Health Economics

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 Chapter one
Introduction
– Definition of economics
– Concepts and principles
– Classification of economics

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 Introduction
Economics is:
• Economics: is defined as the study of
allocation of scarce resources among
competing wants so as to “maximize” the
satisfaction of those wants.
• It is also concerned about how the produced
items are distributed among us.
• It analyses the costs and benefits of improving
patterns of resource allocation.

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 Introduction…
• Economics is the study of how societies use
scarce resources to provide valuable
commodities and distribute them among
different groups.
• It is the science of choice.
• It is the study of commerce among nations.
• It explains why nations export some goods and
import others and analyze the effect of putting
economic barriers at national frontiers.
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 Health economics
• …HOW to maximize the health of population
given constrained health producing resources.
 What health economists need is…
 To understand the relationship between resources
used and health outcomes achieved by alternative
options.
 …and compare!
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 Health economics…
• Health economics can be defined broadly as
the application of the theories, concepts and
techniques of economics to health sector .
• It is thus concerned with such matters as:
– The allocation of resources to various health
promoting activities
– The quantity of resources used in health delivery

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 Health economics…
• The efficiency with which resources are
allocated and used for health purposes
• The effect of preventive, curative and
rehabilitative health services on individuals
and society.
• The organization and funding of health
institutions

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 Three basic questions of economics

1. What to produce?
2. How to produce?
3. For whom to produce?

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 Health economic problem
 Unlimited healthcare “wants” with rapid
growth in health expenditure.

 Insufficient health sector resources.

 Choosing between ‘wants’ we can ‘afford’

given our resource ‘budget’.

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 Concepts and principles
Scarcity: implies choices have to be made regarding how
and where to use limited resources to address unlimited
human wants.

Opportunity Cost: With resources always being limited, by

choosing to implement one option, there is a benefit
forgone as resources are then not available for other
options. The lost benefit from the next best use of the
resources is the opportunity cost.

Prioritization and choice:

Choice on how to use scarce resources requires
prioritization of health interventions on some agreed
criteria. The costs and benefits of alternative
strategies/interventions have to be compared
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 Classification of economics
• Normative economics
– is prescriptive (narrow, regulatory) , judgmental
and involves ethical, political and philosophical
views and value judgments.
– States which polices should be implemented
– is about what “should be” or “ought to be”.
– Examples are: should the government give money
to the poor? Should budget deficit be financed
through higher taxes or lower spending?

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Classification…
• Positive economics
– is concerned simply with description of facts,
circumstances, and relationships in the economy.
– Attempts to determine the consequences of a particular
policy and which groups benefit and which groups bear
the burden of the policy
– It deals with objective scientific explanation of economic
happenings like, what will be the effect of higher taxes
on tobacco consumption? How does higher price on
bread affect the demand for bread, etc.
– Here you are more of a scientist.

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 Classification…
• Economics is also classified by level and type of issues it
deals with as:
• Microeconomics
– is concerned with the behavior of individual prices
and quantities (issues at individual level) and of a
particular markets and industry.
– It is about scarcity and choice, with individual markets
and goods, price mechanism, and how it works.
– It deals with production, consumption, and exchange
decision with emphasis on supply, demand and price
mechanisms and how they direct economic activities.
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 Classification…
• Macroeconomics
– deals with the behavior of the economy as a
whole or with the broad aggregate of economic
life.
– deals with the problem that apply to economy as
a whole.
– It is the study of rate of flow in the economy
(income, unemployment, output spending,
investment, etc) and what factors influence this
rate of flow.

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 2. Health and development
Health and development
– Meaning of health and development
– Impact of economy on health
– Impact of health on economy
– Economic /Health indicators
– Link between Poverty and Health

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 Meaning of health and development
Is Health a capital?
– Of course, because it helps a person to produce
other things.
– Only a healthy person can be effectively
productive.
Is health care an investment?
– Yes, because we enjoy life when we are healthy
which is the consumption side of health.
– On the other hand, health enhances the
productivity of labor and ensures growth in future
which means investment in health care increases
capital.

