Economics and Financing of Health Care Systems – Health Economics, Policy & Law (GW4567M)
Merel Hoogstad
Plenary meeting 1. Kick-off and Is health care really different?
Video 1a: health economics and expansion of healthcare sector
Health Economics
What is Health Economics? “Health economics studies the allocation of resources to and within the health sector.
Because this sector has become the largest sector of many countries’ economies and its share of GDP is
expected to continue to grow, we should not be surprised that health economics has emerged as a distinct
specialty within economics.” – Folland et al.
Does economics apply to health care? Yes, there is a negative relation between price and demand.
Relevance of health economics
1. The economic organization of healthcare systems has a significant impact on the efficiency and equity of
healthcare allocation (1a).
2. Health care is a large and expanding sector of national economies (1a).
3. Health care is not a regular (economic) commodity; it’s widely considered a right, not a privilege (1b).
4. Specific features of health care can easily result in market failure as well as government failure (1c).
Relevance point 2: ‘Health care is a large and expanding sector of national economies’
The total health expenditure as % of GDP increased many years. There is an upward trend for all countries. The
increase in healthcare expenditures was big in 2009 en then dropped/was stable for some time because of the
financial crisis. Spending on health care depend on the economic situation.
The average annual growth in health expenditure per capita (%) is bigger than the average annual growth in GDP
per capita (%).
Healthcare is not a goal itself, because demand for healthcare results from underlying demand for health.
Healthcare is not the only determinant of health: education, nutrition, shelter and security. Because national
income is limited, these alternative options must be weighed against each other. Health economics helps in
making these choices.
The expansion of the healthcare sector will continue in the following decades, even with cost containment
measures. This is because:
Ageing of populations.
Advancing medical science and technology; there are a lot of expensive medical improvements. Is it
worth it? Is it a bad thing if costs are rising mostly because of quality or health improvements?
Shift towards chronic diseases; people survive longer while they have illnesses.
Increasing welfare; more money = more demand on health services.
Expanding health insurance coverage; moral hazard (risky behaviour, because insurance pay the bill).
Flawed (financial) incentives; healthcare providers do more than is needed.
Baumol’s ‘cost disease’.
o The increase in productivity in the healthcare sector is smaller than the increase of productivity
in other sectors. Labor-intensive services, like healthcare, are becoming more expensive
compared to products of other industries. Reason: productivity of workers in service provision
cannot increase at the same pace as compared to that of workers in other industries. This is
because healthcare services relay much on labor and cannot be easily be automated and
replaced by capital investments, like machines. Thus, increase in wages cannot be earned back
by increased in productivity, making healthcare increasingly expensive. On top of that, demand
for healthcare is unlikely to decline because of insurance, despite the increasing cost price.
Policy-makers are increasingly involved with difficult choices, they have to choose between two
evils. In this case: unwise government interventions or full transfer to the market/private sector.
Interesting questions What is the problem with health spending growth? Why do countries bother about health
spending anyway?
Is health spending growth sustainable?
It’s not, because:
Increasing health spending may significantly harm the economy.
o Taxes and/or premiums labor costs competitiveness of economy .
Increasing public health spending may crowd out other public services.
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, Economics and Financing of Health Care Systems – Health Economics, Policy & Law (GW4567M)
Merel Hoogstad
Financial sustainability: how to ‘pay’ for spending growth? For example, higher cross-subsidies to guarantee
universal access.
Economic sustainability: ensuring value for many. Important task for health economics!
Video 1b: health care: right or privilege?
Right = inherent irrevocable entitlement held by all citizens or all human beings from the moment of birth.
Privilege = special entitlement to immunity grounded to a restricted group on conditional bases after birth.
Relevance point 3: ‘Health care is not a regular (economic) commodity; it’s widely considered a right, not
a privilege’
Universal health coverage (WHO) = ensuring that all people can use the promotive, preventive, curative,
rehabilitative and palliative services they need, of sufficient quality to be effective, while ensuring that the use of
these services does not expose the user to financial hardship.
Universal coverage is based on the WHO constitution of 1948 declaring health a fundamental human
right and the right to health care is embodied in many countries’ constitutions.
It creates a tension with access and sustainability of expenditures on health care.
Universal coverage: three dimensions
“Ensuring that all people can use the [healthcare] services
they need, of sufficient quality to be effective, while
ensuring that the use […] does not expose the user to
financial hardship.”
‘All people’ implies that the entire population be covered.
Healthcare services they need concerned this specific care
to be covered, which should be based on need and should
be upservissioned quality. But when is a service necessary
and what does sufficient quality entail?
Doesn’t expose to financial hardship: people should not
pay too much themselves, but: what is too much? Difficult
questions with difficult trade-offs.
