Summary
Economics of Healthcare
Key words ............................................................................................................................................ 2
Case 1 – What is Health Economics? ................................................................................................... 3
Case 2 – Economics of innovation ....................................................................................................... 5
Case 3 – Product innovation (pharmaceuticals).................................................................................. 8
Case 4 – Organizational innovation ................................................................................................... 11
Case 5 – Economic evaluations ......................................................................................................... 13
Case 6 – Transferability and generalizability ..................................................................................... 17
1
,Key words
Case 1 (Health Economics) Case 2 (Economics of Case3 (Poduct innovation)
innovation)
- Scarcity - Product innovation - Clinical trials
- Preferences - Process innovation - Drug development
- Utility - Innovation - Entry barriers
- Choice - Invention - Coverage with
- Allocation - Creativity evidence development
- Allocative efficiency - R&D - Fourth hurdle
- Competition - Entrepreneur - Health technology
- Demand and supply - Technological change assessment
- Economics - (Economic) growth - Marketing
- Efficiency - Schumpeter’s authorisation (similar
- Health care economics approach to to ´licensing´)
- Health economics innovation - Reimbursement and
- Market - Arrow’s approach to pricing phase
- Market failure innovation - Pharmaceutical market
- Pareto-optimality - Classical Approach to - Priority setting in
- Resources innovation pharmaceuticals
- Behavioural economics - Evolutionary approach - Regulation
- Experimental to innovation - Research &
economics - New institutional development
economic theory - Risk/sharing
arrangements
Case 4 (Organizational Case 5 (Economic evaluation) Case 6 (Limitations /
innovation) transferability)
- Organisational - Cost-benefit analysis - Barriers and
Innovation - Cost-effectiveness facilitators
- Integration strategies analysis - Generalizability
- Firm - Cost-minimisation - Use of economic
- Horizontal integration analysis evaluations in decision
- Vertical integration - Cost-utility analysis making
- Transaction costs - Economic evaluation - Transferability
- Economies of scope - Cost effectiveness
- Economies of scale plane
- Boundaries of the firm - ICER
- Organizational - Cost effectiveness
efficiency threshold
- Governance structures - Identification
- Outsourcing - Measurement
- Model-based
economic evaluation
- QALY
- Trial-based economic
evaluation
2
,Case 1 – What is Health Economics?
➢ Economy as a scientific discipline
➢ The economic approach of health and health care
➢ The past, present, and future of ‘health economics’ as a discipline
Economics = The study of choices under conditions of scarcity to increase efficiency (= related to the
tension between unlimited needs and limited resources to fulfil these needs) / allocation of scarce
resources.
Health economics = An applied field of economics that studies in which the choices / behavior of
individuals, health care providers, public and private organizations, and governments in health-
decision-making. Thus, study of how (scarce) resources are allocated to and within the healthcare
system. / Health is broad, also includes e.g. nutrition and exercise.
Founding father → Arrow (1963), but he was actually talking about Health care economics:
Health care economics = The subject of analysis is the (medical) health care industry, not health.
(Thus, the focus is on the scarcity in medical care)
Key economic concepts
Scarcity = The tension between unlimited needs and limited possibilities to fulfil those needs. (Driver
of choice)
Allocation = the way (scarce) resources are distributed among competing demands
Opportunity costs = all resource uses have opportunity costs → return of most lucrative option not
chosen – return of the chosen option
Efficiency = The minimum input needed to get the greatest amount of output
Pareto-optimality / allocative efficiency = an allocation of resources in which no one can be made
better off without making someone worse off (appears in perfect competition) (demand = supply)
Competition = Different sellers with the same goal which can’t be shared
Utility = The total satisfaction received from a good or service. (influences preferences, demand and
thus price)
Choice = selecting the best option (or the most wanted, based on preferences)
Preferences = Certain characteristics any consumer wants to have in a good or a service to make it
preferable to him (e.g. level of happiness / degree of satisfaction) (influences choice)
Healthcare is always in a state of market failure . Market failure occurs when one or more of the four
conditions of a perfect competition (a state to get the optimal allocation of resources) are not met:
- Many consumers and suppliers (competition)
- A homogenous product (little differences, competition on price or availability)
- Free entry (and exit) to the market (no transaction costs)
- Perfect information (buyers have complete information)
Market failure → inefficiency and sub-optimal outcomes, therefore governmental intervention to
increase efficiency and equity.
