This presentation gives a basic introduction to the field of health economics and includes important concepts like that of efficiency, equity, opportunity costs, demand and supply and also includes financial evaluation

1. Basics of Health Economics
Presented by:
Dr Sourav Goswami
Moderator:
Dr BS Garg

2. Framework
Understanding Health Economics
Why we need Health Economics?
Basic terms and concepts
Different types of Economic Evaluation
The concept of Market, Demand, Supply & Surplus
Health financing
Resource mobilization
Risk pooling
Resource allocation

3. Pessimist: Glass ½ Empty
Guess, what the Economist
will say??
Optimist: Glass ½ Full
This is the “Economist’s view
of the world”
Glass is ½ WASTED

4. What is Economics?
Language of Economy is the language of SCARCITY !!!
“Study of how individuals and societies choose to
allocate scarce productive resources among alternative
uses and subsequently to distribute the products
from these uses among members of a society”
Economics answers: WHAT, HOW & WHO?
Health and Health care are seen as two
important products to which all societies
commit productive resources

5. Can economics be applied in health sector?
Scarcity of resources OR Increased demand?
• Ageing population
• New health technologies
• Increased expectations from people ……

6. Health Economics
It is the study of how scarce productive resources are
allocated among alternative uses for the care of sickness and
the promotion, maintenance and improvement of health.
It further includes the study of how health care and health‐
related services, their costs and benefits, and health itself, are
distributed among individuals and groups in society.

7. Health Economics
So, it gives a theoretical framework to help healthcare
professionals, decision-makers or governments to make
choices on…
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!

8. Types of economic problems in health
sector
• At what level should hospital fees be set?
• Are taxes on cigarettes a useful way of promoting
health through reducing the prevalence of smoking?
• Which is the more effective method of increasing
the take-up of health services: price controls or
subsidies?
• How should doctors be paid?
• Which treatments are the most cost-effective for
people with HIV?

9. Why Economics matters in Health ?
How can we save our resources?
Are we doing the right thing?
How can we decrease the cost?
How can we use public resources to help people who need
them the most?
What’s about a public-private mix-up?
How cost escalation is being contained?
What about the indirect cost of health care?
It helps in developing the effectiveness of the
MOHFW in dialoguing with MOF in order to ask
for more investment in the health sector

10. Basic terms and concepts in Health
Economics
Concept of Efficiency
Concept of Equity
Concept of Utility & Cost
Concept of Opportunity Cost
Concept of Marginal cost & benefit

11. Concept of Efficiency
“Get the MOST out of scarce resources”
3 main elements:
1. Do not waste resources
2. Produce each output at least cost
3. Produce the types and amounts of output which people
value the most

12. Concept of Efficiency contd…
Types of efficiency
Technical efficiency: For any given amount of output
the amount of inputs used to produce it is minimized (it can
also be stated- that maximum output is produced from any
given combination of inputs)
Allocative efficiency: where the pattern of output
matches the pattern of demand;
Cost effectiveness efficiency: A guide to choose
between two alternative methods or interventions
In common language,
efficiency means both 'doing things right' (technical
efficiency and cost effectiveness‐ ), and
'doing the right things' (allocative efficiency).

13. Concept of Equity
The term EQUITY stands for social justice or fairness
Bravemann and Gruskin define equity in health as follows:
“For the purposes of operationalization and measurement,
equity in health can be defined as the absence of systematic
disparities in health (or in the major social determinants of
health) between social groups who have different levels of
underlying social advantage/disadvantage—that is, different
positions in a social hierarchy.”
Inequities in health systematically put groups of people who are
already socially disadvantaged (for example, by virtue of
being poor, female etc) at further disadvantage with respect
to their health;

14. Concept of Equity contd…
Is EQUITY = EQUALITY ??????????????

15. Concept of Equity contd…
HORIZONTAL
It refers to equal access to
health care services for all
people with the same
needs, regardless of
location, gender, race
and other
determinants.
 It looks at how well
health services are
distributed throughout
society
VERTICAL
It refers to the equal access to
health services irrespective
of income
Many health financing systems
are set up so that the rich
subsidize the poor, i.e. the rich
pay relatively more for health
services than the poor—
therefore aiming at reducing
vertical inequity.

