Economics and Financing of
Health Care Systems
Lecture 1- 31-08-2021- Introduction
Main questions
- Challenges of policy makers
- What options exist for health policy?
- How can economic thinking help understand behavior of patients, providers, payers and
policy makers?
- How do we different healthcare systems perform?
- How is policy shaped?
- What are the legal conditions for health policy?
- How should empirical research in healthcare be conducted and interpreted?
Purpose of the course
- Introduce you to various conceptual frameworks that help you to understand and use
economic concepts and principle applied to healthcare systems
Course targets
1. Analyze the challenges and economic complexities of health care (systems) that are relevant
for health policy
2. Classify different types of healthcare systems and analyze how these systems are organized
and financed
3. Infer and reflect on the implications of the organization and financing of healthcare systems
for efficiency and equity
4. Assess the comparative performance of healthcare systems and infer implications for health
policy
Oefen vragen
- In OECD countries, health spending as a percentage of GDP is expected to increase in the
coming decades due to the Baumols cost disease, shifting towards chronic diseases
- Baumols cost disease is: products of other industries become relatively less expensive
relative to healthcare
o Based on: healthcare is service, based on people. Not on capital/ investments only.
In other words: its labor intensive, not easily replaced by technology, machines,
capital investments.
o Also: Why is healthcare becoming more expensive: wages must increase at the same
pace as other industries, for this industry to stay attractive for surgeons, nurses etc.
1
,Video 1a: Is healthcare really different?
Health economics
“Health economics studies the allocation of resources (as all economic disciplines do) to and within
the health sector. Because this sector has become the largest sector of many countries’ economies
and its share of GDP (Gross Domestic Product) is expected to continue to grow, we should not be
surprised that health economics has emerged as a distinct specialty within economics.”.
Health economics provides concepts and tools to understand difficult trade-offs involved in
organizing the allocation of health care resources which may help to improve health policy.
Does economics apply to healthcare?
- Yes, money and resources are scarce, so economics play an important role in identifying
where money has to be spent.
- In addition, if economics studies how scarce resources are produced and then distributed,
then clearly economics applies. Healthcare resources are certainly scarce and there is no
question that health care is produced and distributed.
- Example: does price matter: demand response is downwards sloping that relation also
shows in mental and medical health care.
- The demand curve does apply to health care. Much of health care is elective and even
routine. Some choice, unless in emergency cases.
- Higher prices > lower demand
The relevance of health economics
- The economic organization of healthcare systems has a significant impact on the efficiency
and equity of healthcare allocation
o Health system reforms are often based on health economics
- Healthcare is large and expanding sector of national economies.
- Health care is not a regular (economic) commodity; it is widely considered a right
(entitlement for all, unconditional), not a privilege (entitlement for few, conditional).
- Specific features of health care can easily result in market failure as well as in government
failure. The economic organization of healthcare systems has a significant impact on the
efficiency and equity of healthcare allocation (the work of health economists’ effects health
care).
- Health care will be considered a public good (usually 80% is payed for publicly, to some
extent is however private good to).
Expansion of healthcare sector
- Health care is a very large percentage of a country’s economy, and this share is also
increasing over time.
- There are large differences between some countries must be to some extent differences
in financing.
- Health care in itself is not the goal,
health is the goal, health care is the
means. Health care is not the only
determinant of health.
- The alternative spending opportunities
have to be weighted health
economics helps.
2
, - One clear outlier:
o key drivers of health care costs in the USA: labour costs, capital costs and technology
and patient demand for those.
o What does the USA get in turn not that much, they do not have better health
outcomes.
- Spendings are growing faster than the econnomy
o But slowdown after 2009.
- Upwards sloping curves for health expenditures as % of GPD. In 2009 there is a large kink in
the upslope this is the economic depression/crisis.
- There is a relationship between the wealth of a country and its expenditure on health care.
In case of economic regression the lesser the degree of growth in health care expenditure.
- But still growth is likely to continue in either of both scenarios listed below:
- Cost pressure no intervention of government
- Cost containment government imposes strict regulations
The relationship between countries welfare and healthcare spending is positive, as a countries
economy grows the health care expenditure grows. Health care can in this way be compared to
luxury goods. Note that spending is growing faster than our economies.
