1.

Health system financing & universal health coverage

What are the key steps to introducing universal health coverage?

- Assess the current health system: evaluate the existing health infrastructure,
workforce, and coverage gaps to understand the starting point
- Define the essential health benefit package: determine which health services will be
covered, ensuring they are based on population needs and cost-effectiveness
- Secure sustainable financing: identify sources of funding such as taxation, social
health insurance contributions, and international aid. Establish a pooling mechanism to
ensure funds are managed efficiently
- Strengthen health service delivery: improve the quality, accessibility, and efficiency of
health services. Invest in infrastructure, training, and health information systems
- Implement risk pooling mechanisms: ensure financial risk protection by pooling
resources to cover health costs, preventing catastrophic health expenditures for
individual
- Monitor and evaluate progress: regularly assess the implementation process and
outcomes to make necessary adjustments and improvements.

Key features of health financing models

- Private Health Insurance

o Voluntary enrollment: individuals or employers choose to purchase
o Premium-based: coverage is funded by premiums
o Market-driven: coverage options/ prices influenced by market competition
o Risk selection: insurers may potentially exclude high-risk individuals or charge
higher premiums based on health status

2. Social Health Insurance

o Mandatory enrollment for certain groups (e.g., employed individuals).
o Contribution-based: funded by contributions from employers, employees, and
sometimes government subsidies
o Solidarity principle: contributions based on income, and benefits based on
need, promoting equity
o Comprehensive coverage: often provides a wide range of health services to all
enrolled individuals

3. Tax-based funding
o General tax revenue: funded through general taxation, including income tax,
sales tax, and other government revenues
o Universal access: provide health services to all citizens, regardless of ability to
pay
o Government control: government typically plays a central role in funding and
managing health services
o Equity focused: ensure equitable access to health care for all population groups
 2. The relationship between health & wealth

Why might a public health crisis have negative impacts on the economy?

- Reduced workforce productivity: high morbidity and mortality reduce the number of
healthy workers, leading to decreased productivity
- Increased health expenditure: governments and individuals may face high health care
costs, diverting resources from other economic activities
- Supply chain disruptions: health crises can disrupt supply chains, affecting production
and trade
- Investment uncertainty: investors may be hesitant to invest in regions experiencing
health crises, leading to reduced economic growth
- Social instability: public health crises can lead to social unrest, which further
undermines economic stability

Why does our health impact our income and vice versa?

- Health impacting income: good health enhances productivity and the ability to work,
leading to higher income. Poor health can result in absenteeism, reduced work capacity,
and increased medical expenses
- Income impacting health: higher income provides better access to health care,
nutritious food, safe housing, and education, all of which contribute to better health
outcomes. Conversely, low income is associated with poorer living conditions and
limited access to health services

What does income elasticity of demand measure? Is health care a luxury or necessity?
- Income elasticity of demand measures how the quantity demanded of a good or service
changes in response to a change in income
- Health care is generally considered a necessity because basic health services are
essential for maintaining life and well-being
- The demand for necessities or necessary goods is inelastic because whatever may be the
changes in the price of these goods, their demand does not change drastically
- Some aspects of health care (e.g., elective procedures, advanced treatments) may
exhibit characteristics of a luxury good as their demand increases with higher income

Overall, the elasticity of health care can vary:

• Basic health care: often has low income elasticity, indicating it is a necessity
• Advanced or elective health care: may have higher income elasticity, suggesting it can
be a luxury for higher-income individuals
 3. Equity and equality

Explain differences between libertarian, utilitarian, Rawlsian and egalitarian concepts of

equity?

1. Libertarian
o Principle: emphasizes individual freedom and minimal state intervention
o Equity concept: equity is achieved when individuals have the freedom to pursue
their own interests without interference, and justice is defined by the protection
of property rights and voluntary exchanges
o Outcome: inequalities are acceptable as long as they result from voluntary
transactions and individual choices

2. Utilitarian
o Principle: focuses on maximizing overall happiness or utility
o Equity Concept: policies should aim to produce the greatest good for the
greatest number of people
o Outcome: inequalities are acceptable if they increase the overall utility.
Redistribution is justified if it leads to a net increase in societal happiness

3. Rawlsian (John Rawls)

o Principle: advocates for fairness as justice
o Equity Concept: inequalities are permissible only if they benefit the least
advantaged members of society (the "difference principle")
o Outcome: focuses on ensuring that any social or economic inequalities improve
the position of the least well-off

4. Egalitarian
o Principle: advocates for equal treatment and equal distribution of resources
o Equity Concept: equity is achieved through equality of outcomes or
opportunities
o Outcome: policies should aim to reduce or eliminate disparities in wealth,
health, and other resources to ensure everyone has the same opportunities

Social Welfare Functions (SWFs)

- Utilitarian SWF is the sum of individual utilities. The goal is to maximize the total utility
across all individuals in society
- Rawlsian SWF focuses on the welfare of the least advantaged member of society. The
goal is to maximize the utility of the individual who is worst off.

