Health economics

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World health expenditure as share of global GDP. World Health Expenditure as Share of Global GDP, OWID.svg
World health expenditure as share of global GDP.
How much did the UK spend on healthcare in 2012? How much did the UK spend on healthcare in 2012%3F.png
How much did the UK spend on healthcare in 2012?

Health economics is a branch of economics concerned with issues related to efficiency, effectiveness, value and behavior in the production and consumption of health and healthcare. Health economics is important in determining how to improve health outcomes and lifestyle patterns through interactions between individuals, healthcare providers and clinical settings. [2] In broad terms, health economists study the functioning of healthcare systems and health-affecting behaviors such as smoking, diabetes, and obesity.

Contents

A seminal 1963 article by Kenneth Arrow is often credited with giving rise to health economics as a discipline. His theory drew conceptual distinctions between health and other goods. [3] Factors that distinguish health economics from other areas include extensive government intervention, intractable uncertainty in several dimensions, asymmetric information, barriers to entry, externality and the presence of a third-party agent. [4] In healthcare, the third-party agent is the patient's health insurer, who is financially responsible for the healthcare goods and services consumed by the insured patient.

Health economists evaluate multiple types of financial information: costs, charges and expenditures.

Uncertainty is intrinsic to health, both in patient outcomes and financial concerns. The 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 the health impacts as with infectious disease or opioid abuse . For example, making an effort to avoid catching the common cold affects people other than the decision maker [5] [6] [7] [8] or finding sustainable, humane and effective solutions to the opioid epidemic.

Scope

The scope of health economics is neatly encapsulated by Alan Williams' "plumbing diagram" [9] dividing the discipline into eight distinct topics:

HealthEconPlumbing.gif

Healthcare demand

The demand for healthcare is a derived demand from the demand for health. Healthcare is demanded as a means for consumers to achieve a larger stock of "health capital." The demand for health is unlike most other goods because individuals allocate resources in order to both consume and produce health.

The above description gives three roles of persons in health economics. The World Health Report (p. 52) states that people take four roles in the healthcare:

  1. Contributors
  2. Citizens
  3. Provider
  4. Consumers

Michael Grossman's 1972 model of health production [10] has been extremely influential in this field of study and has several unique elements that make it notable. Grossman's model views each individual as both a producer and a consumer of health. Health is treated as a stock which degrades over time in the absence of "investments" in health, so that health is viewed as a sort of capital. The model acknowledges that health is both a consumption good that yields direct satisfaction and utility, and an investment good, which yields satisfaction to consumers indirectly through fewer sick days. Investment in health is costly as consumers must trade off time and resources devoted to health, such as exercising at a local gym, against other goals. These factors are used to determine the optimal level of health that an individual will demand. The model makes predictions over the effects of changes in prices of healthcare and other goods, labour market outcomes such as employment and wages, and technological changes. These predictions and other predictions from models extending Grossman's 1972 paper form the basis of much of the econometric research conducted by health economists.

In Grossman's model, the optimal level of investment in health occurs where the marginal cost of health capital is equal to the marginal benefit. With the passing of time, health depreciates at some rate . The interest rate faced by the consumer is denoted by . The marginal cost of health capital can be found by adding these variables: . The marginal benefit of health capital is the rate of return from this capital in both market and non-market sectors. In this model, the optimal health stock can be impacted by factors like age, wages and education. As an example, increases with age, so it becomes more and more costly to attain the same level of health capital or health stock as one ages. Age also decreases the marginal benefit of health stock. The optimal health stock will therefore decrease as one ages.

Beyond issues of the fundamental, "real" demand for medical care derived from the desire to have good health (and thus influenced by the production function for health) is the important distinction between the "marginal benefit" of medical care (which is always associated with this "real demand" curve based on derived demand), and a separate "effective demand" curve, which summarizes the amount of medical care demanded at particular market prices. Because most medical care is not purchased from providers directly, but is rather obtained at subsidized prices due to insurance, the out-of-pocket prices faced by consumers are typically much lower than the market price. The consumer sets out of pocket, and so the "effective demand" will have a separate relationship between price and quantity than will the "marginal benefit curve" or real demand relationship. This distinction is often described under the rubric of "ex-post moral hazard" (which is again distinct from ex-ante moral hazard, which is found in any type of market with insurance).

