Summary of ‘’Economic of Health and
Health Care’’ (2020-2021)
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,LECTURE 1: PRODUCTION OF HEALTH ........................................................................................... 4
LECTURE 1A.................................................................................................................................... 4
LECTURE 1B .................................................................................................................................... 4
LECTURE 1C .................................................................................................................................... 4
LECTURE 1D ................................................................................................................................... 5
LECTURE 1E .................................................................................................................................... 5
LECTURE 1F .................................................................................................................................... 6
LECTURE 2: THE DEMAND FOR HEALTH ......................................................................................... 7
LECTURE 2A.................................................................................................................................... 7
LECTURE 2B .................................................................................................................................... 8
LECTURE 2C .................................................................................................................................... 9
LECTURE 2D ................................................................................................................................. 11
LECTURE 2E .................................................................................................................................. 11
LECTURE 3: THE DISTRIBUTION OF HEALTH ................................................................................. 14
LECTURE 3A.................................................................................................................................. 14
LECTURE 3B .................................................................................................................................. 15
LECTURE 3C .................................................................................................................................. 17
LECTURE 3D ................................................................................................................................. 18
LECTURE 3E .................................................................................................................................. 18
LECTURE 4: HEALTH AND HEALTH CARE SPENDING: INTERNATIONAL EVIDENCE .......................... 20
LECTURE 4A.................................................................................................................................. 20
LECTURE 4B .................................................................................................................................. 21
LECTURE 4C .................................................................................................................................. 22
LECTURE 4D ................................................................................................................................. 23
LECTURE 4E .................................................................................................................................. 25
LECTURE 5: THE ECONOMICS OF COVID-19 ................................................................................. 28
EXERCISE LECTURE 1................................................................................................................... 30
QUESTION 1 ................................................................................................................................. 30
QUESTION 2 ................................................................................................................................. 32
QUESTION 3 ................................................................................................................................. 34
LECTURE 6: EQUITY IN HEALTH CARE FINANCING ........................................................................ 36
LECTURE 6A.................................................................................................................................. 36
LECTURE 6B .................................................................................................................................. 37
LECTURE 6C .................................................................................................................................. 38
LECTURE 6D ................................................................................................................................. 40
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,LECTURE 6E .................................................................................................................................. 41
LECTURE 7: FINANCIAL PROTECTION AND UNIVERSAL HEALTH COVERAGE IN LOW/MIDDLE-
INCOME COUNTRIES .................................................................................................................. 43
LECTURE 8: EQUITY IN HEALTH CARE DELIVERY ........................................................................... 44
LECTURE 8A.................................................................................................................................. 44
LECTURE 8B .................................................................................................................................. 45
LECTURE 8C .................................................................................................................................. 47
LECTURE 8C .................................................................................................................................. 48
LECTURE 8E .................................................................................................................................. 49
LECTURE 9: EXPLAINING HEALTH INEQUALITIES .......................................................................... 52
LECTURE 9A.................................................................................................................................. 52
LECTURE 9B .................................................................................................................................. 53
LECTURE 9C .................................................................................................................................. 55
LECTURE 9D ................................................................................................................................. 56
EXERCISE LECTURE 2................................................................................................................... 59
QUESTION 1 ................................................................................................................................. 59
QUESTION 2 ................................................................................................................................. 61
QUESTION 3 ................................................................................................................................. 63
LECTURE 10 & 11: RELATIVE EFFICIENCY MEASUREMENT ............................................................ 65
LECTURE 10A ................................................................................................................................ 65
LECTURE 10B ................................................................................................................................ 65
LECTURE 10C ................................................................................................................................ 66
LECTURE 10D................................................................................................................................ 68
LECTURE 11 .................................................................................................................................. 71
EXERCISE LECTURE 3................................................................................................................... 73
QUESTION 1 ................................................................................................................................. 73
QUESTION 2: 1-INPUT AND 1-OUTPUT ................................................................................................ 75
QUESTION 3 ................................................................................................................................. 78
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,Lecture 1: Production of health
Students should be able to understand, assess and use
• An economic approach of health determination through production functions;
• Empirical (and econometric) evidence on marginal effect of income on health at macro
level;
• The relationship between income inequality and health (inequality).