Measures of equity

1. Gini Coefficient: measure of income inequality within a population, ranging from 0 to 1,

where 0 indicates perfect equality and 1 indicates perfect inequality.
- Calculation based on the Lorenz curve, representing the cumulative distribution of
income
2. Lorenz Curve: graphical representation of the distribution of income or wealth within a
society. It plots the cumulative percentage of total income received by the bottom x% of
the population. The further the Lorenz curve is from the line of equality (the 45-degree
line), the greater the inequality.
3. Kakwani Index: measure of the progressivity of a tax system, calculated as the difference
between the concentration index of tax and the Gini coefficient of pre-tax income. A
positive Kakwani index indicates a progressive tax system, while a negative value
indicates a regressive system.

4. Concentration Curve: similar to the Lorenz curve, it plots the cumulative percentage of
a health variable (e.g., health care utilization) against the cumulative percentage of the
population, ranked by income or another variable. Used to assess inequality in health
variables. If the concentration curve lies above the line of equality, it indicates a pro-poor
distribution; below the line indicates a pro-rich distribution.

4. Economics of risky health behaviours

- Risky behaviors: increase the probability of negative health outcomes, such as smoking,
excessive alcohol consumption, unhealthy eating, and physical inactivity.

- Differences in risk aversion: people differ in their willingness to take risks due to factors
such as personality, genetics, past experiences, and socio-economic conditions

- Time inconsistent preferences: situation where individuals value immediate rewards

disproportionately higher than future rewards, leading to decisions that favor short-term
gratification over long-term benefits
o Example: choosing to smoke despite knowing the long-term health risks

- Bounded rationality: concept that individuals make decisions within the limits of their
information, cognitive abilities, and time constraints
o Example: Making unhealthy choices due to lack of information or understanding
of health consequences

- Theory of rational addiction: theory suggesting that individuals can make rational
decisions about consuming addictive goods by weighing the current benefits against
future costs. Even if behavior appears irrational, it can be understood as a rational choice
if individuals are optimizing their utility over time, taking into account the addictive nature
of the substance.

- Regulatory Interventions
Governments can use taxes, information campaigns, and nudges to influence behavior.
o Taxes: Increase the cost of unhealthy products (e.g., tobacco, alcohol) to
discourage consumption.
o Information campaigns: Educate the public about health risks associated with
certain behaviors.
o Nudges: Subtle changes in the environment or policy to promote healthier
choices without restricting freedom (e.g., placing healthier foods at eye level in
stores).
Differential impact: people may respond differently to these interventions based on
their socio-economic status, education, and personal preferences.

- Externalities: costs or benefits of an activity that affect third parties who did not choose
to incur those costs or benefits.
Example: Second-hand smoke from smoking affecting non-smokers.
 - Public goods: goods that are non-excludable and non-rivalrous, meaning they can be
consumed by everyone without reducing availability to others.
Example: Clean air, public parks.

- Herd immunity: when a significant portion of a population becomes immune to a

disease (through vaccination or previous infections), providing indirect protection to
those who are not immune
Reduces the spread of contagious diseases, protecting vulnerable individuals who
cannot be vaccinated.

5. The Demand for Medical Care

Grossman Model
- Health as an investment: health as a durable capital stock that produces healthy time,
which is valuable for both work and leisure
- Production of health: individuals invest in their health through medical care, diet,
exercise, and other activities. Over time, health depreciates, necessitating continuous
investment
- Demand for health vs. medical care: the demand for medical care is derived from the
demand for health. People invest in medical care to improve or maintain their health
- Optimal health investment: individuals make decisions about health investment by
weighing the marginal cost of health investment against the marginal benefit, which
includes increased productivity and longevity.

Indifference curve: curve representing combinations of two goods that provide the same level
of utility or satisfaction to an individual
- Properties: downward sloping, convex to the origin, and do not intersect
- Application: shows trade-offs between health and other goods.