16. In order to gauge equity we need to gather data through
household surveys on socio-economic status and health
outcomes.
HEALTH OUTCOMES are primarily measured by
mortality, fertility, nutrition and morbidity outcomes and
are expressed as a rate which represents an average
among the population, not taking into account the
variance in outcomes across different income quintiles
Concept of Equity contd…

17. Concept of Equity contd…
0
30
60
90
120
150
1980 1985 1990 1996
Bangladesh
India
Nepal
Pakistan
Sri Lanka
Source: Poverty Fact Sheets, World Bank (based on DHS Data, USAID
(Source: United Nations
Population Division)
IMR

19. Concept of Utility & Cost
“Utility” is the economic term for satisfaction obtained
from purchasing a particular good or service
“Cost” originates from constraints on our resources
Economic resources are allocated according to a “price
system.”

20. “I have sometimes suggested when teaching [health economics]
that if any of the participants fall asleep during my lecture and
awaken conscious that I have asked a question but that it has
gone unheard, then the best response is to mutter something
about opportunity cost and the margin. This has something
like a 50 per cent or higher chance of being at least partly right.”
Professor Gavin Mooney,
a leading health economist

21. Concept of Opportunity Cost
The opportunity cost of a commodity is the value of the
best alternative use to which those resources could have
been put, the value of the productive opportunities
foregone by the decision to use them in producing that
commodity
Two fundamental characteristics of economic analysis
follow from the concept of opportunity cost.
1. Economics is concerned with evaluating and choosing
among alternative courses of action, whether or not they
are explicitly identified.
2. Secondly, in doing so, it examines both the costs and
consequences of the alternatives

22. Concept of Marginal cost & benefit
Marginal refers to ‘the next unit’.
Economists define the MARGINAL COST of an output to
be the additional cost incurred in producing the last (or
next) unit of that output.
Similarly, the MARGINAL BENEFIT is the additional
benefit obtained by consuming the last (or next) unit of
an output

23. Marginal cost & benefit
Number
Of tests
Total no
Of cases
detected
Additiona
l
Cases
detected
Total
Cost ($)
Average
Cost/case
($)
Marginal
Cost per case
($)
1 65.946 65.95 77,511 1,175 1,175
2 71.442 5.496 107,690 1,507 5,492
3 71.900 0.458 130,199 1,810 49,146
4 71.938 0.038 148,116 2,059 471,500
5 71.941 0.00372 163,141 2,268 4,038,978
6 71.942 0.00028 176,331 2,451 47,107,143
Source: What do we gain from the sixth stool guaiac?
by: Neuhauser and Lewicki (1976)
New England Journal of Medicine
To summarise, marginal analysis is about
getting the most value out of the
resources used and in practical terms
entails measuring the costs and benefits
of expanding or contracting an activity,
program or service

24. Economic Analysis
To ensure healthcare resources are allocated in an efficient
manner, health economists rely on various types of economic
analyses.
A common element across all forms of economic evaluation
is that they involve measuring “costs”
The important methods of doing an economic evaluation are:
1. Cost Effectiveness analysis (CEA)
2. Cost-Utility analysis (CUA)
3. Cost-Benefit analysis (CBA)

25. Input-output Analysis
Input Process Output

Money

26. Cost effectiveness Analysis
Input Process Output  Effect

Cost
Example: What is the unit-cost for treating Tb?

27. Cost Utility Analysis
InputProcessOutputEffect Impact
 
Money Change in mortality/
fertility/ disability
( we use proxy indicator:
DALY/HALY)

28. Cost Benefit Analysis
InputProcessOutputEffect Impact
 
Money Money

29. Measurement of costs and consequences in
economic evaluation

30. Market concept: Alternative use of a resource

31. The concept of Market
A market is simply the result of the interaction of supply
and demand.
For any market to function, we need 3 components:
1. Trading of a good or service;
2. Two independent players— buyers & sellers;
3. A 'price' of the good or service that conveys information
about its value —
buyers’ willingness to pay = DEMAND,
sellers’ willingness to produce = SUPPLY

