E&F, 2023
Meeting 1: Is healthcare really different?
Video 1A: health economics and expansion of the healthcare sector
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 HE has emerged as a distinct specialty within economics
- HE provides concepts and tools to understand difficult trade-offs involved in organizing the
allocation of healthcare resources: may help to improve health policy and health system design
Does economics apply to healthcare: Yes, because price matters in healthcare and economics studie how
scarce resources are produced and then distributed. Economics then clearly applies, because healthcare
resources are certainly scarce and there is no question that healthcare is produced and distributed.
Relevance of health economics
1. The economic organization of healthcare systems has a significant impact on the efficiency and
equity of healthcare allocation (forms the basis for healthcare reforms)
2. Healthcare is a large and expanding sector of national economies
3. Healthcare is not a regular (economic) commodity it is widely considered a right, not a privilege
4. Specific features of healthcare can easily result in market failure as well as in government failure
Note: healthcare is not a goal in itself, it is a means to achieve the goal of health. Health, however, is
determined by other factors as well such as education, nutrition, shelter, and security. These alternative
spending options must be weighed against each other and health economics helps in making this decision.
Expansion of the healthcare sector (spending is growing faster than our economies)
1. Aging of populations
2. Advancing medical science and technology
3. Shift towards chronic diseases
4. Increasing welfare (stimulates demand)
5. Expanding health insurance coverage (‘moral hazard:’ prices reduced so more care demanded)
6. Flawed financial incentives
7. Baumol’s ‘cost disease’
a. Most labor-intensive services are becoming more expensive. Productivity of workers in
service provision cannot increase at the same pace. Thus, an increase in wages cannot be
earned back by increases in productivity, making healthcare increasingly expensive.
b. Also, demand for healthcare is unlikely to decline, despite increasing cost prices. Policy
makers involved with many choices (unwise interference vs transfer to private market)
Is health spending growth sustainable? No, because:
1. Increasing health spending may significantly harm the economy
- Taxes and/or premiums ↑ → labor costs ↑ → competitiveness ↓
2. Increasing public health spending may crowd out other public services
- However, health spending growth has also contributed to population health and, thereby,
productivity. So it can also have a positive influence on the economy as a whole
, E&F, 2023
Financial sustainability: subsidies to guarantee universal access might become too great and
governments need to manage the boundaries between what is provided through collective health programs
and what is left to private entities + ensuring value for money (example: US health expenditure)
- The US spent approximately twice as much as other high-income countries on medical care, yet
utilization rates in the United States were largely similar to those in other nations.
Video 1B: healthcare: right of privilege?
Privilege = special entitlement to immunity granted to a restricted group, on a conditional basis after birth
Right = inherent, irrevocable entitlement, held by all citizens from the moment of birth
Universal health coverage (WHO definition) = 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 firmly based on the WHO constitution of 1948 declaring health a
fundamental human right and the right to healthcare is embodied in many countries’ constitutions
- However, this idea of healthcare as as a right is not universally accepted
The three dimensions of universal coverage:
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
Video 1C: healthcare’s distinctive features
Healthcare is not a regular economic good → it 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.
Distinctive features of healthcare
1. Presence and extent of uncertainty (demand is irregular and uncertainty about health outcomes)
2. Problems of information (e.g. asymmetry in information; parties have different info)
3. Presence of insurance / risk-bearing third parties (prices do not play a large role in healthcare,
weakening the price effects expected in economics. Insurance changes demand: moral hazard)
4. Large role of nonprofit firms
5. Restrictions on competition
6. Importance of equity and solidarity (does not hold in a free market)
7. Government subsidies and public provision (use of care also influences others: externalities)
8. Ethical concerns
Sources of market failure in healthcare: due to these specific features, a free, competitive market is
unsuitable for healthcare because it may lead to socially undesirable effects = market failure
, E&F, 2023
Market failure = individuals’ pursuit of self-interest leads to outcomes that can be improved upon from
societal point-of-view. Sources →
1. Uncertainty
2. Risk-bearing third parties (moral hazard)
3. Asymmetric information (agency problems)
4. Externalities
Non-market institutions in healthcare
Governments prevent the market from failing by intervening in many ways: non-markets
- Professional licensure
- Non-profit organizations
- Restrictions on provider advertising
- ‘Any-willing-provider’ laws
- Social health insurance
- Supply regulation (e.g., of entry and capacity)
- Price regulation
- Quality regulation
- Public provision of healthcare (e.g. NHS)
Market failure vs. government failure
How can governments effectively intervene and if they do so, how do they do it better than markets?