Not universally accepted that health is a right
In de US democrats wants universal coverage, the republicans don’t (they see it as a privilege). Obama care (or
‘the patient protection and affordable care act’) was most closely to it.
Video 1c: health care’s distinctive features
Relevance point 4: Specific features of healthcare can easily result in market failure as well as
government failure
Smith, Shaw and Arrow all say that health care is not a regular economic good, because:
‘We trust our health to the physician. Their reward must be such, therefore, as may give them that rank
in the society which so important a trust requires.’ – Smith.
‘That any sane nation, having observed that you could provide for the supply of bread by giving bakers a
pecuniary interest in baking for you, should go on to give a surgeon a pecuniary interest in cutting off
your leg is enough to despair of political humanity.’ – Shaw.
‘The special structural characteristics of the medical-care market are largely attempts to overcome the
non-marketability of the bearing of risks and the imperfect marketability of information.’ – Arrow.
Are health economics necessary or can you easily apply economics on healthcare?
‘Healthcare has many distinctive features, but is not unique in any of them. What is unique is the combination of
features and even the sheer number of them.’ – Folland et al.
Distinctive features of healthcare
Important: Presence and extent of uncertainty (aanwezigheid en mate van onzekerheid) - Arrow.
o Consumers are uncertain for their health and their need for healthcare: the type, amount, costs
and when they need it, so demand for healthcare is irregular. On top of that, consumers don’t
know the outcome of the treatment and in many cases the physician itself doesn’t know either.
Because of this, market failure is likely, suggesting some role for government. This uncertainty
can follow from problems of information.
Important: Problems of information.
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, Economics and Financing of Health Care Systems – Health Economics, Policy & Law (GW4567M)
Merel Hoogstad
o In healthcare information is known to some parties, but not all. The asymmetry of information
can be problematic. Consumers don’t know which providers are good. Consumers don’t know if
they’re sick at all. When there is asymmetry of information in favor of the supplier, problems
may arise when at the same time there are conflicting interests. Doctors care for their patients,
but they also have their own interests.
Presence of insurance/risk-bearing third parties.
o Consumers buy insurance to guard against uncertainty and risk. Because of that, consumers
rarely face the full costs of healthcare. Insurances change the demand of care; moral hazard. It
also applies to physicians, because it effects if and how many times they can give a treatment.
Large role of nonprofit firms.
Restrictions on competition.
o Health sector has developed many practices that influence competition. This includes life
insurance requirements, restrictions on advertising etc.
Importance of equity and solidarity.
o In a free market, this will not hold, because most people don’t want to pay extra, because they
are not sure that others will do the same: prisoners dilemma. They are also afraid that some
people will benefit more than others: free-rider problem.
Government subsidies and public provision.
o For prevention.
Ethical concerns.
Sources of market failure in healthcare
Market failure = individual’s pursuit of self-interest leads to outcomes that can be improved upon from a societal
point-of-view.
Due to the features a free competitive market is unsuitable for healthcare, because it leads to society undesirable
effects or market failure. According to Arrow the many forms of government interventions in healthcare can be
explained by the limitation of the free market.
Non-market instutions in healthcare
When the market fails there is a role for the government. There are institutions to address market failure:
Professional licensure.
Non-profit organizations.
Restrictions on provider advertising.
‘Any-willing-provider’ laws; this force payers of healthcare to have contracts with every provider.
Social health insurance.
Supply regulation (for example, of entry and capacity).
Price regulation
Quality regulation.
Public provision of health care (for example, NHS).
…
Market failure vs. government failure
The government can try to correct market failures by public provision, redistribution and regulation, but the fact
that it cán intervene in the healthcare system doesn’t always mean that it will actually succeed in doing so.
Sources of government failure:
Information problems.
Coordination problems.
Motivation problems.
Special interest groups.
What role should markets and governments play in healthcare?
Goal 1 = universal access (how to realize/organize solidary between low- and high-risk people and between high-
and low-income people) and goal 2 = efficiency (how to organize an efficient provision and financing of health
services and systems?). The challenge is finding the right balance between those goals.
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, Economics and Financing of Health Care Systems – Health Economics, Policy & Law (GW4567M)
Merel Hoogstad
Lecture
KAHOOT
In OECD-countries, health spending as a percentage of GDP is expected to increase in the coming decades due
to:
Advancing medical technology and decreasing health insurance coverage.
Decreasing welfare and ageing of populations.
Baumol’s cost disease and a shift towards chronic diseases.
Expanding health insurance coverage and lacking incentives for efficiency.
Baumol’s cost disease implies that:
The productivity of workers in health care increases at a faster pace as compared to the productivity of
workers in other industries.
Wages of workers in health care typically increase at a faster pace as compared to wages of workers in
other industries.
Health care becomes increasingly less expensive relative to products of other industries.
Products of other industries become increasingly less expensive relative to health care.
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