HEALTH

ECONOMICS

HISTORICAL VIEW

WHAT IS ECONOMICS?

Economics

is the science of scarcity. It

analyses how choices are structured
and prioritized to maximize welfare
within constrained resources.

Economics

is the study of distribution

of scarce resources commonly known
as goods and services across a
population

WHAT IS ECONOMICS?

The

Economics is the science that

deals with the consequences of
resources scarcity.

The

discipline of economics deals

with use of scarce resources to
satisfy human wants and needs how
best to use the resources available.

MODELS

POSITIVE
ECONOMICS

NORMATIVE
ECONOMICS

to establish cause and

effect in a scientific
manner

establishing the means

by which socially
desirable outcomes can
be achieved

WHAT IS HEALTH?

. According to World Health

Organization's (WHO)
constitution health is 'a
state of complete physical,
mental and social well
being and not merely the
absence of disease or
infirmity'

Health" in health
economic (evaluation) is
health status according to
some measure.

Economists view of the world

Pessimist: bottle empty

Optimist: bottle full
Economist: bottle WASTED!!

The Health Economic problem

Unlimited healthcare
wants with rapid growth
in health expenditure.
Insufficient health sector
resources.
Choosing between
wants we can afford
given our resource
budget.
8

Concept of opportunity cost

The value of forgone benefit which could be obtained
from a resource in its next-best alternative use.
Pg A

Pg B

Budget

The aim is to choose activities where benefits outweigh

opportunity cost.
9

What is Health Economics?

Theoretical framework to help healthcare
professionals ,decision-makers or governments to make
choices on
HOW to maximize the health of population given
constrained health producing resources.
What health economists need is
To understand the relationship between resources used and
health outcomes achieved by alternative options.
and compare!
10

DEFINITIONS OF HEALTH
ECONOMICS
Health economics is the study of distribution of
health care. It is a branch of economics concerned
with issues related to efficiency, effectiveness, value
and behavior in the production and consumption of
health and health care.

DEFINITIONS OF HEALTH
ECONOMICS
It is the allocation of resources within the health
system in the economy, as well as functioning of
health care market.

DEFINITIONS OF HEALTH
ECONOMICS

Health economics is concerned with the formal

analysis of costs, benefits, management, and
consequences of health and health care. It is the
branch of economics concerned with the application
of economic theory to phenomena and problems
associated with health and health care.

DEFINITIONS OF HEALTH
ECONOMICS
Health economics is the study of how scarce
resources are allocated among alternative uses for the
care of sickness and the promotion, maintenance and
improvement of health, including the study of how
health care and health-related services, their costs
and benefits, and health itself are distributed among
individuals and groups in society. It can, broadly, be
defined as 'the application of the theories, concepts
and techniques of economics to the health sector'.

CONCEPTS IN HEALTH ECONOMICS

Resources
Scarcity

opportunity of cost
efficiency
production of health
health care market

CONCEPTS IN HEALTH ECONOMICS

econom
y level
of
outputs

level of
national
income

Macroecono
mics

general
price
level

CONCEPTS IN HEALTH ECONOMICS

Microeconomics
Microeconomics is the study of economic
behavior of individual decision making units
such as: consumers, resource owners and
business firms in a free enterprise economy.
This can be measured by conducting

market surveys, pilot and feasibility studies.

CONCEPTS IN HEALTH
ECONOMICS
Health Microeconomics
Health microeconomics is concerned with how
individuals choose, minimize costs or maximize
profit or utilities within a given health care
system within a set of rules and prices.

COMPONENTS OF HEALTH ECONOMICS

Meaning and scope of health
economics
Determinants of health
Demand for health and health care
Supply of health care
Health care markets

COMPONENTS OF HEALTH ECONOMICS

The relationship between economic
growth and health
Health sector budgeting and planning
National health systems
Equity in health outcomes and in
health care
International health.

