“Economic Models”

1. “Economic Models” Steve Morris Professor of Health Economics UCL Epidemiology and Public Health “The Future of Healthcare in Europe”, 13 May 2011

2. Life, death and big business: why health economics is important

3. Health care sector of the economy is very large • Total expenditure on health as % GDP • Size of health workforce • Household out of pocket expenditures on health

4. Total expenditure on health as % GDP, 2008(WHO Health Statistics, 2010)

5. Total expenditure on health as % GDP, 2008(WHO Health Statistics, 2010)

6. Size of health workforce, 2008(WHO Health Statistics, 2010)

7. Household out of pocket expenditures on health, 2008(OECD Health Data, 2010)

8. Health and health care are affected by the economic environment and economic constraints • Decisions about how health care is funded, provided and distributed are strongly influenced by the economic environment and economic constraints • Global, national and local policy responses to health issues are increasingly being informed by economic models

9. Modelling in economics • In economics, a model is a theoretical construct that represents economic processes by a set of variables and a set of logical and/or quantitative relationships between them • Useful because: • Expression of concepts in formal language promotes clarity • Implicit assumptions easier to detect • Derive all implications of explicit assumptions • Promotes logical coherence Gravelle, H. Connecting health and economics. Centre for Health Economics, York, 2011.

10. The scope and contribution of health economics

11. The scope of health economics A. Meaning, measurement and valuation of health B. Influences on health and the demand for health F. Economic evaluation C. Demand for healthcare E. Market equilibrium D. Supply of healthcare G. Planning, budgeting, monitoring & regulation H. Evaluation at the whole system level Adapted from: Williams, A. “Health economics: the cheerful face of the dismal science?” In Health and Economics, A. Williams, Macmillan, London, 1987.

12. A. Meaning, measurement and valuation of health • Measurement of health outcomes • E.g., EQ-5D (Brooks, 1996) • Measurement of health gain • QALYs (Williams, 1985), DALYs (Fox-Rushby, 2002), HYEs (Mehrez and Gafni, 1989) • Monetary valuation of health states • Equivalent and compensating variation (Johansson, 1991) • Discrete choice experiments (Ryan and Farrar, 2000) • Non-monetary valuation of health states (Torrance, 1986) • Standard Gamble , Time Trade Off, Rating Scale • Multi-Attribute Utility measures

13. B. Influences on health and the demand for health • Mainly jurisdiction of epidemiologists and others • e.g., CSDH (2008), Marmot Review (2010) • Accounting for endogeneity issues • Total health expenditure on population health (Martin et al., 2008) • Doctor supply on health (Gravelle et al., 2008) • Impact of macroeconomic conditions on health • “Health living in hard times” (Ruhm, 2005) • Technological change and obesity (e.g., Cutler et al., 2003)

14. C. The demand for health care • (Derived) demand for health care • Derived from the demand for health (Grossman, 1972) • Impact of health insurance • RAND Experiment (Manning et al, 1987) • Asymmetry of information • Supplier-induced demand (Evans, 1974) • Understanding patient choices • Discrete choice experiments (Burge et al, 2005) • Estimating demand functions • Demand for health insurance (Propper et al., 2001)

15. D. The supply of health care • Goals of providers • Internal firms (Harris, 1977) • Utility maximisation (Newhouse, 1970) • Physician income maximisation (Pauly and Reddisch, 1973) • Provider behaviour • Doctor performance under pay for performance (Gravelle et al., 2010) • Provider behaviour and prospective reimbursement (Ellis and McGuire, 1986) • Costs and relative efficiency • Cost frontiers for hospitals (Linna, 1998) • Health care labour markets • Determinants of GP wages (Morris et al., 2011) • Supply of nursing labour (Antonazzo et al., 2003

16. E. Market equilibrium • Rationing • Role of price and non-price factors (Gravelle et al., 2002) • Rationing by waiting (Gravelle and Siciliani, 2008) • Market failures • Why health care is ‘different’ (Culyer, 1971) • Caring externalities (Jacobssen et al., 2005) • Impact of market structure • Competition and prices (Propper, 1996) • Monopsony in the labour market for nurses (Hirsch and Schumacher, 2005)

17. F. Economic evaluation • Many, many examples! (see NHS EED) • Formalised role in regulatory bodies in many countries • Generally agreed set of basic principles with variations by country in specifics (www.ispor.org) • Increasingly sophisticated analytical techniques • Decision modelling – decision trees, Markov models, microsimulations, and much, much more! • Economic evaluation alongside clinical trials • Dealing with uncertainty

18. G. Planning, budgeting, monitoring & regulation • Resource allocation formula • Methods for computing weighted capitations (Chernichovsky and van de Ven, 2003) • Using economic evaluation • Cost-effectiveness league tables (Drummond et al, 1993) • Policy evaluation • Impact of health policy on waiting times (Propper et al., 2008) • Regulation in health care • Regulating prices and profits in the pharmaceutical industry (Bloom and van Reenen, 1998)

19. H. Evaluation at the whole system level • Inequality measurement • Welfare foundations of inequality measures (Fleurbaey and Schokkaert, 2009) • Gini coefficient as a measure of total health inequality (Le Grand, 1989) • Concentration index for the measurement of socioeconomic-related health inequality (Wagstaff, 2000) • Decomposition of the concentration index (Wagstaff et al., 2003) • Health achievement index (Wagstaff, 2002) • Impact of spending on health (Nolte and McKee, 2004)

20. Moving beyond economic evaluation

21. Scope for increased use of economic evaluation in decision-making • There has been a massive increase in recent years in the use of economic evaluation • But not in all areas (notably public health) • There is still considerable scope for extending its use in decision making in health care • A survey of health care decision-makers in Austria, France, Finland, The Netherlands, Norway, Portugal Spain and the UK revealed that only one-third said they considered the results of a health economics study when making a decision (Von der Schulenberg, 2000) . • The authors suggested that an important factor hindering greater use was lack of knowledge about the techniques of economic evaluation

22. Mismatch between the science of evaluation and the art of decision making • Huge advances in economic evaluation during the last decade have occurred in the development of statistical and modelling techniques • But these developments have not been matched by development of decision-making processes they seek to support: • Research on the value of a QALY is only in its infancy • There has been little research to examine the way in which decision-makers use evidence from advanced economic evaluation methods (e.g., cost-effectiveness acceptability curves to reflect uncertainty), if at all • The incorporation of explicit equity weights into economic evaluation is feasible, yet research on this issue has yet to have an impact on practice

23. Health economics is not just about economic evaluation

24. Health economics is not just about economic evaluation F. Economic evaluation

25. Health economics is not just about economic evaluation A. Meaning, measurement and valuation of health B. Influences on health and the demand for health F. Economic evaluation C. Demand for healthcare E. Market equilibrium D. Supply of healthcare G. Planning, budgeting, monitoring & regulation H. Evaluation at the whole system level

26. “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” Robinson, J. Collected Economic Papers, 1951-1980 Vol II. MIT Press, Cambridge, 1980. p.17.