Discussion 1: (Due Day 3 of Week 1 – 5 Points)

Review Chapters 1, 2 and 3 from the primary text and respond to the following:

Define, explain and discuss Opportunity Cost and Investment and how they are applied to maximizing
profits within the healthcare environment. What is the importance of supply and demand to the healthcare
industry?

Provide your own substantive response and a relevant and substantive comment to a minimum of two
posts. Support opinion with in text citation and reference.

Review the Discussion Rubric. (Learning Outcome 1, 2 & 4)

Welcome to Our First Weekly Discussion!

COLLAPSE
Greetings, and welcome to the first discussion in the MBAH-6660 course, Healthcare Finance and
Economics. For our first discussion, you are asked to “define, explain and discuss Opportunity Cost and
Investment and how they are applied to maximizing profits within the healthcare environment.” Since as
a general question, there are a limited range of answers to this question, it might be difficult for you to
find an answer to the question that differs substantially from your colleagues. I suggest that in your
answer, you discuss an organization or facet of the industry that you have worked at or are otherwise
familiar with, and discuss how opportunity costs apply specifically to that organization or industry facet.
This will allow for a more interesting and diverse set of responses that you should also find easier to reply
to colleagiues about.

I am looking forward to hearing your ideas!

--Dr. Dan
Define, explain and discuss Opportunity Cost and Investment and how they are applied to maximizing
profits within the healthcare environment.

Since there is always scarcity in resources in reference to human demand, Every opportunity
costs loss of other alternative value. “The opportunity cost of devoting resources to a particular
use is defined as the loss of the benefits the resources could have produced had they been put to
their next-best use—the lost opportunity to invest in that alternative. The benefits from the next-
best use may be smaller than those of the current use, indicating that the current use is best, or
they may be greater, in which case the alternative is preferable.” (Russell, 1992). From health
prospective opportunity cost is the cost of keep a person in healthy status

“Examination of resource allocation in the health-care industry is complicated because the

market characteristics differ from those in a perfectly competitive market. The market for health-
care services is considered an imperfect market because:
1)Health care is a heterogeneous product, as the patient can experience a range of outcomes; 2)
Patients who are insured have third-party payers covering their direct medical expenses; and 3) A
"market price" is lacking, i.e., no feedback mechanism exists that reflects the value of the
resources used in health field”

“ One example of this is the cost-effectiveness ratios of two drugs, Propranolol and Lovastatin,
using the medical component of the Consumer Price Index (CPI) updated to 1990
dollars. 1 Prescribed for people ages thirty-five to sixty-four, Propranolol is the most cost-
effective of the drugs used to treat mild to moderate hypertension. At $13,640 per life-year in
1990, $1 million spent on Propranolol would buy 73.3 life-years. Lovastatin prescribed to reduce
cholesterol in low-risk men ages thirty-five to forty-four costs $727,260 per life-year saved, and
$1 million would buy 1.4 life-years. Both drugs are used here for “primary” prevention, that is,
to prevent future disease in people who do not have heart disease at the outset of treatment. Both
can also be used to prevent subsequent coronary events in people who have already suffered one
or more events (“secondary” prevention). Restatement of cost-effectiveness ratios in terms of
life-years per $1 million brings out the opportunity costs involved by focusing on the amount of
health that could be “purchased” when the same amount of money is used for different
interventions. If these were the only two interventions under consideration, the opportunity cost
of investing in Propranolol—the next-best use of the resources—would be the 1.4 years that
could have been achieved if the money had been spent on Lovastatin instead. The opportunity
cost of investing in Lovastatin would be the 73.3 life-years that would be lost because the
resources were not used for Propranolol. Propranolol is clearly the better health investment of the
two.” (Russell, 1992)

After a careful study of Health Industry we can conclude that the supply of health care facilities
depends on internal and external factors.The internal factors are availiability of funds
,Government subsidy and encouragement,existence of medical personnels and drugs,etc.The
external factors demand for health care, existence of pharmaceutical companies,laboratories,
blood banks,etc.As the demand for health care services is inelastic ,the supply of healthcare
services is also inelastic. DEMAND-AND-SUPPLY-IN-HEALTH-CARE.pdf
 In Grossman’s model the optimal level of investment in health occurs where the marginal cost of health
capital is equal to the marginal benefit.With the passing of time health depreciates at some rate.The
marginal cost of health capital can be found by adding these variables.The marginal benefit of health
capital is the rate of return from this capital in both market and non market sectors.In this model the
optimal health stock can be impacted by factors like age,wages and education.As an example increases
with age so it becomes more and more costly to attain the same level of health capital or health stock as
one ages.Age also decreases the marginal benefit of health stock.The optimal health stock will therefore
decreasa as one ages.

