HOW HEALTH SYSTEMS WORK
Science, Management & Innovation - Health
JANUARY 17, 2023
RADBOUD UNIVERSITY, NIJMEGEN
, How Health Systems Work
Table of Contents
Pre-recorded lecture – Future of health ............................................................................ 2
Lecture 1 – Introductory lecture/ Health care insurance .................................................... 2
Lecture 2 – Health policy and payment ............................................................................. 9
Lecture 3 – Trends in health, care and costs .....................................................................20
Lecture 4 – Health systems (NL).......................................................................................32
Lecture 5 – International systems: US, Germany and the UK ............................................39
Lecture 6 – Cost containment ..........................................................................................51
Lecture 7 – Competition in healthcare .............................................................................64
Lecture 7 part 2 – Analysis of concentrated markets ............................................................... 72
Lecture 8 – Labour markets in health care .......................................................................80
Lecture 9 – Innovation and pharmaceutical companies ....................................................93
Lecture 10 – Healthcare management and innovation ................................................... 103
Lecture 11 – Healthcare Purchasing............................................................................... 119
Lecture 12 – Payments .................................................................................................. 132
Lecture 13 – Practice variation and unnecessary care .................................................... 140
Lecture 14 – Applying health economics and policy – COVID-19 ........................................ 147
Lecture 15 – Prevention and health policy ....................................................................... 151
1
, How Health Systems Work
Pre-recorded lecture – Future of health
• Opportunity costs = so for every choice you make, you have to give something up
(the alternatives). Time is also a cost that you invest for your choice. Happiness
function → rational choice. How to evaluate your happiness. They use utility as a
measure → If I’m happy, I receive more utility (can be expressed in euros).
• Diminishing marginal utility = the amount of satisfaction provided by the
consumption of every additional unit of a good decrease as we increase the
consumption of that good. Marginal utility is the change in the utility derived from
consuming another unit of a good.
• Pareto efficiency = trading of goods until no-one can become better off without the
other being worse off. By redistributing, you can reach the pareto optimal point.
o In real life, this is difficult. There is almost always someone who is worse off
after the policy change → winners compensate losers and everyone is better
off. Compensate for utility losses. Total net benefits → when positive, it is
possible.
• Cost-benefit analysis (CBA) = quantify all costs and benefits in monetary terms for
each option. This provides insight in which of the options leads to the highest total
welfare. Either pick the most beneficial or pick all with positive net benefits. Health
benefits are difficult to express in monetary terms.
• Market equilibrium = if at the market price the quantity demanded is equal to the
quantity supplied. The price at which the quantity demanded is equal to the quantity
supplied is called the equilibrium price or market clearing price and the
corresponding quantity is the equilibrium quantity.
• QALY = equivalent of one life-year lived in perfect health. Common denominator to
compare interventions. Increased quality of life or extending the length of your life.
Added benefit of an intervention can be measured in QALYs.
o Cost-utility analysis – look at QALYs
o How much do we value a QALY?
Lecture 1 – Introductory lecture/ Health care insurance
Healthcare consists of many actors and is complex.
Chaos – covid policies and how the system would respond to these policies.
How to analyse complex systems?
- Start simple: health economics – a toolbox for rational analysis of complicated issues
- Introduce complexity: health policy – how to design, implement and evaluate
policies in an irrational environment
- As an innovator, policy maker, manager, you will need to ‘navigate through the
system’
Health care insurance
Reasons for health insurance:
- Just in case something worse happens
- Mandatory
o Because we all have to contribute to the costs for everyone
2
, How Health Systems Work
Insurance is widespread – health, dental, theft/fire, life, funeral, car, liability, legal, travel,
disability, unemployment, etc.
Risks and probabilities
Expected costs = health costs * probability
3 cases: would you take insurance?
- The higher the potential costs, the
more likely you would get insurance.
Taking into account the insurance costs as well.
Choice of health insurance:
- Apply CBA: express utility of insurance and no insurance, and compare.
- The main trade-off is: do I pay a little upfront, or risk paying much more later in case
something happens?
- Depends on:
o Time preference: do I like to have more wealth now or in the future?
o Loss aversion: how much disutility does it costs to lose a small amount versus
a large amount? (I versus ph)
▪ Losing a euro makes you sadder than gaining a euro makes you happy
o Risk aversion: play on safe or roll the dice? (ph vs E(h))
Valuation of money
- In case of linear utility function – each euro makes you equally happy
- 1 euro = 1 util
- Risk neutral → indifferent between fair insurance or paying for care
- Are you risk neutral?
Most people are risk averse
- Diminishing marginal utility: the first euro makes you ecstatic, after 1000 euro
you’re like ‘mweh’.
- Risk averse → willing to pay a small amount to reduce the chance for losing a large
amount
- Are you risk averse?