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 Meaning of health and development…
• Development is a comprehensive concept.
• According to UNDP it includes:
• Income distribution
• Level of Education and skill
• Health status of population
• Gender balance
• Political representation
• Natural resources management
• And others

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 Impact of Economy on Health
• Poverty at household level:
– Poor diet
– Poor housing and sanitation
– Poor individual and group attitude
• Poverty at country level:
– Low allocation of resources to public health programs
– IMR (poor countries) = 215/’000
– IMR (rich countries) = 42/’000
• There is correlation between economic development and high
life expectancy

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 Impact of Economy on Health…
• Growth on its own does not guarantee improved
health status development.
• It depends on:
– How growth takes place
– How benefits are distributed
– How benefits are reinvested
– How public spending is used
– Who controls resources in the family and their
priority

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 Impact of Economy on Health…

• Economic growth had also unfortunate

consequences.
• Disease of affluence (cancer, heart diseases,
depression…)
• Developing countries are also are facing
“double burden” of diseases
–Old: malaria, TB, etc
–New: cancer, heart diseases, etc
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 Impact of health on economy
• Healthier population is more productive
– Attendance
– Skill level
– Increased life expectancy leading to decrease in
time preference and increased investment
• Effect on population structure is hard to say
– Good health can lead to prolonged life. But
prolonged life can either lead to productive
working life or a high ratio of dependent and
financial burden.
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 Relevant channels from health
to the economy: a simple framework
Labour
productivity

Labour
supply
HEALTH Education ECONOMY

Saving
 Impact of health on…

Health is fundamental to wellbeing of the

individual
Generally there is correlation between
economic development and health status:
– L.E & GNP/GDP
– IMR & GNP/GDP

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• Annual days of absence due to illness per
employee
• High alcohol consumption significantly
increases the probability of job loss.
• The death of a household member
affects other household members’
welfare:
• Chronic illness affects household
incomes:
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 HEALTH AND …
Therefore, the relationship between health and
economy show a two-way interaction.

Health Economy

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 The interrelationship of health, health
care and the economy
Key messages
• Health system and economic systems are not
independent. They are interrelated in several
ways.

• Although health care can be an important

influence on health, it is only one of a broad
array of determinants of health.

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 Health indicators
• Infant mortality rate (IMR)
 Used as an indicator of the health of the
population
• Infants have less developed immune systems
• More likely to die from diseases in the
environment
• Nutrition
 Nutrition is a good measure of general
susceptibility to health since it is the under lying
cause of many disease.
• Malnourished have a weaker immune system
(World Bank)
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 Health indicators…
– Health indicators in developing countries fall short of
developed countries
• e.g., life expectancy at birth for females is:
 Low income countries: 59
 Middle income countries: 72
 High income countries: 81
• Great improvements in access to water but still very
high IMR in developing countries
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 Health indicators…

• In lower income countries:

 Higher prevalence of malnutrition

 Much higher incidence of preventable diseases

• Types of health problems different in developed and

developing countries (e.g. obestity)

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 Health indicators…
Difference in health outcomes between developed and
developing countries
In Developing Countries:
• Age distribution of ill health skewed toward infants and
pre-school children – policy incline as well
• More communicable than non-communicable
• Adults more likely to be afflicted with health problems
 Result of poor health when a child

 New health problems in adulthood

• Less likely to receive government help to solve health

issues – high health expenditure can lead to poverty
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 Health poverty trap

• Low income tends to cause poor health and

poor health in turn causes low income.
• Policy must therefore address both health and
poverty simultaneously.

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 Poverty affects health: Theory
1. Poor cannot buy health care
2. Poor more likely to be malnourished
3. Lack of income to buy drugs
4. Poor are more likely to live far away from
doctors and hospitals
5. Poor less likely to be educated
6. Poor and uneducated girls are more
vulnerable to AIDS

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 Health affects poverty
– Low life expectancy leads to lower investment in
education and health because less years to obtain
the returns to those investments.
– If you live in high disease environments it is more
likely one or more of your parents will die.
– This affects the level of education and health of
the child (human capital).
 This is especially the case in HIV/AIDS prevalent areas.

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 Health affects poverty
1. Poor health reduces national savings and capital
accumulation
2. Poor health also leads to the wrong choice of
institutions in a country
3. Health inequality leads to less social cohesion and
larger probability of unrest

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 Health affect education
Mechanism through which health affects
schooling:
1. Poor health leads to worse attendance and
attention in class
2. Poor nutrition leads to poor brain
development which affects learning
3. Parental death

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 Health and labor outcomes
• Better health may improve wages and labor
productivity (hours supplied/work done)
 Can work more hours and get more done during
the same amount of hours when are healthier.
 Better health as a child leads to improved

cognitive ability which can lead to better labor

market outcomes in the future

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 Thank you!!

