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HEALTH ECONOMICS
Prabesh Ghimire
HEALTH ECONOMICS BPH/MPH
Table of Contents
Economics
Economics is a broad term referring to the scientific study of human action, particularly as it relates to
human choice and the utilization of scarce resources. It deals with the production, distribution, and
consumption of goods and services, or the material welfare of humankind.
Health Economics
Health economics can be defined broadly as the application of the theories, concepts and techniques of
economics to the health sector. It is thus concerned with such matters as:
the allocation of resources between various health-promoting activities
the quantity of resources used in health delivery
the organization and funding of health institutions
the efficiency with which resources are allocated and used for health purposes
the effects of preventive, curative and rehabilitative health services on individuals and society
Role of Health Economics and Health Financing in Health Planning and Management
Health planning is basically about choice: choice between one future and another; choice between
various ways of achieving that future. Health economics is also interested in choice, so there is an
obvious affinity between health economics and health planning.
Economic considerations play a key role in all aspects of life including health. In addition, the nature and
level of a country's economic development is a major determinant of the health status of its inhabitants
and is associated with the level of health service and health-related activities a country can support.
Health policy and its implementation are thus strongly influenced by macro-economic considerations.
The table below attempts to elaborate the connection between economics and health planning in the
following manner:
Issues relevant to planners Key Questions of health planning and Role of health economics
and manager management that is addressed by health
economics
Organizational behavior 1. Who makes the resource allocation - Notions of efficiency and
e.g. How can managers and decisions to and within the health sector, and the role inducements
health workers be what are their objectives? (rewards and penalties)
encouraged to increase their 2. What types of cost controls or incentives
efficiency? (monetary or otherwise) can be introduced to
encourage efficient behavior?
Project Evaluation 1. Does the service do any good or have any - Micro-economic
e.g. Which health programs discernible effect on health? evaluation: cost benefit
or services should receive 2. What are the relative efficiencies (merits and cost-effectiveness
analyses.
highest priority when and demerits) of alternative health activities?
allocating new funds? 3. What are the distributional (who incurs the
cost, who receives the benefits?)
Health policy, equity and 1. How best can the resources be matched - Develop optimum
social justice to the population's needs, mortality and welfare criteria and the
e.g. Does the operation of morbidity patterns, demands and utilization? concept of the social
welfare function
the health sector reflect the 2. What impact do different health care
- - Identify effect of
government's objectives e.g. systems have upon access, take-up and socioeconomic
for equity benefits received by target groups in the variables and physical
population? access on utilization
3. What are the financial barriers, if any, to patterns
the provision of an equitable (fair) health
service
Health Economics can be better understood by examining the two basic theories underlying the science
of economics: microeconomics and macroeconomics.
i. Micro-economic theory
- Microeconomic theory is concerned with supply and demand. This theory is utilized to understand the
intricate relationship between health inputs and health outputs.
- It is useful for understanding price determination, resource allocation, consumer income, and
spending distribution at the level of individuals and organizations.
- Micro-economic theory covers economic concepts that look at issues on a smaller scale such as
health care market and allocation of resources within it.
- Micro-economic theory comes into play when health care competition increases, because the
success of supply and demand concept depends upon a competitive market.
- Issues such as cost containment, competition between providers, accessibility of services, quality and
st
need for accountability continue as target of major concern in the 21 century.
General Market
The term market refers to a situation where buyers (consumers) and sellers (producers) interact directly
or through intermediaries to trade goods and services. It is a situation where forces of demand and supply
interact to determine prices of goods and services being exchanged.
- The structure of the market in which the firm is operating has a significant effect on efficiency.
- A general market structure is defined by the following characteristics
Number and size of the firms in the market
The ease with which firms may enter and exit the market
The degree to which firms’ products and services are differentiated
The degree of information available to both buyers and sellers regarding prices and product
characteristics
- The characteristics of market structure determine the nature of competition which ranges from perfect
competition to a pure monopoly. Between these extremes there are many structures such as
monopolistic competition and oligopoly.
Demand
- In economics, the term demand refers to effective demand backed up by purchasing power.
