HEALTH ECONOMICS

HEALTH ECONOMICS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041
Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE)
Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences
Balassi Kiadó, Budapest
ELTE Faculty of Social Sciences, Department of Economics

HEALTH ECONOMICS
Authors: Éva Orosz, Zoltán Kaló and Balázs Nagy
Supervised by Éva Orosz

June 2011
HEALTH ECONOMICS
Part I
Economic analysis of the
health system
Week 1–7

Author: Éva Orosz

Supervised by Éva Orosz
 Contents
• Week 1: Analysis of the health system: basic concepts.
Introduction to health economics
• Week 2: Markets and market failure in health care and
health insurance
• Week 3: Role of the state in health care
• Week 4: Health care financing
• Week 5: Resource allocation in health systems
• Week 6: Analysis of health expenditure
• Week 7: Health policies for sustainable financing and
improving efficiency
HEALTH ECONOMICS
Week 1
Analysis of the health system:
basic concepts
Introduction to health economics

Author: Éva Orosz

Supervised by Éva Orosz
 Overview
• Health economics as a discipline
• Relationships of health, health care and
economy
• Health care as an economic good
• Need, demand and supply
• Components and functions of the health
system
• Assessment of health system
performance: criteria, methods and
indicators
Health system is an important branch of
national economies
• Spending on health services and goods
amounts to 7-15% of GDP in OECD countries
• Manpower employed in health and social
services amounts to 6–16% of the employed in
OECD countries
• At micro-level: a hospital may serve as one of
the most important economic organization in
the given area (in terms of employment,
demand for goods produced by other
economic branches, etc.)
• A driving force of innovation
Health economics as a discipline
• Analysis of health care and health
system – from the perspective of the
allocation of scarce resources
– Application of methods of economics
for the analysis of the health care
sector
– A multidisciplinary approach to the
allocation of health sector’s scarce
resources
Centre for Health Economics, University of York
Limitations of health economics
“A larger challenge for macroeconomic
policymakers is the enormous gap that
exists between the recognition of the
need to achieve more effectiveness in
the use of resources to achieve quality
health outcomes and the knowledge
base available to implement good
policies to achieve these outcome ..”
(Hsiao and Heller, 2007)
Health status, health care (spending)
and the economy
Basic issues to explain and measure:
• Contribution of improvement in health to economic
growth
• Contribution of economic growth to improvement in
health status
• Contribution of health care to improvement in
health status
• How can the performance of health system be
improved? Would higher health spending result in a
higher performance?
• How does public spending on health influence
health status and economic growth?
 Grossman model of inputs to
and outputs from health
INPUTS OUTPUTS

Health care

Education
Healthy
Housing Individual’s time
stock of health
Income

Employment status

Nutrition

Source: (Donaldson and Gerard, 2005)

Determinants of health and health
inequalities

Source: COM(2009) 567

Impact of health status on the economy
– at individual level
Positive impact of improving health status / or
increasing life expectancy on:
• productivity
• willingness to save
• (childhood health status on) learning capacity
and creativity
Channels through which health may influence
macro and microeconomic variables

Source: IMF WP 07/13

Manifold relationships between health status and the
economy
Consumption of healthy goods;
Health care; Knowledge;
Democracy

Improving economic Improving health

conditions status

Productivity, supply of labour;

Education; Savings

Consumption of goods Lower environmental pollution

jeopardizing health;
Environmental pollution; Risky
work conditions, stress Decreasing productivity, labour
supply and savings, weakening
incentives for human capital
development
Decreasing health Worsening economic
status conditions

Scarcity; Lack of security

Source: (Kollányi, 2011)

The impact of health systems – new research
findings
• “Health services themselves do make a
difference. The evidence of this is
complex but consistent, showing that
around a half of life expectancy
increases in recent decades stem from
improved health care.”
– Figueras, J. et al: Health systems, health
and wealth: Assessing the case for
investing in health systems. WHO, 2008, p.
viii.)
The ”clinical iceberg” (based on Last,1963)

Demand for formal care

Demand for lay care

Felt need but unexpressed

Unfelt need

Healthy

Source: (Black and Gruen, 2005)

 Need, demand and supply
Population
Screening

Felt need Demand Professionally

defined need

Rationing

Felt need Unmet need Met need

Source: (Black and Gruen, 2005)

 Health care as economic goods
The nature of the goods
Public Mixed Private
Excludability – +– +

Rivalry – +– +

– +– +
Deniability

Consumer protection Consumer goods / providers

Policy-making Clinics
Regulation Hospitals
Setting standards Health service providers
Quality-control Pharmaceuticals

Source: (Preker and Harding, 2005)

Types of health care as economic goods
• Public goods
• Low-cost private goods
• High cost private goods (can be paid from savings)
• Catastrophically costly private goods (that may result
in loss of property, grave indebtedness or even
impoverishment of the families affected)

• In economic terms, most health services and goods

are quasi-private or private goods.
– Externalities: private markets produce more (e.g.,
antibiotic resistance) or less (e.g., vaccination) than
optimal for society’s welfare.
 Health system and health system goals
Source: (WHO, 2006)

Intermediate Health
Health system functions
objectives of health system goals
finance policy
Resource
generation
Quality Health gain
Health financing Equity in utilization
system and resource distribution Equity in
Stewardship

Revenue health
collection
Financial
Pooling protection
Efficiency Equity in
Purchasing
finance

