Introduction
Health is not only a matter of
medical treatment. It is also an economic issue because the resources available
for health and health care are limited, while the needs and expectations of
individuals and populations are extensive. Health economics applies economic
thinking to the organization, allocation, and use of these scarce resources in
the health sector.
Economics is the science of
scarcity. It analyzes how choices are structured and prioritized to maximize
welfare within constrained resources. It is also concerned with the
distribution of scarce resources, commonly known as goods and services, across
a population. The consequences of resource scarcity and the use of scarce
resources to satisfy human wants and needs are therefore central to economic
analysis.
Two broad approaches are commonly distinguished in economics. Positive economics seeks to establish cause-and-effect relationships in a scientific manner, whereas normative economics is concerned with establishing the means by which socially desirable outcomes can be achieved.
What Is
Health?
Health is broader than the mere
absence of disease or infirmity. According to the World Health Organization's
constitution, health is a state of complete physical, mental, and social
well-being and not merely the absence of disease or infirmity.
In health economic evaluation,
health status is considered according to some measure. This makes it possible
to examine health outcomes in economic terms and to compare the consequences of
alternative health-related decisions.
What Is
Health Economics?
Health economics is the study of
the 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.
Health economics is also
concerned with the allocation of resources within the health system in the
economy and with the functioning of the health care market. It involves the
formal analysis of the costs, benefits, management, and consequences of health
and health care and applies economic theory to phenomena and problems
associated with health and health care.
More broadly, health economics
studies how scarce resources are allocated among alternative uses for the care
of sickness and the promotion, maintenance, and improvement of health. This
includes 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. Health economics can therefore be understood as the application of the
theories, concepts, and techniques of economics to the health sector.
Basic
Concepts in Health Economics
Resources
and Scarcity
Resources are limited, while
human needs and wants are extensive. Scarcity creates the need for choices
about how resources should be allocated. In health economics, scarcity is
closely associated with opportunity cost, efficiency, and the production of health.
Opportunity cost represents the
value of the next best alternative that is forgone when resources are committed
to a particular health intervention or service. Efficiency concerns how well
available resources are used to achieve health-related objectives. These
concepts are fundamental to decisions within the health care market.
Macroeconomics
and Health
Health economics also has a
relationship with macroeconomics. The economy's level of output, the level of
national income, and the general price level are among the macroeconomic
factors that can influence the health sector.
Economic conditions affect the
resources available for health care and can influence the organization,
financing, and use of health services. Health economics therefore cannot be
considered independently of the wider economic environment.
Microeconomics
and Health
Microeconomics is the study of
the economic behavior of individual decision-making units such as consumers,
resource owners, and business firms in a free enterprise economy. In health
economics, microeconomic analysis can be examined through market surveys, pilot
studies, and feasibility studies.
Health microeconomics is
concerned with how individuals choose, minimize costs, or maximize profit or
utility within a given health care system and within a set of rules and prices.
Components
and Scope of Health Economics
The scope of health economics
includes the meaning and scope of health economics itself, determinants of
health, demand for health and health care, supply of health care, and health
care markets.
It also includes the
relationship between economic growth and health, health sector budgeting and
planning, national health systems, equity in health outcomes and health care,
and international health.
These areas connect economic
decisions with the organization and performance of health systems. Health
economics therefore extends from individual choices within health care to the
planning and financing of national and international health systems.
Need for
Health Economics
The need for health economics
arises from several developments in health and society. Medical advances have
expanded the possibilities for prevention, diagnosis, treatment, and care. At
the same time, increases in life expectancy have increased the period over
which health services may be required.
Changes in family structure and
social norms, advances in health research, higher expectations among people,
and increasing public awareness of health also contribute to the need for
systematic economic analysis in health.
As health needs and expectations
increase while resources remain constrained, decisions about priorities,
resource allocation, and the value of different health interventions become
increasingly important.
Importance
of Health Economics
Health economics helps formulate
health services and establish the true costs of delivering health care. These
costs can include not only direct expenditures but also other real costs, such
as patients' time and loss of output elsewhere in the system.
It also helps evaluate the
relative costs and benefits of particular policy options. Economic variables
such as user charges, time, and distance costs of accessibility can be examined
to understand their effects on the utilization of health services.
Health economics is relevant to
health policy and economic development. It helps identify and measure health
and diseases, identify basic needs, determine the determinants of growth and
economic development, and examine elements of health expenditure through
macroeconomics.
