The Economics of Health Care
ECM206
Nancy Devlin
[email protected]
Course organisation
 Week-by-week guide to this module
→ guest lectures
 Key readings & texts
 Further readings
 Study questions
 Assessment
 Lectures
Questions?
Topic 1. Introduction to the economics of
health and health care.
1. The starting point for economic analysis:
 Resources are limited
 Potential uses of those resources are
virtually unlimited.
Thus:
 Health care is an economic good: i.e.,
scarce relative to our wants for it.
 Choices about the way health care is
funded, produced and distributed (the
‘basic economic question’)
Q. Some would argue that health care is a
basic human right and to treat it as an
‘economic good’, like any other sort of
consumer good or service, is either irrelevant
or inappropriate. What are your views?
Q. No health system can afford to treat all of
the health needs of its population that could be
treated using available technology. Rationing
is unavoidable. True or false? In what ways
might health care be rationed?
Basic economic questions.
1. What combination of health care/nonhealthcare goods should be produced in
the economy?
2. Which particular types of healthcare
should be produced?
3. What resources (inputs) should be used
to produce these healthcare services?
4. Who should receive the medical goods?
1 & 2 concern allocative efficiency
3 concerns technical efficiency
4 concerns distribution and equity
Each decision involves tradeoffs.
2. Production possibilities curve
 The role of models in economics (1)
Mental
health
D
 Opportunity cost
 The law of increasing opportunity cost
 Technical efficiency: relationship between
physical inputs and physical outputs
 Allocative efficiency: concerns the mix of
outputs.
Elective
surgery
3. Brief introduction to models of
competitive markets
 The role of models in economics (2)
 Models of consumer and provider
behaviour.
 Simple demand, supply & market
equilibrium
Price
£
Quantity per time
period
Underlying assumptions:
 Consumers have perfect information on
prices, quality, benefits of healthcare
(“consumer search”)
 Consumers can judge quality
(“caveat emptor”)
 Consumers are rational and are the best
judges of their own well-being
 Consumers receive the benefits of any
health care consumed.
 “Firms” behave competitively and respond
to profit incentives
4. Is health care “different”?
(from what…?)
Seminal paper: Arrow (1963) Uncertainty
and the welfare economics of medical care
AER.
 Consumer behaviour in health care
markets
 Provider behaviour in health care
markets
The role of Governments:
 regulation
 subsidisation
 provision
Case study: Is blood an economic good?
The supply and demand for organs and
blood
Each year, thousands of people suffer
avoidable death because of shortages of blood
products and organs. These persistent
shortages arguably exist because supply relies
on charitable acts.
Q: Why not use market forces to eliminate
these shortages?
See: Titmuss (1972) The Gift relationship; Cooper and
Culyer (1968, 1972) The price of blood and The
economics of giving. IEA.
5. Positive and normative economics
Positive = value free; is ‘descriptive’.
Normative = rests upon judgements; is
‘prescriptive’.
Assess the following statements:
Positive?
Normative?
“NHS patients should be given
more choice about how, when
and where they receive
treatment”
“Patients are less likely to
choose quicker treatment at
an alternative hospital if they
are older, have low education
levels, or have low incomes”
“The demand for dental care
is generally found to be price
inelastic”
“Dental care is increasingly
concerned with cosmetic
rather than functional
considerations: it is a luxury,
which patients should pay for”
For a discussion of US and UK economists’ views
on positive and normative questions (and a
discussion of ambiguities over what constitutes
positive and normative):
Newhouse JP (1998) US and UK health economics:
two disciplines separated by a common language?
Health Economics 7:S79-S92 (and the response
from Dolan (1999) Health Economics 8:177.
The “X and Y theories of health economics”
View of:
Health
Theory X
Health and
disease occur
randomly
Medical care
special
The practice of
medicine
Economics
A science
Theory Y
Health is
determined by
people’s lifestyle
choices
No different than
any other good or
service
An art
Financial rewards Financial rewards
reduce the quality are responsible
of caring
for generating
high-quality
medicine
Policy
Regulations are
Reduce
needed to
regulations and
mitigate economic encourage market
forces.
forces.
Tax the healthy’
Tax the sick, not
subsidise the sick. the healthy.
Discourage new
Encourage new
medical
medical
technologies.
technologies.
Source: Table 1.1 Santerre and Neun (2000); based on
Musgrave (1995).
Q: At this stage of the module, would you consider
yourself more of a theory X person, or theory Y
person? Why? To what extent might your reasons
be based on beliefs, or evidence?