Summary of ‘’Economic of Health and Health
Care’’ (2020-2021)
Health Economic, Policy and Law (HEPL)& European Health Economics and Management (EU -HEM)
Table of Contents
Lecture 1: Production of health ............................................................................................................... 2
Lecture 2: Demand for health.................................................................................................................. 3
Lecture 3: The distribution of health ........................................................................................................ 5
Lecture 4: Health and health care spending: International evidence ........................................................ 7
Lecture 6: Equity in health care financing .............................................................................................. 10
Lecture 7: Financial protection and universal health coverage in low/middle-income counties............... 13
Lecture 8: Equity in health care delivery ................................................................................................ 14
Lecture 9: Explaining health inequalities ............................................................................................... 17
Lecture 10&11: Relative efficiency measures ......................................................................................... 22
Exercise lecture 1 .................................................................................................................................. 26
Question 1 ..................................................................................................................................................... 26
Question 2 ..................................................................................................................................................... 27
Question 3 ..................................................................................................................................................... 28
Exercise lecture 2 .................................................................................................................................. 30
Question 1 ..................................................................................................................................................... 30
Question 2 ..................................................................................................................................................... 31
Question 3 ..................................................................................................................................................... 32
Exercise lecture 3 .................................................................................................................................. 33
Question 1 ..................................................................................................................................................... 33
Question 2 ..................................................................................................................................................... 34
Question 3 ..................................................................................................................................................... 36
1
,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).
The relationship between income and health
Income and health are strongly related on macro-level. This is measured mostly by
using GDP/capita (income) and child-survival (health) as determinants. There is a
positive relation between these two, except in Africa where income doesn’t grow
and child survival decreases. Difficulties in measuring the two are caused by
struggles in how to measure population’s health, only being able to measure
marginal contribution and the presence of reverse causality and confounding. So,
there is difference in the relationship between income and health across countries,
namely between rich and poor countries.
Income generates health through being able to purchase health-enhancing (or decreasing) goods, so the relationship
is not direct. The Preston curve on the right shows a concave relationship, which would simply mean that income is
the best medicine. But this is not the case because causality between the two is not that clear. The curve moves
upwards over time, so even countries that don’t gain income gain health. The curve can be drawn with a lot of right-
hand side variables, like education, schooling, etc.
But if not income, what can explain health variation at high income levels?
Within rich countries one can argue that there is a flat-of-the-curve and the
maximum health is reached. But Wilkinson argues that more health can be
reached by (re)distributing incomes. So, not higher income but reducing income
inequality can improve health. At higher incomes there are diminishing returns
to income. When redistributing income from the rich to the poor, the mean
income will stay the same while overall health rises.
Moreover, a study by Mackenbach et al. (2017) showed that when you shift the
focus on mortality towards amenable (avoidable) mortality, there is a negative
relationship between health expenditures and non-amenable mortality.
Therefore, higher health expenditures are associated to reducing amenable
(should not occur when timely and effective care is applied) mortality. But no
causal interpretation can be made.
Cutler, Deaton et al. (2006) agree that there is a strong association between income and health, both within and
between countries. But income growth is neither a necessary nor sufficient condition for health improvement
(wealthier is not always healthier). The key lies with knowledge, technology and science, whereby knowledge may
even close the gap.
Health production function
The population’s health is measured by more than just health care
consumption. E.g. lifestyle, schooling and consuming other products
count as well. Here you see the diminishing returns of health when
you compare between people with good health (mostly high-income)
and people with bad health (mostly low-income).
2
,Lecture 2: 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.
Grossman four quadrant model
Grossman made four observations. Consumers want both health and other
consumptions (not only healthcare). While health cannot be purchased directly, health
care can and is useable in producing health. Health is a stock in human capital that
depreciates over time. Finally, health is both a consumption (direct improvement) as
investment good (healthy time).
• Q1: Concave production of health (H) with medical care (C)
• Q2: Demand for health (H) vs. other consumption (C) determined by
preferences embodied in the utility curve
• Q3: Redundant (45-degree line)
• Q4: Income available for medical care (M) and other consumption (C). It
defines BCao
At the point where the PPF is tangent to the highest indifference curve, the
maximum utility is reached. This is because the concavity of the HPF implies that
marginal health is positive but decreasing and translates into a concave PPF.
• Indifference curve: The indifference curve, measured by utility, is concave
to the origin. This means that the further it is from the origin; the higher
satisfaction can be reached.
• Budget constraint: On the left there is the maximum achievable health for
this consumer, while on the right you have the maximum when you spend
everything on other goods.
The effect of rising budget (income) on health
Ceteris paribus, a rising income will increase health inequality (and vice versa). Figure 5 shows how to eliminate income
inequality through the redistribution of income also eliminated health inequality. Here, both person A and C shift
towards budget constraint B. Figure 7 shows an equiproportionate growth in average income What happens is mainly
influenced by the income elasticity of health. If it gets more elastic, it will rise health inequality and when its less it will
lower health inequality. The line shows the health income relationship (Preston curve). The optimal demand of health
is drawn further until the max. consumption for each income is reached. Then black Preston curve can be drawn. The
dots shows the demand for health.
3
,Technological advantages or subsidizing
It is important to aim for control of technological changes. Income increases tend to
lead to productivity increases in health technology. Therefore, the HPF will shift
upwards and with the same investment more health can be reached. In practice it will
become very difficult to separate effects of income and technology growth.