Based on literature:
• Folland, Goodman and Stano, 2014, Chapter 5
• Jack, 1999, Chapter 3
• Cutler, Deaton, Lleras-Muney, J Econ Perspectives, 2006
Lecture 1A
-
Lecture 1B
Since 2000 the proportion of people below the poverty line has diminished. The goal to halve
poverty in 2015 was met mostly because of financial growth in Asia. Only not in Africa,
because about 2/3rd of the total poor people live in Africa.
What is the relationship between income and health? GDP/Capita and child survival are the
used determinants, because child survival is a good indicator to what is happening in the
healthcare sector. There is a positive statistical relation between these two determinants. A lot
of counties have a growing child survival and GDP/Capita. Only Africa has a decrease in child
survival and didn’t get much richer.
Income and health are strongly related on macro level. Each of the regions has richer and poorer
countries. E.g. Sub-Saharan Africa can be divided into very poor and very rich countries. This
pattern is also visible within countries (based on income groups). Only OECD countries don’t
have the same slope. They are all very rich and have a high child survival.
Child survival is higher in OECD and lower in sub-Saharan Africa. Over time most regions are
improving, sub Saharan Africa is getting poorer and didn’t improve that much on survival.
Lecture 1C
• Health care systems aim at improving health distributions.
• Both the level and the distribution matter.
• Health care is only the half of the many determinants. Health and (economic)
development are related.
• Measurement of marginal health product of health care and income is hampered by:
o Population health measurement → How to measure?
o Estimation of marginal contribution isn’t the total contribution →
o Reverse causality and confounding →
Health production function
4
,Population health is constructed by more than medical care consumption, like lifestyle or
schooling. There are diminishing returns of scale (marginal product of health investment
decreases → concave curve).
Demographic and epidemiological transition
Demographic transition:
• Mortality effect (longer lives)→ Due to technological progress
• Fertility effect (fewer births)→ Due to behavioural change
o Both lead to age structure shift (fewer young and more older people)
In high-income countries this leads up to a 2% growth. In development countries it leads to
population growths up to 4%.
Epidemiological transition → Causes of deaths and diseases are changing
Expensive (chronic) diseases drive out cheap diseases
- Relative increase in old-age diseases
Mortality decline was caused by improvements within nutrition (increased calory intake),
public health (hygiene/ water purification), vaccinations (doubtful effect) and medical
treatments (e.g. cardiovascular diseases).
Lecture 1D
The model between life expectancy and income is concave and is shifting up. From the 1960’s
you actually see the concave line emerging but also shifting upwards. This is due to
technological improvement, which makes health production cheaper.
Empirical analysis of the income-health relation saw a strong income elasticity of population’s
health but falling with rising income. Later research concluded that income was just one of the
factors.
Lecture 1E
The Millennium Preston Curve: At a certain high level of income, is there any population health
gained from certain income resources?
Some strong conclusions:
• Income in health are strong associated, both between and within counties
• However: Income growth is neither necessary nor sufficient condition for health
improvement
• Knowledge, science and technology are key (adoption of that)
• Accelerated production of new knowledge may even increase the health gap by
income, because of lagged adoption
The income inequality hypothesis → At high levels of income, it is not the level of the income
that is important but (re)distribution of income.
You shouldn’t focus on all mortality but only on the subset of mortality from conditions that
are potentially avoidable or amenable to healthcare. When focusing on the subset of avoidable
mortality, it is still falling. So, studies focus on deaths from certain conditions that should not
occur in the presence of timely and effective healthcare.
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,A study from Mackenbach et al. showed a negative relationship between income and health
expenditure and no such relationship for non-amenable mortality. It also shows that high
expenditures on HC have an impact on amenable mortality.
Lecture 1F
What matters for heath? A high income or a variation in income? This is called Wilkinson’s
hypothesis on income equality. He asks himself whether the distribution of income or income-
level itself matters more when there already are high levels of income and health? He argues
that reducing income inequality would have substantial gains.
