has arisens
i. Prepayments the insurance is directly paid in medical care
ii. Indemnites according to a fxed schedules cash payment is paid to the
person insured
iii. Insurance against costss insurance pays all the costs
In a perfect market these three types would be equal but hard in healthcare
cd Third-party control over payment – the need for third party control is reinforced by
another aspect of the moral haiard. Insurance removes the incentve to shop around
for beter prices.
dd Administratve costs – several types of operatng costs, the most important
categories include commissions and acquisitons costs insurances have to be sold
to a price higher than they are worth, furthermore there are great diferences
between insurances.
d Predictability and insurance – from the risk aversion point insurance is more
valuable, the greater the uncertainty in the risk being insured against. Therefore,
usually there is a bigger emphasis on insurance against hospitaliiaton and surgery
than other forms of medical care. On a lifetme insurance basis, insurance against
chronic illness makes sense, since this is both highly unpredictable and highly
signifcant in costs.
fd Pooling of unequal risks – hypothetcally insurance requires for its full social beneft a
maximum possible discriminaton of risks. Those in groups of higher incidences of
illness should pay higher premiums. In fact there is a tendency to equaliie.
ad Gaps and coverage - At any rate to date (1960's) insurances against the cost of
medical care are far from universal. Certain groups are completely uncovered, so it
can be assumed that the insurance mechanism is stll very far from achieving the full
coverage of which it is capable.
3d Unc rtainty of f cts of tr atp nt
ad Two major aspects of uncertainty for an individual already sufering from an illnessn
1) uncertain about the efectveness of the treatment, 2) uncertainty diferent from
physician based on the prior knowledge.
ud Ideal insurance – insurance against a failure to beneft from medical care. A system in
which the payment to the physician is made in accordance with the degree of
beneft. Transfer the risks from the patents to the physician (physicians donnt want
this). Under ideal insurance the patent would have no concern with the inequality
between himself and the physician.
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