It also helps determine the
economic characteristics of health care and health-related activities, identify
sources of health care financing such as social accounting systems and
self-financing insurance, and analyze determinants of demand, individual and
supplier-induced behavior, time, cost, and health payment systems.
Further applications include
determining physical resources and costs, estimating short-term and long-term
cost curves, examining the labor market and the demand and supply of health
workers, studying remuneration and other determinants of behavior and productivity,
and supporting budgeting, accounting, and inventory management.
Major Tasks
of Economics in Health Care
Economic analysis in health care
can be organized around three major tasks: descriptive quantification,
explanatory or predictive analysis, and evaluative analysis.
Descriptive quantification
focuses on measuring and describing relevant health and economic conditions.
Explanatory or predictive analysis examines relationships and helps understand
or anticipate outcomes. Evaluative analysis compares alternative courses of
action in terms of their costs and consequences to support decisions.
Features of
Health Economics
Health and medical care are
considered economic goods, and health may be viewed in relation to both private
and public goods. Measurement of health is also an important part of economic
analysis.
Health economics considers the
stock of health and the investment aspects of health. It also examines losses
associated with ill health, the resource costs of different diseases, and the
effects of health and medical care provision.
Planning of health and medical
care, choice of technology in the health care system, and provision of equity
in health outcomes and health care are also important features of the field.
Areas of
Health Economics
Health economics covers the
economic aspects of the relationship between health status and productivity and
the financial aspects of health care services. It also addresses economic
decision-making in health and medical care institutions and the planning of
health development and related activities.
Factors
Influencing Health Economics
Health economics is influenced
by several characteristics of the health sector. These include extensive
government intervention, intractable uncertainty in several dimensions,
information asymmetry, barriers to entry, and externalities together with the presence
of a third-party agent.
These characteristics make
health care different from many ordinary markets and create a need for careful
economic analysis when resources and policies are evaluated.
Tools Used
in Economic Analysis
Economic analysis uses economic
variables, relationships between economic variables, graphical representation
of relationships, and the direction of those relationships. These tools help
describe economic conditions, examine how variables are connected, and evaluate
the consequences of changes in costs, resources, prices, and outcomes.
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.
A systematic economic evaluation
therefore requires a clear study question, identification and measurement of
costs and health effects, appropriate adjustment for timing, adjustment for
uncertainty, and ultimately a decision.
Steps in
Economic Evaluation
The process begins by deciding
upon the study question. The costs and health effects are then assessed,
followed by adjustment for timing and adjustment for uncertainty. The final
stage is making a decision based on the results.
The purpose is not simply to
calculate costs. The objective is to compare alternatives in a structured way
so that available resources can be directed toward interventions that provide
appropriate value and health outcomes.
Types of
Economic Evaluation
Several forms of economic
evaluation are used in health economics. These include cost-benefit analysis,
cost-minimization analysis, cost-utility analysis, and cost-effectiveness
analysis.
The methods differ mainly in how
costs and outcomes are measured and compared. Cost-benefit analysis expresses
both costs and outcomes in monetary terms. Cost-effectiveness analysis
expresses outcomes in natural health units. Cost-utility analysis expresses
outcomes in utility-based measures such as quality-adjusted life years.
Cost-minimization analysis is used when the outcomes of the alternatives are
assumed to be equal and the comparison is therefore based on costs.
Cost
Analysis
Cost analysis is a resource tool
for financial management in a hospital or department. It is an economic
evaluation technique involving the systematic collection, categorization, and
analysis of program or intervention costs and the cost of illness.
Cost analysis can be used as an
evaluation method when only one program is being assessed, when information
about program effectiveness is not available, or when the interventions being
assessed and compared are equally effective.
Its objectives include assessing
the efficiency and effectiveness of functions and their cost implications,
improving policy relevance and utility through assessment and planning and
avoidance of wasteful expenditure in the hospital, and allowing researchers to
achieve cost minimization for the programs under consideration.
Cost analysis is also a tool for
planning and cost projection. It can be used to assess the efficiency of a
program, assess priorities, support accountability, and assess equity.
Principles
of Cost Analysis
A sound cost analysis should
make the analytic perspective explicit and describe the anticipated benefits.
It should specify the components of costs, discount to adjust for differential
timing, perform a sensitivity analysis, and calculate measurements of
efficiency.
