Maastricht University – Master Healthcare Policy, Innovation and Management
HPI4001 Economics of health care
Summary
Case 1 The economic approach of health care
Economics
Economics, health economics and health care economics
Developments in health economics
Case 2 The economics of innovations
Innovation
Theories on innovation in economics: economic growth theories
Theories on innovation in economics: innovation economics
Case 3 Pharmaceuticals as typical product innovations in health care
Coverage decisions
Usage of economic evaluations
The 4 hurdles
Drug development
Types of drugs
The pharmaceutical industry
Product innovations in health care
Case 4 Innovations from an organizational (economics) perspective
Health care strategies
Transaction costs
Organizational innovation
Innovation firms
Case 5 Any future for telemedicine
Mix-up of terms
Valuation of productivity losses and informal care
Methods to conduct economic evaluation
Results of an economic evaluation
Types of economic evaluation
Economic evaluation
Case 6 Economic consequences disappear
Differences between countries
Transferability and generalizability
Implementing results
Implementation
, Case 1 The economic approach of health care
Learning goals
1. What is economics?
2. Clarify the economic terms: scarcity, preferences, choices, allocation, efficiency, pareto-optimality,
competition, utility, costs and benefits, innovation and insurance, perfect competition, supply and demand,
market failure, governmental intervention, opportunity costs.
3. What is health economics and why do we need it?
4. What is the difference between economics, health economics and health care economics?
5. What are the specific of health care market and health care goods?
6. Describe the history, present and future of health economics.
7. Describe the Williams’ diagram.
The aims of case 1:
- Economy as a scientific discipline
- The economic approach of health and health care
- The past, present and the future of health economics as a discipline
,Economics
Economics is a study that is doing research for the choices people of a society make under conditions
of scarcity and what the most efficient choices are. There are unlimited needs, but limited resources.
Economics is concerned with the allocation of scarce resources among competing demands, how
these resources are distributed in an effective way.
- Scarcity: The tension between unlimited needs and limited possibilities to fulfil those needs.
The needs are so high, that the possibilities can’t fulfil those needs. It is a driver of choice.
- Allocation: The way that resources are distributed (the allocation of scare resources among
competing demands).
- Efficiency: The minimum input needed to get the greatest amount of output. E.g.
questioning how to distribute/locate the resources for the best efficiency?
- Pareto-optimality: An allocation of resources is ‘optimal’ if there is no way to rearrange
things that makes somebody better off without making at least one other person worse off.
o The pareto-efficiency is the same as allocative efficiency, only perfect competition.
o In health care, there is almost no pareto-optimality (which is not about equity).
- Preferences: The ordering of alternative options. It influences the choices that need to be
made because of scarcity. Preferences are driven by utility.
- Utility: Utility is the driver of preferences. It is the satisfaction people get: when people are
less satisfied, the utility decreases. It is hard to measure.
- Competition: Different kind of sellers striving for a goal which can’t be shared.
- Opportunity costs: Obtaining a good/service requires giving up something else. Opportunity
costs are the costs of the best alternative option, the value of the next-best resource/option,
the lost benefit. All resources have opportunity costs.
- Externalities: Costs and benefits that our decisions to buy or not to buy impose on others
who are not a party to the transaction. These can be positive (e.g. vaccinating yourself) or
negative (e.g. smoking) (or no/indirect externalities, e.g. at a dentist of surgery).
- The relation between the different economic concepts:
- Innovation and insurance: People who experience a risk get together and get covered.
Perfect competition and market failure:
- Perfect competition: A state that is needed to get optimal allocation of resources. There are
4 conditions/aspects of a perfect competition. Failing 1 aspects means there is an inefficient
allocation of resources (and then a governmental intervention is needed). The aspects are:
o Many consumers and suppliers: They can compete with each other.
o A homogenous product;
o Free entry (and exit) to the market (no transaction costs);
o Perfect information.
- Market failure: If one or more of efficient conditions are not fulfilled, then there is market
failure. It leads to inefficiency and suboptimal outcomes. Then a governmental intervention
is needed. When a perfect market is not reached, then there is no pareto-optimality.
o There are 4 influencing factors, namely the aspects of perfect competition/market.
o Complete market failure: There is demand, but no supply.
Partial market failure: There is demand, and a little bit of supply (but not enough).
, Perfect competition vs. Market failure
Economics, health economics and health care economics
Economics: A study of choices under conditions of scarcity, e.g. how to distribute resources in an
effective way.