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 3. Demand and Supply
• Demand, Needs and Consumption
– Demand as a function of price
– Elasticity of Demand
• Supply, Production
– Supply as a function of price
– Elasticity of supply
– Production

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 Market, Demand and Supply
• Market is an arrangement by which buyers
and sellers of a commodity interact to
determine its price and quantity.
• The two sides, supply and demand, interact in
the market to set the price and quantity of the
good through the price mechanism.
• Thus, through price mechanism market
decides what, how and for whom to produce.

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 Demand
• Demand is the amount of a good (service)
buyers want to purchase at different prices.
• It refers to the willingness or desire and ability
to buy a good.

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 Demand
• Factors affecting demand for a good or service are:
 own price (P)
 Average income (Y)
 Population (group size) (G)
 Price of related goods (Pxy)
» Complementary
» Substitutes
 Tastes (T)
 Expectation of future prices and income (Ex)
 Other factors
Qd = f(P,Y,G,PXY,T,Ex,etc)
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 Law of Demand
The law of demand states the quantity demanded of a
good/service is inversely related to its price. As price of
a commodity increase its quantity demanded will
decrease and vice versa.

Demand Schedule: is the tabular presentation of quantity

demanded of a good at different prices.

Demand Curve: is graphic presentation of the demand

schedule.
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 Demand Schedule

Quantity of Disposable Gowns

Price per Disposable gown: Demanded per Day:
$1 60
$2 30
$3 20
$4 15
$5 12
$6 10

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 Movement along and Shift in Demand
Curve
Movement along Demand Curve: occurs as a
result of a change in price of a good/service.

Shift in Demand Curve: is caused by non-price

factors affecting demand for a good such as
income, taste, and population.

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 Movement …

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 Supply
Supply is the amount of a good producers/sellers are
willing to produce and sell at different prices.

Factors Influencing the supply of a good or service:

– own price
– production cost and technology
– price of substitutes
– Market structure/organization
– particular factors

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 Law of Supply
Law of supply states that the quantity supplied of a
good is positively related to its own price, other
things being equal.

Supply Schedule: is the tabular presentation of

what quantity of a good will be supplied by the
producer/seller at different prices.

Supply Curve: is graphic presentation of the supply

schedule.
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 Supply Schedule
Price of Hip Quantity Hip Replacement
Replacement Supplied by the Hospital
Br. 2000 1000
2500 2000
3000 3000
3500 4000
4000 5000
4500 6000

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 Movement along and Shift in Supply Curve

Movement along Supply Curve: occurs as a

result of a change in price of a commodity.

Shift in Supply Curve: is caused by non-price

factors affecting supply for a good such as
change in cost of production.

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 Market Equilibrium
Market equilibrium is a point where market
forces of supply and demand are in balance
clearing all excesses on both supply and
demand sides.

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 Market Equilibrium Illustrated
Price of Hip Quantity Hip Quantity Hip
Replacement Replacement Replacement
(P) Demanded by the Supplied by the
Population (Qd) Hospital (Qs)
Br.1000
Br. 2000 7000
2500 6000 2000

3000 5000 3000

3500 4000 4000
4000 3000 5000
4500 2000 6000

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 Effect of Non-price factors on Supply and
Demand
All changes in other non-price factors result in
shift of the demand and supply curve.

Lets look at what happens to demand as

income, price of complementary and
substitute goods change in either direction.

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 Effect of Non-price …
Income:
• As disposable income of people increase demand
will also increase holding other things constant.
• As income decrease demand will also decrease.

• Therefore demand is positively related to change in

income for all normal goods.

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• However, with a special kind of goods called
Giffen or inferior Goods this is not always true.
• As income increases people tend to demand
less of the inferior goods as they now move to
“better” goods that are usually more
expensive.

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 Effect of Non-price …
Complementary Goods : are goods that
are consumed together.
e.g. car and gasoline
As price of good “X” increases, demand for
good “Y” decreases which means
demand of a good is inversely related to
price of a complementary good.

