Health economics

1www.drjayeshpatidar.blogspot.com
HEALTH ECONOMICS
DEFINITION
HEALTH
 A “state” of complete physical, mental and social well-being and not merely an absence
of disease or infirmity.
-WHO definition
 It is a state that would enable an individual to lead a socially and economically productive
life.
-Operational definition
ECONOMICS:
 It deals with human relationships within the specific context of production, distribution &
consumption including ownership of resources (goods and services).
 Economic considerations play a key role in all aspects of living:- agriculture, housing,
industry, trade including health sector
 Study of Wealth:- Adam Smith
(Father of Economics)
ECONOMICS
The world “economics” literally means “house-keeping”. It deals with the human
relationship in the specific context of production, distribution, consumption, ownership of
resources, goods and services, Economics and sociology overlap in many areas.
FOR THE “COMMAN MAN”
Economical means:-
 Less costly/cheap
 Saving
 Producing more result with less resources
 Producing some result with same resources
HEALTH ECONOMICS

 It is the discipline of economics applied to the health care. Broadly defined, economics
concerns how society allocates its resources among alternative uses. Scarcity of these
resources provides the foundation of economic theory.
 It provides a useful conceptual basis for many health-related disciplines and as a
framework for health policy.
 Essence of economic thinking is that it I the study of choices between alternative use of
scarce resources.
 Health economic is a branch of economic concerned with issues related to scarcity
in the allocation of health & health care. Broadly, health economics study the
functioning of the health care system at the private & social causes of health
affecting behaviors such smoking.
A seminal 1963 articles by KENNETEH ARROW, obtain credited with giving rise to the
health economic as discipline, drew conceptual distinctions between health & other causes.
Factors that distinguish health economics for others area include extensive govt. interventions,
intractable uncertainty several dimensions, asymmetric information‟s, and externalities.
Government tends to regulate the health care industry heavily and also tend to be the largest pay
or within the market. Uncertainty is intrinsic to health, both in patient outcomes and financial
concerns. He knowledge gap that exists between a physician and a patient creates a situation of
distinct advantage for the physician, which is called asymmetric information. Externalities arise
frequently when considering health and health care, notably in the context of infectious disease.
For example, making an effort to avoid catching a cold, or practicing safe sex, affects people other
than the decision maker.
Health Economics deals with-
 Allocation of resources between various health activities.
 Quality of resources used in health-care
 Organization of healthcare institutions.
 The efficiency with which the resources are allocated & used for health-care purpose.
 The effects of comprehensive health services on individual and society.

 It covers the medical industry as a whole and also extends the economic analysis to costing
of disease ,benefits of a health programmes and returns from investments
IMPORTANTANCE OF HEALTH ECONOMICS
1. It is a relatively new concept.
2. Resources crunch compels to make choices.
3. To study the pattern of allocation of budget is effectiveness and efficiency.
4. To study health expenditure vs health status.
5. To minimize wasteful expenditure.
Scope of health economics:
The scope of health economics is neatly encapsulated by Alan William‟s “Plumbing
diagram” dividing the discipline into eight distinct topics:-
1. What influences health? (other than health care)
2. What is health & what is its value
3. The demand for health care?
4. The supply of health care
5. Micro-economics evaluation at treatment level
6. Market equilibrium
7. Evaluation at whole system level
8. Planning, budgeting & monitoring mechanisms.
WHY STUDY HEALTH ECONOMICS?
 Application of economic principle proved powerful addition to the decision-making
process in the health sector.
 Medical (Health) care services are growing both in quantity & quality ,with resources
being devoted increasing day by day.
 Empirical need (elaborate & complete) for development of theory & testing; in order to
understand economic behaviour.
Predict &control
Macroeconomics