Health economics: An applied field of economics. It studies the choices and/or behaviour of
individuals, health care providers, public and private organizations, and governments in health
decision-making, and it studies of how (scare) resources are allocated to and within the healthcare
system.
- E.g. How do we distribute health care within the population?
- Arrow (1963) is seen as the birth of health economics.
- Improving health is only possible by improving e.g. health care.
- Characteristics why health economics is different than economics:
1. The demand for health care is a derived demand (for health): You don’t’ ask for
‘health’ when going to the hospital, but you want care to gain health.
2. Existence of externalities: These refer to costs or benefits of consumption/product of
a good for others than direct users.
3. Informational asymmetries between health care providers and patients: Patients are
not always well informed. E.g. you can compare different cars before buying one, but
when a GP will prescribe certain medicine, you will probably just accept it.
4. Uncertainty with respect to both the need for and effectiveness of health care: E.g.
the outcome of a treatment differs per person.
- The effects of health economics (Cuyler):
o It has introduced the common currency of economists (algemene economische
termen) into medical parlance (jargon);
o Multi-disciplinary working in fully integrated teams of researchers in some major
areas of research.
o A great policy impact by helping public decision makers concerning questions on ‘big
issue’ questions, e.g. a myriad (talloze) of smaller scale research outcomes for
specific clients, investment decisions, pricing.
,Health care economics: The subject of analysis is the health (medical) care industry, not health. It is a
subdivision of health economics.
- Health care is getting more and more costly, so there is need to try to innovate: economics
are needed to work more efficiently.
- Health care influences health, but also other commodities, e.g. nutrition, sanitation, clothing,
and leisure time.
Government interventions/interferences in health care: The government interference in health care
can concern 5 aspects:
- Presence of externalities: Externalities can be positive or negative, e.g. smoking bans (passive
smoking) to avoid a negative externality.
- Market power: E.g. the regulation of (drug) prices in the market: when a company has
monopoly power (with a patent), then drug price regulation is needed to prevent extremely
or too high costs.
- Nature of goods (collective goods): Everybody would/could benefit (without paying), e.g.
national vaccination program, patents, transaction costs, information asymmetry.
- Uncertainty: E.g. insurances.
Characteristics of medical care market (Arrow):
- The nature of demand: An individual’s demand for medical services is not steady in origin,
but irregular and unpredictable. The demand for medical services is associated with an
assault (aanval) on personal integrity: it brings a considerable risk of death or impairment.
- Expected behaviour of the physician: There is an element of trust in the relation between a
customer and a physician. The behaviour of a physician is supposed to be governed (heersen)
by a concern for the customer’s welfare: self-interest on part of the participants is an
accepted norm in ‘collectivity-orientated’ behaviour, the advice of a physicians is supposed
to be completely divorced from self-interest. The chosen treatment (or product) should not
be limited by financial considerations.
- Product uncertainty: Uncertainty among the care-product (you don’t know before you try)
increases by the unpredictable aspect (uncertainty due to inexperience, which will increase
the difficulty of prediction) and there is a great utility variability. In health care, experience
generally cannot solve the product uncertainty problem. Further, there is an information
inequality which colors the relation between the customer and the physician: the medical
knowledge of the physician is probably greater than that of the patient, differences in
information should be noticed.
- Supply conditions: Licensing the physicians, by an expensive medical education, is restricted
and therefore increases the cost of medical care. It is a striking and insufficiently remarked
phenomena that such an important part of resource allocation should be performed by non-
profit-orientated agencies. It is an anomaly that educational costs are that high.
- Pricing practices: The pricing practices and attitudes of the medical profession are unusual:
extensive price discrimination by income (charging different customers different prices for
the same service), fee for services against such alternatives as prepayment and closed-panel
practices (contractual arrangements which bind the patient to a particular group of
physicians). Healthcare is a need, rather than a want (utility for being healthy, not for
receiving health), so they can just ask a lot of money for it.
, Developments in health economics
Arrow (1963) is seen as the founder of health economics. The real beginning of health economics by
coincides with that of the related sub-discipline economics of education. Arrow wrote ‘Uncertainty
and the welfare economics of medical care.
Williams’ schematic overview (1987) (!!!): A diagram that is the most important subject of health
economics. It shows the principal topics in the field and the intellectual links between them, which
make it possible to create research programmes and a sub-discipline.