- Demand refers to the quantities or amount of well-defined commodity that consumers are willing and
able to purchase at each possible price.
- The demand for any products or services by an individual consumer (household) is influenced by
various factors:
Price of the commodity
The income (wealth) of the consumer
The price of other (related) commodity
Law of Demand
- The law of demand states that the quantity demanded varies
inversely with price of the commodity, other things remaining
constant.
- This means that as the price of a commodity falls (rises), people
will be willing purchase and able to pay more (less) for the
commodity.
- The law of demand applies to health care as in other markets: as
the price of health care increases, people demand less of it.
Supply
- Supply is one of the forces that determine the price in the market.
- Supply refers to the quantity of a commodity which a seller is willing and able to sell at a given price in
a market at a given time.
Determinants of supply
Supply of a commodity is determined by number of factors:
- The price of goods or service
- The price of related goods or services
- Price of factors of production
- Technology and productivity of resources
- Expectation of producers
- The number of producers
- Taxation
Law of Supply
- The law of supply gives the relation between price and quantity supplied.
- The law of supply states that other factors remaining constant, as the price of a good or service rises,
the quantity supplied also raises i.e there is a direct relationship between price and quantity supplied.
Market Equilibrium
Elasticity of Demand
- The elasticity of demand is a measure of the responsiveness of product demand to changes in one of
its determinants.
- Elasticity measures are particularly useful because they focus on the relative magnitude of changes
rather than absolute.
- The demand determinants for which elasticity measures are typically computed are the price of good
or service, the income of the consumer, and the price of related goods or services.
- In this context, there are three types of elasticity of demand:
i. Price Elasticity of Demand
ii. Income Elasticity of Demand
iii. Cross-Elasticity of Demand
- A higher price elasticity of demand shows that consumers are price sensitive.
Elasticity of Supply
- The responsiveness of supply to changes in price of the service is given by the elasticity of supply.
- Like the elasticity of demand, supply is considered as elastic when coefficient of elasticity is greater
than 1 and inelastic when coefficient of elasticity is less than 1.
- For example, supply of hospitals may be regarded as relatively inelastic. In contrast, a relatively small
increase in wages may induce a relatively large increase in home care workers, making their supply
curve relatively elastic.
The health markets in Nepal are competitive, and in this unregulated, fee-for-service payment system,
providers are able to maximize profits by increasing volume, through the use of high technology, and by
intensive resource use, increasing the overall cost of care. This demands designing alternative system of
financing health care with incentives to contain costs.
There are basically three models of alternative financing that encourages more accountability,
sustainability, better efficiency and reduced cost:
i. Community based health insurance schemes (CHIS)/ Micro-insurance
- Typically, in such model, the community manages the setting and collection of premiums, the
contents of the benefit package, criteria for copayments and exemptions, and finally the choice of
providers.
- Two types of CBHI schemes existed in Nepal
o Government (public) schemes- initiated and financially & technically supported by government
o Private schemes- Supported by NGOs or based within cooperatives
- A pilot program for government supported community based health insurance scheme was
introduced in Nepal in 2003 from two districts. Four districts were added in 2005.
- The benefit packages of these schemes include consultation fees, diagnostic services, inpatient care
and the cost of medicines available at the health care facilities involved.
- After the introduction of free health care program, government supported CBHI schemes adapted by
expanding their benefit package beyond what is covered by free health care program.
- However, the population coverage of these schemes remained low and had small risk pools and
limited cross-subsidies.
Social health insurance (SHI) is one of the alternative financing mechanisms for raising and pooling funds
to finance health services. The ultimate objective of SHI is universal health coverage and secured access
to adequate health care for all at an affordable price.
- A social health insurance scheme ensures financing mainly through formal sector i.e. employee and
employer payroll contributions.
Disadvantages
- Special mechanisms may be needed to cover the poor who are unable to pay contributions.
- It may require and administrative effort to register members in the informal sector and to collect
contributions from them.
- National health insurance program (NHIP) is a social protection program of the Government of Nepal
that aims to enable its citizens to access quality health care services without placing a financial
burden on them.