 It is a study of aggregate national income and expenditure, aggregate demand and
consumption, aggregate investment level in both private & government sectors
Microeconomics:
It is a study of individual economics units
Characteristics of Health Need are:-
Uncertainanity:-
Accidental: - Unplanned event
Urgent:-Can‟t be postponed
Essential:-No substitute
Consumer Rationality:-
Doesn‟t hold true in cases of
Consciousness of illness
Mental illness
Head injury
 Externalities:-
Third party payment
Spill-over
Taxes
WANTS
Wants are unlimited; therefore, problem of choice
Readability of wants:-
Primary
Secondary
Superfluous
TYPES OF DEMAND
 Derived
 Effective
 Utility compensated
Unlike other Goods & Services:-
Health has a value in use, where as no value in exchange (because, it can‟t be); hence, Health
Care is a derived demand. Therefore, Markets exist in health care. Price elasticity of demand
Income elasticity of demand
Factors influencing health demands.
 Consumer‟s Income,
 Price of health care (relative),
 consumption pattern,
 Taste & Preference of the consumer,

 Perception about health needs &health care.
Health care needs & wants do not become demands- WTP vs. ATP
To understand more about demand, supply & the factors affecting them, one should be Familiar
with the following terms:
 GDP
 GNP
 POVERTY
 POVERTY LINE
Many health variables& health seeking Behavior, correlate better with the per capita GDP or
GNP, as these serve as a general measure of Human Welfare i.e. Health in a broad sense.
 GNP: It is the gross income generated within the country & income received from abroad.
 GDP: It is the gross income generated within the country excluding the money from
abroad.
 POVERTY LINE: it is defined in terms of minimum percent capita consumption level of
people
 As per the Planning Commission “Poverty line” corresponds to the caloric intake of
people. It is the cut off point, below which people are unable to purchase food sufficient to
provide 2400 Cal in rural & 2100 Cal in urban area.
 The GDP & GNP give us the idea about the performance of economy.
PUBLIC HEALTH ECONOMICS
 India has hit rock bottom in public health spending.
 We stand at 171, out of 175 countries in public health spending.
 The GOI spends just 0.9%of GDP on public health.
WHO states that at least 5% of GDP should be spent on public health?
 Most of the less developed countries spend 2.3% of GDP on health ,whereas
India‟s expenditure is merely 1/3 of poorer countries average!
 The rest is spent by people from their own resources.
 Only 17% of public health expenditure is borne by the govt.
 This makes the public health system in India, grossly inadequate to meet the public
demands.
This expenditure is declining since last two decades. The consequence of this dismally low
allocation is deteriorating quality of public health.

 The Primary Health Care system meant to serve the poorest and marginalized population,
today, is in a pathetic condition
 Only 38%PHCs have all the critical staff.
 Only 31% have all the critical supply.
 In spite of the high MMR, 8 out of 10 PHCs have no essential obstetric care kit.
 Only 34% PHCs have delivery services.
 And only 3% offer MTP services.
 There is no obstetrician in 7 out of 10 CHCs.
 There is no pediatrician in 8 out of 10 CHCs.
 Only 28% PHCs have one woman doctor.
 Only 18% PHCs have an ambulance in working condition.
 In urban areas the dominance of private sectors denies access to poorer sections of the
society
 A growing proportion of people can‟t afford health care services, when they fall ill.
 The proportion of such people unable to afford health care almost doubled, increasing from
10 to 21% in urban and from 15 to 24% in rural areas in the last decade.
 40% of the hospitalized people are forced to borrow money or sell their assets to cover the
hospital expenses.
 Irrational medical prescription is on the rise. Due to irrational prescribing, 63% of money
is spent on unnecessary drugs.
 The pharmaceutical companies have increased, yet, only 20% population have access the
essential drugs.
 There is proliferation of brand names with over 70,000 brands marketed in India.
 Many drugs are sold with 200 to 500% profit margin.
 Increasing number of unethical practices( “cut practices”)
 The introduction of “user charges”.
All the above facts are leads to
Over 2 crore Indians being pushed Below Poverty Line, every year.
 The “ Planning Commission” review of country‟s health system show that :-
 There is 1 doctor for 1800 population and
1 bed for 1123 people.
 Every year about 15,000 graduate and 5,000 P.G. doctors are produced; but, 1/5th of them
„leave‟ this country, every year.
All these are having deleteriorous effect on quality of health services.
Scarcity is there, in all walks of life. No one can buy or be provided with everything for
indefinite period of time.
Scarcity is because of improper allocation of the available resources and inadequate funding.