Reasons healthcare costs are growing
- Advancing medical science & technology
- Ageing of populations
- Shift towards chronic diseases (related to ageing of the population)
- Increasing welfare (related to expenditure of health care)
- Expanding health insurance coverage
o Better coverage on a personal level leads to bigger health expenditures on
national level moral hazard
- Flawed (financial) incentives
- Baumol’s “cost disease”
3
, o the rise of salaries in jobs that have experienced no or low increase of labor
productivity, in response to rising salaries in other jobs that have experienced
higher labor productivity growth.
o Labor-intensive services, like health care, are becoming more expensive
compared to products of other industries because productivity of workers in
service provision cannot increase at the same pace as compared to that of
workers in other industries.
o Thus, increase in wages cannot be earned back by increases in productivity,
making healthcare increasingly expensive.
o However, demand for healthcare is unlikely to decline, despite the increasing
cost price. AND you need to pay the health care sector, otherwise no one wants
to work there anymore.
o Policy-makers are increasingly involved with difficult choices, which is like
navigating between Scylla and Charybdis (choosing between to evils:
interference of the government vs. full transfer to the market/ private sector)
What is the problem with health spending growth?
is the growth of the health care sector sustainable?
- Increasing health spending may significantly harm the economy, taxes and premiums
will increase, because health care is a public good, leading to rise in labor costs,
therefore it is not interesting for firms or any player in the market to enter the health
care market, making competitiveness of the economy as a whole go down. Other side is
that can also make new jobs.
- Increasing public health spending may crowd out other public services
o this is not desirable as other public goods are important as well.
- Financial sustainability: how to pay for spending growth (e.g. higher cross-subsidies to
guarantee universal access).
- Economic sustainability: ensuring value for money (important task for health
economists).
Video 1b- Healthcare: a right of a privilege?
Healthcare: A right of a privilege?
- A right (granted to all/universal on an unconditional basis from the moment of birth,
irrevocable)
- A privilege (granted to some, on conditional basis, afterwards)
Universal Health coverage (WHO definition)
- Ensuring that all people can use the promotive, preventive, curative, rehabilitative and
palliative services they need, of sufficient quality to be effective, while ensuring that the
use of these services does not expose the user to financial hardship
- Universal coverage is firmly based on the WHO constitution of 1948 declaring health a
fundamental human right and the right to health care is embodied in many countries’
constitutions. Universal coverage comes at a price, but universal care is not universally
accepted.
4
Health Care Systems
Lecture 1- 31-08-2021- Introduction
Main questions
- Challenges of policy makers
- What options exist for health policy?
- How can economic thinking help understand behavior of patients, providers, payers and
policy makers?
- How do we different healthcare systems perform?
- How is policy shaped?
- What are the legal conditions for health policy?
- How should empirical research in healthcare be conducted and interpreted?
Purpose of the course
- Introduce you to various conceptual frameworks that help you to understand and use
economic concepts and principle applied to healthcare systems
Course targets
1. Analyze the challenges and economic complexities of health care (systems) that are relevant
for health policy
2. Classify different types of healthcare systems and analyze how these systems are organized
and financed
3. Infer and reflect on the implications of the organization and financing of healthcare systems
for efficiency and equity
4. Assess the comparative performance of healthcare systems and infer implications for health
policy
Oefen vragen
- In OECD countries, health spending as a percentage of GDP is expected to increase in the
coming decades due to the Baumols cost disease, shifting towards chronic diseases
- Baumols cost disease is: products of other industries become relatively less expensive
relative to healthcare
o Based on: healthcare is service, based on people. Not on capital/ investments only.
In other words: its labor intensive, not easily replaced by technology, machines,
capital investments.
o Also: Why is healthcare becoming more expensive: wages must increase at the same
pace as other industries, for this industry to stay attractive for surgeons, nurses etc.
1
,Video 1a: Is healthcare really different?
Health economics
“Health economics studies the allocation of resources (as all economic disciplines do) to and within
the health sector. Because this sector has become the largest sector of many countries’ economies
and its share of GDP (Gross Domestic Product) is expected to continue to grow, we should not be
surprised that health economics has emerged as a distinct specialty within economics.”.
Health economics provides concepts and tools to understand difficult trade-offs involved in
organizing the allocation of health care resources which may help to improve health policy.
Does economics apply to healthcare?
- Yes, money and resources are scarce, so economics play an important role in identifying
where money has to be spent.
- In addition, if economics studies how scarce resources are produced and then distributed,
then clearly economics applies. Healthcare resources are certainly scarce and there is no
question that health care is produced and distributed.
- Example: does price matter: demand response is downwards sloping that relation also
shows in mental and medical health care.