- A. What influences health? (other than health care): Concerning the determinants of health
as a distinctive (kenmerkend) way of treating health itself, not about discounted benefits
over an expected lifetime. It concerns the interaction between a health production function
and a health demanding function.
- B. What is health? What is its value?: A multi-disciplinary approach to the meaning of
‘health’, its relationship with ‘welfare’ and the reliable measures of it for a variety of
purposes, specific and in general, e.g. constructing quality of life and (cost per) QUALY
measures. These are needed to make a value assumption about it.
- C. Demand for health care: It concerns a derived demand (from the demand of health). It is
about utility interdependencies (onderlinge afhankelijkheid) (externalities), the tensions and
advocates (verdediger) between ‘need’ and ‘demand’ and questions related to the normative
significance of revealed demand. The nature and determinants of health influence the
demand (A and B), i.g. demand differs for groups (poor/rich, old/young, male/female).
- D. Supply of health care: The material to be expected in supply-side economics (e.g. hospital
production functions, input substitutions, behavioural relations, labour markets
(arbeidsmarkt)). The largest group of research activity (20,65% of all publications).
- E. Micro-economic evaluation at treatment level: It concerns the applied cost-effectiveness
and cost-utility analysis, more specifically evaluative and normative. This involves the
economic evaluation of alternative ways of delivering care. The second large group of
research (14,75% of all publications).
- F. Market equilibrium (balans): Market analysis, the way in which markets operate, in a
positive (i.e. what happens, happened or what is predicted to be happen) or normative (i.e.
evaluating the performance of markets using the tools of welfare economics) way. Especially
applicable where there is substantial dependence on market institutions for the provision of
health care insurance and the delivery of health care. E.g. health technology assessments.
- G. Evaluation at whole system level: The highest level of evaluation and appraisal (schatten,
beoordelen) across systems and countries: internationally observed differences need
explanation and raise questions of how best to make comparisons, for what purpose and
how best to infer (afleiden, concluderen) lessons from others.
- H. Planning budgeting and monitoring mechanisms: A great variety of related parties. The
evolution of new forms of organisation, financing and monitoring/control.
In the future, more and more the focus will shift towards micro-economic evaluation at treatment
level, the evaluation at whole system level and the planning budgeting and monitoring mechanisms
(so E, G and H).
HPI4001 Economics of health care
Summary
Case 1 The economic approach of health care
Economics
Economics, health economics and health care economics
Developments in health economics
Case 2 The economics of innovations
Innovation
Theories on innovation in economics: economic growth theories
Theories on innovation in economics: innovation economics
Case 3 Pharmaceuticals as typical product innovations in health care
Coverage decisions
Usage of economic evaluations
The 4 hurdles
Drug development
Types of drugs
The pharmaceutical industry
Product innovations in health care
Case 4 Innovations from an organizational (economics) perspective
Health care strategies
Transaction costs
Organizational innovation
Innovation firms
Case 5 Any future for telemedicine
Mix-up of terms
Valuation of productivity losses and informal care
Methods to conduct economic evaluation
Results of an economic evaluation
Types of economic evaluation
Economic evaluation
Case 6 Economic consequences disappear
Differences between countries
Transferability and generalizability
Implementing results
Implementation
, Case 1 The economic approach of health care
Learning goals
1. What is economics?
2. Clarify the economic terms: scarcity, preferences, choices, allocation, efficiency, pareto-optimality,
competition, utility, costs and benefits, innovation and insurance, perfect competition, supply and demand,
market failure, governmental intervention, opportunity costs.
3. What is health economics and why do we need it?
4. What is the difference between economics, health economics and health care economics?
5. What are the specific of health care market and health care goods?
6. Describe the history, present and future of health economics.
7. Describe the Williams’ diagram.
The aims of case 1:
- Economy as a scientific discipline
- The economic approach of health and health care
- The past, present and the future of health economics as a discipline
,Economics
Economics is a study that is doing research for the choices people of a society make under conditions
of scarcity and what the most efficient choices are. There are unlimited needs, but limited resources.
Economics is concerned with the allocation of scarce resources among competing demands, how
these resources are distributed in an effective way.
- Scarcity: The tension between unlimited needs and limited possibilities to fulfil those needs.
The needs are so high, that the possibilities can’t fulfil those needs. It is a driver of choice.
- Allocation: The way that resources are distributed (the allocation of scare resources among
competing demands).
- Efficiency: The minimum input needed to get the greatest amount of output. E.g.
questioning how to distribute/locate the resources for the best efficiency?