We need to allocate these resources in such a way that the demands are met with, effectively
& efficiently.
COST TRENDS.
The economic growth and social development are inter-related, particularly with regard to
health. The economic development enhances health status. The higher the level of GDP per capita,
the higher the life expectancy. Like education, Health is both satisfaction of a need and
investment. Moreover, people are more energetic & productive when they are in good health thus
improve health status should lead to more growth & grater wealth.
This is one of the reasons why economics want health expenditure to be considered and
investment. Further it is believed that better health would reduce the total volume of sickness in
the community & consequently the need for health services would decline. The state of health
service is thus seen not only as a wealth producing services but also a partially self-liquidating
service. It has been, however observed that expenditure on health is consuming the national
income at an increasing rate and, if this trend continues, several countries may be spending some
10 % of their national income on health.
There are various reasons for such increasing trends on the cost of health services. Some of
them are:
1. Changing demographic profile of the community.
2. Changing epidemiological picture of health & disease.
3. Changing in socio-economic policies of the government.
4. labor Intensive capture of health services
5. Better quality of health services.
6. Extensive healthcare services coverage.
7. Higher public expectations.
8. Organization & structure of health care services (Health care delivery system)
9. Availability of newer & costly technologies.
10. Natural escalation of cost with time.
11. Poor management of health services
12. Multiple agencies financing & delivering parallel and uncoordinated health services.

COMMON TERMINOLOGY
1. FIXED COST (FC) – Theses are the costs that the organization will have to bear, even if
there is no programme or activity. This is a recurring cost which does not increase over the
total cost even if the programme or activity is at its maximum level. Such cost includes cost
of building, or space or its rental, taxes, insurance, salaries, equipments and some
maintenance, etc. However, in the long run, some of the fixed costs are variable, e.g. the
equipment becoming old, decayed or beyond economical repair, asked for replacement.
2. VARIABLE COST (VC) - The cost actually incurred to undertake any programme or
activities is called variable cost.
It also includes the cost of manpower employed specifically for the
activity. This cost increases as per the increases in per unit of the activity or programme,
materials and supplies consumed, cost is equal to average variable cost.
3. AVERAGE COST - The total cost include for the activities or the programme to produce
certain outputs. The average cost is equal to average fixed cost plus average variable cost.
Average fixed cost (AFC) = Total fixed cost (TFC) / Units of output produced.
Average cost (AC) = Average fixed cost (AFC) + Average variable cost (AVC)
4. TOTAL FIXED COST (TFC)- It is defined as the sum total of all the fixed costs incurred
for the activity or programme.
5. TOTAL VARIABLE COST (TVC)–It is defined as the sum total of all the variables costs
incurred in the activity or programme.

