Opportunity cost = value of benefits foregone because a resource is not available for its best alternative use.

Scarcity implies that the resource is limited + choices made on course of action whenever competing uses of resources occur

Concept of foregone benefits if choose to do something = also decided not to do something else (deciding that it is less beneficial compared to chosen action) Production possibilities frontier = curve showing all possible combinations of goods in trade-off Efficiency = weighs opportunity cost + benefits (most benefits with limited resource, benefits derived > benefits foregone); efficient = work in both theory + practice Efficacy = work in theory 1. Technical efficiency achieved when given output cannot be produced with fewer resources ie. No more can be produced with same resources = max with regards to quantity not value (technical inefficiency waste/mismanagement) 2. Allocative efficiency achieved when best possible mix of goods + services valued by society as a whole is produced. (Value of input to value of output; not just quantity) Healthcare can be seem as a competitive market model where consumers aim to maximise their benefits from goods + services and producers aim to maximum profits from goods/services. Demand affecting factors: 1. 2. 3. 4. Price of commodity Price of alternative product Income of consumers Tastes of consumers Demand for a given commodity/service is reflected by willingness + ability to pay (up to when benefit = price inversely proportional) Extra benefit from one extra unit declines as more commodities are consumed. Lower the price the more consumers will buy

Substitution effect = switch to products of lower price after price rise Income effect = increased price = fall in income (cannot spend on other things) Opportunity costs = transportation + travel time etc. Utility = the benefits/negatives of what is perceived when obtaining a product/service (greater utility expected, more willing to be paid for it) Marginal utility = additional utility received by consuming 1 more unit (satisfaction decrease when more is consumed law of diminishing marginal utility) Supply: quantity of product depends on price (higher = more willing to produce positive relationship)

Factors affecting supply: 1. Price of commodity 2. Cost of production (technology, price of inputs, price of goods related to production) Excess supply = producers supplied more products/services than the consumers willing to pay (producers then encouraged to lower the price to sell excess stocks + price fall till quantity supplied = quantity demanded) Excess demand = some cosumers unable to buy the product due to increased demand if the price is lower (producer increase price and sell more until equals) NB: consumers restricted by their income, producers restricted by production costs Price how much consumers willing to pay + how much producers willing to sell When neither unsatisfied demand + excess supply = market in equilibrium (outcome is efficient) To do so: 1. Sufficient buyers and sellers + freedom of entry into the market for potential new producers (inhibit seller collusion) 2. No externalities (benefits of buying solely to the buyer + production cost solely to the seller) 3. Consumer sovereignty (cosumers best judge at their needs + makes rational market decisions) Healthcare model dont comply with idealised market model: 1. 2. 3. 4. Often no market price Difficult to measure output Consumers not fully aware of treatment implications or of all possible treatment options Also general consensus that distribution of services should be determined by the market (all have access despite ability to pay)

Inherent characteristics = why often imbalance in demand + supply of healthcare (market failure) Institutional response = special arrangements for funding, supply + regulation Such characteristics include: Uncertainty difficulty to budget for future expenditure (uncertain future health status) Institutional response insurance market (however if the price faced by individual is lower than marginal benefit received, then more likely to increase consumption of the service = introduction of co-payments)

Information asymmetry between consumers + providers Lack information about expected benefits of treatment or possible alternatives + implications of no treatment

Consumer too unwell or distressed to acquire information needed to make decision (often rely on provider as agent) Complex relationship, highly variable outcome + information held with numerous providers

Perfect agents acting as consumers behalf to satisfy their demands Imperfect agency relationship provider chose different type or amount of service than what the patient would have done if fully informed Responses barriers to market entry (e.g. training places), professional license, provider regulations, peer review By restricting market = monopoly provision of services (providers) + monopsony purchasing power (consumers)

Externalities Spillover benefits experienced by people other than the ones using the service e.g. herd immunity (+ve externalities) Amount of health care demanded in competitive market = below socially optimal (dont consider spillover benefits = underestimating full benefit to community); response reduce market price to increase consumption e.g. via subsidy but as personal benefit can be gained, they will be willing to pay something -ve externalities e.g. pollution reduce utility experienced by others Caring externality e.g. utility derived from seeing others better off

Supply side imperfections Monopoly = one provider, entry by new suppliers blocked, no substitutes for service, producer strong price control Oligopoly = few producers often collude prices above competitive level Monopolistic competition = more producers but enjoys discretion in setting prices

Cause decrease in production cost as output expands + usually require large capital e.g. pharma, often will have natural monopoly where most efficient supply has to be through one provider and the local region may only be able to support one facility + increased training length restricts new providers entry. Response regulation of quantity/price e.g. PBS + public sector may act as sole buyer/monopsonist and secure lower prices. Public provision = government operate + own public assets Private provision with taxes and subsidies = encourage activities + taxes discourage bad activities Private provision with regulation = ensure firms act in socially desirable way NB: private provision pure + nil gov interference (rare as most have legislations), gov contract with private providers but maintain ownership, gov provide subsidy to producers to provide good (subsidy pass to consumers with lower prices) or gov provide subsidy to consumers (tax/direct grant) 3 approach for paying hospital services: Historical (input-based) budgets

Taking into consideration previous years budgets/production inputs + may have budget caps in place But tight budgets encourage long term reducing output + does not discriminate between efficient vs inefficient

Output-based payments

A day of stay = per diem (measure of output) hospitals paid on basis of inpatient length of stay (LOS) But as condition improves, cost of care reduces + less inclined to discharge early/intensive therapy Rehab, nursing home paid on per diem rate (may approximate bed day costs) Diagnosis related group (DRG) case based payment (however may be inclined to produce output at least cost instead of producing long term health outcomes) Capitation-based payment

Hospitals funded on population basis (weighted population formula; higher expected for elderly + chronic) Encourage allocative efficiency + incentives for health promotion + integrate primary health + rehab services Activity based funding (ABF)

Output for inpatient acute care (AR-DRGs) = output services defined Urgency Related Groups (URGs) = ED weighted by triage category + pt number etc.

3 methods of paying doctors Fee-for-service basis of medicare benefits scheme Salary employed and obtain salary from employer (usually in hospital setting) Capitation based funding remunerate on population basis + fixed amount received over given time period covers all services patient requires

Others case payments (single payment covers all services provided in an episode) Pharmaceuticals cost control mechanisms: Expenditure capping capping total budget available in a given time period irrespective of who misses out Listing restrictions e.g. for high cost drugs or defined by medical conditions Generic substitutions for products with brand premium once out of patent negotiates lower price as generic available as competitors Increasing co-payment price increase demand decreases (but impacts on access), safety net system provides protection for low income consumers adversely affected by price increases Influencing prescribing patterns or use indication restrictions, authority listing, education etc.