Example:
- 10% chance of getting ill: costs are 8000 euro
- 90% chance of staying healthy and pay nothing
- Expected costs are 0.1 * 8000 + 0.9 * 0 = 800 euro
- Happy with insurance → risk averse
3
Science, Management & Innovation - Health
JANUARY 17, 2023
RADBOUD UNIVERSITY, NIJMEGEN
, How Health Systems Work
Table of Contents
Pre-recorded lecture – Future of health ............................................................................ 2
Lecture 1 – Introductory lecture/ Health care insurance .................................................... 2
Lecture 2 – Health policy and payment ............................................................................. 9
Lecture 3 – Trends in health, care and costs .....................................................................20
Lecture 4 – Health systems (NL).......................................................................................32
Lecture 5 – International systems: US, Germany and the UK ............................................39
Lecture 6 – Cost containment ..........................................................................................51
Lecture 7 – Competition in healthcare .............................................................................64
Lecture 7 part 2 – Analysis of concentrated markets ............................................................... 72
Lecture 8 – Labour markets in health care .......................................................................80
Lecture 9 – Innovation and pharmaceutical companies ....................................................93
Lecture 10 – Healthcare management and innovation ................................................... 103
Lecture 11 – Healthcare Purchasing............................................................................... 119
Lecture 12 – Payments .................................................................................................. 132
Lecture 13 – Practice variation and unnecessary care .................................................... 140
Lecture 14 – Applying health economics and policy – COVID-19 ........................................ 147
Lecture 15 – Prevention and health policy ....................................................................... 151
1
, How Health Systems Work
Pre-recorded lecture – Future of health
• Opportunity costs = so for every choice you make, you have to give something up
(the alternatives). Time is also a cost that you invest for your choice. Happiness
function → rational choice. How to evaluate your happiness. They use utility as a
measure → If I’m happy, I receive more utility (can be expressed in euros).
• Diminishing marginal utility = the amount of satisfaction provided by the
consumption of every additional unit of a good decrease as we increase the
consumption of that good. Marginal utility is the change in the utility derived from
consuming another unit of a good.
• Pareto efficiency = trading of goods until no-one can become better off without the
other being worse off. By redistributing, you can reach the pareto optimal point.
o In real life, this is difficult. There is almost always someone who is worse off
after the policy change → winners compensate losers and everyone is better
off. Compensate for utility losses. Total net benefits → when positive, it is
possible.
• Cost-benefit analysis (CBA) = quantify all costs and benefits in monetary terms for
each option. This provides insight in which of the options leads to the highest total
welfare. Either pick the most beneficial or pick all with positive net benefits. Health
benefits are difficult to express in monetary terms.
• Market equilibrium = if at the market price the quantity demanded is equal to the
quantity supplied. The price at which the quantity demanded is equal to the quantity
supplied is called the equilibrium price or market clearing price and the
corresponding quantity is the equilibrium quantity.
• QALY = equivalent of one life-year lived in perfect health. Common denominator to
compare interventions. Increased quality of life or extending the length of your life.
Added benefit of an intervention can be measured in QALYs.
o Cost-utility analysis – look at QALYs
o How much do we value a QALY?
Lecture 1 – Introductory lecture/ Health care insurance
Healthcare consists of many actors and is complex.
Chaos – covid policies and how the system would respond to these policies.
How to analyse complex systems?
- Start simple: health economics – a toolbox for rational analysis of complicated issues
- Introduce complexity: health policy – how to design, implement and evaluate
policies in an irrational environment
- As an innovator, policy maker, manager, you will need to ‘navigate through the
system’
Health care insurance
Reasons for health insurance:
- Just in case something worse happens
- Mandatory
o Because we all have to contribute to the costs for everyone
2
, How Health Systems Work
Insurance is widespread – health, dental, theft/fire, life, funeral, car, liability, legal, travel,
disability, unemployment, etc.
Risks and probabilities
Expected costs = health costs * probability
3 cases: would you take insurance?
- The higher the potential costs, the
more likely you would get insurance.
Taking into account the insurance costs as well.
Choice of health insurance:
- Apply CBA: express utility of insurance and no insurance, and compare.
- The main trade-off is: do I pay a little upfront, or risk paying much more later in case
something happens?
- Depends on:
o Time preference: do I like to have more wealth now or in the future?
o Loss aversion: how much disutility does it costs to lose a small amount versus
a large amount? (I versus ph)
▪ Losing a euro makes you sadder than gaining a euro makes you happy
o Risk aversion: play on safe or roll the dice? (ph vs E(h))
Valuation of money
- In case of linear utility function – each euro makes you equally happy
- 1 euro = 1 util
- Risk neutral → indifferent between fair insurance or paying for care
- Are you risk neutral?
Most people are risk averse
- Diminishing marginal utility: the first euro makes you ecstatic, after 1000 euro
you’re like ‘mweh’.
- Risk averse → willing to pay a small amount to reduce the chance for losing a large
amount
- Are you risk averse?
Example:
- 10% chance of getting ill: costs are 8000 euro
- 90% chance of staying healthy and pay nothing
- Expected costs are 0.1 * 8000 + 0.9 * 0 = 800 euro
- Happy with insurance → risk averse
3