Medical
advances
Due to
increase
in life
expectanc
y

public
awareness

Higher
expectatio
n among
people

NEED FOR
HEALTH
ECONOMICS

Advances in
health
research

Changes in
family
structure
and norms

IMPORTANCE OF HEALTH ECONOMICS

To formulate health services

To establish the true costs of delivering
health care or to estimate all real costs
like the use of patients' time, loss of
output elsewhere in the system etc

IMPORTANCE OF HEALTH ECONOMICS

To evaluate the relative costs and

benefits of particular policy options
To estimate the effects of certain
economic variables like user charges,
time and distance costs of accessibility,
etc on the utilization of health services

HEALTH POLICY ISSUES

Health and
economic
development

Organization and
economic
development

RELEVANCY OF
ECONOMICS
To identify and measure
health and diseases
,basic needs. To identify
determinants of growth
and economic
development, elements
of health expenditure
by use of macro
economics
To determine the
economic
characteristics of health
care and Health related
activities

HEALTH POLICY
ISSUES

Finance
aspects of
health sector

Demand
analysis

RELEVANCY OF ECONOMICS

To find out the source

of health care
financing; social
accounting system,
self financing
insurance etc.
To analyze the
determinants of
demand, individual
and supplier induced
behavior, time, cost
,health payment

HEALTH POLICY
ISSUES

Supply
analysis

Health man
power

RELEVANCY OF ECONOMICS

To determine the
physical resources and
costs, estimation of
short term And long
term cost curve
To determine the
labour market and
demand for & supply
of health
workers,remuneration
and other
determinants of

HEALTH POLICY
ISSUES

Financial
managem
ent

RELEVANCY OF ECONOMICS

Budgeting
system and
accounting
,inventory
managment

Major Tasks of Economics In Health (Care)

Descriptive
Quantification
Explanatory or
Predictive
Evaluative

FEATURES OF HEALTH ECONOMICS

Health and medical care is considered

as economic goods
Health is a private or a public good
Measurement of health is also
considered in economics
Stock of health
Investment aspects of health

FEATURES OF HEALTH ECONOMICS

Loss due to ill health

Resource costs of different diseases,
effects of health and medical care
provision
Planning of health and medical care
Choice of technology in health care
system, etc.
Provision of equity in health outcomes and
health care;

AREAS OF HEALTH ECONOMICS

Economic

aspects of relationship
between health status and
productivity
Financial aspects of health care
services

AREAS OF HEALTH ECONOMICS

Economic

decision making in
health and medical care
institutions
Planning of health development
and such other related aspects

FACTORS INFLUENCING HEALTH

ECONOMICS

Extensive government intervention

Intractable uncertainty in several dimensions

Information asymmetric

Barriers to entry

Externalities and the presence of a third-party

agent

TOOLS USED IN ECONOMIC

ANALYSIS

Economic
Variables

Relationships
between
Economic
Variables

Graphical
Representation
of
Relationships

The Direction
of the
Relationships

ECONOMIC EVALUATION

Economic evaluation is the comparative analysis

of alternative courses of action in terms of both
their costs and consequences in order to assist
policy decisions

Steps in Economic Evaluation

Deciding Upon the Study Question
Assessment of Costs and Health
Effects
Adjustment of timing
Adjustment for uncertainity
Making a decision

TYPES OF ECONOMIC EVALUATION

Cost minimization Analysis

Cost-benefit
AnalysisAnalysis
(CBA).
Cost-effectiveness
(CMA
Cost-utility Analysis
(CUA)
(CEA)

Cost analysis
Cost analysis is a resource tool for
financial management in hospital
or department. It is an economic
evaluation technique that
involves the systematic
collection, categorization, and
analysis of program or
intervention costs, and cost of
illness.

When to Use Cost

Analysis?
Cost analysis can be used as an
evaluation method when
-Only one program is being assessed,
-Information about program
effectiveness is not available, or the
interventions being assessed and
compared are equally effective.

Objectives of Cost Analysis

To

assess the efficiency and

effectiveness of function and their
cost implication.
To improve the policy relevance and
utility through assessment, planning
and avoidance of wasteful
expenditure in the hospital.
To allow researchers to achieve cost
minimization for the programs
under consideration.

