General Introduction to Health Economics

1. General Introduction to Health Economics Awad MATARIA, PhD Health Economist HEC/DHS/WHO-EMRO Introduction to Economic Evaluation with Special Application to NCDs Cairo-Egypt, 16-18 December 2012

2. Outline • What is “Health”? • What is “Economics”? • What is “Health Economics”? • Health from an Economic perspective • Issues in Health Economics

3. What is “Health”? Dictionary - “Sound bodily or mental condition” - “Condition of wholesomeness” WHO (1946) - “…a state of complete physical and mental and social well-being, and not merely the absence of disease or infirmity” How do we operationalize these definitions? - Condition-specific measures? - Quality-adjusted life years (QALYs)?

4. What is “Economics”? “The study of how men and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses, to produce various commodities and distribute them for consumption, now or in the future, among various people and groups in society…It analyses the costs and benefits of improving patterns of resource use.” Paul Samuelson

5. What is “Health Economics”? “The study of how men and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses, to produce various commodities and distribute them for consumption, now or in the future, among various people and groups in society…It analyses the costs and benefits of improving patterns of resource use.” health-related health and health care Cam Donaldson

6. A Note to Start with: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw conclusions.” Joan Robinson (1955)

7. The role of Health Economics to provide: • a method of thinking • a set of techniques to assist decision making to promote: Efficiency & Equity

8. The underlying Economic problem: People almost have infinite needs Finite (limited) resources Economics is about maximizing social benefits subject to the constraint imposed by resource availability

9. What are health economists interested in? • Evaluating interventions: • health care/health • valuing the benefits of health care • economics as a management process • Broader policy issues: • type of health care system • health financing arrangements • incentives • health care reform • health inequalities All relates back to the notions of Scarcity

10. Unavoidable consequences: • Scarcity implies “Opportunity Costs” • Efficiency necessitates “Marginal Analysis” • Equity involves “Value Judgments”

11. Opportunity Cost • Resources are scarce we have to make choices. • Every time we choose to use a resource to meet one need, we give up the "opportunity" to use this resource to meet some other needs. • The benefits associated with the best alternative use of the resources is the OPPORTUNITY COST • The aim of economics is to ensure that we do those activities whose benefits outweigh their opportunity cost (i.e. we do the most beneficial things with the resources at our disposal)

12. Marginal Analysis – Colonic Cancer (1) • Stool is tested for the presence of occult blood – “guaiac test”. • Proposal was for six sequential tests. • Each test detects 91.67 per cent of cases undetected by the previous test. • Example of screening a population of 10,000 of whom 72 have colonic cancer

13. Marginal Analysis – Colonic Cancer (2) True positive rates and numbers of cases detected No. of testsTrue +ve rateNo. of cases 1 91.6667 65.9469 2 99.3156 71.4424 3 99.9421 71.9003 4 99.9952 71.9385 5 99.9996 71.9417 6 99.9999 71.9420

14. Marginal Analysis – Colonic Cancer (3) Cases detected and costs of screening with six sequential tests No. of testsNo. of cases Total costs ($)Av. cost ($) 1 65.9469 77,511 1175 2 71.4424 107,690 1507 3 71.9003 130,199 1811 4 71.9385 148,116 2059 5 71.9417 163,141 2268 6 71.9420 176,331 2451

15. Marginal Analysis – Colonic Cancer (4) Neuhauser and Lewicki (1975): Incremental cases detected and incremental (marginal) costs of screening with six sequential tests No. of testsIncrementalIncrementalMarginal cases detectedcosts ($)costs ($) 1 65.9469 77,511 1175 2 5.4956 30,179 5494 3 0.4580 22,509 49,150 4 0.0382 17,917 469,534 5 0.0032 15,024 4,724,695 6 0.0003 13,190 47,107,214

16. Implications of opportunity cost and marginal analysis • to do more of some things, we have to take resources from elsewhere • often about how much rather than whether

17. Important (if not unique) aspects of Health Economics: • Welfare Economic Theory & the “Free Market Optimality”. • Pure and perfect competition: • Perfect competition & product homogeneity. • Price-takers & Free entry/exit. • Utility & profit maximization.