Subsidizing healthcare will cause a rotation in the budget constraint, because more
health can be bought with less budget. Both optimal health levels will increase, but
because the increment of the poor is higher than the rich (diminishing scale of
returns), health inequality is reduced.
The effect of higher education on healthcare demand
The effect of higher education will have an effect on the height of the HPF. Now, through more knowledge the same
health benefits of care can be reached by using less care or more benefits can be reached by using less care. This leads
to an outward shift of the PPF and higher optimal health levels.
Swimming against the tide
Wagstaff argues that economic growth only makes health inequality worse by studying malnutrition in countries like
Bolivia and Brazil. All of these countries show inequality growths which is associated to economic growth. And the
distribution of technology adoption is mostly more focussed among the rich, which again increases inequality (e.g.
reductions in smoking are more prevalent among higher SES). But luckily economic growth does increase average
health.
Reaching millennium development goals (MDGs)
Data was recovered over a 20-year period across 64 countries considering 5 health
indicators and 7 intervention indicators relating to 4 MDGs. The mean progress of
the poor (40%) and rich (60%) were examined by mean and mean progress. To
determine rich and poor, households were compared by indicators of
housing/sanitary and not income. Now relative and absolute inequality changes can
be determined. A positive index means that X is more concentrated among the rich.
On the intervention indicators a lot of the poor countries have improved faster than
the rich, while on the outcome measures in 50% of the countries relative inequality
has grown. So, the poor have not been left behind in the access to services, but
probably still don’t have access to the same quality of services.
To determine differences between rich and poor, concentration indices are used. The orange line determines relative
health inequality, ranked by households and health status. The green line shows the absolute concentration index.
Pro-poor inequality: When the X is more concentrated among the poor (negative C.I.). This is the case in the outcome
measure. In 60% of the countries you see a pro-poor inequality rise, which has a negative impact on inequality.
Pro-rich inequality: When the X is more concentrated among the rich (positive C.I.) You see pro-rich inequality
dropping at the intervention measure.
Concluding
• Demand for health model provides an ‘economic’ theory of ‘’rational’’ health behaviour
• Four quadrant diagram useful for graphical understanding of the ‘’mechanics’’ of the demand for health model
• Economic growth may mean ‘swimming against the tide’ of it induces higher health inequality
• Crucial role of income elasticity of health and rate of technology adoption
• Growth in health levels at the ‘’cost’’ of greater relative inequality may call for trade-off type measures of
‘’health achievement’’
4
, Lecture 3: The distribution of health
Students should be able to understand, assess and use
• The basics of a welfare analysis of the equity-efficiency trade-off;
• Approaches to intergenerational equity, including the fair innings approach;
• Empirical operationalizations using measures of inequality in quality-adjusted survival.
Equity and efficiency
Efficiency is not the only concern of economists, but also equity. Can it be ethical or not to use the most efficient
distribution of care? Do you want to maximize health or social welfare?
The health possibility frontier
The HPF depends on the resources and budget available to society, but also the capacities the benefit from health and
opportunity cost of providing health. The concavity of the HPF is due to the diminishing returns to scale of health,
which is true for both individual A & B (but not symmetrical). But person A can reach more health with the same costs
or the same health with less costs. This difference also creates the asymmetrical shape of the HPPF. The slope of the
HPPF determines the marginal costs of a QALY for A in terms of QALYs lost to B.
Social welfare function
The social welfare function (SWF) is very similar to an indifference curve and
shows preferences of the population considering equity. The 45-degree line
shows perfect equality. Different points in the figure show different goals:
P (maximum health): The highest attainable total health of the society. This is
where the slope is -1 and meets the HPPF. On this point the marginal health of A
and B are the same. But healthcare maximization is unconcerned with the
interpersonal distribution.
Q (equal health): The highest attainable combination of equal health, which
comes at a loss of total reached health.
S (welfare maximization): To reach this point of equality, the society is willing to
offer a certain amount of total health. So, which losses in health are acceptable in
return for more equality.
1-t 1-t
Social welfare curve: W (social welfare)= (t - 1) [(a hA ) + (b hB ) ], t ¹ 1 .
-1
Equity principles and social welfare
α and β: welfare weights. When these are equal, the line will be a straight -1 slope. ¡ If τ=0 and α=β=1, then W = HA +HB (i.e.health
maximization)
τ = the inequality aversion parameter. When this parameter is higher, the curve ¡ If τ=0 and α≠β, then W = α HA + β HB (i.e. weighted
health maximization, but no inequality aversion)
increases and aversion against inequality lowers. Straighter SWF show more aversion ¡ Rawlsian maximin SWF implies extreme inequality
aversion (τ —> ∞)
against inequality. Most commonly, T>0 and the line is convex to the origin. ¡ Only if τ>0 , some degree of inequality aversion and
SWF contours convex to the origin
Welfare (or ‘healthfare’) maximization provides a way
to estimate which health losses can be acceptable in
Fair innings approach (Williams, 1997) return for equ(al)ity gains (in resource allocation).
To be estimated: society’s degree of inequality
Williams on fair innings: ‘’Everybody is entitled to fair innings, i.e. a fair chance to live aversion
a normal span of life’’. Four characteristics of this are equity notions: 11
• Outcome-based
5
