2005

1. INTRODUCTION TO HEALTH
ECONOMICS
Assignment No. 1
University of Glamorgan
Enrolment No. 04155084
23 November 2009

2. Introduction to health Economics. Assignment 1. 04155084
Assess the potential contribution(s) which an understanding of health
economics may offer to the discipline of Primary Care.
Word Count: 1,963 (excluding bibliography)
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3. Introduction to health Economics. Assignment 1. 04155084
Introduction
Health Economics
The simplest way to describe health economics is by saying that it is the economics
applied to health. However, it is not just this, health economics is also a way of
thinking (Mooney, 2003).
As with general economics, health economics is based on the principle that resources
are scarce relative to the demands made on them. All Health Systems in the world,
and the NHS is not an exception, have the problem of how best to allocate limited
resources (Klein, 1995) and choices in how to allocate resources are inescapable.
Health economics tries to minimize the problem first increasing awareness that
choices have to be made but also providing tools to help taking rational decisions on
how to allocate scarce resources.
Resources are things that contribute to the production of an output. In healthcare the
principal output is “health”, which it is a difficult output to define (Salek, 1999).
In the year 2000, the total UK NHS expenditure was £ 67 billion. This money was
financed through direct taxation (85%), National Insurance (13%) and though other
means such as patient charges (2%). In the same year, the NHS represented 16.3% of
the total public expenditure. In terms of GDP, the UK health expenditure
corresponded to about the 6.7% of the GDP in 1998 (lecture notes, M Longo, 2004).
Two key concepts in health economics:
1. Opportunity cost
Opportunity cost is the benefit foregone when taking actions (Jefferson et al., 1996).
Because the resources are scarce, when we use these resources in a particular way we
have to be aware that there is an opportunity foregone to obtain benefits if using the
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4. Introduction to health Economics. Assignment 1. 04155084
resources in another different way (Mooney et al., 1980, Salek, 1999). As Mooney
states: “opportunity costs entails sacrifice” (Mooney, 2003).
2. Efficiency
Salek defined efficiency as maximising the benefits from available resources. In
health, economics efficiency means obtaining as much health as possible from the
resources available (Salek, 1999).
Primary Care
Despite the vast majority of patient contacts with the NHS take place in primary care
settings (over 90% of health care episodes begin in primary care), community services
receive just 10.2% of the total NHS budget. The main proportion of the NHS budget
is spent on hospital services (53%) and medication (13.1%) (lecture notes, M Longo,
2004).
Primary care services are organized differently to the other services in the NHS.
General Practitioners (GPs), who are ‘gatekeepers’ to the hospital sector, are
independent contractors that provide a service to the NHS. This means that despite the
financing of primary care services is public, the provision is private (Donaldson,
1993). This setting has been changing slowly in the last few years and more and more
GPs are becoming salaried employees (Oldham and Rutter, 1999). The rest of the
personnel working in Primary Care are employed either by the GPs owning the
practices (e.g. receptionists, practice nurses) or directly by the NHS (e.g. midwifes,
health visitors, community nurses).
Main problems and issues Primary Care faces today:
• Changing technology and new techniques in primary care (as in the rest of the
NHS) that creates new demand instead of satisfying it. This is creating more and
more pressure on existing scarce resources and it is raising costs in the NHS.
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5. Introduction to health Economics. Assignment 1. 04155084
• Constant changes in the organisation of Primary Care. Just a few years after Local
Health Boards (LHBs) and Primary Care Trust (PCTs) were introduced in Wales
and England there are indications that a new reform may be happening in the near
future. This is likely to cause motivation problems amongst primary care workers
(Groves, 1999) and there is no evidence that this continuous changes are
benefiting patients or increasing the quality of the services provided.
• Loss of independent contractor status by GPs as more GPs are employed directly
by the NHS though LHBs and PCTs. This, that is seen as an opportunity by some
GPs is perceived as a threat for some others (Oldham and Rutter, 1999).
