After hearing about India’s New Health Insurance Program, I thought it is good idea to share about Health Economics, so here I am
Health economics is a branch of economicsconcerned with issues related to efficiency, effectiveness, value and behavior in the production and consumption of health and healthcare.
Alan William Plumbing Diagram about Health Economics
I am using Alan Williams “Plumbing Diagram” to comprehensively understand Healthcare Economics. He has divided scope of healthcare economics into eight distinct topics (explained in the documents) which are:
There are interlinkages between each topic, which make it possible to see Health Economics as an integrated whole – more than an Ad-hoc assemblage of topics. According to understanding – The first five boxes (A) Health and its values, (B) Influencers to health, (C) Demand for healthcare, (D) Supply of healthcare and (E) Market equilibrium factors are the analytical“Engine”of health economics.
The remaining three (F) Microeconomic evaluations, (G) Planning, budgeting and monitoring and (H) Evaluation of system are main area ofApplied Economics.
Let us understand each topic and its relationships:
Health can be defined as physical, mental, and social wellbeing, and as a resource for living a full life. It refers not only to the absence of disease, but the ability to recover and bounce back from illness and other problems.
Health generally evaluated through its value and perceived attributes, which are like:
1. Productivity of individual healthy days
2. Value of life
3. Expenses caused by diseases and etc.
Health can be treated both as consumption and an investment good, Consumption: health makes people feel better, Investment: it increases the number of healthy days to work and to earn income.
Health does have characteristics that more conventional goods have; it can be manufactured; it is wanted and people are willing to pay for improvements in it; and it is scarce relative to people’s wants for it. It is less tangible than most other goods, cannot be traded and cannot be passed from one person to another, although obviously some diseases can.
According to WHO, many factors combine together to affect the health of individuals and communities. The few factors which affect health include:
1. Income and social status – higher income and social status are linked to better health. The greater the gap between the richest and poorest people, the greater the differences in health.
2. Education – low education levels are linked with poor health, more stress and lower self-confidence.
3. Physical environment – safe water and clean air, healthy workplaces, safe houses, communities and roads all contribute to good health. Employment and working conditions – people in employment are healthier, particularly those who have more control over their working conditions
4. Social support networks – greater support from families, friends and communities is linked to better health. Culture – customs and traditions, and the beliefs of the family and community all affect health.
5. Genetics – inheritance plays a part in determining lifespan, healthiness and the likelihood of developing certain illnesses. Personal behavior and coping skills – balanced eating, keeping active, smoking, drinking, and how we deal with life’s stresses and challenges all affect health.
6. Health services – access and use of services that prevent and treat disease influences health
7. Gender – men and women suffer from different types of diseases at different ages.
There are evidences available of other examples which has been documented which are like: Transport, Food and Agriculture, Housing, Waste, Energy, Industry, Urbanization, Water, Radiation, Nutrition etc.
Health demand is to achieve larger stock of Health Capital (healthy days). It is not passively purchased from market; it is produce in combining time with purchased medical inputs. Both value of Health and its influencers affect the demand.
The demand for health is unlike most other goods because individuals allocate resources in order to both consume and produce health. There are four roles of person in health economics:
In the context of ordinary goods and services, economics distinguishes between a want, which is the desire to consume something, and effective demand, which is a want backed up by the willingness and ability to pay for it. It is effective demand that is the determinant of resource allocation in a market, rather than wants. But in the context of health care, the issue is more complicated than this, because many people believe that what matters in health care is neither wants nor demands, but needs. Health economists generally interpret a health care need as the capacity to benefit from it, thereby relating needs for health care to a need for health improvements.
Not all wants are needs and vice versa. For example, a person may want nutrition supplements, even though these will not produce any health improvements for them; or they may not want a visit to the dentist even if it would improve their oral health.
Healthcare has its peculiarity that may mean, it is not considered as any good or service where demand can be analyzed, however that the usual assumptions about the resource allocation effects of markets do not hold meaning for healthcare. Moreover, it may well be that people wish resource allocation to be based on the demand for health or the need for health care, neither of which can be provided in a conventional market.
Supply is to achieve and fulfill the demand of health. The supply side of the market is analyzed in economics in two separate but related ways. One is related to theResource inputandGoods outputmodel, looking at how resource use, costs and outputs are related to each other within a system.
Important influencing factors to supply are as follows:
1. Cost of production of service
2. Alternatives of services
3. Substitutes of inputs
4. Remuneration and incentives
5. Medical equipment and pharmaceutical markets
Other way in which supply is analyzed is Market structure – how many firms are there supplying to a market and how do they behave with respect to setting prices and output and making profits. These generally managed through market equilibrium
E. Market equilibrium
State where economic forces like demand and supply balanced. For healthcare many believes, it is imperfectly competitive market (Nash Equilibrium) where there is strategic interdependence between two firms. The Nash equilibrium occurs when both firms are producing the outputs which maximize their own profit given the output of the other firm. The other side believes it is competitive market. Market equilibrium factors are as follows:
1. Money (payer), investment etc.
2. Price mechanism
3. Time price factors
4. Waiting list
F. Micro-economics evaluation
In simple words it is decision making related to allocation of resources. Major goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. It also analyzes market failure, where markets fail to produce efficientresults. Few topics which would play important role in micro economics evaluation are:
1. Cost effectiveness and cost benefit analysis of alternative treatment
2. Cost utility analysis
3. Opportunity costing
4. Allocation based on phases of disease (Detection, diagnosing, treatment and after care)
5. Market structure
Healthcare market typically which are analyzed are:
1. Healthcare financing market
2. Physician and Nurse services market
3. Institutional service market
4. Input factors market
5. Professional education market
G. Planning, Budgeting and Monitoring
Optimizing the system through effective instruments and tools, few are as follow:
2. Manpower allocation
3. Regulation and norms
4. Incentives structure
H. Evaluation of system
It is to bring efficiency and equity to the system to bear on (E) Market equilibrium and (F) Micro economic factors through inter regional comparison, international comparison and benchmarking.
Efficiency – the allocation of scarce resources that maximizes the achievement of aims by Knapp.
Equity is always an important criterion for allocation of resources. However, it is observable that people attach more importance to equity in health and health care than they do to many other goods and services. It is important to distinguish equity from equality. Equity means fairness; in the health care context this means a fair distribution of health and health care between people and fairness in the burden of financing health care. Equality means an equal distribution, but it may not always be fair to be equal.
Health economics has number of methodological limitations but it can offer us useful concepts and principles which help us think more clearly about the implications of resource decisions. An understanding of some basic economic principles is essential for all practitioners not only to understand the useful concepts the discipline can offer but to appreciate its limitations and shortcomings.
Wish to hear more from my connections on this…
The article was first published on Dr. Karan Sharma’s LinkedIn pulse page here, its been re-published here with the Author’s permission.
Healthcare Strategy and Customer Experience Manager, Technology Enthusiast, Innovator and Healthcare Business Leader.
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He is a clinician and healthcare management professional, worked in India, Middle East and Maldives.