LECTURE 1: IS HEALTHCARE REALLY
DIFFERENT?
ECONOMICS AND FINANCING OF HEALTH CARE SYSTEMS 23/24 – M HEPL
Goals:
- Explain the relevance of health economics
- Analyze the causes and consequences of the expansion of the healthcare sector
- Explain what makes health care different and infer the implications thereof
HEALTH ECONOMICS AND EXPANSION OF HEALTH CARE SECTOR
Health economics studies the allocation of resources to and within the health sector, and 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 healthcare resources, which may help to improve health
policy and health system design. Economics apply to health care as production and distribution is also present,
similar to other economics. As does the RAND health insurance show, that prices affect the demand response
of mental health care and medical care.
Health economics is relevant because:
- The economic organization of healthcare systems has a significant impact on the efficiency and equity
of healthcare allocation
- Health care is a large and expanding sector of national economies
- Health care is not a regular (economic) commodity; it is widely considered a right, not a privilege
- Specific features of health care can easily result in market failure as well as in government failure
EXPANSION OF THE HEALTHCARE SECTOR
Health care spending relative to GDP is and continues increasing in OECD countries. In addition, the healthcare
sector has also been consuming an increasing share of the capital investment and labor forces. An clear outlier
is the US in terms of health care spending. In the US this not only reflects the rapid adoption of medical
technologies, but is also attributed to the high costs of labor and goods, as well as administrative costs
(Nicolaus et al.), however the health outcomes are not necessarily good in the US.
The growth of healthcare spending has consistently outpaced the growth of the national economies, as
measured by the GDP per citizen. The average annual growth in health expenditure per capita is bigger than
the average annual growth in GDP per capita (citizen). However, the economy and its growth rate definitly
matter for the growth of healthcare spending. Although healthcare spending has typically outweighed the
economic growth, there was a slowdown following the financial crisis in 2008-2009. If it doesn’t go very well in
the economy, this is reflected in economies spending relatively less on healthcare as when the economy is
relatively well.
Healthcare spending is expected to increase steadily in the coming decades, this is due to the following
reasons:
- Ageing of populations
- Increasing welfare
- Advancing medical science & technology
- Shift towards chronic diseases
- Expanding health insurance coverage
- Flawed (financial) incentives
- Baumol’s cost disease
,Baumol’s cost disease describes that labor intensive services, like health care, become more expensive
compared to products of other industries. This is due to the fact that the productivity of workers in the
service provision cannot increase at the same pace as compared to that of workers in other industries. Thus,
increase in wages cannot be earned back by increases in productivity, making healthcare increasingly
expensive. Furthermore, demand for healthcare is unlikely to decline, despite the increasing cost price.
Increasingly involving policy makers with difficult choices.
Reasons why health spending growth is not sustainable
- Increasing health spending may significantly harm the economy. As taxes and/or premiums rise, labor
costs also rise and this affects the competitiveness of the economy.
- Increasing public health spending may crowd out other public services
- Financial sustainability: spending growth needs payment, however this puts greater pressure on tax
systems because of higher cross-subsidies to guarantee universal access.
- Economic sustainability: The value obtained for the money paid, it is important to ensure that the
benefits of healthcare spending exceed the costs of healthcare.
HEALTHCARE, RIGHT OR PRIVILEGE?
Universal coverage, as embodied in many
countries constitutions, is based on the WHO
constitution of 1948, declaring health a
fundamental human right:
“Ensuring that all people can use the promotive,
preventative, curative, rehabilitative and palliative
services they need, of sufficient quality to be
effective, while ensuring that the use of these
services do not expose the user to financial
hardship.”
Universal coverage has three dimensions:
population (“all people”), services (“services they
need”), Financial protection (“do not expose the
user to financial hardship”)
Healthcare as a right is not yet universally accepted, like in countries such as the USA.
DISTINCTIVE FEATURES OF HEALTH CARE
Healthcare has distinctive features, which are shared in other economic fields. However what is unique to
healthcare is the combination of features and the sheer number of them, some of them are:
- Presence and extent of uncertainty
- Problems of information
- Presence of insurance/risk bearing third parties
- Large role of non-profit firms
- Restriction on competition
- Importance of equity and solidarity
- Government subsidies and public provision
- Ethical concerns
,MARKET FAILURE IN HEALTH CARE
Market failure is caused by individual’s pursuit of self-interest, which lead to outcomes that can be improved
upon from a societal point-of-view. Various sources of market failure are:
- Uncertainty
- Risk bearing third parties (moral hazard)
- Asymmetric information (agency problems)
- Externalities
The government can intervene market failure with institutions, such as: professional licensure, non-profit
organizations, restrictions of provider advertising, “any-willing-provider” laws, social health insurance, supply
regulations (e.g. of entry and capacity), price regulation, quality regulation, public provision of health care,
etc. .
