Week 1: Introduction to Health Economics
Learning Objectives
To provide a critical understanding of the use of health economics in the
delivery of public health services.
To provide a critical understanding of economic principles, economic theories
and models.
,Contents
Introduction ............................................................................................................................... 1
Economic principles, economic theories and models ................................................................ 3
Scarcity ................................................................................................................................... 4
Opportunity Cost and Choice ................................................................................................. 4
Marginal Utility ...................................................................................................................... 5
Equity and Efficiency ............................................................................................................ 5
The market model................................................................................................................... 7
Demand model ....................................................................................................................... 8
Supply model........................................................................................................................ 10
Conclusion ............................................................................................................................... 10
References ................................................................................................................................ 11
,Introduction
Economics is the study of how the society allocates scarce resources how to deal with the
problem of scarcity. Consequently, choices have to be made about how the scarce resources
should be used. Economics is generally concerned with how choices are made in case of
scarcity with assumptions that individuals will make wise decisions. It follows that if
economics is relevant anywhere then it should be relevant in the health sector. However, health
services have some interesting characteristics that mean crude economic models should be used
cautiously (Arrow 1963).
Since economics is concerned with the allocation of scarce resources, health economics is
concerned with issues relating to the allocation of scarce resources to improve health. It
therefore means that with accurate information, the society can choose to do things, such as
utilize health services that will take full advantage of their utility given the limited resources
they have at their disposal.
This module introduces key principles of economics using the foundations of economic theory
and how to apply the theory to health and health markets. It enhances deeper understanding of
how demand and supply interact, how markets work and why they fail, and enables one to
identify the main methods of health financing as well as critically use economic evaluation
evidence like cost effectiveness, cost utility and cost benefit analyses.
Health financing is essential to the ability of health systems to keep and improve human
welfare. Health financing is the “function of a health system concerned with the mobilization,
accumulation and allocation of money to cover the health needs of the people, individually and
collectively, in the health system… the purpose of health financing is to make funding
available, as well as to set the right financial incentives to providers, to ensure that all
individuals have access to effective public health and personal health care” (WHO 2000).
1
, Economic evaluations are used globally as tools that allow health care providers to make
informed decisions given their limited financial resources. For instance, those responsible for
determining and managing different areas of a health sector are typically forced to evaluate:
Effectiveness of initiatives such as increase of tax on cigarettes to promote health
by reducing the prevalence of lifestyle diseases.
Effectiveness of incentives used to increase take-up of health services.
Cost-effectiveness of new treatment methods.
Clinical effectiveness and expenditure are used to examine cost-effectiveness, and therefore
inform decisions. The application of economic evaluation to particular healthcare fields raises
methodological challenges despite the fact that at the extreme without the necessary funds no
health workers would be employed, no medicines would be available and no health promotion
or prevention would take place. However, financing is much more than simply generating
funds. Public health and health care is different to how other goods and services operate in a
market because:
Consumers have limited knowledge. They rely upon providers (e.g., doctors, nurses,
social workers) to provide health care, medicines, information, interventions and referrals
to specialist services if required.
There are educational and financial barriers to entry into the medical profession, thus
maintaining limited consumer knowledge in the general population.
There are indirect consequences to public health and health care, these include positive
externalities (whereby a benefit is enjoyed by a third-party as a result of an economic
transaction) such as herd immunity through vaccination programs.
2
Learning Objectives
To provide a critical understanding of the use of health economics in the
delivery of public health services.
To provide a critical understanding of economic principles, economic theories
and models.
,Contents
Introduction ............................................................................................................................... 1
Economic principles, economic theories and models ................................................................ 3
Scarcity ................................................................................................................................... 4
Opportunity Cost and Choice ................................................................................................. 4
Marginal Utility ...................................................................................................................... 5
Equity and Efficiency ............................................................................................................ 5
The market model................................................................................................................... 7
Demand model ....................................................................................................................... 8
Supply model........................................................................................................................ 10
Conclusion ............................................................................................................................... 10
References ................................................................................................................................ 11
,Introduction
Economics is the study of how the society allocates scarce resources how to deal with the
problem of scarcity. Consequently, choices have to be made about how the scarce resources
should be used. Economics is generally concerned with how choices are made in case of
scarcity with assumptions that individuals will make wise decisions. It follows that if
economics is relevant anywhere then it should be relevant in the health sector. However, health
services have some interesting characteristics that mean crude economic models should be used
cautiously (Arrow 1963).
Since economics is concerned with the allocation of scarce resources, health economics is
concerned with issues relating to the allocation of scarce resources to improve health. It
therefore means that with accurate information, the society can choose to do things, such as
utilize health services that will take full advantage of their utility given the limited resources
they have at their disposal.
This module introduces key principles of economics using the foundations of economic theory
and how to apply the theory to health and health markets. It enhances deeper understanding of
how demand and supply interact, how markets work and why they fail, and enables one to
identify the main methods of health financing as well as critically use economic evaluation
evidence like cost effectiveness, cost utility and cost benefit analyses.
Health financing is essential to the ability of health systems to keep and improve human
welfare. Health financing is the “function of a health system concerned with the mobilization,
accumulation and allocation of money to cover the health needs of the people, individually and
collectively, in the health system… the purpose of health financing is to make funding
available, as well as to set the right financial incentives to providers, to ensure that all
individuals have access to effective public health and personal health care” (WHO 2000).
1
, Economic evaluations are used globally as tools that allow health care providers to make
informed decisions given their limited financial resources. For instance, those responsible for
determining and managing different areas of a health sector are typically forced to evaluate:
Effectiveness of initiatives such as increase of tax on cigarettes to promote health
by reducing the prevalence of lifestyle diseases.
Effectiveness of incentives used to increase take-up of health services.
Cost-effectiveness of new treatment methods.
Clinical effectiveness and expenditure are used to examine cost-effectiveness, and therefore
inform decisions. The application of economic evaluation to particular healthcare fields raises
methodological challenges despite the fact that at the extreme without the necessary funds no
health workers would be employed, no medicines would be available and no health promotion
or prevention would take place. However, financing is much more than simply generating
funds. Public health and health care is different to how other goods and services operate in a
market because:
Consumers have limited knowledge. They rely upon providers (e.g., doctors, nurses,
social workers) to provide health care, medicines, information, interventions and referrals
to specialist services if required.
There are educational and financial barriers to entry into the medical profession, thus
maintaining limited consumer knowledge in the general population.
There are indirect consequences to public health and health care, these include positive
externalities (whereby a benefit is enjoyed by a third-party as a result of an economic
transaction) such as herd immunity through vaccination programs.
2