Purposes of Cost Analysis

A

tool for planning and cost

projection
To assess the efficiency of a
programme
To assess the priorities
Accountability
To assess equity

Principles of Cost Analysis

Make

explicit the analytic

perspective
Describe the anticipated benefits
Specify the components of costs
Discount to adjust for differential
timing
Perform a sensitivity analysis
Calculate measurement of
efficiency

Framework of Cost Analysis

1. Identify and define the problem

2. Defining the alternatives
3. Defining the audience
4. Define the perspective
5.Define time frame
6. Determine the time frame and
analytic horizon
7. Choose a format/methodology


Basic Steps in Cost Analysis

Define

program, treatment, or
technology to be analyzed
Develop a framework for cost
analysis of program
Describe objectives of analysis
Select type of cost analysis
Design methodology of cost analysis


Basic Steps in Cost Analysis

Apply

principles of cost analysis

Describe study outcomes
Development of cost inventory
Preparation of cost summary


Basic Steps in Cost Analysis

Measurement/evaluation

of

resources used
Calculate

cost analysis results : total

cost, average costs, and marginal
costs

Sensitivity analysis and discounting

Total cost (TC)

The total cost of a program or an

intervention is derived by adding all the
costs incurred in producing a given level of
output. It includes the cost of all the
personnel, the supplies, and the equipment
that were identified in the cost inventory.
TC = Quantity of resource 1 X value of that
resource 1 + ....+
Quantity of resource n X value of that
resource n

Average cost (AC)

The average cost is the cost per

unit of output (e.g., cost per
patient treated or cost per child
immunized). AC is computed by
dividing the total cost by the
number of participants or other
relevant intervention units. The
formula is
AC = TC / Q ;
Q= Units of output

Marginal cost (MC)

The marginal cost is the resource cost associated with

producing one additional or one less unit within the
same intervention/program
MC = Change in total costs/change in quantity produced
Or
MC = (TC' -TC) / (Q' Q)
TC' = Total costs a higher output level TC = Total costs
at lower output level Q' = Higher level of output Q =
Lower level of output

Health Valuation Methods

Cost-ofIllness
Method
(COI)

Non Market
Valuation
Methods

NON MARKET VALUATION

METHODS

REVEALED
PREFERENC
E METHOD
STATED
PREFERENCE
METHOD

REVEALED PREFERENCE
METHOD
Hedonic

pricing
The hedonic method is based on the
principle that the prices that
consumers pay or receive depends
on characteristics of the person that
can be objectively measured.
W = f (q,e,ex,a,g)
Whereas W= the wage rate; q =a
measure of qualification; e=
experience; ex = measure of

REVEALED PREFERENCE
METHOD
Hedonic

pricing

REVEALED PREFERENCE
METHOD
Averting behavior method
The value of a small change in health
status can be measured by the
amount of money a person is willing
and able to spend on some
controlling or preventive device or
defensive (averting) action. This
amount of money represents the
person's valuation of safety against

STATED PREFERENCE OR CONTINGENT

VALUATION METHOD (CVM)

This

is direct method, uses primary

surveys that ask persons to place
values on an intervention to attain a
level of health outcome.

Types of Cost Analysis

Cost-ofillness
analysis
Costconsequenc
e Analysis

Costbenefit
Analysis
(CBA)

Costminimizatio
n Analysis

Costeffectivene
ss Analysis
(CEA)

Cost-utility
Analysis
(CVA)

TYPE OF
ANALYSIS

COST OF
OUTCOME
INTERVENTION

CONCERN

Cost benefit
analysis

Monetary units

Valued In cash
terms

Net cost: benefit

ratio

Cost
effectiveness
analysis

Monetary units

Cost per unit of

consequence or
cost per years of
life
gained/saved

Cost utility
analysis

Monetary units

Qualitative nonmonetary units

eg: reduced
morbidity or
years of life
gained or saved
Valued as Utility
Eg: Quality
adjusted life
year (QALY)
Equivalent
outcome in all
respect

The least cost

alternative

Costminimisationanalysis

Cost per unit of

consequence or
cost per QALY

COST-BENEFIT ANALYSIS
Cost-benefit

analysis is a practical way of

assessing the desirability of projects, where
it is important to take a long view (looking
at the repercussion in the future as well as
in the near future and a wide view in the
sense of allowing side effects of many
decisions) Le. it implies the enumeration
and evaluation of all the relevant cost and
benefits.
-Prest
and Terkey

COST-BENEFIT ANALYSIS
Cost

Benefit Analysis (CBA) is an

economic evaluation technique that
measures all the positive (beneficial)
and negative (costly) consequences
of an intervention or program in
monetary terms.

COST-BENEFIT ANALYSIS

CBA is a practical approach of

appraising the desirability of an
intervention involving public
expenditure in terms of net social gain
society.

