Week 1 (Ch 1, Ch 14, Arrow)
Chapter 1 – Why Health Economics?
- Health economics is important:
1. Health care economy is massive and expensive
2. Health is major source of uncertainty and risk
3. Governments deeply involved in financing health care systems
1.1 Health care economy is massive
- US: 1/6 dollar spent on health care
1.2 Health is uncertain and contagious
- Health is uncertain: different to other economies
o Risk aversion
- Health care customers know more than companies à adverse selection à moral
hazard
1.3 Health economics is public finance
- Most of health care expenditure is done by government
1.4 Welfare economics
- People know what’s best for them
Chapter 14 – Health Technology Assessment
- HTA: Health Technology Assessment
o Cost-effectiveness analysis: compare costs and benefits
o Cost-benefit analysis: choose optimally among different treatments by making
a trade-off between money and health
14.1 Cost-effectiveness analysis
- Cost-effectiveness analysis (CEA): process of measuring costs and health benefits of
medical treatments, procedures or therapies
- Dominated treatment: more expensive, less effective
- Incremental cost-effectiveness ratio (ICER): “buy extra day of life for …$”
14.2 Cost-effectiveness frontier
- Cost-effectiveness frontier (CEF): subset of treatment strategies, not dominated by
each other
14.3 Measuring costs
- Whose costs?
o Everyone: insurer, patient
, o Only exception: monopolistic levels: only patient
- Which costs?
o All costs: future, and non-monetary
14.4 Measuring effectiveness
- Quality adjusted life year (QALY): unit of life expectancy adjusted for quality of life
during those years
o DALY measures health lost
- QALE: number of QALYs a person expects to live
- Virtual analogue scale (VAS): questionnaire scale
o Disadvantage: trade-offs not considered
- Time trade-off (TTO): choose x years of H or fewer years in perfect health
- Whose opinion should count?
o Delphi method: medical experts estimate quality weights
o Ask people with medical condition to rate
14.5 Cost-benefit analysis: picking optimal treatment
- Cost-benefit analysis (CBA): pick optimal treatment among potentially cost-effective
ones
14.5 Valuing life
- Value of Statistical Life (VSL): used to measure how costly small changes in mortality
are
1. Labor market choice: how much more money to work at power plant?
§ Difficult to find equivalent jobs
§ Some value money more than others
§ Risk premium might compensate nonfatal injuries
§ Workers might misjudge risk
2. Product purchase decisions: What do people pay to reduce risks
3. Policy decisions
Lecture 1 recap
I. History of Health
- Arrived in New World: wiped out nearly entire population of America à slaves
brought to USA
- Colonies: settler mortality high due to lack of resistance to tropical diseases
- Epidemiological transition ages:
1. Pestilence and famine
2. Receding pandemics
3. Degenerative and man-made diseases
4. Mental health (?)
, II. Definition of Health
- Life expectancy give limited picture: quality of life isn’t measured
o Disability adjusted life years: scale 0-1
- Definition of health: “Confidence and ability to be effective in achieving optimal health
given biologic and genetic disposition; intermediate and the broader social, political,
and economic environment; and access to the public health and health care system.”
III. The Health System
- Prevention: municipalities
- Primary care: general practitioners
- Secondary care: medical specialists
- Tertiary care: advanced specialized care
IV. Health in the Media
- Health policy, new intervention, medicine approval
V. Competitive model
- First optimality theorem: competitive market will tend toward an efficient welfare
equilibrium.
o Pareto optimum: nobody can be made better off without making at least one
person worse off
- Second optimality theorem: any efficient welfare equilibrium can be achieved through
lump-sum redistribution of income:
o After income will be redistributed, desired equilibrium will be reached by
market forces
VI. Theory of Second best
- Earlier mentioned optimality theorems’ assumptions hardly met
o All goods, services marketable
o All markets exist
o Perfect competition
- Second Best Theory:
o All goods and services are marketable: some are not allowed
o All markets exist: also insurance markets etc.
o Perfect competition: market power distorts equilibrium
VII. Arrow & Health
- Health demand: irregular and unpredictable
o Health shocks hit whenever they want
- Information asymmetry between patient and physician: population is lowly educated
Chapter 1 – Why Health Economics?