The government can try to correct market failures by public provision, however the fact that It can intervene in
the healthcare system does not necessarily mean that it will succeed in doing so. If they fail, than market failure
turns into government failure, various sources for government failure are:
- Information problems
- Coordination problems
- Motivation problems
- Special interest groups
How much government intervention is preferred depends on the historical and cultural differences, the balance
between market and government intervention is difficult to find.
Therefore it is important to ask the question: what role should markets and governments play in health care?
As this question is relevant in regard to the two goals of healthcare:
- Universal access: how to realize/organize solidarity
o Between low & high risk people?
o Between low & high income people?
- Efficiencies: how to organize an efficient provision and financing of health care services and systems
, LECTURE 2: DEMAND FOR
HEALTCARE
THREE HEALTHCARE MODELS
Demand for healthcare is derived from the demand for health: health care has no utility in itself, but only if it
can improve health, however demand for healthcare is often not well defined: people are uncertain about
what and how much care they need. The demand of healthcare is derived from the demand for health, as it
only makes sense to go to the doctor, when you are sick.
Healthcare is an input in an individual’s health production function (health = h(health care, schooling, nutrition,
prevention, safety…).
It is also important to realize that health care is not only a consumption but also an investment good.
There are Three models for HC demand
1. Medico-technical model:
a. Doctor in the lead, acting as a perfect agent on behalf of the patient
2. Neo-classical
a. Patient/consumer is in the lead, having perfect information
3. Imperfect agency
a. Demand determined by both doctors and patients.
THE MEDICO TECHNICAL MODEL
In the medico technical mode, the demand is determined by medical experts based on objective needs.
Assumptions:
- Perfects agents: health care providers act as perfect agents on behalf of their patients (ethical code of
conduct)
- Full patient compliance: patients have uniform preferences and fully comply with the decisions made by
their providers
- Provider certainty: providers know with certainty the results of their decisions
The only determinant of health care is need, therefore the individual demand is completely (price-)inelastic.
For this model, the demand curve will look like a vertical line.
In this case the graph is fully inelastic, It makes no difference what the price is, as
demand will stay the same.
Also referred to as the naïve medical model, because substantial empirical
evidence shows that the assumptions of the medico-technical model are
violated in practice:
- Doctors are not perfect agents but also pursue their own, sometimes conflicting, interests
- Doctors often do not know with certainty the effect of medical treatment
- Consumers do not have uniform preferences for medical care, even if they would be equally well-
informed as their doctors
DIFFERENT?
ECONOMICS AND FINANCING OF HEALTH CARE SYSTEMS 23/24 – M HEPL
Goals:
- Explain the relevance of health economics
- Analyze the causes and consequences of the expansion of the healthcare sector
- Explain what makes health care different and infer the implications thereof
HEALTH ECONOMICS AND EXPANSION OF HEALTH CARE SECTOR
Health economics studies the allocation of resources to and within the health sector, and 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 healthcare resources, which may help to improve health
policy and health system design. Economics apply to health care as production and distribution is also present,
similar to other economics. As does the RAND health insurance show, that prices affect the demand response
of mental health care and medical care.
Health economics is relevant because:
- The economic organization of healthcare systems has a significant impact on the efficiency and equity
of healthcare allocation
- Health care is a large and expanding sector of national economies
- Health care is not a regular (economic) commodity; it is widely considered a right, not a privilege
- Specific features of health care can easily result in market failure as well as in government failure
EXPANSION OF THE HEALTHCARE SECTOR
Health care spending relative to GDP is and continues increasing in OECD countries. In addition, the healthcare
sector has also been consuming an increasing share of the capital investment and labor forces. An clear outlier
is the US in terms of health care spending. In the US this not only reflects the rapid adoption of medical
technologies, but is also attributed to the high costs of labor and goods, as well as administrative costs
(Nicolaus et al.), however the health outcomes are not necessarily good in the US.
The growth of healthcare spending has consistently outpaced the growth of the national economies, as
measured by the GDP per citizen. The average annual growth in health expenditure per capita is bigger than
the average annual growth in GDP per capita (citizen). However, the economy and its growth rate definitly
matter for the growth of healthcare spending. Although healthcare spending has typically outweighed the
economic growth, there was a slowdown following the financial crisis in 2008-2009. If it doesn’t go very well in
the economy, this is reflected in economies spending relatively less on healthcare as when the economy is
relatively well.
Healthcare spending is expected to increase steadily in the coming decades, this is due to the following
reasons:
- Ageing of populations
- Increasing welfare
- Advancing medical science & technology
- Shift towards chronic diseases
- Expanding health insurance coverage
- Flawed (financial) incentives
- Baumol’s cost disease
,Baumol’s cost disease describes that labor intensive services, like health care, become more expensive
compared to products of other industries. This is due to the fact that the productivity of workers in the
service provision cannot increase at the same pace as compared to that of workers in other industries. Thus,
increase in wages cannot be earned back by increases in productivity, making healthcare increasingly
expensive. Furthermore, demand for healthcare is unlikely to decline, despite the increasing cost price.