- It is a family-based health insurance scheme.
Implementation Modality
The modalities of Social Health Insurance Program in Nepal are discussed under different headings:
i. Benefit Package
- The benefit package includes selected drugs and health services for the members at health facilities
under NHIP.
- These include emergency services, out-patient services, selected in-patient services, selected
diagnostic services and selected drugs, in addition to any free services and drugs available at public
and contracted private health facilities.
- The maximum ceiling of benefit available to enrolled members is based on the size of the family.
Each additional member of the NPR 425 per additional NPR 10,000 per additional
family members member but a maximum
ceiling of 100,000 per family
- UHC is firmly based on the WHO constitution of 1948 declaring health a fundamental human right
and on the Health for All agenda set by the Alma Ata declaration in 1978.
- UHC cuts across all of the health-related Sustainable Development Goals (SDGs) and brings hope of
better health and protection for the world’s poorest.
Economic evaluation is a comparative analysis of alternative courses of action in terms of both their costs
and consequences.
According to Drummond et al. (2005), two features characterize economic evaluation:
- It is a comparative analysis (i.e. it compares two or more different options), and
- It compares these options in terms of their costs and their consequences.
- Cost-effectiveness analysis is a type of economic evaluation that examines both the costs and health
consequences for the alternative courses of action.
- The cost effectiveness analysis compares the cost (in monetary units) of an intervention to its
effectiveness as measured in natural health units (e.g. years of life saved, cases prevented, etc.)
- Cost-effectiveness analysis is used when competing alternatives produce a common health
consequence (similar outcome unit).
- Cost-effectiveness analysis is typically expressed as a ratio of costs divided by health outcomes. The
cost-effectiveness ratio of one intervention can then be compared with that of another.
- Cost effectiveness ratios typically come in the form of average cost-effectiveness ratios (ACERs) or
incremental cost-effectiveness ratios (ICERs).
- When two interventions are independent (e.g. ARI and diarrhoea treatment), then average cost-
effectiveness ratios are calculated separately for each of interventions and one with lower ACER is
given higher priority
- For example: If ACER of ARI treatment is lower than ACER of diarrhoea treatment, ARI treatment
intervention is given a priority given.
- When two interventions are mutually exclusive (e.g. two types of diagnostic testing for malaria), then
incremental cost effective ratio is calculated.
- We order the given programs according to their effectiveness and calculate ICER.
Interventions Cost (C) Effectiveness (E) Change in Change in ICER
cost (C) E ( (C
C 500 0.1 500 0.1 5000
B 2,000 0.2 1500 0.1 15000
A 9,000 0.3 7000 0.1 70000
D 10,000 0.4 1000 0.1 10000
- Here, since A is dominated alternative (because ICER decreased for next intervention D). Therefore
intervention A is eliminated and ICER is recalculated.
Interventions Cost (C) Effectiveness (E) Change in Change in ICER
cost (C) E ( (C
C 500 0.1 500 0.1 5000
B 2,000 0.2 1500 0.1 15000
D 10,000 0.4 8000 0.2 40000
- Cost-utility analysis is a form of economic evaluation that measures the effect of an intervention on
both morbidity and mortality.
- By using a utility based outcome unit, such as QALY, to measure outcomes, cost-utlility analysis is
able to compare alternative health interventions that have completely different type of outcomes.
- The interventions are selected in the order of lowest ratio (best intervention) to highest ratio until the
budget is expended.
- The lower the incremental ration for an intervention, the higher priority should be in terms of
maximizing health benefits.
Benefits: CUA can address both productive efficiency and allocative efficiency
Limitations: QALYs do not capture differences in the process characteristics of interventions (such as
respect, autonomy, provision of information, etc.)
QALY example
- A person who gets some disability at the age of 10, lives with condition for 35 years and suffers
premature death at the age of 45. If the life expectancy is 60 years and the health related quality of
life weight associated with the condition is 0.75, then the undiscounted QALY of this person is
Cost-Benefit Analysis
Cost benefit analysis (CBA) is a method of economic evaluation where the monetary value of the
resources consumed by a health intervention (costs) is compared with the monetary value of the
outcomes (benefits) achieved by the intervention.
