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Encyclopedia > Health care economics

Health economics is a branch of economics concerned with issues related to scarcity in the allocation of health and health care. This article needs additional references or sources for verification. ... A physician visiting the sick in a hospital. ...

The scope of health economics is neatly encapsulated by Alan William's "plumbing diagram"[1] dividing the discipline into eight distinct topics:

  • what influences health? (other than health care)
  • what is health and what is its value
  • the demand for health care
  • the supply of health care
  • micro-economic evaluation at treatment level
  • market equilibrium
  • evaluation at whole system level; and,
  • planning, budgeting and monitoring mechanisms.


The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Look up supply in Wiktionary, the free dictionary. ... Microeconomics is the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. ... Treatment may refer to: // Health Therapy - the act of remediation of a health problem. ... Look up equilibrium in Wiktionary, the free dictionary. ... Budget generally refers to a list of all planned expenses. ...

What influences health?

What is health and what is its value?

In economics Private good is an opposite of the public good. ... In economics, a public good is a good that is non-rivalrous and non-excludable. ... A merit good is defined in economics as a good that is under consumed if provided by the market mechanism because individuals typically consider how the good benefits them as individuals rather than the benefits that consumption generates for others in society. ...

The demand for health care

The Supply of Health Care

Micro-economic evaluation at treatment level

A large focus of health economics particularly in the UK, is the microeconomic evaluation of individual treatments. In the UK, the National Institute for Health and Clinical Excellence (NICE) appraises certain new and existing pharmaceuticals and devices using economic evaluation. The National Institute for Health and Clinical Excellence or NICE is an agency of the National Health Service in the United Kingdom. ...

Economic evaluation is the comparison of two or more alternative courses of action in terms of both their costs and consequences (Drummond et al.). Economists usually distinguish several types of economic evaluation, differing in how consequences are measured:

In cost minimisation analysis (CMA), the effectiveness of the comparators in question must be proven to be equivalent. The 'cost-effective' comparator is simply the one which costs less (as it achieves the same outcome). In cost-benefit analysis (CBA), costs and benefits are both valued in cash terms. Cost effectiveness analysis (CEA) measures outcomes in 'natural units', such as mmHg, symptom free days, life years gained. Finally cost-utility analysis (CUA) measures outcomes in a composite metric of both length and quality of life, the Quality Adjusted Life Year (QALY). (Note there is some international variation in the precise definitions of each type of analysis). Cost-benefit analysis is the process of weighing the total expected costs vs. ... Cost-effectiveness analysis (CEA) is a form of economic analysis that compares the relative expenditure (costs) and outcomes (effects) of two or more courses of action. ... Cost-utility analysis is a form of economic analysis used to guide procurement decisions, especially health technology assessment (HTA). ...

A final approach which is sometimes classed an economic evaluation is a cost of illness study. This is not a true economic evaluation as it does not compare the costs and outcomes of alternative courses of action. Instead, it attempts to measure all the costs associated with a particular disease or condition. These will include direct costs (where money actually changes hands, e.g. health service use, patient co-payments and out of pocket expenses), indirect costs (the value of lost productivity from time off work due to illness), and intangible costs (the 'disvalue' to an individual of pain and suffering). (Note specific definitions in health economics may vary slightly from other branches of economics.) Indirect costs are costs that are not directly accountable to a particular function or product; these are fixed costs. ...

Market equilibrium

Health care markets

The five health markets typically analyzed are:

Although assumptions of textbook models of economic markets apply reasonably well to health care markets, there are important deviations. Insurance markets rely on risk pools, in which relatively healthy enrollees subsidize the care of the rest. Insurers must cope with "adverse selection" which occurs when they are unable to fully predict the medical expenses of enrollees; adverse selection can destroy the risk pool. Features of insurance markets, such as group purchases and preexisting condition exclusions are meant to cope with adverse selection. Finance addresses the ways in which individuals, business entities and other organizations allocate and use monetary resources over time. ... The Doctor by Luke Fildes This article is about the term physician, one type of doctor; for other uses of the word doctor see Doctor. ... This article focuses on the education and regulation of nurses. ... An institution is a group, tenet, maxim, or organization created by a group of humans. ...

Insured patients are naturally less concerned about health care costs than they would if they paid the full price of care. The resulting "moral hazard" drives up costs, as shown by the famous RAND Health Insurance Experiment. Insurers use several techniques to limit the costs of moral hazard, including imposing copayments on patients and limiting physician incentives to provide costly care. Insurers often compete by their choice of service offerings, cost sharing requirements, and limitations on physicians. The RAND Health Insurance Experiment remains one of the most rigorous and comprehensive studies of health care cost, utilitzation and outcome. ...