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 Effect of Non-price …
• Substitute Goods: are goods that can replace
the consumption of an other good (e.g.,
electricity and biomass fuel).
• As price of good “X” increases, demand for
good “Y” increases which means demand of a
good is directly related to price of a substitute
good

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 Reasons Behind Down-ward Sloping
Demand Curve
The downward sloping of a demand curve is the
result of two effects:
–Substitution effect
–Income effect
Substitution effect occurs because as the price
of a good fall it becomes less expensive
relative to all other goods as a result of which
people now consume more of it and
substituting the good for others.
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 Reasons Behind …
Income effect as an other explanation, is the
phenomenon when price of a commodity rise
the buyer real income will be reduced or
becomes poorer as a result he/she will
consume less than before.

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4. Principles of health care demand
• Health care need
• Health care demand
• Health care utilization
• Relationship between need, demand, supply
and utilization
• Demand and quality of services

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 Demand
• Demand describes the behavior of consumers. It does
not mean the desire to obtain something (Health
care)

• The hungry man who can not pay for food has no
demand for it

• An individual’s demand for a good is the various

quantities of goods & services that the consumer is
willing and able to buy at each specific price

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 Demand for health care
• The major purpose of demand analysis for
medical care is to determine those factors
which on the average, most affect a persons
utilization of medical services

• Demand analysis seeks to identify which

factors are most influential in determining
how much care people are willing to
purchase
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 Need Vs. want

• A need is something that is necessary for humans to live

a healthy life.
• Needs are distinguished from wants because a
deficiency would cause a clear negative outcome, such
as dysfunction or death.
• In economics, a want is something that is desired.
• It is said that people have unlimited wants, but limited
resources.
• Thus, people cannot have everything they want and
must look for the best alternatives which they can
afford.
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 Need versus demand…
• Health plans that focus on need and ignore
demand will face under- or over-utilization of
service capacity

• If one believes quantity demanded is too little

or too much (e.g. under-use or over-use of
emergency room) relative to need, then
quantity demanded must be manipulated by
changing,
– price or other costs to buyer, or
– demand through marketing or de-marketing
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 Deriving a Demand Curve for
institutional Visits
• Downward sloping demand curve for the visits

Price

P1

P0

q1 q0

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• Price changes lead to movements along D curve 66
 Other Economic Factors Affecting
Demand

• The demand curve illustrates the effect of

changes in the price of the good on quantity
demanded holding all other factors (income,
prices of other goods) constant.
• Changes in factors other than the price of the
good itself lead to shifts in the demand curve.

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 Other Economic Factors Affecting
Demand…

1. Income
• If income increases, then at any given price, consumer
is willing and able to purchase more q
Price

DO D1

P0

11/09/23 q0 q1 Physician Visits 68

 Other Economic Factors Affecting
Demand…

2. Complements - 2 or more goods which are

consumed together

• e.g. sugar and milk?

• e.g. contact lenses and optometrist visits

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 Other Economic Factors Affecting
Demand…

2. Complements
• e.g. contact lenses and optometrist visits
• If contact lenses become cheaper, demand for optometrist
visits will increase

Price
Price of complement falls

D0 D1

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 Other Economic Factors Affecting
Demand…

3. Substitutes - other goods which satisfy the same

wants, or provide same characteristics

• e.g. Doctor and Health Officer?

• Generic and brand name drugs
• Private and public hospitals

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 Other Economic Factors Affecting
Demand…

3. Substitutes - other goods which satisfy the same

wants, or provide same characteristics
• e.g. generic and brand name drugs
• If generic drugs in price decrease , D for brand name will decrease

Price
Demand for brand name
drug falls

D1 D0

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 Equilibrium of supply and demand
• Market equilibrium occurs when two economic
variables [supply and demand] are in balance

• The market equilibrium comes at that price and

quantity where supply and demand forces are in
balance

• At such a price the quantity and amount that buyers

wish to buy is just equal to the amount that sellers
wish to sell

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 Equilibrium of supply and demand…
• At the equilibrium, price and quantity tend to stay
same as long as other things remain equal

• Equilibrium price and quantity come at that level where

the amount willingly supplied equals the amount
willingly demanded.

• In a competitive market, this equilibrium is found at the

intersection of supply and demand curves.

• No shortages or no surplus are found at equilibrium

price.
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 Equilibrium of demand and supply

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 Elasticity
Elasticity is a measure of responsiveness or sensitivity of
the dependent variable to the change in the
independent variable.
Different types of elasticity:
– Price elasticity of demand (Єd)
– Price elasticity of supply (Єs)
– Income elasticity of demand (Єy)
– Cross elasticity of demand (Єxy)
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 Price elasticity of Demand
Price elasticity of demand (Єd) is sensitivity of the
quantity demanded of a good to the change in
the price of the good.