18. What’s different about health? • Particularities of the health care market: • Uncertainty • Asymmetric knowledge • Externalities • Government involvement

19. 1. Uncertainty: • Three levels of uncertainty: • Uncertain health events: e.g., appendicitis, “do I have a cancer?”, etc. • Uncertain demand: inter-professional variability on treatment decision (Y/N) and type of treatment. • Uncertain outcomes.

20. 2. Asymmetric knowledge: • Asymmetry Symmetry. • “Knowledge is Power”. • Doctor-Patient versus Driver-Auto mechanics: • Opportunity & skills in evaluating others claims. • Incentives to reveal information. • It is difficult for a Patient to verify doctor’s claims a posteriori • Professional duty and ethics (Hippocrates Oath)

21. Information Financing Agencies Government Providers Consumers

22. Financing Agencies ? ? Providers Consumers ?

23. Financing Agencies • Moral Hazard • Adverse Selection ? ? Providers Consumers ?

24. Financing Agencies ? ? Providers Consumers • Principal-Agent problem ?

25. Financing Agencies • Principal-Agent problem ? ? Providers Consumers ?

26. Regulations Information Financing Agencies Government Providers Consumers

27. 3. Externalities: • External benefits and costs: definition. • Example of a negative externality are the “Communicable Diseases”. • Social benefit and private benefit of vaccination (e.g., flu vaccination). • Private activities and external costs? • Bacterial resistance. • Externality & public good

28. 4. Government Involvement: • Extensive intrusion of the government. Examples: • Licensing of health professionals. • Finance: insurance and financial aids against health expenses; e.g., elderly, poor, children, handicapped-persons, government employees, etc. • Control on the direct economic behavior (e.g., prices) of health care providers; e.g., hospitals, doctors, etc. • Control on market entry and exit: e.g., “certificate of need”, regulations for new drugs, etc. • In some place: financial aids for health professions’ students, and research funding.

29. What’s different about health? • Are these failure specific to the Health Care Market? • What is particular to the Health Care Market, then?

30. Health & Health Care from an Economic perspective: • How can we think about health and health care from an economic perspective? • Do any of the normal tools of economics apply to health and health care? • How to modify standard tools to suit the particularities of health and health care?

31. Health as a durable good: • Health care – an economic “GOOD”?!! • “Health care” “Health” and “Utility”. • Michael Grossman model. • Health as a durable good: stock and daily life actions. Utility = U(X, H) X: buddle of other goods; H: stock of health (unobservable). U/X , U/H > 0 (U/X)/H > 0

32. Health through life cycle

33. U (H, X)

34. Indifference curves

35. Indifference curves concept

36. The production of Health • Where does health come from? • Health care: a set of activities designed specifically to maintain, restore or augment the stock of health. • Demand for Health Care is a derived demand. H = g (m) m: health care; H: health; g(.): a production function. g/m > 0; g2/2m < 0

37. H = g (m, D)

38. Lifestyle and Health • Lifestyle affects: rate of aging and the frequency and severity of the “spikes”. • “You are what you eat!” • X and H are substitutes and X affects H in a productive way [+ve or –ve or neutral]. - + + H = g (XB, XG, m) • Should we prohibit consumers from consuming BAD items?

39. Efficiency versus/and Equity

40. Concepts of Efficiency • Technical efficiency: carrying out agreed activities using the least possible resources – or carrying out the maximum of activities possible using a fixed pot of resources. • Allocative efficiency: directing resources to their most productive use. In health care, it means assessing which intervention will produce greatest health gains, and focusing on that activity.

41. Interpretations of Equity: • Equal resources/use of services. • Equal health. • Fair innings. • Equal access/utilization according to need. • Treatment according to capacity to benefit. • Horizontal versus Vertical Equity: • Horizontal equity: Equal treatment for equals. • Vertical equity: un-equal treatment for un-equals. Which one to use? What does it cost?

42. A Note to End with: ““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.” John Maynard Keynes (1923)

43. THANK YOU