Budget constraint: line representing all possible combinations of two goods that a consumer
can afford given their income and the prices of the goods
- Properties: downward sloping with the slope determined by the ratio of the prices of the
two goods
- Application: illustrates the trade-offs consumers face given their limited resources

Price elasticity of demand: measures the responsiveness of the quantity demanded of a good
to a change in its price
- If elasticity > 1, demand is elastic; if elasticity < 1, demand is inelastic; if elasticity = 1,
demand is unit elastic.

Moral hazard
• Ex ante moral hazard occurs when individuals take more risks because they are insured,
leading to riskier behavior before an adverse event occurs.
o Example: Someone with health insurance might neglect preventive care.
• Ex post moral hazard occurs when individuals consume more medical care than
necessary because they do not bear the full cost due to insurance.
o Example: Over-utilization of medical services after getting insured

- Problem: Increases healthcare costs and leads to inefficiency

- Solutions: Implementing co-payments, deductibles, and coinsurance to ensure patients
share in the cost of care
Adverse selection and cream skimming
• Adverse selection: occurs when individuals with higher health risks are more likely to
purchase health insurance, leading to higher costs for insurers.
o Solutions: mandatory insurance, risk adjustment mechanisms, community
rating to spread risk across a larger population.
• Advantageous selection: occurs when individuals with lower health risks are more likely
to purchase insurance, potentially leading to lower costs for insurers.
• Cream skimming: insurers selectively enroll healthier individuals to minimize costs.
o Problem: leads to inequities in access to insurance and higher costs for sicker
individuals.

Experience vs. community rating

• Experience rating: premiums are based on the individual’s or group’s health risk and
claims history
o Impact: Can lead to higher premiums for high-risk individuals.
• Community rating: premiums are the same for all individuals within a defined
community, regardless of individual health risk.
o Impact: Spreads risk across a larger population, promoting equity.

RAND Health Insurance Experiment (HIE)

 6. Geographical configuration of hospital services

- Determining number of hospital beds

- Cost Definitions
o Total Costs: sum of all costs incurred in producing a certain level of output
o Average costs: total costs divided by the number of units produced
o Marginal costs: additional cost incurred by producing one more unit of output

- Revenue Definitions:
o Total revenue: total amount of money received from sales
o Average revenue: total revenue divided by the number of units sold
o Marginal revenue: additional revenue gained from selling one more unit of output

- Cost types
o Fixed costs: costs that do not vary with the level of output e.g., rent, salaries
o Semi-fixed costs: costs that are fixed up to a certain level of output, after which
they become variable e.g., utility bills with a base fee plus usage charge
o Variable costs: costs that vary directly with the level of output e.g., raw materials,
hourly wages

Returns to scale
- Constant returns to scale: output increases in proportion to inputs.
- Increasing returns to scale: output increases more than proportionately to inputs.
- Decreasing returns to scale: output increases less than proportionately to inputs.
- Varying returns to scale: returns to scale that change at different levels of production.

Line-item budgeting: budgeting method where specific amounts of money are allocated to each
expenditure category or line item.
- Application: common in public sector budgeting, ensuring transparency and control
over spending.

7. Health care supply

- Market equilibrium occurs when the quantity demanded of a good or service equals the
quantity supplied, resulting in a stable market price. At equilibrium, there is no tendency
for the price to change because the plans of buyers and sellers are fully coordinated

- Price elasticity of supply: measures the responsiveness of the quantity supplied of a

good to a change in its price.
o Interpretation: If elasticity > 1, supply is elastic; if elasticity < 1, supply is
inelastic; if elasticity = 1, supply is unit elastic.

- Herfindahl-Hirschman Index (HHI): measure of market concentration used to assess

the level of competition within an industry
o Interpretation:
§ HHI < 1,500: competitive market.
§ 1,500 ≤ HHI < 2,500: moderately concentrated market.
§ HHI ≥ 2,500: highly concentrated market.
- Key market types
o Perfect competition: many small firms, identical products, no barriers to entry,
and perfect information
o Monopolistic competition: many firms, differentiated products, low barriers to
entry
o Oligopoly: few large firms, products can be identical or differentiated, significant
barriers to entry
o Monopoly: Single firm, unique product, high barriers to entry.

- Cost and revenue curves under Perfect Competition (PC) and Monopoly
o Perfect competition: firms are price takers

o Monopoly: firm is a price maker

- Profit maximizing point of production and profits

o Profit maximizing point: Marginal Cost (MC) equals Marginal Revenue (MR)
o Normal profit: occurs when total revenue equals total costs, including
opportunity costs
o Abnormal profit (economic profit): occurs when total revenue exceeds total
costs, including opportunity costs

- Key conditions for perfect competition

1. Many small firms: no single firm can influence market price.
2. Identical products: products are perfect substitutes.
3. Perfect information: all buyers and sellers have full information about prices and
products
4. Free entry and exit: No barriers to entering or leaving the market.

