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HPI4001 Economics of healthcare lectures
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Economics of healthcare (HPI 4001)Lecture 1 06-09-2019
Introduction lecture; Case 1: What is health economics?
Economics
|
Scarcity
Unlimited needs Limited resources HC budget contribution
Leads to tension choices, which must be efficient outsource? = IEA or new drug good value?
= HTA
Video
“Economics is a study about how people/governance make choices/decisions under conditions of
scarcity”.
Economists study the choices people make and what are the most efficient choices.
o Explain how our economics system works
o Forecast the future of our economy
o Suggest way to make the future even better
Scarcity is related to the tension between unlimited needs and limited possibilities to fulfil those
needs. It forces us to make choices. A scarce resource: something that you can use for alternative
purposes (i.e. money, time, staff, rooms, materials).
Economics is thus concerned with the allocation of scarce resources among competing demands in the
most efficient way.
All resource uses have an opportunity cost (cost of the best alternative option), you buy your
preference at the expense of other alternatives.
Health economics (broader than health care economics) is an applied field of economics, you study
the choices/behavior of individuals, health care providers, organizations, and governments in health
decision-making. Study of how (scarce) resources are allocated to and within the healthcare system.
Health care economics is the subject of analysis is the health (medical) care industry, not health.
Health care influences health but also other commodities (nutrition, sanitation, leisure time).
Arrow 1963 is regarded as the birth of health economics (understand the why we have health
economics, and understand the formula’s but we don’t have to use the figures or formula’s).
Health economics is different
1. Demand for health care is a derived demand for being in good health
You don't want to (ill or )be treated in the hospital, you have to
2. Existence of externalities (these refer to costs or benefits of consumption/production of a good
for others than the direct users).
Smoking negative externalities. We need governance intervention.
3. Informational asymmetries between health care providers and patients.
You don’t have knowledge about the drugs/treatment, only the doctor knows. With buying
a phone. you know things or looked them up.
4. Uncertainty with respect to both the need for and effectiveness of health care.
You can’t predict when you need it
1
,Pareto-optimality
Allocative efficiency (or Pareto efficiency) as a distribution or use
of resources (=allocation) in which no one can be made better off
without making someone worse off.
On the curve = pareto optimality
At the start/end of the curve, efficiency is good, but equity is not
good
Perfect competition = optimal allocation
4 conditions for a perfect competitive market:
o Many consumers and many suppliers
o Homogenous product
o Free entry and exit
o Perfect information
If we have these pareto optimality
In health care we never have perfect competition, if one/more condition(s) misses Market failure
inefficiency government intervention. That is why in health care there are a lot of government
interventions.
Government interference in health care (because we have a lot of market failure)
1. Presence of externalities (e.g. passive smoking) smoking bans
2. High research and development cost patient protection
3. Market power (e.g. monopoly) drug price regulation
4. Nature of goods (e.g. collective goods such as public health program) national vaccination
program
5. Uncertainty insurance
Williams’ diagram (most important subject of health economics) See Case 1 document
You don’t have to know everything/reproduce whole diagram, but you have to know relationships.
Some challenges for health care system
More demand for health care with rising healthcare expenditures challenges us to make choices
Medical and technological advancement challenges (but maybe not all efficient)
Healthcare regulatory challenges
Increasing expectations form patients
More healthcare demand puts the labor market under pressure and asks for innovation
The future of health economics
To successfully meet new challenges, health economics need to consider new theoretical, empirical
and methodological approaches behavioral economics and experimental economics
1. Experimental economics: to reveal preference through experiment, judgement and decision
making phases preceding the actual choice of the participant.
Better study the decision-making of individual and market outcomes + powerful research tool to
develop knowledge
2. Behavioral economics: importance of psychological cognitive, emotional, cultural and social
factors on the economic decisions of individuals; when specifically addressing individual economic
decision-making
How people actually make decision.
Bounded nationality: limits time, money and quality (e.g. if the price of ice cream decreases, people
think it’s bad)
2
, Lecture 2 13-09-2019
Economic Theories and innovation
Content
1. What is innovation, according to economists?
2. Why is innovation important from an economic point of view?
3. How doe economists look at innovation? Which economic theories on innovations are there?
History
- 1776, Adam Smith: Wealth of nations; how to achieve a sufficient allocation for welfare in society
pure market competition (you leave people to make the choice to allocate the resources). How to
decrease the tension (more limited resources)?
1920: faced with scarcity: consumers, producers, market. They made models for each groups
Neoclassical theory (ruling paradigm in economics).
Economics of healthcare: also scarcity but in health care.
1963 Arrow: started the discipline of HE. He saw a difference between the neoclassical theory and the
choices that were made in health care. Differences:
o Uncertainty
o Knowledge
o You don’t want to be ill
1. What is innovation, according to economists?
‘Successful exploitation of new ideas’ (Swann, 2009)
Exploitation: in terms of value, profit or sold on the market.
Simple model of innovation:
a. Research and creativity
b. Invention
c. Design and development
d. Innovation
Invention: generation of new ideas through research or other forms of creativity. Coming up with a
prototype
Innovation: the commercial application of invention (Swann, 2009)
Types of innovations
o Product innovation (case 3): the development and market introduction of a new, redesigned or
substantially improved good or service
o Process innovation: the implementation of a new or significantly improved production or
delivery method.
o Organizational innovations (case 4): coming with new ways to bring a new drug to the
pharmacy.
2. Why is innovation important from an economic point of view?
Economic point of view
Widespread implications for economy and society
o Innovation can be costly: increase the tension between UN and LR
o Innovation may lead to economic benefits: decrease the tension between UN and LR
o Innovation: considerable impact on economic growth and social welfare. I.e. the innovation of
airplanes
A real understanding requires deviation from mainstream economics (neoclassical).
3. How doe economists look at innovation? Which economic theories on innovations are there?
a. What is theory?
3
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