- In many aspects, CBA is broader in scope than CEA/CUA.
- Cost benefit analysis is appropriate when a decision maker wants to know if a single intervention
policy or a number of intervention policies are worth investing. (Are benefits greater than costs?)
- In the cost-benefit analysis, both the cost and consequences of healthcare programs are measured in
monetary units.
- Benefits include the total benefits the population receives in all sphere of their welfare. It includes
o Benefits in terms of improvement in Length of life
o Benefits in terms of improvement in morbidity condition (Quality)
o Benefit in terms of resource saved due to improvement in health condition
Disadvantages
- This technique is open to bias because respondents can find the hypothetical situation difficult to
understand.
- WTP tends to be positively related to the income of respondent.
- Estimates are based on what people say they would do and not what they actually do.
- The people who respond may not be representative (often better educated people tend to
participate).
Equity
- Equity is a policy objective which seeks to establish fairness in the allocation of resources.
- Equity in health implies that ideally everyone should have a fair opportunity to attain their full health
potential and, more pragmatically that no one should be disadvantaged from achieveing this potential.
- Efficiency is a general term used to describe the relationship between inputs and outputs; which in
turn can be valued respectively in terms of costs and benefits.
- Efficiency is concerned with maximizing benefits with the resources available, or minimizing costs for
a given level of benefit. In health care, benefits may be interpreted as health gains.
The total health expenditure in Nepal is funded from three major sources:
i. General Government
- Most general government health expenditures are principally undertaken by the central government
and funded mainly through general taxation.
- Government is the primary and stable source of financing for health budget contributing to almost
76% of total health budget.
- The general government expenditure represents about 40% of total health expenditure.
- However, donor support contributes to only about 5-7% of total health sector expenditure (as per
2008-2010 data).
A national level budget preparation process (as presented in the Budget Formulation Directive) is:
1. Medium Term Fiscal Forecasts
- Ministry of Finance (MoF), National Planning Commission (NPC), Central Bank and Line Ministries
prepare expenditure forecasts (aggregate budget envelop) – based on the macro economic situation,
past budget expenditure, the performance of line ministries and government development policies
and priorities.
- MoF and NPC presents first draft of sector wise ceilings to ‘Resource Committee’ (includes NPC,
MoF, Central Bank, FCGO and chaired by the Vice-Chairman of the NPC)
- Budget Presentation:
- Finance Minister presents a budget speech.
- Parliament appropriates the budget.
Accounting Process
- National Health Accounts is a tool specifically designed to inform the policy process, including policy
design and implementation, policy dialogue, and the monitoring and evaluation of health care
interventions.
- It was initiated in 2000 AD under Nepal Health Sector Support Program (NHSSP) of MOH with the
support of GIZ.
- Health Economic and Financing Unit (HEFU) of the MOHP is a designated focal point for the National
Health Account process and responsible for the production of the report.
- Three rounds of National Health Account reports have been produced to date.
Benefits of National Health Accounts (NHA)
- NHA can also be used to determine the level of catastrophic spending, the mix of public-private
health care services provided, the impact of health financing reforms, and even health outcomes.
- NHA can provide decision makers with systematic information on health spending for policy making
and monitoring purposes.
- If maintained properly, NHA can produce an internationally comparable data set on health
expenditure.
- NHA can track health expenditure trends, an essential element in heath care monitoring and
evaluation.
- NHA can be used to answer many essential questions, including:
how much money is spent on health?
what is the financial burden on private households in the form of out-of-pocket expenditure?
what kind of services are being purchased?
Challenges
- The necessary data for NHA is data is generated through various surveys (e.g. health facility costing
survey, household survey). Therefore the process is very costly.
- In every rounds of survey, a new database is created making it impossible to show trends.
- HEFU of MOH has been unable to retain skilled staff, which has led to the loss of institutional
memory, affecting the quality and timely production of NHA data.