Characteristics of healthcare (different from other markets) → and how the government steps in:
- Demand: derived from health, irregular and unpredictable nature
- Existence of externalities: positive or negative effects for indirect users → smoking bans /
vaccines
3
, - Informational asymmetry: between patient and physician
- Expected behavior of the physician → no advertising and pricing competition
- Uncertainty: of the effect and the need → insurance
- Supply: costs of licensing physicians and high R&D costs → patent protection
- Market power (monopoly): high pricing - a need instead of a want → drug price regulation
William’s diagram → shows the most important subjects of health economics
A. What influences health? (other than healthcare?)
B. What is health? What is it’s value? (QoL / QALYs)
C. Demand for health care: determined by A and B, the barriers to consumption of health care
(e.g. costs or distance), and the physician-patient relationship.
D. Supply of health care: influenced by C and E, the production, the input, and most
importantly by incentives.
E. Micro-economic evaluation at treatment level (e.g. by CEA and CBA)
F. Market equilibrium (influenced by C and D, quantity demand = quantity supply at a given
price)
G. Evaluation at the whole system
H. Planning, budgeting and monitoring mechanisms
Past of economics: the traditional neo-classical perspective has four tenets:
- Utility maximization (assumption that one can choose their most preferred one)
- Individual sovereignty (assumption that one is their own best judge of welfare)
- Consequentialism (only the outcome matters)
- Welfarism (‘goodness’ of situation judged on utility levels attained)
Pros of this theory: profit maximization, utility maximization and the market equilibrium. However, it
is not possible to apply these to health care, as decision making (choosing) is more difficult due to
high risks, uncertainty and limited knowledge. Thus, the subdiscipline health economics arose.
Current challenges in health care:
- Rising demand + increasing expectations of patients
- Medical, technological, and regulatory challenges
The future of health economics (to meet the challenges: new theoretical, empirical, and
methodological methods needed)
- Behavioral economics: incorporation of methods and theories from cognitive psychology
when specifically addressing individual economic decision-making.
- Experimental economics: experiments (laboratory or in the field) to study the decision-
making of individual in specific circumstances and alternative market mechanisms (and their
outcomes).
- Proper role of markets and institutions:
o Institutions matter: institutions design the rules of the game (organizations are about
how the game is played). In HC: patients are influenced, and patients influence
scarcity: institutions can influence this system in a paternalistic way.
o The proper role of the market: putting everything in perspective with a theory on
efficient resource allocation
- Movement to a more socioeconomic model: a focus on equity and thus not only on
economics (flexible approach to economic methodology)
- Movement from ‘health care economics’ to ‘health economics’ (a broader view)
- Movement to more original data collection (big data)
4
Economics of Healthcare
Key words ............................................................................................................................................ 2
Case 1 – What is Health Economics? ................................................................................................... 3
Case 2 – Economics of innovation ....................................................................................................... 5
Case 3 – Product innovation (pharmaceuticals).................................................................................. 8
Case 4 – Organizational innovation ................................................................................................... 11
Case 5 – Economic evaluations ......................................................................................................... 13
Case 6 – Transferability and generalizability ..................................................................................... 17
1
,Key words
Case 1 (Health Economics) Case 2 (Economics of Case3 (Poduct innovation)
innovation)
- Scarcity - Product innovation - Clinical trials
- Preferences - Process innovation - Drug development
- Utility - Innovation - Entry barriers
- Choice - Invention - Coverage with
- Allocation - Creativity evidence development
- Allocative efficiency - R&D - Fourth hurdle
- Competition - Entrepreneur - Health technology
- Demand and supply - Technological change assessment
- Economics - (Economic) growth - Marketing
- Efficiency - Schumpeter’s authorisation (similar
- Health care economics approach to to ´licensing´)
- Health economics innovation - Reimbursement and
- Market - Arrow’s approach to pricing phase
- Market failure innovation - Pharmaceutical market
- Pareto-optimality - Classical Approach to - Priority setting in
- Resources innovation pharmaceuticals
- Behavioural economics - Evolutionary approach - Regulation
- Experimental to innovation - Research &
economics - New institutional development
economic theory - Risk/sharing
arrangements
Case 4 (Organizational Case 5 (Economic evaluation) Case 6 (Limitations /
innovation) transferability)
- Organisational - Cost-benefit analysis - Barriers and
Innovation - Cost-effectiveness facilitators
- Integration strategies analysis - Generalizability
- Firm - Cost-minimisation - Use of economic
- Horizontal integration analysis evaluations in decision
- Vertical integration - Cost-utility analysis making
- Transaction costs - Economic evaluation - Transferability
- Economies of scope - Cost effectiveness
- Economies of scale plane
- Boundaries of the firm - ICER
- Organizational - Cost effectiveness
efficiency threshold
- Governance structures - Identification
- Outsourcing - Measurement
- Model-based
economic evaluation
- QALY
- Trial-based economic
evaluation
2
,Case 1 – What is Health Economics?