- Health economics is important:
1. Health care economy is massive and expensive
2. Health is major source of uncertainty and risk
3. Governments deeply involved in financing health care systems
1.1 Health care economy is massive
- US: 1/6 dollar spent on health care
1.2 Health is uncertain and contagious
- Health is uncertain: different to other economies
o Risk aversion
- Health care customers know more than companies à adverse selection à moral
hazard
1.3 Health economics is public finance
- Most of health care expenditure is done by government
1.4 Welfare economics
- People know what’s best for them
Chapter 14 – Health Technology Assessment
- HTA: Health Technology Assessment
o Cost-effectiveness analysis: compare costs and benefits
o Cost-benefit analysis: choose optimally among different treatments by making
a trade-off between money and health
14.1 Cost-effectiveness analysis
- Cost-effectiveness analysis (CEA): process of measuring costs and health benefits of
medical treatments, procedures or therapies
- Dominated treatment: more expensive, less effective
- Incremental cost-effectiveness ratio (ICER): “buy extra day of life for …$”
14.2 Cost-effectiveness frontier
- Cost-effectiveness frontier (CEF): subset of treatment strategies, not dominated by
each other
14.3 Measuring costs
- Whose costs?
o Everyone: insurer, patient
, o Only exception: monopolistic levels: only patient
- Which costs?
o All costs: future, and non-monetary
14.4 Measuring effectiveness
- Quality adjusted life year (QALY): unit of life expectancy adjusted for quality of life
during those years
o DALY measures health lost
- QALE: number of QALYs a person expects to live
- Virtual analogue scale (VAS): questionnaire scale
o Disadvantage: trade-offs not considered
- Time trade-off (TTO): choose x years of H or fewer years in perfect health
- Whose opinion should count?
o Delphi method: medical experts estimate quality weights
o Ask people with medical condition to rate
14.5 Cost-benefit analysis: picking optimal treatment
- Cost-benefit analysis (CBA): pick optimal treatment among potentially cost-effective
ones
14.5 Valuing life
- Value of Statistical Life (VSL): used to measure how costly small changes in mortality
are
1. Labor market choice: how much more money to work at power plant?
§ Difficult to find equivalent jobs
§ Some value money more than others
§ Risk premium might compensate nonfatal injuries
§ Workers might misjudge risk
2. Product purchase decisions: What do people pay to reduce risks
3. Policy decisions
Lecture 1 recap
I. History of Health
- Arrived in New World: wiped out nearly entire population of America à slaves
brought to USA
- Colonies: settler mortality high due to lack of resistance to tropical diseases
- Epidemiological transition ages:
1. Pestilence and famine
2. Receding pandemics
3. Degenerative and man-made diseases
4. Mental health (?)
, II. Definition of Health
- Life expectancy give limited picture: quality of life isn’t measured
o Disability adjusted life years: scale 0-1
- Definition of health: “Confidence and ability to be effective in achieving optimal health
given biologic and genetic disposition; intermediate and the broader social, political,
and economic environment; and access to the public health and health care system.”
III. The Health System
- Prevention: municipalities
- Primary care: general practitioners
- Secondary care: medical specialists
- Tertiary care: advanced specialized care
IV. Health in the Media
- Health policy, new intervention, medicine approval
V. Competitive model
- First optimality theorem: competitive market will tend toward an efficient welfare
equilibrium.
o Pareto optimum: nobody can be made better off without making at least one
person worse off
- Second optimality theorem: any efficient welfare equilibrium can be achieved through
lump-sum redistribution of income:
o After income will be redistributed, desired equilibrium will be reached by
market forces
VI. Theory of Second best
- Earlier mentioned optimality theorems’ assumptions hardly met
o All goods, services marketable
o All markets exist
o Perfect competition
- Second Best Theory:
o All goods and services are marketable: some are not allowed
o All markets exist: also insurance markets etc.
o Perfect competition: market power distorts equilibrium
VII. Arrow & Health
- Health demand: irregular and unpredictable
o Health shocks hit whenever they want
- Information asymmetry between patient and physician: population is lowly educated