A framework for cost analysis
begins with identifying and defining the problem, defining the alternatives,
defining the audience, defining the perspective, defining the time frame,
determining the time frame and analytic horizon, and choosing an appropriate
format or methodology.
The basic process then involves
defining the program, treatment, or technology to be analyzed; developing a
framework for cost analysis; describing the objectives of the analysis;
selecting the type of cost analysis; and designing the methodology. The principles
of cost analysis are applied, study outcomes are described, a cost inventory is
developed, and a cost summary is prepared.
Resources used are measured and
evaluated, after which cost analysis results such as total cost, average cost,
and marginal cost are calculated. Sensitivity analysis and discounting are also
applied where appropriate.
Total Cost
The total cost of a program or
intervention is derived by adding all the costs incurred in producing a given
level of output. It includes the costs of personnel, supplies, and equipment
identified in the cost inventory.
The total cost can be
represented as the sum of the quantity of each resource multiplied by the value
of that resource:
TC = Quantity of resource 1 × value of resource 1 + … + Quantity of
resource n × value of resource n
Average
Cost
Average cost is the cost per
unit of output, such as the cost per patient treated or the cost per child
immunized. It is calculated by dividing total cost by the number of
participants or other relevant intervention units.
AC = TC / Q
Here, Q represents the units of
output.
Marginal
Cost
Marginal cost is the resource
cost associated with producing one additional or one less unit within the same
intervention or program. It can be expressed as the change in total costs
divided by the change in quantity produced.
MC = Change in total costs / Change in quantity produced
or
MC = (TC′ − TC) / (Q′ − Q)
Here, TC′ is total cost at a
higher output level, TC is total cost at a lower output level, Q′ is the higher
level of output, and Q is the lower level of output.
Health
Valuation Methods
Health valuation can involve the
cost-of-illness method and non-market valuation methods. Non-market valuation
methods include revealed preference methods and stated preference methods.
Revealed
Preference Method
Hedonic pricing is based on the
principle that the prices consumers pay or receive depend on characteristics of
the person that can be objectively measured. The relationship can be
represented as:
W = f(q, e, ex, a, g)
Here, W is the wage rate; q is a
measure of qualification; e is experience; ex is a measure of experience; a is
age; and g is gender.
Hedonic pricing can also be used
to examine how characteristics of a product contribute to its unit price. For
example, the unit price of a personal computer can be related to
characteristics such as display size, HDD memory capacity, type of optical drive,
bundled software, CPU memory capacity, and other features.
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, or
averting, action. This amount of money represents the person's valuation of
safety against a perceived risk.
Stated
Preference or Contingent Valuation Method
The stated preference or
contingent valuation method is a direct method that uses primary surveys to ask
persons to place values on an intervention to attain a level of health outcome.
Cost-Benefit
Analysis
Cost-benefit analysis is a
practical way of assessing the desirability of projects when it is important to
take a long view, considering repercussions in the future as well as the near
future, and a wide view that allows the side effects of many decisions to be
considered. It involves the enumeration and evaluation of all relevant costs
and benefits.
Cost-benefit analysis is an
economic evaluation technique that measures all positive, or beneficial, and
negative, or costly, consequences of an intervention or program in monetary
terms.
It is also a practical approach
to appraising the desirability of an intervention involving public expenditure
in terms of net social gain to society. It uses analytical techniques involving
monetary assessment to identify the total costs and benefits of a specific
intervention.
Benefits in
Cost-Benefit Analysis
Benefits may be direct,
indirect, or intangible. When benefits exceed costs, the intervention produces
positive net benefits. Net benefits can be expressed as:
NB = B − C > 0
Here, B represents benefits and
C represents costs.
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, such as instituting a new program or intervention or revising an
existing one.
It can also be used to compare
health-related interventions with activities in other economic sectors. It
enables policy makers to determine whether the value of positive consequences
exceeds the value of the societal resources required to implement a program.
By estimating and totaling the
equivalent monetary value of benefits and costs, cost-benefit analysis helps
establish whether projects are worthwhile. It provides a practical basis for
deciding whether a change should be made.
Features
and Purposes of Cost-Benefit Analysis
Cost-benefit analysis adopts a
broad societal perspective because it includes all costs and all benefits. It
measures outcomes in monetary terms and assesses the desirability of a program
or intervention.
Its purposes include assessing
economic efficiency, deciding whether to implement a specific program, and
selecting among competing or alternative options.
