Case 1: The economic approach of healthcare
Susan, Mike and George just arrived in Malta to attend a conference on the ‘Economics of health
care and innovation’. Susan works as a nurse at an academic hospital. Mike works at the economic
department of the same hospital, while George is the director of a nursing home foundation. After
their check-in, they have a look at the program. Although the actual conference starts tomorrow,
there is a preconference session on advanced health economics. Mike, who is an economist, says
that he is not going to attend that session. “I already know a lot about economics”, he says,
“economists always talk about scarcity, preferences, choices, allocation, efficiency, Pareto-optimality,
competition, utility, costs and benefits and the relationship between those concepts. Did you know
that health economics is partially separated from mainstream economics and covers a wide range of
themes? They will probably tell you all about it by showing you Williams’ schematic overview of
health economics. Probably, they will also discuss different paradigms or theories within health
economics and even tell you about the future direction of health economics!”
George is getting nervous. He doesn’t understand a word of what Mike is saying but as a director he
is anxious to find out the origins, present and future of the economics of healthcare. Susan is
completely overwhelmed. She admits that she has never heard of the concepts, ideas, paradigms and
theories that Mike has mentioned; let it be their possible links. Now that she comes to think of it, she
also has no idea of why there is a separate discipline within economics, which is dedicated solely to
the study of health, healthcare and insurance. “I will definitely go to this preconference session so
that I am up to date before the real conference starts!” Susan says. George couldn’t agree more.
COVID-19 Task for Post-discussion
Please read the following news article and respond to the question:
“The economic effects of Covid-19 around the world”
https://www.weforum.org/agenda/2020/02/coronavirus-economic-effects-global-economy-trade-
travel/
Based on this article, describe why Covid-19 might be important to look at from a health economics
point of view.
It is important to look at COVID-19 from a health economics point of view because economics and
healthcare are in a lot of countries connected (e.g. in the USA). Also, it is important to study the scare
resources and how they are allocated to and within the healthcare system and the rest of the
population (e.g. tests, mouth maskers).
Aims
- Economy as a scientific discipline
- The economic approach of health and healthcare
- The past, present and the future of ‘health economics’ as a discipline
What is economics?
Economics: study of choices under conditions of scarcity
- Aim: to increase efficiency
- Unlimited needs, limited resources
What are the key concepts of economics?
Some key economic concepts (explanation and relationship between concepts)
- Scarcity: tension between unlimited needs and limited resources to fulfill those needs
- Economics is thus concerned with the allocation of scarce resources among competing
demands
o Allocation: the division of things into shares or portions
- All resource uses have an opportunity cost (cost of the best alternative option)
- Economists study society and the choices people make
, o Choices arise as a result of economic problem of scarcity
- Efficiency: an economic state in which every resource is optimally allocated to serve each
individual or entity in the best way while minimizing waste and inefficiency
- Competition: a condition where different economic firms seek to obtain a share of a limited
good by varying the elements of the marketing mix (price, product, promotion, place)
- Utility: the satisfaction derived or expected to be derived from the consumption of goods
and services (subjective)
- Preferences: the order that a person gives to alternatives based on their relative utility
- Moral hazard: a situation in which one party gets involved in a risky event knowing that it is
protected against the risk and the other party will incur the costs. It arises when both the
parties have incomplete information about each other
What economists do?
They study the choices people make and what are the most efficient choices
- Explain how our economic system works
- Forecast the future of our economy
- Suggest ways to make the future even better
What is health economics?
Economics of health (Grossman)
- Applied field of economics
- Study the choices/behavior of individuals, healthcare providers, public and private
organizations, and governments in health decision-making
- Study of how (scarce) resources are allocated to and within the healthcare system
- Example: smoking, addiction, lifestyle
Some questions health economists have to answer
- How do we distribute healthcare within the population?
- How much money should the government spent on healthcare?
- How to efficiently allocate scarce healthcare resources?
What is healthcare economics?
Economics of healthcare (Arrow)
- Applied field of health economics
- The subject of analysis is the health (medical) care industry, not health
- Healthcare influences health but also other commodities including nutrition, sanitation,
leisure time, etc.
- Arrow (1963) is regards as the birth of health economics
- Examples: care demand, care supply, market competition
Why is health economics different from economics?
Health economics is different from economics (Arrow, 2001)
- Demand for healthcare is a derived demand (for health)
- Existence of externalities: costs or benefits of consumption/production of a good for others
than the direct users (e.g. smoking)
- Informational asymmetries between healthcare providers and patients
- Uncertainty with respect to both the need for and effectiveness of healthcare
- Supply conditions
o Entry to the profession is restricted by licensing
- Pricing practices
