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What is health
? Health is a multifaceted concept and not
easily measurable.
? WHO definition:
– Health is a state of complete physical and mental
well-being and not merely the absence of disease
or infirmity (WHO, 1948)
? Refer to peoples’ health status (how healthy
they are).

What is health
? Important part of human capital
– Human capital: value of learning, experience and ability embodied in
workers which increases productivity and income.
– Asset: accumulates and depreciates
? Individual or households can improve their health through use of
health care, diet ..
– Production of health
? Health Production Functions
? Determinants of health

What is health care?
Definition: The prevention, treatment, and
management of illness and the preservation
of mental and physical well-being through
the services offered by the medical and
allied health professions.

What is health care?
? Important difference between health and health
care
– Health care can be traded on the market but health
cannot.
? Demand health care to improve our health
– Demand for Health Care
? Health care markets differ from markets for other
commodities
– Role for Government

Roots of health economics
Emerged as a sub discipline of economics in
the1960s with the publication of two
important paper:
1. Kenneth Arrow (1963) “Uncertainty and Welfare
Economics of Medical Care” The American
Economic Review.
2. Mark Pauly (1968) “The Economics of Moral
Hazard: Comment” The American Economic Review.
? Concerned with the health market not with health
or health status.

What is health economics?
1. Health economics is the study of how (scarce)
resources are allocated to and within the health
economy.
? Production of health care (doctors, specialists, or
nurses).
? How do we distribute health care across the
population?
– Based on who can pay or who needs it or some
combination.
? How much money should the government spend on
health care?

What is health economics?
2. Demonstrates the magnitude and importance of the
health sector
e.g. How fast it might be growing and why
3. What makes it different from other markets and
how our analysis may need to adjust
4. Models the determinants of health status and looks
and how government policy might improve health
status in short and long run

Economics is about …
? Limited resources
? Unlimited “wants”
? Choosing between
which ‘wants’ we can
‘afford’ given our
resource ‘budget’
8

? Personal choice…
? Government choice…
10

Economists view of the
world...
? Pessimist: bottle ? empty
? Optimist: bottle ? full
? Economist: bottle ? wasted
11
inefficient!

Economics is NOT…
? Concerned with (saving) money
? Store of value
? Means of exchange
? The same as accountancy
? Monitoring financial transactions
? Only practised by economists
? Everyone has choices
? Economists just think of these explicitly
12

Economics IS…
? Concerned with…
? Costs (resource use)
? Benefits
? Choice
? Efficiency
? Basically… ‘if I choose X do the benefits
? outweigh the costs?’
? If ‘yes’ then doing X is ‘efficient’
? If ‘no’ then doing X is ‘inefficient’
13

‘Health’ and economics…
? Economics focuses on ‘utility’: the level of ‘happiness’ resulting from
consumption
? Health is thus one component of utility. This has important
implications:
? Health is not the sole objective of behaviours
? Creates trade-offs and choices between health and other objectives –
e.g. education, defence etc
? Health economics is the discipline of economics applied to the topic
of health
? In practice, health economics is predominantly (but not solely)
“health care” economics: goods and services produced (by health
sector) primarily to affect health status
14

Health economics ‘map’
1. What is Health? What is its value?
2. What influences Health? (other than healthcare)
3. Demand for Healthcare
4. Supply of Healthcare
5. Market Analysis
6. Planning, Budgeting, regulation mechanisms
7. Macro-Economic Appraisal
8. Micro-Economic Appraisal
15

A: Value of health
? Quality-Adjusted Life Years (QALYs) and
? Disability-Adjusted Life Years (DALYs)
? Combine length and quality of life
17

B: Other influences on health
? Economics of obesity – technology is fattening (Propper C, Health Economics,
2005; 14: 987-997)
? Study examined the relationship
between ‘price’ of food and food
consumption/weight
? Technological change has altered the
relative prices of consuming calories and
expending calories
– Reduced the price of food (calories)
– Reduced time costs of food (calorie)
preparation
– Changed the nature of work
18

