HPIM4001: Economics of Healthcare summary of cases and
accompanying lectures
Note: some things are moved from one case to another because it fits the topic better of a
different case then what it originally belongs to.
Case/lecture 1 – advanced health economics
Economics = the systematic study of resource allocation mechanisms. How society choses to
allocate resources to produce goods and services (technical efficiency) and how to distribute
these among the society (allocative efficiency). Resources are not only monetary resources but
for example also time, space, persons, pretty much everything that you can put into an alternative
use.
If resources are insufficient to meet all demands, they are scarce. Hence:
- all resources have an opportunity cost every choice has an opportunity cost
- health and healthcare demands appear to be infinite
- resources available for health care are finite
need for health economics
2 defining concepts of economics:
1. the vast range of human wants
2. the relative scarcity of resources that can be employed to meet these wants
assumption in economics: choices are rational. This does not mean that people choose the
smartest option, but rather that people choose what they think is the smartest option.
However, traditional market economics does not work well for healthcare because:
- Externalities: the costs of benefit incurred by actions or transactions of others
o Positive externality example: a beekeeper that lives next to an apple orchard,
vaccinations
o Negative externality example: smoking second hand smoke
- Nature of goods
- Nature of exchange of goods
o Transaction costs
o Information asymmetry
- Market power/monopoly
- Derived demand: there is no demand for healthcare, but for health. Therefore, the demand
for healthcare is a derived demand from the demand for health.
- Information asymmetry: healthcare professional knows more than the consumer (patient),
and patient sometimes withholds information from the healthcare professional
5 characteristics of Arrow:
, - Nature of demand: individual demand of healthcare is very various, it is not regular.
uncertainty of when we will need healthcare (uncertainty of demand)
- Expected behaviour of physician: doctors vs physician. Concern of customers welfare
more important than profits
- Unpredictability of product: no certain result uncertainty of what we will get from the
purchased product (which is healthcare) (uncertainty on output side)
- Supply conditions: licencing, you cannot just be a doctor. Control of quality is constricted
- Pricing practices: price competition is frowned upon because of goals of healthcare.
Difference between the two lists: the first 4 characteristics lead to the market failures that are
mentioned in the 5 characteristics by Arrow
Health(care) vs traditional economics:
- Health cannot be traded on the market
- Health is embodied and depends on the health status of the individual
- Health status is stochastic (unpredictable)
That is why the following concepts have been developed:
Health economics: the study of how scarce health care resources may be used to meet our needs.
How do we produce health and distribute health (health differences).
Arrow started health economics because regular economics was not sufficient to make choices in
healthcare, due to the characteristics of healthcare and the following market failure mentioned
before.
Healthcare economics is a part of health economics
Difference between the two: health economics takes other effects than healthcare into
account that influence the product ‗health‘ e.g. social status, education, environment etc.
Healthcare economics: aim: to inform decision makers so that the choice they make maximizes
health benefits to the population. Not concerned with saving money but with improving the level
and distribution of population health with the resources available. Demand for healthcare is
derived demand (you want health but to get there you need healthcare, no direct demand for
healthcare). How do we produce and distribute healthcare.
- Neoclassical economics is the main thought of healthcare economics:
o The notion that the value of a good or service is defined by people‘s preferences
o Marginal analysis: the examination of small changes in particular variables
o Optimization: calculating at what point a particular variable is maximized
Important challenges for health economics:
1. Institutions matter: institutions define ‗the rules of the game‘, while organization is about
‗how the game works‘
, 2. The proper role of the market and government.
Important terms in health economics:
Pareto efficiency/allocative efficiency: a situation in which it is not possible to improve the
welfare of one person in an economy without making someone worse off. Directly related to
allocative efficiency, no better allocative efficiency is possible. Optimal production and
allocation of products. Has nothing to do with fairness of equity.
Externality: the costs of benefit incurred by actions or transactions of others
Positive externality example: a beekeeper that lives next to an apple orchard, vaccinations
Negative externality example: smoking second hand smoke
Opportunity costs: the value of the next best alternative which will be gone as a result of the
decision made
Utility: the measurement of happiness of satisfaction a person gains from consuming a
commodity. Difficult to measure. Abstract concept.
Scarcity: In economics, scarcity refers to limitations—insufficient resources, goods, or abilities
to achieve the desired ends. Figuring out ways to make the best use of scarce resources or find
alternatives is fundamental to economics. Scarcity is not limited resources, it is about the conflict
between needs and resources.
Preferences: something is favoured instead of something else. Leads to an optimal choice
Choices: deciding between different uses for scarce resources
Allocation: Process by which resources/products are divided.
Efficiency: costs is lowest, utility highest. Minimal costs, maximal output
Technical efficiency: about the production
Allocative efficiency: how products are distributed
Competition: Economic competition takes place in markets--meeting grounds of intending
suppliers and buyers. Typically, a few sellers compete to attract favourable offers from
prospective buyers. Similarly, intending buyers compete to obtain good offers from suppliers.
When a contract is concluded, the buyer and seller exchange property rights in a good, service, or
asset. Everyone interacts voluntarily, motivated by self-interest.