Health technology assessment

Economic evaluation, and in particular cost-effectiveness analysis, has become a fundamental part of technology appraisal processes for agencies in a number of countries. The Institute for Quality and Economy in Health Services (Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen – IQWiG) in Germany and the National Institute for Health and Care Excellence (NICE) in the United Kingdom, for example, both consider the cost-effectiveness of new pharmaceuticals entering the market.

Some agencies, including NICE, recommend the use of cost–utility analysis (CUA). This approach measures outcomes in a composite metric of both length and quality of life, the Quality-adjusted life year (QALY).

Healthcare markets

The five health markets typically analyzed are:

Although assumptions of textbook models of economic markets apply reasonably well to healthcare markets, there are important deviations. Many states have created risk pools in which relatively healthy enrollees subsidise the care of the rest. Insurers must cope with adverse selection which occurs when they are unable to fully predict the medical expenses of enrollees; adverse selection can destroy the risk pool. Features of insurance market risk pools, such as group purchases, preferential selection ("cherry-picking"), and preexisting condition exclusions are meant to cope with adverse selection.

Insured patients are naturally less concerned about healthcare costs than they would if they paid the full price of care. The resulting moral hazard drives up costs, as shown by the famous RAND Health Insurance Experiment. Insurers use several techniques to limit the costs of moral hazard, including imposing copayments on patients and limiting physician incentives to provide costly care. Insurers often compete by their choice of service offerings, cost sharing requirements, and limitations on physicians.

Consumers in healthcare markets often suffer from a lack of adequate information about what services they need to buy and which providers offer the best value proposition. Health economists have documented a problem with supplier induced demand, whereby providers base treatment recommendations on economic, rather than medical criteria. Researchers have also documented substantial "practice variations", whereby the treatment also on service availability to rein in inducement and practice variations.

Some economists argue that requiring doctors to have a medical license constrains inputs, inhibits innovation, and increases cost to consumers while largely only benefiting the doctors themselves. [11]

Other issues

Medical economics

Often used synonymously with health economics, medical economics, according to Culyer, [12] is the branch of economics concerned with the application of economic theory to phenomena and problems associated typically with the second and third health market outlined above: physician and institutional service providers. Typically, however, it pertains to cost–benefit analysis of pharmaceutical products and cost-effectiveness of various medical treatments. Medical economics often uses mathematical models to synthesise data from biostatistics and epidemiology for support of medical decision-making, both for individuals and for wider health policy.

Behavioral economics

Peter Orszag has suggested that behavioral economics is an important factor for improving the healthcare system, but that relatively little progress has been made when compared to retirement policy. [13] The relevance of behavioral economics in healthcare is further highlighted in Vuong et al. (2018). [14]

Healthcare systems inherently introduce difficult situations for all parties. Game theory—the branch of economics that studies strategic interaction among small groups of rational decision-makers—can serve as a helpful tool to model and help guide such difficult decisions. Take one instance of the doctor-patient relationship in which a doctor is deciding whether to prescribe opioid pain-killing medication, which is highly addictive, to a new patient who presents with pain. Relieving pain and suffering is one of a doctor's primary objectives. Moreover, doctors consider patient satisfaction scores when choosing whether and how to treat patients. From the patient's perspective, patients may present to the doctor with real pain, requesting pain-mitigating treatment legitimately, or with fake pain to satisfy an existing addiction or for some other illicit purpose. While physicians may suspect that a patient is not in pain, there is no objective test to prove the patient's true pain levels. Because patient satisfaction scores impact doctor wages, doctors may over-treat their patients if and when their patients ask for certain treatment in order to receive better satisfaction scores.

This interaction can be modeled in a prisoner's dilemma paradigm as follows:

Doctor
Prescribe narcoticsDo not prescribe narcotics
PatientReal Pain(Patient satisfied; doctor receives high satisfaction score and is professionally rewarded )(Patient dissatisfied;

doctor receives low satisfaction score and is not professionally rewarded)

Fake Pain(Patient satisfied; doctor receives high satisfaction score and is professionally rewarded)(Patient dissatisfied;

doctor receives low satisfaction score and is not professionally rewarded, even if this response is professionally most ethical)

A standard solution technique utilized in game theory is Nash equilibrium, where the players converge to a common strategy, where no agent can achieve a more favorable outcome by switching actions. Observing where a Nash equilibrium exists in a difficult situation can help inform decisions. This can lead to cooperation and trust, which is vital in a healthcare environment.