Critics state that when you add other countries, the hypothesis
goes away or even becomes positive. But an economist states
that when you subtract income from the rich and give it to the
poor, the mean income stays the same but the health of the poor
increases more (scale of diminishing returns). So, the mean
income stays the same and the mean health rises. Income gains
and income losses mean different things at different levels of
incomes. But there is no causal relationship.
Concluding:
• Economic focusses on ‘contribution’ of health determinants ‘at the margin’
• Concavity of Preston curve suggests decreasing marginal returns to income and health
investment
• Economic growth is usually associated with – but no guarantee for – health gains
• Adequate adoption of new knowledge and technology appear to be the key for
improvement
• No flat-of-the curve for avoidable mortality
• Greater income inequality associated with lower mean health in concave relationship,
but no causal
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,Lecture 2: The demand for health
Students should be able to understand, assess and use
• A (graphical) explanation of the demand for health theory;
• Economic theory that may help guide empirical research on health and income;
• The relationship between income growth and health (inequality) at the macro level.
Based on Literature:
• Folland, Goodman and Stano, 2014, Chapter 7: Demand for Health Capital
• Wagstaff A. (2002). Inequalities in Health in Developing Countries: Swimming against
the Tide?
• Wagstaff, A., Bredenkamp, C., Buisman, L. R. (2014). Progress on Global Health
Goals: Are the Poor Being Left Behind? The World Bank Research Observer, 29(2),
137–162. https://doi.org/10.1093/wbro/lku008
Lecture 2A
Grossman (1972) made four crucial observations:
• Consumers want health, not health care, but not only health (there are other things that
consumers value)
• Health cannot be purchased directly, while medical care can. Health can be produced,
using time and health-improving efforts (like medical care use).
• Health is a stock of human capital, which lasts for more than one period, but depreciates
over time
• Health is both a consumption good (providing direct utility→feeling better, do more)
and an investment good (a human capital stock, providing healthy time → Obtaining
earnings, studying)
Other thing that are important in the Grossman model is that the production of health exhibits
diminishing marginal returns to scale. In this course we will only get a graphical interpretation
(four-quadrant model). This model can help to explain the effect of education, income etc. A
two-person example will be used (health inequality=income-related health inequality).
• Quadrant 1: Concave production of health
(H) with medical care (M)
• Quadrant 2: Demand for health (H) vs
other consumption (C) determined by
preferences embodied in utility curve U
(H, C)
• Quadrant 3: (Redundant, 45 degrees line)
• Quadrant 4: Income available for medical
care (M) and other consumption (C)
defines budget constraint BCA0
Maximization of utility (U), given income (BC),
and production possibilities defines optimum HA0.
How to choose optimal health, given budget
constraint?
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,For every level of income, you can look at how much health can be bought through health care
units.
The indifference curve is concave to the origin. The
further the curve is from the origin, the higher the
level of satisfaction that the consumer can achieve.
The budget constraint can be read in different ways.
Left is the maximum health achievable by this
consumer. All the other combinations follow this
concave shape, because to the right you have the
maximum if you spend everything on other
consumption. At the point where the production
possibility frontier is tangent to the indifference curve
is the optimum.
Maximize U(H,C)
subject to: PMM + PCC = IH = h(M,C)
• Concavity of health production implies that:
• Marginal health product of M is positive (dh/dM > 0) but decreasing in M (d2h/dM2 < 0)
• And translates into a concave production possibilities frontier T(H,C)
• Gives optimal solution (M0, H0, C0) where possibilities frontier is tangential to highest
indifference curve
Lecture 2B
Modeling means simplifying reality:
Assume two individuals, A (poor) and B (rich)
• Higher budget of B enables her to reach higher
‘optimum’ U(H0,C0)
• Absolute income inequality: BCB0 – BCA0
• Relative income inequality: BCB0 / BCA0
Assuming same production technology and preferences,
this translates into B being healthier (demanding better
health) than A and:
• Absolute health inequality: HB0 – HA0
• Relative health inequality: HB0 / HA0
The figure shows different budget constraints (poor=a; rich=b). We can read of through
connecting the dots via the 45-degree line and HPF what the PPFS is in the top right quadrant.