6. TOTAL COST (TC) – It is defined as the sum total of all the cost incurred to produce
certain outputs. Thus, the total cost equals the sum of total fixed costs and total variable
costs.
Total cost (TC) = Total fixed cost (TFC) + Total variables cost (TVC)
7. MARGINAL COST (MC)- It is defined as the extra cost incurred to produce one or more
unit, or to achieve one more positive result. The MC of the nth unit of output equals TC of n
units minus TC (n-1) units. Thus, MCn = TCn – TCn-1.
8. MARGINAL BENEFIT (MB)- it is defined as extra benefit achieved by increasing the
magnitude of the programme by one unit.
9. OPPORTUNITY COST- it is defined as the value of the most desirable alternatives
which are forgone when another courses of action is taken.
10.CAPITAL COST : It is a fixed cost and is borne irrespective of the workload of the health
center , e.g. building cost or major equipment cost etc.
11.OPERATIONAL OR RECURRENT COST: It is changing and is related to the type of
activity in an health institution, like
1. Salaries and allowances of health staff
2. Medicines and drug cost
3. Maintenance and repair cost
4. Transport and training cost.
12.MARGINAL COST: It reflects the changes in the total cost at a given scale of output
when a little more or little less output is produced.
13.SOCIAL COST: It is the cost of health activity to the society.
14.UNIT COST: It is also known as average cost. It is the total cost divided by the number of
units produced.
15.OPPORTUNITY COST: It is the value of next best alternative in achieving the objective.
OTHER TYPES OF COST

 Past & Future
 Controllable & Uncontrollable
 Escable & Unescable
 Incremental & Sunk
 Money & Opportunity
 Cash & Book
 Fixed & Variable
 Direct & Indirect
ECONOMIC EVALUATION OF HEALTH CARE PROGRAMME
 Aims:-
To aid decision-makers with their difficult choices in allocating health care resources,
setting priorities and moulding health policy.
 Definition:-
Comparative analysis of the alternative courses of action in terms of their costs and
consequences.
METHODS & TECHNIQUES
THERE are many methods and techniques, which have been derived from the field of
economics, successfully applied in the health management, some of them are discussed here;
COST ACCOUNTING - It is defined as a set of procedure for determine the cost of
the product or services and various activates involved in the manufacture and sales, for
planning and measuring performance. Therefore, the functions of the cost- account are;
(a) To determine and analysis the cost which help in evaluating the operating efficiency
at each stage.
(b) Accumulation and utilization of cost data and
(c) Aid to management to arrive at the cost of production, work order, processes etc.
In health sector, the application of cost-accounting is not as easy as it does not allow the
comparisons of the cost and benefit in given problems. There are many situation and programmes
which are using the resources jointly, viz., teaching, training, and provision of medical care. It is
further quite difficult to find out the proportional expenditure in different categories. In health
management, the cost accounting methods are required to be standardized for each programme

and broken down by the type and resource such as staff equipment, drugs, etc. the cost
accounting as per unit of service organization such as
primary health centre is feasible and it would be possible only it essential records are well
maintained.
COST BENEFIT ANALYSIS- It is a method of comparing the cost of providing service with
the gain accruing or likely to accrue from it or, in other words, it pertains to the ratio of the benefit
to he cost. It is often not possible to measure benefits of a particular programme accurately in
terms of monetary gains, disease prevented or overcome , death prevented, birth avoid, etc…
Thus, it is a technique of measuring various alternatives. In practice, it is mainly used to justify a
particular health service or programme. The main problem in cost –benefit analysis is that the
costs and benefits are likely to spread over time, and are usually not measured at the same time.
As time passes, the value of benefit thus decreases with the decreases in its monetary value. To
overcome this problem, the economists use the value of discount rate for convenience. The scope
of this method in health management is limited.
COST- EFFECTIVENESS ANALYSIS – it is a method pertraining to the best ratio of
benefits and cost. I.e. finding the least costly way of reaching an objective or getting on the
greatest value for given expenditure, cost effectiveness analysis concentrates on one major
outcome or benefit. Such as health improvement or reduction of incidence of one particular
diseases in terms of effectiveness, rather than valuing it in terms of money. In this method,
effectiveness has to be kept constant while different option are considered and compared, to seek
which alternative is likely to be most effective. The cost-effectiveness analysis does not say
whether or not a particular policy is worth pursuing. To find out the answer to this question, one
must weigh the total cost of the programme against total benefits.
MARGINAL ANALYSIS – The terms marginal benefits have already been defined. The
basic piece of economic theory is the “Law of Diminishing marginal Benefit” which states that
once a certain level of operation has been reached, than increased cost per positive result or, in