- Pareto-optimality: An allocation of resources is ‘optimal’ if there is no way to rearrange
things that makes somebody better off without making at least one other person worse off.
o The pareto-efficiency is the same as allocative efficiency, only perfect competition.
o In health care, there is almost no pareto-optimality (which is not about equity).
- Preferences: The ordering of alternative options. It influences the choices that need to be
made because of scarcity. Preferences are driven by utility.
- Utility: Utility is the driver of preferences. It is the satisfaction people get: when people are
less satisfied, the utility decreases. It is hard to measure.
- Competition: Different kind of sellers striving for a goal which can’t be shared.
- Opportunity costs: Obtaining a good/service requires giving up something else. Opportunity
costs are the costs of the best alternative option, the value of the next-best resource/option,
the lost benefit. All resources have opportunity costs.
- Externalities: Costs and benefits that our decisions to buy or not to buy impose on others
who are not a party to the transaction. These can be positive (e.g. vaccinating yourself) or
negative (e.g. smoking) (or no/indirect externalities, e.g. at a dentist of surgery).
- The relation between the different economic concepts:
- Innovation and insurance: People who experience a risk get together and get covered.
Perfect competition and market failure:
- Perfect competition: A state that is needed to get optimal allocation of resources. There are
4 conditions/aspects of a perfect competition. Failing 1 aspects means there is an inefficient
allocation of resources (and then a governmental intervention is needed). The aspects are:
o Many consumers and suppliers: They can compete with each other.
o A homogenous product;
o Free entry (and exit) to the market (no transaction costs);
o Perfect information.
- Market failure: If one or more of efficient conditions are not fulfilled, then there is market
failure. It leads to inefficiency and suboptimal outcomes. Then a governmental intervention
is needed. When a perfect market is not reached, then there is no pareto-optimality.
o There are 4 influencing factors, namely the aspects of perfect competition/market.
o Complete market failure: There is demand, but no supply.
Partial market failure: There is demand, and a little bit of supply (but not enough).
, Perfect competition vs. Market failure
Economics, health economics and health care economics
Economics: A study of choices under conditions of scarcity, e.g. how to distribute resources in an
effective way.
Health economics: An applied field of economics. It studies the choices and/or behaviour of
individuals, health care providers, public and private organizations, and governments in health
decision-making, and it studies of how (scare) resources are allocated to and within the healthcare
system.
- E.g. How do we distribute health care within the population?
- Arrow (1963) is seen as the birth of health economics.
- Improving health is only possible by improving e.g. health care.
- Characteristics why health economics is different than economics:
1. The demand for health care is a derived demand (for health): You don’t’ ask for
‘health’ when going to the hospital, but you want care to gain health.
2. Existence of externalities: These refer to costs or benefits of consumption/product of
a good for others than direct users.
3. Informational asymmetries between health care providers and patients: Patients are
not always well informed. E.g. you can compare different cars before buying one, but
when a GP will prescribe certain medicine, you will probably just accept it.
4. Uncertainty with respect to both the need for and effectiveness of health care: E.g.
the outcome of a treatment differs per person.
- The effects of health economics (Cuyler):
o It has introduced the common currency of economists (algemene economische
termen) into medical parlance (jargon);
o Multi-disciplinary working in fully integrated teams of researchers in some major
areas of research.
o A great policy impact by helping public decision makers concerning questions on ‘big
issue’ questions, e.g. a myriad (talloze) of smaller scale research outcomes for
specific clients, investment decisions, pricing.
,Health care economics: The subject of analysis is the health (medical) care industry, not health. It is a
subdivision of health economics.
- Health care is getting more and more costly, so there is need to try to innovate: economics
are needed to work more efficiently.
- Health care influences health, but also other commodities, e.g. nutrition, sanitation, clothing,
and leisure time.
Government interventions/interferences in health care: The government interference in health care
can concern 5 aspects:
- Presence of externalities: Externalities can be positive or negative, e.g. smoking bans (passive
smoking) to avoid a negative externality.
- Market power: E.g. the regulation of (drug) prices in the market: when a company has
monopoly power (with a patent), then drug price regulation is needed to prevent extremely
or too high costs.
- Nature of goods (collective goods): Everybody would/could benefit (without paying), e.g.
national vaccination program, patents, transaction costs, information asymmetry.
- Uncertainty: E.g. insurances.