32. Market concept:
Flow of money, resource and commodities

33. Issues in interaction of supply & demand in
health
Buyers/Clients
1.Able and willing to pay
2.Informed
3.Rational
4.Time to shop
Good or Service
5.Homogenous
(similar)
inputs/similar quality
6.Price known in
advance
Producers/Suppliers
7.Many sellers
8.Free entry
9.Free exit
(A producer
starts producing,
buying necessary
machinery, patents
or anything else on
terms that are
equivalent to those
already in the
industry)

34. Demand
When economists talk of 'demand' in the market place,
they are talking about consumers who want something
and are able and willing to pay for it. The presumption
when analyzing markets is that when consumers want
something and are willing to pay for it, it is because they
feel it enhances their personal utility or welfare.
Demand VS Need

35. The Demand curve

36. Demand shifters
Five types of demand shifters are recognized:
1.Number of consumers
2.Income of consumers
3.Consumer tastes
4.Price of substitutes
5.Price of complements

38. Supply
SUPPLY is the amount of a commodity that present or
potential sellers are willing to put on the MARKET, in
response to the price offered by (or on behalf of) buyers.

39. Supply curve

40. Supply shifters
Three types of supply shifters are recognized:
1. Number of suppliers
2. Cost of inputs
3. New technologies
If we want to increase the supply of a good or service,
we can:
1. Increase its price;
2. Reduce costs of producer inputs;
3. Invent new technologies that yield more output per input.

41. Concept of Equilibrium price

43. Health Financing
Health financing is the process of monetary support of a
program such as health care. It comprises of three stages:
RESOURCE MOBILIZATION
RISK-POOLING
RESOURCE ALLOCATION

45. Resource Mobilization
Resource mobilization looks at mechanisms for collecting
money to be spent on health.
The different ways of resource mobilization includes:
1.General revenue
2.Insurance schemes
3.Community financing
4.OOP
5.External source of financing

46. OOP 69%
Source: National Health Accounts

47. Risk Pooling
RISK-POOLING refers to the management of financial
resources so that large, unpredictable individual financial
risks become predictable and are distributed among all
members of the pool.
Three Ways to Pool Revenues are –
From Healthy to Sick;
From Rich to Poor and
Across the Life Cycle.

48. Resource allocation
Resource Allocation concerns itself with allocating the mobilized
(and pooled) resources to service providers.
Allocation has three dimensions:
The goals dimension—Criteria of allocation (Why ?)
The institutional dimension—Recipient institutions
(Who To ?)
The financial dimension- Forms of allocation (How To?)
1. Why (criteria) Allocation involves
criteria that express health policy
objectives. Those can range from
explicit targeting of programs such as
Maternal and Child Health (MCH) or
specific projects such as particular
immunization. It may also involve
criteria such as allocation by age and
gender or income levels that target
the specific need of particular
populations.
2. Who To (institutions) Institutions
are involved since they are the
budget holders responsible for
securing, but not necessarily
providing, health care. These
institutional arrangements may be
related to geography and to
particular types of health financing
systems.
3. How To (financing
mechanisms) Finally, we focus on
the explicit financial mechanism
used to transfer funds from the
pool to the recipient, making use
of the institutional framework of
the specific health care system.
All organizations that mobilize
funds have to decide which
organizations to pay, what to pay
them for, and how much to pay
them.
Payment methods include:
1. Fee-For-Service;
2. Salary (and Bonuses);
3. Capitation;
4. Admission-Based;
5. Diagnostic-Related Grouping
(DRG);
6. Budgets (Line-Item or Global).

49. References
 World Bank Institute: Basics of Health Economics; Module 1 to 10.
 Bhalwar R. Textbook of Public Health and Community Medicine, Published
by Dept of Community Medicine AFMC Pune in collaboration with WHO,
India office New Delhi, First edition 2009; 427-435
 Phillips CJ. Health Economics: an introduction for health professionals.
Blackwell Publishing ; BMJ Books.2005.
 Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW.
Methods for the Economic Evaluation of Health Care Programmes.4th
ed.
Oxford University Press. United Kingdom;2015

50. Thank you !!!!
Happy Navratri