Perfect competition/free market:
- Many suppliers and many consumers, no market power
accompanying lectures
Note: some things are moved from one case to another because it fits the topic better of a
different case then what it originally belongs to.
Case/lecture 1 – advanced health economics
Economics = the systematic study of resource allocation mechanisms. How society choses to
allocate resources to produce goods and services (technical efficiency) and how to distribute
these among the society (allocative efficiency). Resources are not only monetary resources but
for example also time, space, persons, pretty much everything that you can put into an alternative
use.
If resources are insufficient to meet all demands, they are scarce. Hence:
- all resources have an opportunity cost every choice has an opportunity cost
- health and healthcare demands appear to be infinite
- resources available for health care are finite
need for health economics
2 defining concepts of economics:
1. the vast range of human wants
2. the relative scarcity of resources that can be employed to meet these wants
assumption in economics: choices are rational. This does not mean that people choose the
smartest option, but rather that people choose what they think is the smartest option.
However, traditional market economics does not work well for healthcare because:
- Externalities: the costs of benefit incurred by actions or transactions of others
o Positive externality example: a beekeeper that lives next to an apple orchard,
vaccinations
o Negative externality example: smoking second hand smoke
- Nature of goods
- Nature of exchange of goods
o Transaction costs
o Information asymmetry
- Market power/monopoly
- Derived demand: there is no demand for healthcare, but for health. Therefore, the demand
for healthcare is a derived demand from the demand for health.
- Information asymmetry: healthcare professional knows more than the consumer (patient),
and patient sometimes withholds information from the healthcare professional
5 characteristics of Arrow:
, - Nature of demand: individual demand of healthcare is very various, it is not regular.
uncertainty of when we will need healthcare (uncertainty of demand)
- Expected behaviour of physician: doctors vs physician. Concern of customers welfare
more important than profits
- Unpredictability of product: no certain result uncertainty of what we will get from the
purchased product (which is healthcare) (uncertainty on output side)
- Supply conditions: licencing, you cannot just be a doctor. Control of quality is constricted
- Pricing practices: price competition is frowned upon because of goals of healthcare.
Difference between the two lists: the first 4 characteristics lead to the market failures that are
mentioned in the 5 characteristics by Arrow
Health(care) vs traditional economics:
- Health cannot be traded on the market
- Health is embodied and depends on the health status of the individual
- Health status is stochastic (unpredictable)
That is why the following concepts have been developed:
Health economics: the study of how scarce health care resources may be used to meet our needs.
How do we produce health and distribute health (health differences).
Arrow started health economics because regular economics was not sufficient to make choices in
healthcare, due to the characteristics of healthcare and the following market failure mentioned
before.
Healthcare economics is a part of health economics
Difference between the two: health economics takes other effects than healthcare into
account that influence the product ‗health‘ e.g. social status, education, environment etc.
Healthcare economics: aim: to inform decision makers so that the choice they make maximizes
health benefits to the population. Not concerned with saving money but with improving the level
and distribution of population health with the resources available. Demand for healthcare is
derived demand (you want health but to get there you need healthcare, no direct demand for
healthcare). How do we produce and distribute healthcare.
- Neoclassical economics is the main thought of healthcare economics:
o The notion that the value of a good or service is defined by people‘s preferences
o Marginal analysis: the examination of small changes in particular variables
o Optimization: calculating at what point a particular variable is maximized
Important challenges for health economics:
1. Institutions matter: institutions define ‗the rules of the game‘, while organization is about
‗how the game works‘
, 2. The proper role of the market and government.
Important terms in health economics:
Pareto efficiency/allocative efficiency: a situation in which it is not possible to improve the
welfare of one person in an economy without making someone worse off. Directly related to
allocative efficiency, no better allocative efficiency is possible. Optimal production and
allocation of products. Has nothing to do with fairness of equity.
Externality: the costs of benefit incurred by actions or transactions of others
Positive externality example: a beekeeper that lives next to an apple orchard, vaccinations
Negative externality example: smoking second hand smoke
Opportunity costs: the value of the next best alternative which will be gone as a result of the
decision made
Utility: the measurement of happiness of satisfaction a person gains from consuming a
commodity. Difficult to measure. Abstract concept.
Scarcity: In economics, scarcity refers to limitations—insufficient resources, goods, or abilities
to achieve the desired ends. Figuring out ways to make the best use of scarce resources or find
alternatives is fundamental to economics. Scarcity is not limited resources, it is about the conflict
between needs and resources.
Preferences: something is favoured instead of something else. Leads to an optimal choice
Choices: deciding between different uses for scarce resources
Allocation: Process by which resources/products are divided.
Efficiency: costs is lowest, utility highest. Minimal costs, maximal output
Technical efficiency: about the production
Allocative efficiency: how products are distributed
Competition: Economic competition takes place in markets--meeting grounds of intending
suppliers and buyers. Typically, a few sellers compete to attract favourable offers from
prospective buyers. Similarly, intending buyers compete to obtain good offers from suppliers.
When a contract is concluded, the buyer and seller exchange property rights in a good, service, or
asset. Everyone interacts voluntarily, motivated by self-interest.
Perfect competition/free market:
- Many suppliers and many consumers, no market power