➢ Economy as a scientific discipline
➢ The economic approach of health and health care
➢ The past, present, and future of ‘health economics’ as a discipline
Economics = The study of choices under conditions of scarcity to increase efficiency (= related to the
tension between unlimited needs and limited resources to fulfil these needs) / allocation of scarce
resources.
Health economics = An applied field of economics that studies in which the choices / behavior of
individuals, health care providers, public and private organizations, and governments in health-
decision-making. Thus, study of how (scarce) resources are allocated to and within the healthcare
system. / Health is broad, also includes e.g. nutrition and exercise.
Founding father → Arrow (1963), but he was actually talking about Health care economics:
Health care economics = The subject of analysis is the (medical) health care industry, not health.
(Thus, the focus is on the scarcity in medical care)
Key economic concepts
Scarcity = The tension between unlimited needs and limited possibilities to fulfil those needs. (Driver
of choice)
Allocation = the way (scarce) resources are distributed among competing demands
Opportunity costs = all resource uses have opportunity costs → return of most lucrative option not
chosen – return of the chosen option
Efficiency = The minimum input needed to get the greatest amount of output
Pareto-optimality / allocative efficiency = an allocation of resources in which no one can be made
better off without making someone worse off (appears in perfect competition) (demand = supply)
Competition = Different sellers with the same goal which can’t be shared
Utility = The total satisfaction received from a good or service. (influences preferences, demand and
thus price)
Choice = selecting the best option (or the most wanted, based on preferences)
Preferences = Certain characteristics any consumer wants to have in a good or a service to make it
preferable to him (e.g. level of happiness / degree of satisfaction) (influences choice)
Healthcare is always in a state of market failure . Market failure occurs when one or more of the four
conditions of a perfect competition (a state to get the optimal allocation of resources) are not met:
- Many consumers and suppliers (competition)
- A homogenous product (little differences, competition on price or availability)
- Free entry (and exit) to the market (no transaction costs)
- Perfect information (buyers have complete information)
Market failure → inefficiency and sub-optimal outcomes, therefore governmental intervention to
increase efficiency and equity.
Characteristics of healthcare (different from other markets) → and how the government steps in:
- Demand: derived from health, irregular and unpredictable nature
- Existence of externalities: positive or negative effects for indirect users → smoking bans /
vaccines
3
, - Informational asymmetry: between patient and physician
- Expected behavior of the physician → no advertising and pricing competition
- Uncertainty: of the effect and the need → insurance
- Supply: costs of licensing physicians and high R&D costs → patent protection
- Market power (monopoly): high pricing - a need instead of a want → drug price regulation
William’s diagram → shows the most important subjects of health economics
A. What influences health? (other than healthcare?)
B. What is health? What is it’s value? (QoL / QALYs)
C. Demand for health care: determined by A and B, the barriers to consumption of health care
(e.g. costs or distance), and the physician-patient relationship.
D. Supply of health care: influenced by C and E, the production, the input, and most
importantly by incentives.
E. Micro-economic evaluation at treatment level (e.g. by CEA and CBA)
F. Market equilibrium (influenced by C and D, quantity demand = quantity supply at a given
price)
G. Evaluation at the whole system
H. Planning, budgeting and monitoring mechanisms
Past of economics: the traditional neo-classical perspective has four tenets:
- Utility maximization (assumption that one can choose their most preferred one)
- Individual sovereignty (assumption that one is their own best judge of welfare)
- Consequentialism (only the outcome matters)
- Welfarism (‘goodness’ of situation judged on utility levels attained)
Pros of this theory: profit maximization, utility maximization and the market equilibrium. However, it
is not possible to apply these to health care, as decision making (choosing) is more difficult due to
high risks, uncertainty and limited knowledge. Thus, the subdiscipline health economics arose.
Current challenges in health care:
- Rising demand + increasing expectations of patients
- Medical, technological, and regulatory challenges
The future of health economics (to meet the challenges: new theoretical, empirical, and
methodological methods needed)
- Behavioral economics: incorporation of methods and theories from cognitive psychology
when specifically addressing individual economic decision-making.
- Experimental economics: experiments (laboratory or in the field) to study the decision-
making of individual in specific circumstances and alternative market mechanisms (and their
outcomes).
- Proper role of markets and institutions:
o Institutions matter: institutions design the rules of the game (organizations are about
how the game is played). In HC: patients are influenced, and patients influence
scarcity: institutions can influence this system in a paternalistic way.
o The proper role of the market: putting everything in perspective with a theory on
efficient resource allocation
- Movement to a more socioeconomic model: a focus on equity and thus not only on
economics (flexible approach to economic methodology)
- Movement from ‘health care economics’ to ‘health economics’ (a broader view)
- Movement to more original data collection (big data)
4