If Conditions are not met: market may experience monopolistic behavior, reduced
efficiency, higher prices, and lower quantity of goods supplied

8. Physician agency

- Health care as a credence good: product or service where the consumer relies on the
expertise of the seller to evaluate the quality and necessity, as the consumer cannot
assess these attributes themselves
o Explanation: in health care, patients depend on physicians to diagnose their
conditions and recommend appropriate treatments, making health care a
credence good.

- Information asymmetry occurs when one party in a transaction has more or better
information than the other
o Explanation: physicians possess more medical knowledge than patients,
leading to a potential imbalance in decision-making.
- Agency relationship and physician agency
o Agency relationship: exists when one party (the agent) makes decisions on
behalf of another party (the principal)
o Physician agency: physicians act as agents for their patients (principals), making
decisions about their health care based on their expertise

- Imperfect agency
o Explanation: occurs when the agent's (physician's) actions do not perfectly align
with the best interests of the principal (patient)
o Causes: conflicts of interest, financial incentives, or lack of perfect information

- Supplier-induced demand: occurs when a physician influences a patient's demand for

care beyond what is clinically necessary, often due to financial incentives
o Example: recommending unnecessary tests or procedures to increase revenue.
9. Hospital payment models

- Principal-agent problem: situation where one party (the principal) delegates work to
another party (the agent), who performs that work. The problem arises because the
principal and the agent may have different goals and the agent may have more
information, leading to potential conflicts of interest
o Example in healthcare: hospital (agent) might have different incentives
compared to the government or insurance company (principal) that pays for
healthcare services

- Sources of information asymmetry

o Knowledge gap: agents (e.g., hospitals) typically have more specialized
knowledge than principals (e.g., patients)
o Complexity of services: healthcare services are complex and outcomes are
often uncertain, making it difficult for principals to assess the necessity and
quality of services
o Unobservable effort: effort and quality of care provided by agents are not always
observable by principals

- Key features of hospital payment models

1. Line-Item Budgeting: allocates specific amounts of money to different categories of
expenses (e.g., salaries, equipment)
o Revenue function: fixed, based on budget allocations for each category.
o Key features: provides financial control and accountability but can lead to
inflexibility and inefficiency

2. Fee-for-service (FFS): providers are paid for each service they deliver
o Revenue function:
o Key features: incentivizes high volume of services, potentially leading to
overutilization

3. Global budgets (GB): fixed total amount of money is allocated for a specific period
o Revenue function: R=B, where B is the budgeted amount
o Key features: controls costs and encourages efficiency but can lead to under-
provision of care

4. Case mix financing: payments are based on the types and numbers of cases treated,
adjusted for case complexity.
o Revenue function:
o Key features: balances incentives for efficiency and quality, rewarding treatment
of more complex cases

- Yardstick competition: method of regulating firms by comparing their performance to a

benchmark or to the performance of other similar firms. This creates an incentive for
firms to improve efficiency and performance
o Application in healthcare: hospitals can be compared based on performance
metrics such as cost, quality, and outcomes to encourage improvements.
10. Hospital payment based on diagnosis related groups

- DRGs: system of classifying hospital cases into groups expected to have similar hospital
resource use. They are used to determine the amount hospitals will be paid
o Key features: payments are based on the average cost of treating patients within
each DRG, encouraging hospitals to manage costs effectively

- Assessing financial sense of increasing activity under Case Mix Financing (CF):
hospitals should evaluate whether the marginal revenue from treating additional patients
exceeds the marginal cost of treatment.
o Calculation: compare additional DRG payments for increased activity to the
variable costs incurred for treating more patients.

- Marginal pricing: price of producing one additional unit of output.

o Application: in healthcare, marginal pricing can be used to determine whether
expanding services or increasing patient volume is financially viable.

- Impact of changing hospital payment models

1. From FFS to CF:
o On activity: likely decrease in unnecessary services and increase in efficiency
o On length of stay: potential reduction as hospitals manage resources more
effectively
2. From FFS to GB:
o On activity: decrease in volume of services due to fixed budget constraints
o On length of stay: potential reduction to manage within budget constraints
3. From GB to CF:
o On activity: potential increase in activity to maximize case mix payments
o On length of stay: possible reduction as hospitals aim to treat more patients
within each DRG efficiently