Increasingly involving policy makers with difficult choices.
Reasons why health spending growth is not sustainable
- Increasing health spending may significantly harm the economy. As taxes and/or premiums rise, labor
costs also rise and this affects the competitiveness of the economy.
- Increasing public health spending may crowd out other public services
- Financial sustainability: spending growth needs payment, however this puts greater pressure on tax
systems because of higher cross-subsidies to guarantee universal access.
- Economic sustainability: The value obtained for the money paid, it is important to ensure that the
benefits of healthcare spending exceed the costs of healthcare.
HEALTHCARE, RIGHT OR PRIVILEGE?
Universal coverage, as embodied in many
countries constitutions, is based on the WHO
constitution of 1948, declaring health a
fundamental human right:
“Ensuring that all people can use the promotive,
preventative, curative, rehabilitative and palliative
services they need, of sufficient quality to be
effective, while ensuring that the use of these
services do not expose the user to financial
hardship.”
Universal coverage has three dimensions:
population (“all people”), services (“services they
need”), Financial protection (“do not expose the
user to financial hardship”)
Healthcare as a right is not yet universally accepted, like in countries such as the USA.
DISTINCTIVE FEATURES OF HEALTH CARE
Healthcare has distinctive features, which are shared in other economic fields. However what is unique to
healthcare is the combination of features and the sheer number of them, some of them are:
- Presence and extent of uncertainty
- Problems of information
- Presence of insurance/risk bearing third parties
- Large role of non-profit firms
- Restriction on competition
- Importance of equity and solidarity
- Government subsidies and public provision
- Ethical concerns
,MARKET FAILURE IN HEALTH CARE
Market failure is caused by individual’s pursuit of self-interest, which lead to outcomes that can be improved
upon from a societal point-of-view. Various sources of market failure are:
- Uncertainty
- Risk bearing third parties (moral hazard)
- Asymmetric information (agency problems)
- Externalities
The government can intervene market failure with institutions, such as: professional licensure, non-profit
organizations, restrictions of provider advertising, “any-willing-provider” laws, social health insurance, supply
regulations (e.g. of entry and capacity), price regulation, quality regulation, public provision of health care,
etc. .
The government can try to correct market failures by public provision, however the fact that It can intervene in
the healthcare system does not necessarily mean that it will succeed in doing so. If they fail, than market failure
turns into government failure, various sources for government failure are:
- Information problems
- Coordination problems
- Motivation problems
- Special interest groups
How much government intervention is preferred depends on the historical and cultural differences, the balance
between market and government intervention is difficult to find.
Therefore it is important to ask the question: what role should markets and governments play in health care?
As this question is relevant in regard to the two goals of healthcare:
- Universal access: how to realize/organize solidarity
o Between low & high risk people?
o Between low & high income people?
- Efficiencies: how to organize an efficient provision and financing of health care services and systems
, LECTURE 2: DEMAND FOR
HEALTCARE
THREE HEALTHCARE MODELS
Demand for healthcare is derived from the demand for health: health care has no utility in itself, but only if it
can improve health, however demand for healthcare is often not well defined: people are uncertain about
what and how much care they need. The demand of healthcare is derived from the demand for health, as it
only makes sense to go to the doctor, when you are sick.
Healthcare is an input in an individual’s health production function (health = h(health care, schooling, nutrition,
prevention, safety…).
It is also important to realize that health care is not only a consumption but also an investment good.
There are Three models for HC demand
1. Medico-technical model:
a. Doctor in the lead, acting as a perfect agent on behalf of the patient
2. Neo-classical
a. Patient/consumer is in the lead, having perfect information
3. Imperfect agency
a. Demand determined by both doctors and patients.
THE MEDICO TECHNICAL MODEL
In the medico technical mode, the demand is determined by medical experts based on objective needs.
Assumptions:
- Perfects agents: health care providers act as perfect agents on behalf of their patients (ethical code of
conduct)
- Full patient compliance: patients have uniform preferences and fully comply with the decisions made by
their providers
- Provider certainty: providers know with certainty the results of their decisions
The only determinant of health care is need, therefore the individual demand is completely (price-)inelastic.
For this model, the demand curve will look like a vertical line.
In this case the graph is fully inelastic, It makes no difference what the price is, as
demand will stay the same.
Also referred to as the naïve medical model, because substantial empirical
evidence shows that the assumptions of the medico-technical model are
violated in practice:
- Doctors are not perfect agents but also pursue their own, sometimes conflicting, interests
- Doctors often do not know with certainty the effect of medical treatment
- Consumers do not have uniform preferences for medical care, even if they would be equally well-
informed as their doctors