other words, decreased success rate per unit of expenditure on the programme. The marginal
analysis approach is useful in knowing whether.
 The exiting deployment of resources in a particular health programme with
associated benefits can be shifted to some other programme, i.e., with a low
marginal benefit to another with higher marginal benefit,
 Additional funds are required to be spent, and where they should be directed to
achieve greater additional benefits,
 The resources are required to be reduced,
 It helps the planner in allocation of resources between the health programmes.
METHODS FOR COST CONTAINMENT - in order to reduce the cost, one is required to
distinguish between „down-sizing‟ and „right-sizing‟. „Down-sizing‟ is reducing fixed costs,
while „right-sizing‟ is identifying the right number of people to conduct the right activities. The
following methods may be applied for cost containment (fig...1)

A) Directive method- it is also called as „top-down‟ method. It ensures certain
coherence in rapid decision making and implementation. It takes lesser
time.
B) Participatory method- it is also called as „bottom up method‟. It involve people‟s
participation and identifies the hidden costs and function deficiencies. It
takes into consideration the people‟s experience which perpetuates the
saving, but is usually slow and takes a longer time.
Whatever method is applied, a significant reduction is seen after the first few month of
implementation, but the costs will be gain to increases again which is slow in the participatory
method than the directive method. In order to succeed in the long run, the use of the skills of the
personnel and critical analysis of the activities, which consume most of the resources, is a most.
AREAS OF COST CONTAINMENT – THE HEALTH ECONOMIST MUST IDENTIFY
the areas which consume most resources and apply one of the above or both the methods
simultaneously to contain the costs. Some of the areas for the cost containment are manpower,
building/space, equipments and instruments, supplies and materials, transport, administration and
establishment, meeting, training, research, technical complexities, and time frame „delay‟
HEALTH INSURANCE
 Principle:-Sharing of risks
 A group of person put together current funds, financial or in kind, to minimize future
uncertain risk.
 Money needed for health care for this group become much more predictable.
Risk for the group as a whole eliminated.
WHY NO NATIONAL HEALTH INSURANCE IN INDIA?
 Provision of health care is free or almost free.
 Requires a lot of organizational capacity
(Trust for administrating funds)
 Young & healthy people may not be interested in joining the scheme.
ISSUES / PROBLEM
 Moral hazard:-Over use of services by patients (Solution:-Deductible, Co- insurance,
Group insurance).
 Adverse Selection:- Insurance market to be adversely affected, person not revealing their
full risk profile (Solution:- Compulsory universal coverage, long term policies)
 Underutilization:- Preventive Care (Solution:- IEC, Cashless hospitalization)

 Risk selection (skimming):- No insurance for sick & elderly (Solution:- Community
Rating)
 Insurance Cartelization:-Excess profits, Poor quality, Premium pricing (Solution:-
Regulatory Control).
TYPES OF HEALTH INSURENCE
 Private based
 Public based
UHIS
Jan Aryogya
 Community based (NGO)
ACCORD, Tamilnadu
SEWA, Gujrat
SWRC, Rajasthan
BUDGET & BUDGETING CONTROL:
 Budget: Systematic economic plan for a specified period of time. It indicates, in what way
& for what purpose various health resources are to be utilized.
 Budgeting control: It designates the spending authority to ensure that the budget is spent
judiciously for various aspects of health programmes.
HEALTH FINANCING SYSTEM:
 It refers to the raising of resources to pay for goods or services related to health.
 Now days, health financing is facing a lot of problems due to lack of funds, unequal
distribution and rising health care costs.
HEALTH FINANCING CAN BE FROM
1. Public sources (General taxation)
2. Private (NGOs, corporate sectors)
3 .External sources (International agencies)
4 .Individuals and households (User charges)
5 .Insurance (Public, Private & community based)

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