Consumers in health care markets often suffer from a lack of adequate information about what services they need to buy and which providers offer the best value proposition. Health economists have documented a problem with "supplier induced demand", whereby providers base treatment recommendations on economic, rather than medical criteria. Researchers have also documented substantial "practice variations", whereby the treatment a patient receives depends as much on which doctor they visit as it does on their condition. Both private insurers and government payers use a variety of controls on service availability to rein in inducement and practice variations.

The U.S. health care market has relied extensively on competition to control costs and improve quality. Critics question whether problems with adverse selection, moral hazard, information asymmetries, demand inducement, and practice variations can be addressed by private markets. Competition has fostered reductions in prices, but consolidation by providers and, to a lesser extent, insurers, has tempered this effect.

Competitive equilibrium in the five health markets

While the nature of healthcare as a private good is preserved in the last three markets, market failures occur in the financing and delivery markets due to two reasons: (1) Perfect information about price products is not a viable assumption (2) Various barriers of entry exist in the financing markets (i.e. monopoly formations in the insurance industry)

Efficiency vs equity

The First Theorem of Welfare Economics states that any Walrasian equilibrium (that is, any competitive equilibrium) is Pareto-efficient. Its implications are that competitive markets will always be efficient. This result follows from the definition of a Walrasian equilibrium and the definition of Pareto efficiency. A key assumption to the proof of the theorem is local non-satiation of consumer preferences. It is that assumption that is often violated in the first two of the health markets and therefore the First Welfare Theorem does not hold for these markets. Pareto efficiency, or Pareto optimality, is a central concept in game theory with broad applications in economics, engineering and the social sciences. ... General Equilbrium (linear) supply and demand curves. ... Pareto efficiency, or Pareto optimality, is an important notion in neoclassical economics with broad applications in game theory, engineering and the social sciences. ...

In addition, even if the outcome in a health market is Pareto Optimal, the government deems it to be inequitable due to vast health disparity or lack of basic healthcare services.

So, government intervention is warranted for two reasons:

  • Absence of Pareto Optimality in a health market
  • Pareto Optimality with socially inequitable health outcome.

Ideological bias in the debate about the financing and delivery health markets

The healthcare debate in public policy is often informed by ideology and not sound economic theory. Often, politicians subscribe to a moral order system or belief about the role of governments in public life that guides biases towards provision of healthcare as well. The ideological spectrum spans: individual savings accounts and catastrophic coverage, tax credit or voucher programs combined with group purchasing arrangements, and expansions of public-sector health insurance. These approaches are advocated by health care conservatives, moderates and liberals, respectively.

Evaluation at a whole system level

Planning, budgeting, and monitoring mechanisms

Other issues

Medical economics

Often used synonimously with Health Economics Medical economics, according to Culyer,[2] is the branch of economics concerned with the application of economic theory to phenomena and problems associated typically with the second and third health market outlined above. Typically, however, it pertains to cost-benefit analysis of pharmaceutical products and cost-effectiveness of various medical treatments. Medical economics often uses mathematical models to synthesise data from biostatistics and epidemiology for support of medical decision making, both for individuals and for wider health policy. Pharmacology (in Greek: pharmacon is drug, and logos is science) is the study of how chemical substances interfere with living systems. ... See drugs, medication, and pharmacology for substances that are used to treat patients. ... A mathematical model is an abstract model that uses mathematical language to describe the behaviour of a system. ... Biostatistics or biometry is the application of statistics to a wide range of topics in biology. ... Epidemiology is the study of factors affecting the health and illness of populations, and serves as the foundation and logic of interventions made in the interest of public health and preventive medicine. ... Decision making is the cognitive process of selecting a course of action from among multiple alternatives. ...

See also

Health insurance is a type of insurance whereby the insurer pays the medical costs of the insured if the insured becomes sick due to covered causes, or due to accidents. ... This is a list of important publications in economics, organized by field. ... The Journal of Health Care for the Poor and Underserved (JHCPU) is an academic journal founded in 1990 by David Satcher, MD, PhD then President of Meharry Medical College (later, U.S. Surgeon General). ...


  1. ^ Williams A (1987) "Health economics: the cheerful face of a dismal science" in Williams A (ed.) Health and Economics, Macmillan: London
  2. ^ A.J. Culyer (1989) "A Glossary of the more common terms encountered in health economics" in MS Hersh-Cochran and KP Cochran (eds) Compendium of English Language Course Syllabi and Textbooks in Health Economics, Copenhagen, WHO, 215-234

Further reading

  • Michael F. Drummond (2005) Methods for the economic evaluation of health care programmes, Oxford University Press, ISBN 0-19-852945-7
  • Victor R. Fuchs (1987). "Health economics" The New Palgrave: A Dictionary of Economics, v. 2, pp. 614-19.

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