Transparency and
Responsiveness
Service delivery accountability
Basic questions of health system analysis
• How to provide a description of a health
system?
• When can a health system be considered
well-functioning?
• How to assess/measure health system
performance?
• How to influence the performance of a
health system?
Description of a health system: basic issues
• Who are covered by compulsory social insurance/
government programmes?
• What services are goods are included in the
service-basket of the publicly financed system in a
county?
• How resources to finance health services and goods
are raised?
• What payment-methods are applied to pay for services
/to provides?
• What characteristics does the service provision have?
• What components of and how the health system are
regulated?
• How (and whether) adequate human and material
conditions of operation of the health system are
ensured?
Measuring health system performance
• Performance: the extent of achievement of the
basic health system goals
• Conceptual framework
– The concept of performance (and its
dimensions)
– Clarifying cause-consequence relationships
– Developing adequate indicators
• Information system
• Analysis, interpretation of results
• Utilisation of performance indicators in practice
• Analysis of the system of performance
measurement and its operation in practice
Criteria applied in measuring health system
performance
• Improvement in health status (health-gain due to health
interventions)
• Financial protection
• Responsiveness (patients’ satisfaction)
– Responsiveness can be categorised as a component of quality
of care.
• Reducing inequalities (equity in health, in finance, in access to
care)
• Efficiency
• Quality of care
• Saving human life (can be categorised as a component of health
gain)
• Respect of human dignity (can be categorised as a component of
responsiveness)
• Individual freedom (can be categorised as a component of
responsiveness)
• Sustainability of financing
• Transparency and accountability of health policy / decision-making
Components of health care quality
• Structure (human resources, technology)
• Process
– Adequate and effective therapy
• provided in time and in a continuous, coordinated way
• provided in a way acceptable for the patient (ethical,
acceptable waiting time, etc.)

– Patient’s safety

• Outcome (health-gain)
The definition of efficiency in health care
• Technical efficiency
– To minimize costs of producing a given output (the
same outputs)
• Cost-effectiveness
– To produce a unit of health-gain (e.g. QUALY) at the
lowest cost, considering the available alternative
technologies for treating a given health condition
• Allocative efficiency
– To achieve an allocation of resources where it is not
possible to change the utilisation of society’s health
resources in a way that to make any individual
better off without making some other individuals
worse off (in terms of health-gain)
 OECD conceptual framework for health care
quality indicators

Source: (OECD, 2006)

Conceptual framework for evaluating technical
efficiency and cost-effectiveness measures
Outcomes

Increase in the quality

Cost-effectiveness
and length of life, etc.

Equity in access, etc.

Inputs

Measured in
physical terms
(No. Of physicians,
hospital beds, etc.)
Outputs
Technical efficiency
Measured in
financial Number of patients
terms treated, day beds,
in-patient
admissions, etc.

Source: (OECD, 2008)

Indicator systems: international organizations
• EU: European Community Health
• Indicators (ECHI)
• EU: Sustainable development Indicators
• OECD: Health at a Glance
• OECD Health Care Quality Indicators
Project
• WHO: Monitoring and evaluation of
health systems strengthening framework
Indicator systems: country examples
• DUTCH HEALTH CARE PERFORMANCE
REPORT 2008
• USA: Commonwealth Fund. ”Why Not the Best?
Results from the National Scorecard on U.S.
Health System Performance”, 2008
• United Kingdom: NHS Performance Framework
 A key indicator of health system performance:
Mortality Amenable to Health Care
Deaths per 100,000 population*

150 1997/98 2002/03

134
130 128
116 115 113 115
109 106
99 97 97
100 88 89 89 88
81 84
76

103 103 104 110

50 93 96 101
84 84 90
77 80 82 82
71 71 74 74
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* Countries’ age-standardized death rates before age 75; including ischemic heart disease, diabetes, stroke, and
bacterial infections.
See report Appendix B for list of all conditions considered amenable to health care in the analysis.
Data: E. Nolte and C. M. McKee, London School of Hygiene and Tropical Medicine analysis of World Health
Organization mortality files (Nolte and McKee 2008).

Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2008
 Diagnosis: causes of good/poor
performance
• Context of the health system: socio-
economic and political factors
• Actors of the health system
• Structural characteristics and
mechanisms of the health system
 Factors amenable to health policy
interventions (reforms)

• Revenue-raising
• Payment-methods of providers
• Institutional/organisational structure of service
provision
• Regulation
• Changing behaviour patterns/habits/attitudes
(patients, medical personnel, etc.)
 Health systems: tools, instrumental
and basic goals

Source: (Hsiao-Heller, 2007)

 References
• Black, N. and Gruen, R. (2005), Understanding Health Services, Open
University Press
• COM(2009) 567: Commission Communication Solidarity in health: Reducing
health inequalities in the EU
• Figueras,J. et al. (2008), Health systems, health and wealth: Assessing the
case for investing in health systems. WHO, Copenhagen
• Folland, S. et al. (2008), The Economics of Health and Health Care (Fourth
Edition), Pearson Education
• Hsiao, W. and Heller, P. (2007), What Should Macroeconomists Know About
Health Policy? IMF Working Paper. WP/07613. International Monetary Fund
• Kelley, E. and J. Hurst (2006), Health Care Quality Indicators Project:
Conceptual Framework Paper, OECD Health Working Papers, No. 23
• Murray, C. – Frenk, J. (2000), A framework for assessing the performance of
health systems. Bulletin of the World Health Organisation, 2000, 78(6)
• Häkkinen, U. and Joumard,I. (2007), Cross-country analysis of efficiency in
OECD health care sectors: Options for research, Economics Department
Working Papers, No. 554
• Smith, P.C. (ed.) (2009), Performance measurement for health system
improvement: experiences, challenges and prospects, Cambridge University
Press, 2009