CBA

is the use of analytical techniques

involving a monetary assessment to
identify the total costs and benefits of a
specific intervention

COST-BENEFIT ANALYSIS

COST-BENEFIT ANALYSIS

Benefits
Direct Benefits
Indirect Benefits
Intangible Benefits

Benefits (B) > Costs (C) or Net

Benefits (NB) = B -C > O.

Importance of Cost Benefit Analysis

Cost

Benefit Analysis is used for

determining priorities among
various alternative programs or
interventions.
It provides an estimate of the
potential value of undertaking a
course of action, i.e. instituting a
new program or intervention or
revising the old one.
It can also be used to compare
health-related interventions to

Importance of Cost Benefit Analysis

It

enables policy makers to determine

whether the value of its positive
consequences exceeds the value of societal
resources required to implement the
program.
It estimates and totals up the equivalent
money value of the benefits and costs of
projects to establish whether they are
worthwhile. .
It is a powerful and relatively easy tool for
deciding whether to make a change or not.

Features of Cost Benefit Analysis

CBA

adopts a broad societal

perspective as it includes all
costs and all benefits
CBA measures the outcomes in
monetary terms.
It assess the desirability of
program/intervention

Purposes of Cost Benefit Analysis

To
To

assess the economic efficiency

decide whether to implement a
specific program
To select among
competing/alternative options

Principles of Cost Benefit Analysis

There must be a common unit of

measurement. All the benefits and costs
of the program/project must be measured
in terms of their equivalent money value
The CBA valuations should represent
consumers or producers valuation.
The valuation of benefits and costs
should reflect preferences reveled by
choices

Principles of Cost Benefit Analysis

The benefits are usually measured by

market choices.
The marginal benefit should be equal
to the market price.
The gross benefits of an increase in
consumption are an area under the
demand curve.

Principles of Cost Benefit Analysis

Some measurements of benefits require

the valuation of human life. These values
can be used to estimate personal costs in
terms of increased risk or of reduced risk.
The alternatives must be explicitly
specified and considered in the
evaluation.
The impacts of the programmes must be
defined

Principles of Cost Benefit Analysis

The discounted present value of

benefits should exceed the
discounted present value of costs.
Compare alternative programmes in
terms of the expected benefits and
cost ratio of each programme to
determine which should receive
priority for funding

Advantages of Cost Benefit

Analysis
It helps to allocate scarce resources to
programs that maximize societal
economic benefit
It studies the full economic impact of all
potential outcomes of an intervention.

Advantages of Cost Benefit

Analysis
It makes possible to compare different
programs having different health
outcomes, or health programs to non
health programs.
lt allows analysts to examine its
distributional aspects; who will receive
these benefits and who will bear the costs.

Drawbacks of Cost Benefit

Analysis
It measures costs and outcomes in
monetary terms and not disease
specific
There is difficulty in assigning
monetary values to all pertinent
outcome including changes in the
length or quality of human life.
The results of CBA are only as good
as the assumptions and valuations on
which they are based.

Ratio
approach
Approach
es of Cost
Benefit
Analysis

Net
benefit
approach
.

Procedural Steps in
Cost-Benefit Analysis

Identifying
Intervention
Outcomes

Cost-effectiveness analysis
Cost-effectiveness analysis is an economic
study design in which consequences of
different interventions are measured using
a single outcome, usually in 'natural' units
(for example, life-years gained, deaths
avoided, heart attacks avoided or cases
detected). Alternative interventions are
then compared in terms of cost per unit of
effectiveness.

Cost-effectiveness
analysis
Cost-effectiveness analysis as tool
decision-makers can use to assess
and potentially improve the
performance of their health systems. It
indicates which interventions provide
the highest 'value for money' and
helps them choose the interventions
and programmes which maximize
health for the available resources.

Cost-effectiveness
analysis
Cost Effectiveness Analysis (CEA)
is a type of economic evaluation
that examines both the costs
and health outcomes of
alternative intervention
strategies.

Aim of Cost Effectiveness

Analysis
To maximize the level of benefitshealth effects-relative to the level of
resources available

Objectives of Cost Effectiveness

Analysis
To compare alternative programs with a
common health outcome
To assess the consequences of
expanding an existing program.

Purposes of Cost Effectiveness

Analysis

Purposes of Cost Effectiveness

Analysis

Drawbacks of Cost Effectiveness

Analysis
The data regarding direct costs such as doctors' or
nurses' time and supplies used; indirect costs such
as a portion of administrative costs, the cost of
equipment are usually not readily available.
It does not facilitate comparisons across different
diseases when different outcomes have been
used.
Cost-effectiveness is the only one criterion for
judging whether an intervention is effective or not.