• New GP contract very focused into achieving targets. These targets are being used
as outcomes but many GPs have complained about them, as some are quite
arbitrary and not always correlate with what is the best evidence-based clinical
practice. It is usual to use proxies for health output but it can be difficult to choose
which ones correlate better with the final output that is “health”.
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6. Introduction to health Economics. Assignment 1. 04155084
Contributions of health economics to primary care
Health economics can help answering some of the more difficult questions primary
care is facing.
What should be the objective of the primary care system?
The objectives of the primary care system should be to provide the most efficient,
effective and equitable services for the population that serves. However, these
objectives are nearly impossible to achieve at the same time and it becomes evident
that choices will be needed. Health economics can help by giving a structured
framework that allows these choices to be made. Health economics can help
providing the economic sustainable primary care able to be the most efficient,
effective and equitable system possible with the existing resources. Therefore, the
objective of primary care should be to maximise health from available scarce
resources.
Can the primary care system meet all needs?
When the NHS was created in 1948, the NHS founders had the noble objective of
meeting all needs of the population, years later it became clear that this was
impossible to achieve. The NHS founders made a fundamental mistake, they though
that needs were finite. However, needs are not finite because needs are dynamic,
relative and subjective. This is also applicable to primary care. The resources
available in the primary care system will never be able to meet all needs of the
population.
Changing technology and new techniques in primary care creates new demand instead
of satisfying it. For example in 1948 there was not need for cervical cancer screening
in primary care simply because we did not have the technology to be able to identify
cancerous cells, now cervical screening is essential in any primary care setting.
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7. Introduction to health Economics. Assignment 1. 04155084
Genetic tests to detect the risk of having a cancer or other illnesses are just around the
corner, this will create new needs.
Needs are moving fast away from us, it is true that resources are also increasing, but
needs are increasing faster (lecture notes, D Cohen, 2004). Health economics can help
in deciding to which needs we employ our scarce resources.
On what basis can the primary care services choose how to utilise
scarce resources?
Health economics can help primary care choose how to distribute scarce resources in
the way, which most people can benefit. Scarce resources can be distributed following
a health economics framework. Health economics can provide tools to help taking
rational decisions; some of these tools are the methods of economic evaluation. There
are four main methods of economic evaluation:
• Cost benefit analysis (CBA). This economic analysis intends to determine the
value of interventions that have different therapeutic outcomes by assigning
monetary value to costs and therapeutic benefits. The CBA deals with the
question of “whether” and “how much”. Two basic principles are used: do
only things where benefits exceed costs and do not do things where costs
exceed benefits (Mooney, 2003). The CBA has the difficulty of trying to give
monetary value to benefits and health consequences, which makes this study
restrictive in the questions it can address.
• Cost effectiveness analysis (CEA). This economic analysis is used to
compare interventions that are similar, have similar outcomes and therefore
can be measured in identical units. The different interventions are compared in
terms of cost per unit. Once it has been decided to do an intervention or
project, the CEA tries to address the question of “how” to achieve an objective
at the lowest cost or which is the most effective way to achieve an objective. It
has the advantage over CBA of being able to measure different outcomes but
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8. Introduction to health Economics. Assignment 1. 04155084
the CEA is not very useful when the consequences of the interventions are
very different (Jefferson et al., 1996).
• Cost minimisation analysis (CMA). In this economic analysis, the
interventions compared are considered to have the same consequences and
only the inputs are taken into consideration (Drummond et al., 1997).
• Cost utility analysis (CUA). This sophisticated economic analysis is used to
compare interventions that produce different consequences in terms of
quantity and quality of life (Jefferson et al., 1996). It is a variation of the CEA
but takes into consideration patient choices and preferences for the effects of
an intervention. It uses a multidimensional measure of health called QALY
(quality-adjusted-life-year). The CUA has also some problems; the main one
is that assumes that health is just about health maximisation, ignoring that
there are other issues like equity.
How can primary care assess if the current balance of activities is
right?
