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Summary Healthcare Economics and Organisations
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A comprehensive summary that includes information on all the modules (except module 6). Good summary to use for the exam.
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, Module 1Module 1 - Decision-making in healthcare and Insurance markets
Basic Concepts in Health Economics
– Scarcity: Occurs when the resources available to us are less than the
resources required for everything we would like to do.
– Opportunity cost: Benefit that a person could have received but gave up
in order to take another course of action.
Efficiency and Equity
– Efficiency = maximize the health outcome (population average) given the
available resources
– Equity = reduce social disparities in health and health care.
Principles of markets: Demand
– Assumptions;
• Consumers act rationally.
• Consumers have perfect information about the quality of services
and products.
• Scarcity: consumers have to choose between various goods (budget
restriction).
– When making decisions, consumers compare:
• Preference (relative valuation) for one good.
• Cost: The price of the good and the consumer's budget constraints.
• Utility: The satisfaction or benefit they expect to gain from consuming
a particular good.
, Principles of markets: Supply
– Assumptions;
• Firms act rationally.
• Firms have perfect information.
• Firms maximize profit.
– The profit function can be represented as: 𝜋 = 𝑝𝑞 - 𝑤𝑟.
→ Where:
• 𝜋 = profit • 𝑞 = quantity of output • 𝑟 = quantity of input
• 𝑝 = price of output • 𝑤 = price of input
Healthcare Markets
– Healthcare markets are unique and the standard assumptions about
market efficiency do not always apply to healthcare.
– This is because;
• Third parties (insurers, governments) often have an interest in healthcare
outcomes.
• Patients often don’t know what they need and cannot evaluate the
treatment they are getting.
• Healthcare providers are typically paid by private or government
insurance, rather than directly by patients. Insurance rules significantly
influence how resources are allocated in healthcare.
– Due to these factors, the "invisible hand" of the market may not work
efficiently in healthcare, leading to potential market failures such as
externalities, uncertainties, information asymmetry, and the need for
regulation to correct these issues.
, Externalities
– An externality refers to a situation where the actions of one economic
actor affect the well-being or utility of another actor, without any
compensation or payment between them.
– There are two types of externalities:
1. Positive externalities: These occur when the activity of one actor
benefits another actor without compensation.
2. Negative externalities: These occur when the activity of one actor
harms or imposes a cost on another actor without compensation.
Uncertainty
– Healthcare spending is unpredictable since most people do not know when
and whether they get sick and what kind of treatment they might need
(and what the cost of such treatment are).
– Therefore, people like to take insurance (especially if they are risk averse
and dislike uncertainty).
– Two problems may arise in healthcare markets (with insurance);
1. Adverse selection: Before agreeing on some transaction, one of the
two parties has some relevant information that is not known to the
other party.
2. Moral hazard: After agreeing on some transaction, one party can take
an action to its own benefit that is not observed by the other party.
→ Both may arise because of asymmetric information.
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