Characteristics of medical care market (Arrow):
- The nature of demand: An individual’s demand for medical services is not steady in origin,
but irregular and unpredictable. The demand for medical services is associated with an
assault (aanval) on personal integrity: it brings a considerable risk of death or impairment.
- Expected behaviour of the physician: There is an element of trust in the relation between a
customer and a physician. The behaviour of a physician is supposed to be governed (heersen)
by a concern for the customer’s welfare: self-interest on part of the participants is an
accepted norm in ‘collectivity-orientated’ behaviour, the advice of a physicians is supposed
to be completely divorced from self-interest. The chosen treatment (or product) should not
be limited by financial considerations.
- Product uncertainty: Uncertainty among the care-product (you don’t know before you try)
increases by the unpredictable aspect (uncertainty due to inexperience, which will increase
the difficulty of prediction) and there is a great utility variability. In health care, experience
generally cannot solve the product uncertainty problem. Further, there is an information
inequality which colors the relation between the customer and the physician: the medical
knowledge of the physician is probably greater than that of the patient, differences in
information should be noticed.
- Supply conditions: Licensing the physicians, by an expensive medical education, is restricted
and therefore increases the cost of medical care. It is a striking and insufficiently remarked
phenomena that such an important part of resource allocation should be performed by non-
profit-orientated agencies. It is an anomaly that educational costs are that high.
- Pricing practices: The pricing practices and attitudes of the medical profession are unusual:
extensive price discrimination by income (charging different customers different prices for
the same service), fee for services against such alternatives as prepayment and closed-panel
practices (contractual arrangements which bind the patient to a particular group of
physicians). Healthcare is a need, rather than a want (utility for being healthy, not for
receiving health), so they can just ask a lot of money for it.
, Developments in health economics
Arrow (1963) is seen as the founder of health economics. The real beginning of health economics by
coincides with that of the related sub-discipline economics of education. Arrow wrote ‘Uncertainty
and the welfare economics of medical care.
Williams’ schematic overview (1987) (!!!): A diagram that is the most important subject of health
economics. It shows the principal topics in the field and the intellectual links between them, which
make it possible to create research programmes and a sub-discipline.
- A. What influences health? (other than health care): Concerning the determinants of health
as a distinctive (kenmerkend) way of treating health itself, not about discounted benefits
over an expected lifetime. It concerns the interaction between a health production function
and a health demanding function.
- B. What is health? What is its value?: A multi-disciplinary approach to the meaning of
‘health’, its relationship with ‘welfare’ and the reliable measures of it for a variety of
purposes, specific and in general, e.g. constructing quality of life and (cost per) QUALY
measures. These are needed to make a value assumption about it.
- C. Demand for health care: It concerns a derived demand (from the demand of health). It is
about utility interdependencies (onderlinge afhankelijkheid) (externalities), the tensions and
advocates (verdediger) between ‘need’ and ‘demand’ and questions related to the normative
significance of revealed demand. The nature and determinants of health influence the
demand (A and B), i.g. demand differs for groups (poor/rich, old/young, male/female).
- D. Supply of health care: The material to be expected in supply-side economics (e.g. hospital
production functions, input substitutions, behavioural relations, labour markets
(arbeidsmarkt)). The largest group of research activity (20,65% of all publications).
- E. Micro-economic evaluation at treatment level: It concerns the applied cost-effectiveness
and cost-utility analysis, more specifically evaluative and normative. This involves the
economic evaluation of alternative ways of delivering care. The second large group of
research (14,75% of all publications).
- F. Market equilibrium (balans): Market analysis, the way in which markets operate, in a
positive (i.e. what happens, happened or what is predicted to be happen) or normative (i.e.
evaluating the performance of markets using the tools of welfare economics) way. Especially
applicable where there is substantial dependence on market institutions for the provision of
health care insurance and the delivery of health care. E.g. health technology assessments.
- G. Evaluation at whole system level: The highest level of evaluation and appraisal (schatten,
beoordelen) across systems and countries: internationally observed differences need
explanation and raise questions of how best to make comparisons, for what purpose and
how best to infer (afleiden, concluderen) lessons from others.
- H. Planning budgeting and monitoring mechanisms: A great variety of related parties. The
evolution of new forms of organisation, financing and monitoring/control.
In the future, more and more the focus will shift towards micro-economic evaluation at treatment
level, the evaluation at whole system level and the planning budgeting and monitoring mechanisms
(so E, G and H).