Principles
of Cost-Benefit Analysis
There must be a common unit of
measurement in cost-benefit analysis. All benefits and costs of a program or
project must be measured in terms of their equivalent monetary value.
The valuations should represent
consumers' or producers' valuations, and the valuation of benefits and costs
should reflect preferences revealed by choices. Benefits are usually measured
by market choices. The marginal benefit should be equal to the market price,
and the gross benefits of an increase in consumption are represented by the
area under the demand curve.
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 reduced risk. The alternatives
must be explicitly specified and considered in the evaluation, and the impacts
of the programs must be defined.
The discounted present value of
benefits should exceed the discounted present value of costs. Alternative
programs should be compared in terms of their expected benefits and cost ratio
to determine which should receive priority for funding.
Advantages
of Cost-Benefit Analysis
Cost-benefit analysis helps
allocate scarce resources to programs that maximize societal economic benefit.
It studies the full economic impact of all potential outcomes of an
intervention.
It makes it possible to compare
different programs having different health outcomes, as well as health programs
with non-health programs. It also allows analysts to examine distributional
aspects by considering who will receive the benefits and who will bear the
costs.
Drawbacks
of Cost-Benefit Analysis
Cost-benefit analysis measures
costs and outcomes in monetary terms rather than disease-specific units. A
major difficulty is assigning monetary values to all pertinent outcomes,
including changes in the length or quality of human life.
The results of cost-benefit
analysis are only as good as the assumptions and valuations on which they are
based. The process of assigning monetary values to health outcomes can
therefore be a significant challenge.
Approaches
to Cost-Benefit Analysis
Two approaches identified in the
material are the ratio approach and the net benefit approach. The ratio
approach relates benefits to costs, whereas the net benefit approach focuses on
the difference between benefits and costs.
Procedural
Steps in Cost-Benefit Analysis
A cost-benefit analysis begins
with defining the problem and identifying the interventions. The audience and
perspective are then defined, followed by definition of the time frame and
analytic horizon. The discount rate is also defined.
The intervention outcomes are
identified as health outcomes, non-health outcomes, and intangible outcomes.
These outcomes provide the basis for identifying and assessing the consequences
of alternative interventions.
Cost-Effectiveness
Analysis
Cost-effectiveness analysis is
an economic study design in which the consequences of different interventions
are measured using a single outcome, usually in natural units such as
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
provides decision-makers with a tool for assessing and potentially improving
the performance of health systems. It indicates which interventions provide the
highest value for money and helps decision-makers choose interventions and
programs that maximize health for the available resources.
Cost-effectiveness analysis
examines both the costs and health outcomes of alternative intervention
strategies.
Aim and
Objectives of Cost-Effectiveness Analysis
The aim of cost-effectiveness
analysis is to maximize the level of benefits, or health effects, relative to
the level of resources available.
Its objectives include comparing
alternative programs with a common health outcome and assessing the
consequences of expanding an existing program.
Purposes of
Cost-Effectiveness Analysis
Cost-effectiveness analysis can
identify the most cost-effective intervention from a group of alternatives and
provide empirical justification for a program.
It can also identify and exclude
programs that are wasting resources, provide general information on the
relative costs and health benefits of different alternatives, and evaluate
interventions in terms of efficacy, cost-effectiveness ratio, absolute health
gain, and affordability or absolute cost.
Benefits
and Drawbacks of Cost-Effectiveness Analysis
Cost-effectiveness analysis is
relatively easy to understand and is well suited to decision-making. It
provides empirical results that allow decision-makers to compare the costs and
consequences associated with alternative programs.
However, data regarding direct
costs, such as doctors' or nurses' time and supplies used, and indirect costs,
such as a portion of administrative costs and equipment costs, may not be
readily available. Cost-effectiveness analysis also does not facilitate
comparisons across different diseases when different outcomes have been used.
Cost-effectiveness is only one
criterion for judging whether an intervention is effective or desirable. It
therefore does not, by itself, capture every consideration involved in a health
policy decision.
Measures
for Cost-Effectiveness
Two measures identified for
cost-effectiveness are the cost-effectiveness ratio (CER) and net health
benefits (NHB).
The cost-effectiveness ratio may
be considered through the average cost-effectiveness ratio (ACER), marginal
cost-effectiveness ratio (MCER), and incremental cost-effectiveness ratio
(ICER).