We apply the Nash Equilibrium technique to our opioid prescription decision above: If the patient has real pain, the rational choice for the doctor is to treat the patient. If the patient has fake pain, it is still in the doctor's best interest to treat the patient so that the doctor elicits a good satisfaction rating. Otherwise, a patient's low satisfaction score could result in reputation loss and reduced income. Thus, a doctor will prescribe opioids regardless of whether the patient needs them, and the patient addicted to opioids will demand these opioids for short-term satisfaction notwithstanding that their long-term use may eventually harm the patient's health and society at large. Such an outcome will lead to wasted resources and poor outcomes. The mutual best response, i.e., Nash Equilibrium outcome for this game is for the patient to present with real pain, and for the Doctor to prescribe narcotics, with payoffs in the form (Patient, Doctor) -> (Satisfied, High Satisfaction score & Professionally Rewarded). [15] [16]

The situation where the patient has ‘Fake Pain’ and the doctor ‘Prescribes narcotics’ appears the same as the described Nash Equilibrium. however, there are deeper differences that cause this situation to not be a Nash Equilibrium. Doctors are bound to a code of medical ethics and regulatory restrictions, so prescribing addictive drugs to someone not in need can lead to deeper and long term consequences, such as fueling the opioid epidemic. In such a situation, the patient will end up unsatisfied as their health condition worsens because of opioid addiction and the doctor's reputation could become jeopardized.  

Mental health economics

Mental health economics incorporates a vast array of subject matters, ranging from pharmacoeconomics to labor economics and welfare economics. Mental health can be directly related to economics by the potential of affected individuals to contribute as human capital. In 2009 Currie and Stabile published "Mental Health in Childhood and Human Capital" in which they assessed how common childhood mental health problems may alter the human capital accumulation of affected children. [17] Externalities may include the influence that affected individuals have on surrounding human capital, such as at the workplace or in the home. [18] In turn, the economy also affects the individual, particularly in light of globalization. For example, studies in India, where there is an increasingly high occurrence of western outsourcing, have demonstrated a growing hybrid identity in young professionals who face very different sociocultural expectations at the workplace and in at home. [19]

Mental health economics presents a unique set of challenges to researchers. Individuals with cognitive disabilities may not be able to communicate preferences. These factors represent challenges in terms of placing value on the mental health status of an individual, especially in relation to the individual's potential as human capital. Further, employment statistics are often used in mental health economic studies as a means of evaluating individual productivity; however, these statistics do not capture "presenteeism", when an individual is at work with a lowered productivity level, quantify the loss of non-paid working time, or capture externalities such as having an affected family member. Also, considering the variation in global wage rates or in societal values, statistics used may be contextually, geographically confined, and study results may not be internationally applicable. [18]

Though studies have demonstrated mental healthcare to reduce overall healthcare costs, demonstrate efficacy, and reduce employee absenteeism while improving employee functioning, the availability of comprehensive mental health services is in decline. Petrasek and Rapin (2002) cite the three main reasons for this decline as (1) stigma and privacy concerns, (2) the difficulty of quantifying medical savings and (3) physician incentive to medicate without specialist referral. [20] Evers et al. (2009) have suggested that improvements could be made by promoting more active dissemination of mental health economic analysis, building partnerships through policy-makers and researchers, and employing greater use of knowledge brokers. [18]

See also

Related Research Articles

Health care reform is for the most part governmental policy that affects health care delivery in a given place. Health care reform typically attempts to:

Microeconomics Branch of economics that studies the behavior of individual households and firms in making decisions on the allocation of limited resources

Microeconomics is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.

This aims to be a complete article list of economics topics:

Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other words, it is the sum of personal and external costs. Private costs refer to direct costs to the producer for producing the good or service. Social cost includes these private costs and the additional costs associated with the production of the good for which are not accounted for by the free market. Mathematically, social marginal cost is the sum of private marginal cost and the external costs. For example, when selling a glass of lemonade at a lemonade stand, the private costs involved in this transaction are the costs of the lemons and the sugar and the water that are ingredients to the lemonade, the opportunity cost of the labor to combine them into lemonade, as well as any transaction costs, such as walking to the stand. An example of marginal damages associated with social costs of driving includes wear and tear, congestion, and the decreased quality of life due to drunks driving or impatience, and many people displaced from their homes and localities due to construction work. In their simplest words it is the private cost+external cost.