The government can try to correct market failures by public provision, redistribution, and regulation, but
the fact that it can intervene in the healthcare system does not always mean that it will actually succeed
Sources of government failure
- Information problems
- Coordination problems
- Motivation problems
- Special interest groups
What role should markets and governments play in healthcare?
Universal access (for low and high risk and low and high income) requires a bit of government
intervention, but efficiency is realized by some role of the market. The key challenge is finding the right
balance between the two and avoiding both market and government failure (navigating between 2 evils).
Economic rationale for government intervention = efficiency is one common standard for evaluating
the desirability of economic allocations. (inefficient allocations → distortions → market failure)
Major contributor to market failure → monopoly power
A profit maximizing monopolist produces to the level at which MR = MC. MR lies
below the demand curve so the monopolist will reduce production below competitive
levels, and the price will exceed the MC of production. This creates welfare loss.
In the simplest case and in absence of government failure, price controls can
theoretically reduce the welfare loss
, E&F, 2023
Meeting 2: Demand For Healthcare
Learning Goals
1. Recognize the relationship between the demand for health and healthcare
2. Identify and interpret basic models of healthcare demand
3. Identify the determinants of the demand for healthcare
4. Explain utility theory and its relevance for understanding healthcare demand
5. Categorize and evaluate price and income elasticities of healthcare demand
Video Lecture 2A - Demand for healthcare: three models
What’s the relation between demand for health and healthcare
● Demanding healthcare is not for fun! Pursuing healthcare does not have a value in itself, it only
generates utility if it improves health/quality of life (different for many other goods and services)
● This implies that the demand for healthcare is derived from the demand for health
● In fact, healthcare is only one of the inputs in an individual’s health production function
● Healthcare is not only consumption but also an investment good in future health and productivity
What determines our demand for healthcare? → Three basic models:
1. The medico-technical model: the doctor is in the lead, acting as the perfect agent
2. The neoclassical model (economic model): the patient/consumer is in the lead, having perfect
information, hence is able to make good consumption decisions
3. The imperfect agency model: demand is determined by both doctors and patients as information
is part of the transaction. Patient goes to the doctor and asks for information.
1 The medico-technical model
● Consumer demand is fully determined by medical experts based on objective needs
● Assumptions:
○ Providers act as perfect agents for their patients (serve patient's interests in the best way)
○ Patients have uniform preferences and fully comply with the providers’ decisions
○ Providers know with certainty the results of their decisions
● If these assumptions hold, there is only one determinant of healthcare demand: need
○ Other determinants such as price do not play a role because it is clear what the patient
needs and perfect agents will not act out of other interests
● Thus, individual demand is completely (price-)inelastic → no price sensitivity
○ If the price increases, demand/quantity will stay the same
Critiques on medico-technical model
Substantial evidence suggests that the assumptions of medico-technical model are violated in practice:
● Doctors are not perfect agents but also pursue their own, sometimes conflicting, interests
○ E.g., leisure time , income, professional status
● Doctors often do not know with certainty the effect of medical treatment
● Consumers do not have uniform preferences for medical care, even if they would be
equally well-informed as their doctors (e.g., aggressive vs conservative treatment)
● Consumers do not fully comply with the decisions of their doctors
● Consumers are not insensitive to prices and income (healthcare vs other goods)