After a careful study of Health Industry we can conclude that the supply of health care facilities depends
on internal and external factors.The internal factors are availiability of funds ,Government subsidy and
encouragement,existence of medical personnels and drugs,etc.The external factors demand for health
care, existence of pharmaceutical companies,laboratories, blood banks,etc.As the demand for health
care services is inelastic ,the supply of healthcare services is also inelastic. DEMAND-AND-SUPPLY-IN-
HEALTH-CARE.pdf

1.  health care providers are not yet getting the most from their resources, i.e.
there is some so-called “x-inefficiency” [10] in the way they produce health care,
then increased pressure of demand may be met to some extent by increased
technical efficiency rather than by displacement of other health services.
2. If local health care organisations treat their budgets as, in extremis, not
absolutely fixed and/or have the opportunity to turn to a funder of last resort, then
some increased demand pressure may lead to increased expenditure, in which case
the opportunity cost might fall outside the health budget. It is impossible for a local
health organisation to have spent all of its annual budget to the last pound, and not
a pound more, at midnight on the last day of the financial year. Thus every such
organisation will have a non-zero underspend or overspend every year. Its response
to increased pressure on its budget may in part be to underspend less or overspend
more. It may even explicitly request increased funds from the Government. In
Wales the funder of last resort for local health organisations is the Welsh
Government, which may find the funds either from another part of the NHS in
Wales or from other services for which it has responsibility (social services,
education, etc.).
This paper fits within a broad area of recent literature from the UK and elsewhere
that focuses on priority-setting and rationing of health care services. For example,
Robinson et al. [11] is a qualitative research study investigating local priority-
setting and resource allocation activity across five English PCTs. The authors note
the “political complexity” involved in implementing the redesign of services and
the lack of resources available to produce and understand cost-effectiveness
evidence. Other issues highlighted in the priority-setting literature include the need
for procedural justice and “fair” decision-making processes, shortages of local
quantitative data to inform decision-making and the importance of leadership in the
context of making “tough decisions”.
The aim of the current paper is to identify how NHS organisations, which might be
considered to have fixed budgets, reallocated resources in practice when
responding to a legal requirement to fund new, cost increasing technologies.
Specifically, our objectives are to investigate: (a) how local NHS commissioners
accommodated financial shocks arising from NICE TAs and from other
requirements; and (b) how prioritisation decisions were made in the NHS by those
budget holders.

Methods
One example of this is the cost-effectiveness ratios of two drugs, Propranolol
and Lovastatin, using the medical component of the Consumer Price Index
(CPI) updated to 1990 dollars. 1 Prescribed for people ages thirty-five to sixty-
four, Propranolol is the most cost-effective of the drugs used to treat mild to
moderate hypertension. At $13,640 per life-year in 1990, $1 million spent on
Propranolol would buy 73.3 life-years. Lovastatin prescribed to reduce
cholesterol in low-risk men ages thirty-five to forty-four costs $727,260 per life-
year saved, and $1 million would buy 1.4 life-years. Both drugs are used here
for “primary” prevention, that is, to prevent future disease in people who do
not have heart disease at the outset of treatment. Both can also be used to
prevent subsequent coronary events in people who have already suffered one
or more events (“secondary” prevention). Restatement of cost-effectiveness
ratios in terms of life-years per $1 million brings out the opportunity costs
involved by focusing on the amount of health that could be “purchased” when
the same amount of money is used for different interventions. If these were
the only two interventions under consideration, the opportunity cost of
investing in Propranolol—the next-best use of the resources—would be the
1.4 years that could have been achieved if the money had been spent on
Lovastatin instead. The opportunity cost of investing in Lovastatin would be
the 73.3 life-years that would be lost because the resources were not used for
Propranolol. Propranolol is clearly the better health investment of the two.

Examination of resource allocation in the health-care industry is complicated

because the market characteristics differ from those in a perfectly competitive
market. The market for health-care services is considered an imperfect market
because--

1)Health care is a heterogeneous product, as the patient can experience a range

of outcomes; 2) Patients who are insured have third-party payers covering their
direct medical expenses; and 3) A "market price" is lacking, i.e., no feedback
mechanism exists that reflects the value of the resources used in health care.
Volume 7, Number 2—April 2001
THEME ISSUE
4th Decennial International Conference on Nosocomial and Healthcare-Associated
Infections

State of the Art

Applying Economic Principles to Health Care

R. Douglas Scott*  , Steven L. Solomon*, and John E. McGowan†

Author affiliations: *Centers for Disease Control and Prevention, Atlanta, Georgia,

USA; †Emory University, School of Medicine, Atlanta, Georgia, USA

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