- The demand curve does apply to health care. Much of health care is elective and even
routine. Some choice, unless in emergency cases.
- Higher prices > lower demand
The relevance of health economics
- The economic organization of healthcare systems has a significant impact on the efficiency
and equity of healthcare allocation
o Health system reforms are often based on health economics
- Healthcare is large and expanding sector of national economies.
- Health care is not a regular (economic) commodity; it is widely considered a right
(entitlement for all, unconditional), not a privilege (entitlement for few, conditional).
- Specific features of health care can easily result in market failure as well as in government
failure. The economic organization of healthcare systems has a significant impact on the
efficiency and equity of healthcare allocation (the work of health economists’ effects health
care).
- Health care will be considered a public good (usually 80% is payed for publicly, to some
extent is however private good to).
Expansion of healthcare sector
- Health care is a very large percentage of a country’s economy, and this share is also
increasing over time.
- There are large differences between some countries must be to some extent differences
in financing.
- Health care in itself is not the goal,
health is the goal, health care is the
means. Health care is not the only
determinant of health.
- The alternative spending opportunities
have to be weighted health
economics helps.
2
, - One clear outlier:
o key drivers of health care costs in the USA: labour costs, capital costs and technology
and patient demand for those.
o What does the USA get in turn not that much, they do not have better health
outcomes.
- Spendings are growing faster than the econnomy
o But slowdown after 2009.
- Upwards sloping curves for health expenditures as % of GPD. In 2009 there is a large kink in
the upslope this is the economic depression/crisis.
- There is a relationship between the wealth of a country and its expenditure on health care.
In case of economic regression the lesser the degree of growth in health care expenditure.
- But still growth is likely to continue in either of both scenarios listed below:
- Cost pressure no intervention of government
- Cost containment government imposes strict regulations
The relationship between countries welfare and healthcare spending is positive, as a countries
economy grows the health care expenditure grows. Health care can in this way be compared to
luxury goods. Note that spending is growing faster than our economies.
Reasons healthcare costs are growing
- Advancing medical science & technology
- Ageing of populations
- Shift towards chronic diseases (related to ageing of the population)
- Increasing welfare (related to expenditure of health care)
- Expanding health insurance coverage
o Better coverage on a personal level leads to bigger health expenditures on
national level moral hazard
- Flawed (financial) incentives
- Baumol’s “cost disease”
3
, o the rise of salaries in jobs that have experienced no or low increase of labor
productivity, in response to rising salaries in other jobs that have experienced
higher labor productivity growth.
o Labor-intensive services, like health care, are becoming more expensive
compared to products of other industries because productivity of workers in
service provision cannot increase at the same pace as compared to that of
workers in other industries.
o Thus, increase in wages cannot be earned back by increases in productivity,
making healthcare increasingly expensive.
o However, demand for healthcare is unlikely to decline, despite the increasing
cost price. AND you need to pay the health care sector, otherwise no one wants
to work there anymore.
o Policy-makers are increasingly involved with difficult choices, which is like
navigating between Scylla and Charybdis (choosing between to evils:
interference of the government vs. full transfer to the market/ private sector)
What is the problem with health spending growth?
is the growth of the health care sector sustainable?
- Increasing health spending may significantly harm the economy, taxes and premiums
will increase, because health care is a public good, leading to rise in labor costs,
therefore it is not interesting for firms or any player in the market to enter the health
care market, making competitiveness of the economy as a whole go down. Other side is
that can also make new jobs.
- Increasing public health spending may crowd out other public services
o this is not desirable as other public goods are important as well.
- Financial sustainability: how to pay for spending growth (e.g. higher cross-subsidies to
guarantee universal access).
- Economic sustainability: ensuring value for money (important task for health
economists).
Video 1b- Healthcare: a right of a privilege?
Healthcare: A right of a privilege?
- A right (granted to all/universal on an unconditional basis from the moment of birth,
irrevocable)
- A privilege (granted to some, on conditional basis, afterwards)
Universal Health coverage (WHO definition)
- Ensuring that all people can use the promotive, preventive, curative, rehabilitative and
palliative services they need, of sufficient quality to be effective, while ensuring that the
use of these services does not expose the user to financial hardship
- Universal coverage is firmly based on the WHO constitution of 1948 declaring health a
fundamental human right and the right to health care is embodied in many countries’
constitutions. Universal coverage comes at a price, but universal care is not universally
accepted.
4