Net health benefits represent
the difference between the health outcome and cost divided by the rate of
substitution of money for health. The expression given is:
NHB = E − C/A
Elements
and Procedural Steps in Cost-Effectiveness Analysis
A cost-effectiveness analysis
requires 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 intervention
effectiveness; proper identification of all relevant costs; and a comprehensive
discussion of the results.
The procedural process includes
defining the problem, adopting a research strategy, specifying the audience,
defining the perspective, specifying the time frame, preparing the analytic
horizon, deciding the type of study design, identifying outcome measures or
variables, searching for available alternatives, identifying the types of costs
to be included, and conducting the analysis.
Cost-Utility
Analysis
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 that allows
different health outcomes to be compared by measuring them in terms of a single
unit, such as the quality-adjusted life year, or QALY.
Cost-utility analysis weighs
costs and quality-adjusted health outcomes of each intervention in order to
support the decision about which program should be implemented.
Measures of
Cost-Utility Analysis
The principal measures
identified are quality-adjusted life years (QALY) and disability-adjusted life
years (DALY). These measures provide ways of representing health outcomes in a
form that can be used in economic evaluation.
Methods of
QALY
Methods used to obtain QALY
include the health rating method, time trade-off method, standard gamble
method, and health index method.
Disability-Adjusted
Life Years
The World Health Organization
defines disability-adjusted life years, or DALYs, 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 represents one lost year of
healthy life.
DALY is a combined measure of
years lived with disability and years of life lost due to premature death.
Measures of
DALY
Years of Life Lost (YLL)
represents the number of years of life lost due to premature death.
Years Lived with Disability
(YLD) represents the number of healthy years lost due to disability from the
condition until remission or death.
Together, these components form
the basis of the disability-adjusted life year measure.
Advantages
of Cost-Utility Analysis
Cost-utility analysis can be
used to measure health care costs and interventions and to evaluate the effect
of a nursing intervention on patient outcomes when one of the outcomes is
quality of life. It can also be used to compare the use of a nursing process
management approach with disease process management, such as hypertension
management.
Cost-utility analysis can assess
cost utility for both medical and nursing interventions and can be used to
compare current practice with changes in practice needs.
The cost utility ratio is used
for comparing interventions in terms of the cost required to achieve one
quality-adjusted life year.
Cost-Minimization
Analysis
Cost-minimization analysis is a
specific type of analysis in which the outcomes of two or more health care
interventions are assumed to be equal. Economic evaluation is therefore based
solely on comparative costs, and the result is the least-cost alternative.
Cost-Consequence
Analysis
Cost-consequence analysis is a
form of cost-effectiveness analysis that compares alternative interventions or
programs in which the components of incremental costs, such as additional
therapies and hospitalization, and consequences, such as health outcomes and
adverse effects, are computed and listed without aggregating the results into a
cost-effectiveness ratio.
Cost-consequence analysis
provides a means of estimating whether the value of results obtained is worth
the investment. Instead of combining costs and effects, all costs and outcomes
are reported separately.
Its advantages include
simplicity and the ability to evaluate the entire program of care. It allows
decision-makers to impute their own values to different costs and consequences,
incorporates several outcome measures, and makes the findings relatively easy
to interpret. It can also be used to evaluate practice guidelines and
disease-state management programs.
A disadvantage is the difficulty
of comparing outcomes between different interventions in order to prioritize
them.
Conclusion
Health economics provides a
systematic framework for understanding how scarce resources are allocated
within health systems and how economic principles can be applied to health and
health care. It connects questions of resources, scarcity, demand, supply,
costs, outcomes, efficiency, effectiveness, value, equity, and policy.
The economic evaluation of
health interventions is particularly important because decisions often involve
competing alternatives and limited resources. Cost analysis helps identify and
measure the resources used. Cost-benefit analysis compares costs and benefits
in monetary terms. Cost-effectiveness analysis compares costs with outcomes
measured in natural health units. Cost-utility analysis incorporates
preferences and measures such as QALY and DALY, while cost-minimization
analysis focuses on costs when outcomes are assumed to be equal.
Cost-consequence analysis reports costs and consequences separately rather than
combining them into a single ratio.
Taken together, these approaches
provide different ways to examine the economic consequences of health
interventions. Their appropriate use supports more systematic decision-making
about health services, programs, technologies, financing, and resource allocation.