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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. In broad terms, health economists study the functioning of healthcare systems and health-affecting behaviors such as smoking.
Economics is the social science that studies the production, distribution, and consumption of goods and services.
Health is a state of physical, mental and social well-being in which disease and infirmity are absent.
A seminal 1963 article by Kenneth Arrow, often credited with giving rise to health economics as a discipline, drew conceptual distinctions between health and other goods.Factors that distinguish health economics from other areas include extensive government intervention, intractable uncertainty in several dimensions, asymmetric information, barriers to entry, externalities and the presence of a third-party agent. In healthcare, the third-party agent is the physician, who makes purchasing decisions (e.g., whether to order a lab test, prescribe a medication, perform a surgery, etc.) while being insulated from the price of the product or service.
Kenneth Joseph Arrow was an American economist, mathematician, writer, and political theorist. He was the joint winner of the Nobel Memorial Prize in Economic Sciences with John Hicks in 1972.
Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable and/or stochastic environments, as well as due to ignorance, indolence, or both. It arises in any number of fields, including insurance, philosophy, physics, statistics, economics, finance, psychology, sociology, engineering, metrology, meteorology, ecology and information science.
In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This asymmetry creates an imbalance of power in transactions, which can sometimes cause the transactions to go away, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and monopolies of knowledge.
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 infectious disease. For example, making an effort to avoid catching the common cold affects people other than the decision maker.
The common cold, also known simply as a cold, is a viral infectious disease of the upper respiratory tract that primarily affects the nose. The throat, sinuses, and larynx may also be affected. Signs and symptoms may appear less than two days after exposure to the virus. These may include coughing, sore throat, runny nose, sneezing, headache, and fever. People usually recover in seven to ten days, but some symptoms may last up to three weeks. Occasionally those with other health problems may develop pneumonia.
The scope of health economics is neatly encapsulated by Alan Williams' "plumbing diagram"dividing the discipline into eight distinct topics:
Alan Williams was a British economist.
In economics, supply is the amount of a resource that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or directly to another agent in the marketplace. Supply can be in currency, time, raw materials, or any other scarce or valuable object that can be provided to another agent. This is often fairly abstract. For example in the case of time, supply is not transferred to one agent from another, but one agent may offer some other resource in exchange for the first spending time doing something. Supply is often plotted graphically as a supply curve, with the quantity provided plotted horizontally and the price plotted vertically.
A therapy or medicaltreatment is the attempted remediation of a health problem, usually following a diagnosis.
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.
In economics, derived demand is demand for a factor of production or intermediate good that occurs as a result of the demand for another intermediate or final good. In essence, the demand for, say, a factor of production by a firm is dependent on the demand by consumers for the product produced by the firm. The term was first introduced by Alfred Marshall in his Principles of Economics in 1890.
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:
Michael Grossman's 1972 model of health productionhas 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).
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).
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.
Often used synonymously with health economics, medical economics, according to Culyer,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.
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.The relevance of behavioural economics in healthcare is further highlighted in Vuong et al. (2018).
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.Externalities may include the influence that affected individuals have on surrounding human capital, such as at the workplace or in the home. 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.
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.
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.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.
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.
Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.
In economics, specifically general equilibrium theory, a perfect market is defined by several idealizing conditions, collectively called perfect competition. In theoretical models where conditions of perfect competition hold, it has been theoretically demonstrated that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded at the current price. This equilibrium would be a Pareto optimum.
In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Externalities often occur when a product or service's price equilibrium cannot reflect the true costs and benefits of that product or service. This causes the externality competitive equilibrium to not be a Pareto optimality.
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.
Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.
Preventive healthcare consists of measures taken for disease prevention. Disease and disability are affected by environmental factors, genetic predisposition, disease agents, and lifestyle choices and are dynamic processes which begin before individuals realize they are affected. Disease prevention relies on anticipatory actions that can be categorized as primal, primary, secondary, and tertiary prevention.
In economics, tax incidence or tax burden is the effect of a particular tax on the distribution of economic welfare. Economists distinguish between the entities who ultimately bear the tax burden and those on whom tax is initially imposed. The tax burden measures the true economic weight of the tax, measured by the difference between real incomes or utilities before and after imposing the tax. An individuality on whom the tax is levied does not have to bear the true size of the tax. For the example of this difference, assume a firm, that contains employer and employees. The tax imposed on the employer is divided. The concept of tax incidence was initially brought to economists' attention by the French Physiocrats, in particular François Quesnay, who argued that the incidence of all taxation falls ultimately on landowners and is at the expense of land rent. Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or ultimately suffers a loss from, the tax. The key concept of tax incidence is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. As a general policy matter, the tax incidence should not violate the principles of a desirable tax system, especially fairness and transparency.
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.
Consumer-driven healthcare (CDHC), or consumer-driven health plans (CDHP) refers to a type of health insurance plan that allows members to use health savings accounts (HSAs), health reimbursement accounts (HRAs), or similar medical payment accounts to pay routine healthcare expenses directly, but a high-deductible health plan protects them from more costly medical expenses. Users keep any unused balance or "rollover" at the end of the year to increase future balances or to invest for future expenses. CDHC plans are subject to the provisions of the Affordable Care Act, which mandates that routine or health maintenance claims must be covered, with no cost-sharing to the patient. High-deductible policies cost less than traditional insurance plans.
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.
The following outline is provided as an overview of and topical guide to economics:
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.
There were a number of different health care reforms proposed during the Obama administration. Key reforms address cost and coverage and include obesity, prevention and treatment of chronic conditions, defensive medicine or tort reform, incentives that reward more care instead of better care, redundant payment systems, tax policy, rationing, a shortage of doctors and nurses, intervention vs. hospice, fraud, and use of imaging technology, among others.
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 US community hospitals 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 other advanced industrialized countries.
In macroeconomics, rigidities are real prices and wages that fail to adjust to the level indicated by equilibrium or if something holds one price or wage fixed to a relative value of another. Real rigidities can be distinguished from nominal rigidities, rigidities that do not adjust because prices can be sticky and fail to change value even as the underlying factors that determine prices fluctuate. Real rigidities, along with nominal, are a key part of new Keynesian economics. Economic models with real rigidities lead to nominal shocks having a large impact on the economy.
Joseph P. Newhouse is an American economist and the John D. MacArthur Professor of Health Policy and Management at Harvard University, as well as the Director of the Division of Health Policy Research and of the Interfaculty Initiative on Health Policy. At Harvard, he is a member of the four faculties at Harvard Kennedy School in Cambridge, Harvard Medical School in Boston, Harvard T.H. Chan School of Public Health in Boston, and Harvard Faculty of Arts and Sciences in Cambridge.
This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.
The Grossman model of health demand is a model for studying the demand for health and medical care outlined by Michael Grossman in a monograph in 1972 entitled: The demand for health: A theoretical and empirical investigation. The model based demand for medical care on the interaction between a demand function for health and a production function for health. Andrew Jones, Nigel Rice, and Paul Contoyannis call the model the "founding father of demand for health models".