Benefits of Cost Effectiveness

Analysis
This method is easy to understand and more
readily suited to decision making.
It provides empirical results for the decision
makers to compare the costs and consequences
associated with alternative programmes.

MEASURES FOR COSTEFFECTIVENESS

COST EFFECTIVENESS RATIO (CER)

Average cost-effectiveness ratio (ACER)
Marginal cost-effectiveness ratio (MCER)
Incremental Cost-Effectiveness Ratio (ICER)

NET HEALTH BENEFITS (NHB)

It is the difference between the health outcome and
cost divided by rate of substitution of money for
health.
NHB = E-C/A.

ELEMENTS OF CEA
A clear study perspective, time frame, and
analytic horizon
An explicitly defined study question
Relevant assumptions underlying the study
Detailed descriptions of the interventions
Existing evidence of the interventions'
effectiveness
Proper identification of all relevant costs
A comprehensive discussion of the results

PROCEDURAL STEPS IN COSTEFFECTIVENESS ANALYSIS

Defining the Problem

Adopting a Research Strategy
Specify Audience
Define Perspective
Specify the Time Frame Work
Prepare the Analytic Horizon
Decide the Type of Study Design
Identify the Outcome Measures or Variable
Search for Available Alternatives
Identify the Types of Costs to be included in CEA
Analysis

COST UTILITY ANALYSIS (CUA)

Utility is the value or worth of a level of

health as measured by the preferences of
an individual or society. Cost-utility analysis
is one form of cost-effectiveness analysis,
which allows the comparison of different
health outcomes by measuring them all in
terms of a single unit-(QALY)
(Maurice McGregor).

COST UTILITY ANALYSIS (CUA)

It weighs costs and. quality adjusted health
outcome of each intervention in order to
take the decision for the programme to be
implemented.

Measures of CUA

Methods of QALY

Disability-Adjusted Life Years

The World Health Organization defines disabilityadjusted life years (DALY) as 'a health gap measure
that extends the concept of potential years of life
lost due to premature death to include equivalent
years of healthy life lost by virtue of being in states
of poor health or disability'. In other words, one
DALY is one lost year of healthy life.

DALY is a combined measure of years in disability

and years of life lost due to premature death (from
the disability).

Measures of DALY
Years of Life Lost (YLL): YLL is the number
of years of life lost due to premature death.
Years Lived with Disability (YLD): YLD is the
number of healthy years lost due to
disability from the condition until remission
or death.

Advantages of CUA

To measure health care costs and interventions

To evaluate the effect of a nursing intervention
on patient outcomes when one of these
outcomes is QOL
To compare use of a nursing process
management with a disease process
(hypertension) management
To assess cost utility for both medical
interventions and nursing interventions
To compare current practice and the change in
practice need

Cost Utility Ratio

It is used for comparing interventions to

achieve one quality adjusted life year.

COST MINIMIZATION ANALYSIS

Cost minimization analysis is a specific

type of analysis in which the outcomes
of the two or more healthcare
interventions are assumed equal.
Therefore economic evaluation is based
solely on comparative costs and result
is least cost alternative

COST CONSEQUENCES ANALYSIS

Cost consequences is a form of cost

effectiveness analysis comparing alternative
interventions or programs in which the
components of incremental costs (e.g.,
additional therapies, hospitalization) and
consequences (e.g., health outcomes adverse
effects) are computed and listed, Without
aggregating these results (e.g., into a costeffectiveness ratio).

COST CONSEQUENCES ANALYSIS

Cost consequences analysis is a means to

estimate whether the value of results
obtained is worth the investment. In a costconsequences analysis, instead of combining
the costs and effects, all the costs and
outcomes are reported separately.

Simple to use and evaluates the entire

COST
CONSEQUENCES ANALYSIS-ADVANTAGES
program
of care
Allows decision makers to impute their own
values to the different costs and
consequences Incorporates several outcome
measures and easy to interpret the findings
Used to evaluate practice guidelines and
disease state management programs.

There is a difficulty of comparing outcomes

between different interventions in order to
prioritize them
COST CONSEQUENCES ANALYSIS-DISADVANTAGES

DISCUSSION