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 Price elasticity …
Єd = % change in quantity demanded (Q)
% change in price (P)

Elasticity cut-off points:

Єd is between 0 and 1.00 demand is inelastic
Єd is between 1.00 and ∞ demand is elastic
Єd is 1.00 demand is unit elastic
Єd is ∞ demand is perfectly elastic
Єd is 0 demand is perfectly inelastic
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 Factors affecting elasticity of demand
Why elasticity differ among different goods/services and what
factors affect it?
• Necessities VS Luxuries
• Length of time (Deferred consumption)
• Position of the commodity in consumers budget
• Income change
• Price change
• Availability & price of substitutes
• Availability & price of complements
• Nature of commodity
• Multiple uses

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 Elasticity and Total Revenue
Total revenue /Spending is the product of Price and
quantity, i.e., TR = P * Q

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 Elasticity
A relatively flat demand curve implies that
Price a small increase in price leads to a large
fall in # visits demanded
In this case demand is considered to be
relatively “elastic” with respect to a
change in price

# Visits
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 Elasticity…
Price A relatively steep demand curve
implies that a small increase in price
leads to a small fall in # visits
demanded
In this case demand is considered to
be relatively “inelastic” relative to a
change in price

# Visits
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 Elasticity…
Price Elasticity of Demand:

% Q D % change in quantity demanded

ED  
% P % change in price

• Example: If the elasticity of demand for physician

visits is -.6, a 10% increase in price leads to a 6%
decrease in the number of visits demanded

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 Elasticity…
• ED is expected to be negative. Thus, price
elasticities of demand are often quoted in
terms of absolute value

• The demand curve is inelastic if

• 0<|ED|<1

• The demand curve is elastic if

1<|ED|<
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 Elasticity…
• Income elasticity of demand:
% Q D % change in quantity dem anded
EY  
% Y % change in incom e
• Example: If the elasticity of demand for physician
visits is .1, a 10% increase in income leads to a 1%
increase in the number of visits demanded

• For most types of medical care, EY should be positive

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 Health care utilization patterns
• Utilization
• Determinants of health care utilization

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 Health care utilization…

• utilization of health care services is defined as: ‘the

process of seeking professional health care and
submitting oneself to the application of regular
health services, with the purpose to prevent or treat
health problems’ (Scheppers et al., 2006, p. 326).

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 Health care utilization…
• In Sub-Saharan Africa gaining access to health care
services is still a challenge as health systems
performance is very low
• There exist profound inequities in health within region
• As a result of either geographical, physical, financial or socio-
cultural barriers, the use of effective health services and
interventions is a challenge

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 Health care utilization…

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 7. Health Sector financing
• Total expenditure in health sectors
• Types of health care financing
– Government
– User charge
– Insurance
– Community

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 Health expenditures
• As countries get richer they are more able and
willing to spend public resources on health
care.

• People have to pay more out-of-pocket in

low-income countries as compared to high-
come countries.

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 Health care financing ….Introduction
• Health care is a human right and an essential
component in social and economic
development

• Government policy is to provide comprehensive primary

health service that focuses on preventative care

• Fund is determinant input for providing health service

• Lack of funds is a major constraint to realizing the goals

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 Introduction …

• The goal of the health care financing is to

alleviate the problem of under financing and to
mobilize the necessary resources to improve both
access to and quality of health care in a
sustainable manner.

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 Introduction …
• Financial management comprises two tasks
1) Identification and seeking of financial resources, &
2) Effective utilization of financial resources.

• Systematic mobilization of resources requires,

• Plans ( long, medium and short term plans)
• Regular mapping of resources to be made available
by stakeholders and gap analysis.

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 Introduction…
• In many of the poorest countries, the level of
spending is still insufficient to ensure
equitable access to basic and essential health
services and interventions.

• Different forms of health system financing

exist, that vary in terms of how resources are
generated, pooled together and used.

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 Focus of financial management?

• What program should be prioritized?

• What could be sources of health financing?

• Why and how much should consumer pay for

financing health services?

• What steps should be taken to use the resources

efficiently?
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Role of Health Manager in Financial mgt
• In Developing nations the health care demand is
enhancing while funds are dwindling relatively .

• Effective utilization of funds is a paramount

managerial issue.