Primary care can assess if the current balance of activities is right by performing
continuous evaluation. Health economics can help providing tools to help evaluating
and deciding where to employ available resources.
One of these tools is Programme Budgeting and Marginal Analysis (PBMA).
PBMA is a framework that allows comparisons between programmes (diseases
groups, patient groups, etc) in terms of expenditure over the time making managers
and policy makers decide which areas are priorities and which one are not. Once
priorities are established, the focus is on the marginal benefits of expanding an area
compared with the marginal sacrifices of reducing another area (Mitton and
Donaldson, 2001, Cohen, 1994).
Some people may argue that it is not ethical to decide how to use resources employing
economical tools but those people should be able to provide a better and fairer way to
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9. Introduction to health Economics. Assignment 1. 04155084
justify the choices they are making. Health economics may not provide perfect
solutions but at least gives and structured framework that allows taking them (MPH
lecture notes, D Cohen, 2003)
Can primary care be run based on rules from the free market?
The free markets are ruled by forces of supply and demand. In the free markets, the
output is distributed by the wiliness or ability of the consumer to pay. Health
economics can help analyse some of the rules of the free market.
Some of the characteristics of the health care system in general and primary care in
particular make the free market very difficult to work in these settings. Some of these
peculiarities are (Donaldson, 1993):
• Uncertainty about the risk of contracting an illness. Because the
unpredictable nature of the illness, the consumer can not plan for the future
consumption of health care. In a free market, the market will respond by
generating insurance mechanisms with high premiums to cover for this
uncertainty. These premiums may not be affordable for some parts of the
population.
• Externalities. An externality appears when one person’s action affects another
person. This effect is absolutely free and unwanted. An example of positive
externality is the immunity protection that unvaccinated people get from
vaccinated people. In a free market for health, the cost and benefits of these
externalities can not be accounted for using the rules of supply and demand.
• Information asymmetry between providers (health professionals) and
consumers (patients). In a free health care market, it is very difficult for
patients to know which is the best product on offer. Health care professionals
have a double role as providers and advisers and this can create a conflict of
interest.
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10. Introduction to health Economics. Assignment 1. 04155084
• Access to medical training is restricted. This means that the number of
suppliers (doctors and nurses) is regulated and limited, making difficult to
increase supply in an ideal free market.
Because the failures of the market in the allocation of health care, it is usual in most
of the countries that the government intervenes in the regulation of the health care
market.
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11. Introduction to health Economics. Assignment 1. 04155084
Bibliography
Cohen, D. (1994) 'Marginal analysis in practice: an alternative to needs assessment
for contracting health care', BMJ, 309, 781-5.
Donaldson, C. (1993) Economics of health care financing : the visible hand,
Macmillan, London.
Drummond, M. F., O'Brien, B., Stoddart, G. L. and Torrance, G. W. (1997) Methods
for the economic evaluation of health care programmes, Oxford University
Press, Oxford.
Groves, T. (1999) 'Reforming British primary care (again)', BMJ, 318, 747-748.
Jefferson, T., Demicheli, V. and Mugford, M. (1996) Elementary Economic
Evaluation in Health Care, BMJ Books, London.
Klein, R. (1995) 'Priorities and rationing: pragmatism or principles?' BMJ, 311,
761-762.
Mitton, C. and Donaldson, C. (2001) 'Twenty-five years of programme budgeting and
marginal analysis in the health care sector, 1974-1999', J Health Serv Res
Policy, 6, 239-48.
Mooney, G. H. (2003) Economics, Medicine and Health Care, Prentice Hall Europe,
Hemel Hempstead.
Mooney, G. H., Russell, E. M. and Weir, R. D. (1980) Choices for health care,
Macmillan, London.
Oldham, J. and Rutter, I. (1999) 'Independence days', BMJ, 318, 748-749.
Salek, S. (1999) Pharmacoeconomics and outcome assessment: a global issue,
Euromed Communications Limited, Surrey.
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