HEALTH CARE ECONOMICS & FINANCING
College 1
What is (health) economics?
Economics: how we make decisions of resource use (allocation) under conditions of scarcity
Scarcity: we have unlimited wants, but limited resources (money, time, natural)
Economic good: any good or service that is scarce relative to our wants for it
Health economics applies economic theory, models and empirical techniques to the analysis of
decision making by individuals, healthcare providers and governments with respect to health and
healthcare.
It is a theoretical framework to help healthcare professionals, decision-makers or governments to
make choices on:
Production of healthcare (doctors, specialists, nurses);
The health of the population given constrained health-producing resources;
Distribution of healthcare across the population; and
Spending on healthcare.
The health economic problem
Unlimited healthcare “wants” with rapid growth in health expenditure.
Insufficient (= ontoereikend) health sector resources.
Choosing between “wants” we can “afford” given our resource “budget”.
Problem: Scarcity; Need to allocate resources efficiently.
Answer: Competitive market mechanisms set a benchmark for the efficient allocation of
resources; Economic “laws”
Catch: Healthcare is different; Market failure; Can government intervention improve market
mechanisms?
Why is healthcare different?
• Competition between producers sets market prices (demand & supply achieve a balance)
• There are typically many producers and many consumers.
• Information on products can generally be “observed”.
• In healthcare, there are numerous sources of market failure. E.g. asymmetry of information,
and externalities.
• When markets fail, we need other ways to make collective choices (particularly on resource
allocation).
• There is a strong case for government intervention in the face of market failure.
Healthcare, health, utility
Health vs Healthcare
• Healthcare can be “traded” on the market, health cannot.
• We demand healthcare to improve our health.
• Health is not easily measurable.
• WHO definition of health: Health is a state of complete physical, mental, and social well-
being and not merely the absence of disease or infirmity.
Welfarism
,Resources Health Care Health Utility Other stuff that makes you happy
^ Utility curve for health
^ Product curve for medical care
Total utility curve for health Marginal utility curve for health
Production of health
• There is a production function for every good that shows the maximum output you can get
from any quantities of inputs.
• Health = H(health care, technology, profile, lifestyle, socioeconomic status, environment)
,Total product curve for health care
Marginal product
• Marginal product (MP) of an input = the change in output per unit change in input.
• MP = the slope of the total product curve.
• ΔQ/ΔL
• Marginal product is a measure of “input productivity”.
Marginal product curve for health care
Health care production (question)
• Flat-of-the-curve (Enthoven): point when extra health care consumed does not lead to
substantial health gains.
, Productivity possibility curve
• Given a limited set of resources (e.g. cardiac surgeons), which combinations of
products/services are possible?
• Check out: Production Possibilities Curve Review – YouTube.
Opportunity cost
The benefits that are forsaken/lost when choosing another option
Effectiveness, efficiency, equity
• Effectiveness: whether or not health care “works” (doeltreffend).
• Efficiency: allocation of scarce resources that maximised the achievement of aims
(doelmatig).
• Equity: fairness in the distribution and finance of health and healthcare between people
(rechtvaardig).
Summary
• Health economics deals with the allocation of
resources in health / health care.
• Resources can be used to produce health
care.
• Health is a function of health care and other things.
• Utility is a function of health and other things.
• We care about the margin (= marge).
• We care about opportunity cost.
• We care about effectiveness, efficiency and equity.
College 2
Re-cap
Health economics deals with the allocation of resources in health / health care.
College 1
What is (health) economics?
Economics: how we make decisions of resource use (allocation) under conditions of scarcity
Scarcity: we have unlimited wants, but limited resources (money, time, natural)
Economic good: any good or service that is scarce relative to our wants for it
Health economics applies economic theory, models and empirical techniques to the analysis of
decision making by individuals, healthcare providers and governments with respect to health and
healthcare.
It is a theoretical framework to help healthcare professionals, decision-makers or governments to
make choices on:
Production of healthcare (doctors, specialists, nurses);
The health of the population given constrained health-producing resources;
Distribution of healthcare across the population; and
Spending on healthcare.
The health economic problem
Unlimited healthcare “wants” with rapid growth in health expenditure.
Insufficient (= ontoereikend) health sector resources.
Choosing between “wants” we can “afford” given our resource “budget”.
Problem: Scarcity; Need to allocate resources efficiently.
Answer: Competitive market mechanisms set a benchmark for the efficient allocation of
resources; Economic “laws”
Catch: Healthcare is different; Market failure; Can government intervention improve market
mechanisms?
Why is healthcare different?
• Competition between producers sets market prices (demand & supply achieve a balance)
• There are typically many producers and many consumers.
• Information on products can generally be “observed”.
• In healthcare, there are numerous sources of market failure. E.g. asymmetry of information,
and externalities.
• When markets fail, we need other ways to make collective choices (particularly on resource
allocation).
• There is a strong case for government intervention in the face of market failure.
Healthcare, health, utility
Health vs Healthcare
• Healthcare can be “traded” on the market, health cannot.
• We demand healthcare to improve our health.
• Health is not easily measurable.
• WHO definition of health: Health is a state of complete physical, mental, and social well-
being and not merely the absence of disease or infirmity.
Welfarism
,Resources Health Care Health Utility Other stuff that makes you happy
^ Utility curve for health
^ Product curve for medical care
Total utility curve for health Marginal utility curve for health
Production of health
• There is a production function for every good that shows the maximum output you can get
from any quantities of inputs.
• Health = H(health care, technology, profile, lifestyle, socioeconomic status, environment)
,Total product curve for health care
Marginal product
• Marginal product (MP) of an input = the change in output per unit change in input.
• MP = the slope of the total product curve.
• ΔQ/ΔL
• Marginal product is a measure of “input productivity”.
Marginal product curve for health care
Health care production (question)
• Flat-of-the-curve (Enthoven): point when extra health care consumed does not lead to
substantial health gains.
, Productivity possibility curve
• Given a limited set of resources (e.g. cardiac surgeons), which combinations of
products/services are possible?
• Check out: Production Possibilities Curve Review – YouTube.
Opportunity cost
The benefits that are forsaken/lost when choosing another option
Effectiveness, efficiency, equity
• Effectiveness: whether or not health care “works” (doeltreffend).
• Efficiency: allocation of scarce resources that maximised the achievement of aims
(doelmatig).
• Equity: fairness in the distribution and finance of health and healthcare between people
(rechtvaardig).
Summary
• Health economics deals with the allocation of
resources in health / health care.
• Resources can be used to produce health
care.
• Health is a function of health care and other things.
• Utility is a function of health and other things.
• We care about the margin (= marge).
• We care about opportunity cost.
• We care about effectiveness, efficiency and equity.
College 2
Re-cap
Health economics deals with the allocation of resources in health / health care.