• Health service managers in general requires

knowledge and expertise in maintaining the
financial information vital for the management of
the funds..

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 Types of Health care Financing
• Health financing is raising resources to support the
payment for goods and health services
• Resources raised are:
1. Money/Cash
2. Technical and non technical manpower
3. Materials
• Health finances are :
1. Daily operational/current
2. Long term investment/capital

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 Sources of health care financing
• The health services are financed from four
main sources:
1. Government (both federal and regional)
2. Bilateral and multilateral donors (both grants
and loans)
3. Non-governmental organizations, and
4. Private contributions, both from out-of-pocket
payments and through private sector investors

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Government sources of health care financing
• General tax revenue

• Loans

• Grants (Bilateral Aids)

• Lotteries etc

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 Community Financing

• Community financing is the mobilization of the

resources by the community to support in part or in full
the basic promotive , preventive, and curative services
• Community financing:

• Health related and allied activities

• Income generation scheme

– Service fee

– Drugs Sales
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 Why health insurance?

Positive points
• Enabling people to use health services without
payment
• It generates additional income for the health sector
Negative Points:
• Shifting responsibility by the ministry of health
• The demand for the curative services are enhanced.
• Enhanced pressure on the government to equalize the
health care services.

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 Role of User charges
Positive:
• Resource generations and improved quality and services.

• Additional source for the necessary required indispensable

services.

Negative:
• Emergency and empty pocket

• Poverty and inability to pay.

• Scope for dishonesty

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 Role of Private sector in health care Financing.

• Private health sector financing is globally very high up to

80 % in some developing nations.

• Government services are limited to selective primary health

care.

Advantages of private health care financing:

• Relief for the government to work for high priority , high volume
and high vulnerable area

• Introduction of competitiveness in the services.

• Increased consumer satisfaction and enhanced options

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 External Cooperation
• Much money is allocated for health care financing by
organizations like WHO

• This is more readily available for the capital investment

than recurring expenditure.

• Discuss Adv and Dis

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 Ensuring equity ?
• Health care financing contributions should be
distributed according to ability-to-pay.

• Cross-subsidies (from the healthy to the ill and

from the wealthy to the poor) in the overall health
system should be promoted.

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 Problem of health care financing
Common problems globally.
• Lack of funds
• Distribution of resources
• Raising health cost
• Lack of coordination
• Inefficiency in spending
• Wrong and biased and assumed priorities
• Pilferage
• Concern for self than the institution and
community.
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 Thank you

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Measuring Costs/Cost Analysis
 Overview
• Definition of cost
• Classification of cost
• Importance of cost data
• Measuring cost
 Meaning of cost
• a cost is the value of resources used to
produce a good or services.
• However, the way these resources are
measured can differ.
• There are two main alternatives with respect
to measurement of these resources: financial
and economic costing.
 Meaning of cost…
• Financial cost represents actual expenditure on
goods and services purchased.
• Costs are thus described in terms of how much
money has been paid for the resources used in
the project or services.
• In order to ascertain the financial costs of a
project, we need to know the price and quantity
of all the resources used and the level of
expenditure on these goods and services.
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 Meaning of cost…
• Economic cost include the estimated value of
goods or services for which there were no
financial transaction or when the price of a
specific good did not reflect the cost of using
its productivity elsewhere.

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 Meaning of cost…
• The theory and the concept of cost arise from the
fact that economic resources are scarce by nature.
• Had it not been for the scarcity of resources, the
concept and theory of cost may not exist as such.
• Scarcity has two sides:
– The infinite nature of human wants
– The finite or limited nature of resources available to
produce goods and services.

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 Why Consider costs?
• Scarcity implies choice between alternatives
• Cost is one factor which enables choice
• Accountability
• Assessing efficiency
• Assessing equity
• Assessing priority
• Making cost projection

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 Types of cost

• Financial versus Economic Costs

• Direct/Indirect/Intangible costs
• Operating costs/Capital costs
• Fixed and variable costs
• Total, Average, marginal and Incremental
costs
 Financial and Economic Costs
• Financial Costs
– Real money outlays
• Economic Costs
– Real Money outlays +Resources for which no
money was spent
 Direct, Indirect and Intangible
costs
• Direct cost
– Medical costs
– Non Medical costs
• Productivity losses cost
– In some articles mentioned as Indirect cost
• Intangible Cost
– Pain and suffering
 Direct, Indirect and Intangible costs-Cont