C/D: Agency (Demand &
Supply)
19

F: Creating incentives
? “The typical economist believes the world has not yet invented a problem
that cannot be fixed if given a free hand to design the proper incentive
scheme”
(Levitt and Dubner, “Freakonomics”)
? An incentive is simply a means by which someone is persuaded to (not) do
something
? Eg. F-F-S is to treat more patients; increase price of tobacco or soft-drinks is
to reduce consumption; etc
? Incentive is seen to be a means of urging people to do more of a ‘good’
thing and less of a ‘bad’ thing (a ‘perverse’ incentive is the reverse)
21

G: Ranking of health systems
? https://worldpopulationreview.com/country-
rankings/best-healthcare-in-the-world
22

Is health economics ethical?
? Health economics may appear to be unethical because it implies some individuals
being denied health care. But:
? The need to ration is not simply the result of having a small budget. It is more
fundamental than this
? Health care is only one way of improving health – better sanitation, housing,
education, environment, etc
? Economics tends to focus on society rather than individuals, requiring divergent
ethical constructs
? Unethical not to consider economic aspects:
? Rationing would occur by another (opaque) means
? Will never have enough resources to exhaust all the possibilities to produce some
(small) health benefit
? There are other things of value than ‘health’ - balance
24

? Health economics is the application of economics to the study of health
and health care
? It is important because:
? Our health is important to us
? Health is affected by our choices
? The health sector is very significant to the economy
? Decisions in health (care) often determined by economic environment
? (Health) economics is not concerned with saving money, but with
improving people’s lives
? Health economics is quite literally a matter of life and death!
25

KEY CONCEPTS IN HEALTH
ECONOMICS
26

Concept 1: efficiency
? Efficiency=making most of what we’ve got!
? Technical Efficiency = producing maximum benefit (outputs)
from given inputs (resources), or given level of benefit from least
inputs
? Economic Efficiency = producing maximum benefit from given
budget, or given level of benefit at least possible cost (value of
resources)
? Allocative Efficiency = producing the mix of benefits (from a
given set of resources) that is most highly valued
27

Example of efficiency
? Primary care clinic combines inputs to provide ‘health’ for a population:
? consultation rooms, treatment rooms, office space, doctor time, nurse time,
etc.
? Different possible combinations of inputs:
? a larger waiting area and fewer treatment rooms, or more nurses and fewer
doctors, etc.
? Technically efficient:
? not possible to provide ‘health’ to any more patients without using more of
at least one input (nurse time, doctor time, etc.)
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Example of efficiency (cont.)
? Technical efficiency doesn’t consider cost:
? hour of nurse time vs hour of doctor time
? different input combinations may be technically efficient but not all have
the same overall cost
? Economically efficient:
? combine inputs to provide ‘health’ at lowest cost
? Even if primary care clinic is economically efficient, may produce too much
or too little
? Allocatively efficient:
? no other mix of primary and (for example) secondary care that is more
highly valued
29

Concept 2: opportunity cost
? How do we choose between which ‘wants’ we can ‘afford’
given our resource ‘budget’ to ensure we are being ‘efficient’?
? Assessment of the relative benefits that each course of action
will produce
? The ‘cost’ is therefore the ‘opportunity cost’:
“The value of forgone benefit which could be obtained from a
resource in its next-best alternative use.”
30

Opportunity cost and
health(care)
31

Example of opportunity cost
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Concept 3: ‘marginal’ analysis
33

MEASUREMENT OF UTILITY
? ? 1. INITIAL UTILITY
? ? 2. TOTAL UTILITY
? ? 3. MAGINAL UTILITY
34

An example of transplantation
44

Marginal analysis and ‘the
market’
? Marginal benefit and marginal cost lie behind the concepts of demand (Unit. 3)
and supply (Unit. 4) which in turn are important in understanding the importance
of ‘the market’ (Unit. 5)
? Demand curve shows the quantity (in a specified time period) that an individual
will be willing to buy at different prices
? Amount an individual is willing to pay for a unit will depend on the marginal benefit
from consuming it
? MB falls the greater the quantity consumed
? Demand curve thus slopes down from left to right
45

‘The market’ equilibrium:
demand (MB) = supply (MC)
46

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