Primary care day-to-day health care given by a health care provider

Primary care is the day-to-day healthcare given by a health care provider. Typically this provider acts as the first contact and principal point of continuing care for patients within a healthcare system, and coordinates other specialist care that the patient may need. Patients commonly receive primary care from professionals such as a primary care physician, a nurse practitioner, or a physician assistant. In some localities, such a professional may be a registered nurse, a pharmacist, a clinical officer, or an Ayurvedic or other traditional medicine professional. Depending on the nature of the health condition, patients may then be referred for secondary or tertiary care.

The Canadian Medical Association (CMA) is a national, voluntary association of physicians and medical learners that advocates on national health matters. Its new strategic plan identifies its primary mandate: driving positive change in health care by advocating on key health issues facing doctors and their patients.

Dextropropoxyphene chemical compound

Dextropropoxyphene is an analgesic in the opioid category, patented in 1955 and manufactured by Eli Lilly and Company. It is an optical isomer of levopropoxyphene. It is intended to treat mild pain and also has antitussive and local anaesthetic effects. The drug has been taken off the market in Europe and the US due to concerns of fatal overdoses and heart arrhythmias. Its onset of analgesia is said to be 20–30 minutes and peak effects are seen about 1.5–2.0 hours after oral administration.

The term managed care or managed healthcare is used in the United States to describe a group of activities intended to reduce the cost of providing for-profit health care and providing American health insurance while improving the quality of that care. It has become the essentially exclusive system of delivering and receiving American health care since its implementation in the early 1980s, and has been largely unaffected by the Affordable Care Act of 2010.

...intended to reduce unnecessary health care costs through a variety of mechanisms, including: economic incentives for physicians and patients to select less costly forms of care; programs for reviewing the medical necessity of specific services; increased beneficiary cost sharing; controls on inpatient admissions and lengths of stay; the establishment of cost-sharing incentives for outpatient surgery; selective contracting with health care providers; and the intensive management of high-cost health care cases. The programs may be provided in a variety of settings, such as Health Maintenance Organizations and Preferred Provider Organizations.

Bertrand competition is a model of competition used in economics, named after Joseph Louis François Bertrand (1822–1900). It describes interactions among firms (sellers) that set prices and their customers (buyers) that choose quantities at the prices set. The model was formulated in 1883 by Bertrand in a review of Antoine Augustin Cournot's book Recherches sur les Principes Mathématiques de la Théorie des Richesses (1838) in which Cournot had put forward the Cournot model. Cournot argued that when firms choose quantities, the equilibrium outcome involves firms pricing above marginal cost and hence the competitive price. In his review, Bertrand argued that if firms chose prices rather than quantities, then the competitive outcome would occur with price equal to marginal cost. The model was not formalized by Bertrand: however, the idea was developed into a mathematical model by Francis Ysidro Edgeworth in 1889.

Health care prices in the United States describes market and non-market factors that determine pricing, along with possible causes as to why prices are higher than other countries. Compared to other OECD countries, U.S. healthcare costs are one-third higher or more relative to the size of the economy (GDP). According to the CDC, during 2015 health expenditures per-person were nearly $10,000 on average, with total expenditures of $3.2 trillion or 17.8% GDP. Proximate reasons for the differences with other countries include: higher prices for the same services and greater use of healthcare. Higher administrative costs, higher per-capita income, and less government intervention to drive down prices are deeper causes. While the annual inflation rate in healthcare costs has declined in recent decades; it still remains above the rate of economic growth, resulting in a steady increase in healthcare expenditures relative to GDP from 6% in 1970 to nearly 18% in 2015.

Partial equilibrium is a condition of economic equilibrium which takes into consideration only a part of the market, ceteris paribus, to attain equilibrium.

John C. Goodman health care economist

John C. Goodman is president and CEO of the Goodman institute for Public Policy Research, a think tank focused on public policy issues. He was the founding chief executive of the National Center for Policy Analysis, which operated from 1982 to 2017. He is a senior fellow at the Independent Institute. The Wall Street Journal and The National Journal have called Goodman the "father of Health Savings Accounts."

In the United States, a high-deductible health plan (HDHP) is a health insurance plan with lower premiums and higher deductibles than a traditional health plan. It is intended to incentivize consumer-driven healthcare. Being covered by an HDHP is also a requirement for having a health savings account. Some HDHP plans also offer additional "wellness" benefits, provided before a deductible is paid. High-deductible health plans are a form of catastrophic coverage, intended to cover for catastrophic illnesses. Adoption rates of HDHPs have been growing since their inception in 2004, not only with increasing employer options, but also increasing government options. As of 2016, HDHPs represented 29% of the total covered workers in the United States; however, the impact of such benefit design is not widely understood.