• Diagnostic tests and • Program • Productivity losses • Emotional

procedures administration from morbidity and anxiety and fear
premature mortality
• Drugs and medical • Physical space and • Pain and
supplies utilities suffering
• Physician office • Patients’ out-of-
visits pocket expenses
• Hospitalization • Patient time
 Classification by type of Expenditure
• By cost component (by function)
– Personnel, supplies, equipment, building
infrastructure
• By level of responsibility
– Agencies, personnel levels, etc
• By sources of funding
– National, provincial, district gov. levels; multilateral
partner(s)
• By program activity area
– Training, patient outreach, treatment, laboratory, etc
 Operating and Capital costs
Capital
Costs used for purchase of assets that have a
useful life of more than one year
‗ E.g. Buildings ,Equipment, Vehicles, Computers
Operating (Recurrent)
The ongoing costs of the program required
to deliver good or services
‗ E.g. Personnel, Drugs, Supplies, operation and
maintenance
 Fixed and Variable Costs
Fixed Costs
Those whose total remain constant (with in a
relevant change) even though the volume of
activity may vary
In the short run it do not change in response to
the number of client served or amount of product
delivered
Variable Costs
costs which vary with the level of output
 Measuring Health Status
Input Process Output Outcome
(Structure)

Achievement
How
of the
Resources resources Intended
Productivity
are used Change

Improved health in
quantity and quality
Outpatient Visits No of patient Mortality
Manpower Diagnostic attendance Disability
Equipment procedures No of discharges Prevalence
Money Inpatient admission No of referrals Satisfaction of
Consultation No of children patients
Pain
episodes immunized Distress
Drugs dispensed restoration
 Nature of Comparative Analysis

Costs A Consequences A
Program A

Choice
Consequences B
Program B
Costs B

Note: (1) If program A is subject of interest, program B can

represent some other program, or no program at all. (2) The
difference in costs is compared to the difference in consequences.
 4 Main Methods of Economic
Evaluation

• Cost effectiveness analysis (CEA)

• Cost benefit analysis (CBA)

• Cost utility analysis (CUA)

• Cost minimisation analysis (CMA)

 Cost-effectiveness
 In CEA, outcomes are measured in natural or
physical units (e.g. heart attacks avoided, deaths
avoided…).

 Only one domain of outcomes can be explored at a

time.

 Result: cost per unit of consequence (e.g. cost/LY

gained)
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 Decision rule:
Two programmes A (comparator) and B.
• If Outcome B = Outcome A => Compare costs (CMA).
• If Outcome B > Outcome A and Cost B < Cost A, B is dominant.
• If Outcome B > Outcome A and Cost B > Cost A, we have to make a
decision.

 In order to make a decision on which intervention to choose,

a cost-effectiveness ratio (CER) should be calculated.

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 Cost-effectiveness Analysis
 The most commonly CERs used are the:
 Average cost-effectiveness ratio (ACER)
Cost B
ACER=
Effectiveness B
 Incremental cost-effectiveness ratio (ICER)
Cost B−Cost A
ICER=
 Effectiveness B−Effectiveness A 

 The next question is : Is the intervention “cost-effective”?

 There is no ‘magic’ cut-off number that establishes whether
or not an intervention is ‘cost-effective’.

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 Cost-benefit Analysis (CBA)
• An economic evaluation in which all costs and
consequences of a program are expressed in the same
units, usually money.
• CBA is used to determine allocative efficiency; i.e.,
comparison of costs and benefits across programs
serving different patient groups.
• NB. Even if some items of resource or benefit cannot be
measured in the common unit of account; i.e., money,
they should not be excluded from the analysis.

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 Cost-benefit Analysis
 CBA try to value the outcomes in monetary terms, so as to
make them commensurate with the costs.

 Result: Net benefit or cost-benefit ratio.

 CBAs rarely used in health care.

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 Summary

Type of Analysis Costs Consequences Result

Result

Different magnitude of a Cost

common measure eg.,
Cost per
per unit
unit of
of
Cost Effectiveness Money LY’s gained, blood
consequence
consequence eg.eg. cost
cost
pressure reduction. per
per LY
LY gained.
gained.

Net
Net cost
cost
Cost
Cost Benefit
Benefit Money
Money valued
valued in
in money.
money. cost:
cost: benefit
benefit ratio.
ratio.

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