Given that B has greater possibilities, he will also be inclined to choose a higher optimum.
So, what is the effect of income inequality on health inequality?
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,If all else remains equal (including average income), then
rising income inequality will increase health inequality
(and vice versa). In figure 5 you see that eliminating
income inequality (e.g. through redistribution from rich
person C to poor person A) eliminates health inequality
(both are B) (both go to equal budget line BCB0.
In this figure there are three budget constraints. Both
person A & B shift towards income B. In the original
situation A & B will choose different combinations but
when their HPF and preferences are the same they will
move to the same tangent point. Now there won’t be
health inequality anymore.
So, what is the effect of rising average income growth on health inequality?
If all else equal (including relative income inequality),
then effect of (even an equiproportionate) income
growth on health inequality is unpredictable (e.g. both
budgets double, BCA0 goes to BCB0, and BCB0 goes to
BCC0). In figure 6 you see that relative health inequality
has fallen here (HC0/HB0 is smaller than HB0/HA0). But
it could have been different, depending on position and
slope of HPF (and indifference curve)
Figure 6: Both the poor and rich person experience an
equiproportionate growth. In this case the budget
doubles. There will be a shift on the HPF (even with
diminishing returns), and there will be an outward shift
of the PPF (A&B). What happens to relative and
absolute health inequality is dependent on one other thing. This is the income elasticity of
health (change health/change income).
Lecture 2C
Emperical evidence shows that income growths can result
in rising health inequality (more elastic), the same health
inequality (stays constant) and lower health inequality
(reducing elasticity) depending on what happens to the
income elasticity when income rises.
Figure 7 shows that the health income relationship that
emerges if we trace how (demanded) health varies with
income in the NW quadrant 4. In the example this
relationship is concave, indicating that equal income
increments result in ever lower health increments (dh/dy
falls with rising income.
But concavity doesn’t imply anything yet about change in income elasticity. The elasticity also
depends on the ratio of income over health. So, we cannot predict what this means for the
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, change in income elasticity with rising income. This
also depends on what happens with the ratio y/h.
What we want to talk about is the income/health
relationship but that is not immediately visible. That
is achievable by looking at health when all money is
spend on consumption. Then you can see the health
level that the individual could possibly achieve. Now
the Preston curve emerges. The upper concave curve
shows consumption/health and the lower concave
curve shows health/income.
But what if not all else is equal?
Now predictions will become more difficult, but we now some things:
• Income increases tend to lead to productivity increases in health technology (Cutler,
2006)
• This means an upward shift in production function (remember the Preston curves)
→ With the same investment, higher health can be achieved
• In practice, it then becomes extremely difficult to separate effects of income and
technology growth
• So, if technology changes with economic growth, health inequality could fall with
rising income even when income elasticity increases with income! (i.e. unlike what
C&F have predicted)
• Therefore: empirical tests should aim to control for technology changes!
So, what is the effect of subsidizing health care on health
inequality?
E.g. if insurance pays x% of total costs. This reduces the
price of medical care and therefore causes a rotation of the
budget constraint (fig. 8). Both optimal health levels (rich
and poor) will increase, but because the increment for the
poor is greater than for the rich, we get an inequality
reduction (HB1/HA1 < HB0/HA0). This is a consequence of
diminishing returns to scale in health production. Health
care subsidization this likely to lead to narrowing of health
inequalities.
Both the poor and rich person could possibly buy twice as
much medical care. Also, both the purple and red dot
increase in the new situation. But the difference for the rich person is less, because of
diminishing scale of returns.
Quiz question: ‘’How can this model help us to understand why better educated
individuals ‘demand’ better health than lower educated?’’
People with higher education will, on average, have better knowledge of health benefits of
medical care. As a result, they will have higher health production functions of medical care.
Same medical care leads (on average) to higher health or they can achieve the same health with
lower medical care input. This leads to an outward shift of the PPF and, ceteris paribus, higher
optimal health level. Hence, health inequalities by education level are to be expected.
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