In economics, supplier induced demand (SID) may occur when asymmetry of information exists between supplier and consumer. The supplier can use superior information to encourage an individual to demand a greater quantity of the good or service they supply than the Pareto efficient level, should asymmetric information not exist. The result of this is a welfare loss.

Spain employs a universal health care system. The system is essentially free except for small, often symbolic co-payments in some products and services.

Health care in the United States is provided by many distinct organizations. Health care facilities are largely owned and operated by private sector businesses. 58% of community hospitals in the United States are non-profit, 21% are government-owned, and 21% are for-profit. According to the World Health Organization (WHO), the United States spent $9,403 on health care per capita, and 17.1% on health care as percentage of its GDP in 2014. Healthcare coverage is provided through a combination of private health insurance and public health coverage. The United States does not have a universal healthcare program, unlike most other developed countries.

Primary Care Behavioral Health Consultation model (PCBH) is a psychological approach to population-based clinical health care that is simultaneously co-located, collaborative, and integrated within the primary care clinic. The goal of PCBH is to improve and promote overall health within the general population. This approach is important because approximately half of all patients in primary care present with psychiatric comorbidities, and 60% of psychiatric illness is treated in primary care. Primary Care practice has traditionally adopted a generalist approach whereby physicians are trained in the medical model and solutions to problems typically involve medications, procedures, and advice. Appointment times are short, with the goal of seeing a large number of patients in a day. Many patients present with mental health care needs whose symptomology may overlap with medical disorders and which may exacerbate, complicate, or masquerade as physical symptoms. In addition, many medical problems present with associated psychological sequelae, that are amenable to change, through behavioral intervention, that can improve outcomes for these health problems. Over 50% of medical visits to primary care clinics today are related to chronic medical conditions. As we learn more and more about the contributing factors to the development and maintenance of these medical problems, there is growing evidence that the PCBH model affords us the opportunity for early identification and behavioral/medical intervention that can prevent some acute problems from becoming chronic health care problems. Behavioral Health Consultants (BHCs) work side-by-side with all members of the clinical care team to enhance preventive and clinical care for mental health problems that have traditionally been treated solely by physicians. The role of the BHC is to facilitate systemic change within primary care that facilitates a multidisciplinary approach both from a treatment and reimbursement standpoint. BHCs typically collaborate with physicians to develop treatment plans, monitor patient progress, and flexibly provide care to meet patients’ changing needs In this review the terms Primary Care Behavioral Health Consultation and Behavioral Health Consultation will be used interchangeably.

In microeconomics, the Bertrand–Edgeworth model of price-setting oligopoly looks at what happens when there is a homogeneous product where there is a limit to the output of firms which they are willing and able to sell at a particular price. This differs from the Bertrand competition model where it is assumed that firms are willing and able to meet all demand. The limit to output can be considered as a physical capacity constraint which is the same at all prices, or to vary with price under other assumptions.

Health care quality is a level of value provided by any health care resource, as determined by some measurement. As with quality in other fields, it is an assessment of whether something is good enough and whether it is suitable for its purpose. The goal of health care is to provide medical resources of high quality to all who need them; that is, to ensure good quality of life, cure illnesses when possible, to extend life expectancy, and so on. Researchers use a variety of quality measures to attempt to determine health care quality, including counts of a therapy's reduction or lessening of diseases identified by medical diagnosis, a decrease in the number of risk factors which people have following preventive care, or a survey of health indicators in a population who are accessing certain kinds of care.

Yuting Zhang is a Professor of Health Economics at the University of Melbourne, and an expert on economic evaluations of health policy and healthcare reforms. She is a journal editor, award recipient, and has written numerous articles in influential journals in her field.

References

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  2. Howard, Brandon; Health, JH Bloomberg School of Public. "What Is Health Economics?". Johns Hopkins Bloomberg School of Public Health. Retrieved 25 February 2020.
  3. Arrow, Kenneth (1963). "Uncertainty and the Welfare Economics of Medical Care," The American Economic Review;53(5):941-973
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  11. Svorny, Shirley (2004), "Licensing Doctors: Do Economists Agree?", Econ Journal Watch, 1 (2): 279–305
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  13. Peter Orszag, "Behavioral Economics: Lessons from Retirement Research for Health Care and Beyond," Presentation to the Retirement Research Consortium, August 7, 2008
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Further reading

Journals