Basic Concepts in Health Economics

Basic Concepts in Health Economics

Basic Concepts in Health Economics

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Foundations First - $ & Sense

  • Scarcity: Unlimited human wants vs. finite health resources.
  • Choice: Decisions allocating scarce resources among competing needs.
  • Opportunity Cost: Value of the best alternative forgone. ![Law of Scarcity](law of scarcity)
  • Efficiency: Maximizing output from given inputs.
    • Allocative (AE): Right services for maximum societal health benefit.
    • Productive/Technical (PE/TE): Services produced with least resource cost.
  • Equity: Fair distribution of health and healthcare.
    • Horizontal: Equal treatment for equal needs.
    • Vertical: Appropriate, different treatment for different needs.
  • Key Outcome Measures:
    • QALY: Quality-Adjusted Life Year; $1 \text{ QALY} = 1 \text{ year in perfect health}$.
    • DALY: Disability-Adjusted Life Year; $1 \text{ DALY} = 1 \text{ year of healthy life lost}$.

⭐ Opportunity cost is the value of health benefits from the next best alternative forgone.

Market Mysteries - Demand, Supply & Oddities

  • Demand in Healthcare:
    • Characteristics: Derived (for health itself), irregular, unpredictable.
    • Price inelastic: Essential nature; demand changes little with price.
    • Third-party payers (insurance/govt): Can cause moral hazard (↑utilization due to ↓out-of-pocket cost).
    • Supplier-Induced Demand (SID): Providers influence patient demand using information asymmetry.
    • Positive externalities common: e.g., vaccination benefits the wider community.
  • Supply in Healthcare:
    • Entry barriers: Strict licensing, long & costly professional training.
    • Resource distribution: Often geographic & specialty maldistribution.
    • Provider mix: Public, private for-profit, and not-for-profit entities.
  • Healthcare Market Failures & Oddities:
    • Information Asymmetry: Significant knowledge gap between providers and patients.
    • Externalities: Both positive (e.g., herd immunity) and negative (e.g., antibiotic resistance).
    • Merit Good: Considered socially desirable, often justifying government intervention/provision.
    • Pervasive uncertainty: Regarding illness occurrence, treatment effectiveness, and associated costs.

Elasticity curve showing inelastic and elastic demand

Supplier-Induced Demand (SID): Physicians, leveraging information asymmetry, can influence patient demand for services, potentially leading to over-treatment, especially with fee-for-service payment models.

Evaluation Essentials - Cost vs. Benefit

Economic evaluation systematically compares costs and consequences of alternative health interventions. Key methods include:

  • CMA: Used when outcomes of interventions are identical. Selects the least costly option.
  • CBA: Values both costs and benefits in monetary units. Aims for Benefit-Cost Ratio $> \textbf{1}$.
  • CEA: Outcomes measured in natural or clinical units (e.g., life-years gained, mmHg BP reduction). Results often as ICER (Incremental Cost-Effectiveness Ratio).
  • CUA: A specific type of CEA where outcomes are measured by health utility, like QALYs.
    • QALY (Quality-Adjusted Life Year): $QALY = Years \ of \ Life \times Utility \ Value$ (where Utility is 0-1).
    • DALY (Disability-Adjusted Life Year): $DALY = YLL + YLD$ (Years of Life Lost + Years Lived with Disability).

⭐ CEA is the most commonly used method for evaluating health interventions due to its practical outcome measures.

Funding Flows - India's Health Wallet

  • Sources of Finance:
    • Public Sector: Central & State Govts.
    • Private Sector: Out-of-Pocket Expenditure (OOPE), insurance, NGOs.
    • External Aid.
  • Key Characteristics:
    • High OOPE (major household burden).
    • Govt. Health Expenditure (GHE): ~1.35% of GDP (target ↑ to 2.5%).
    • Key Schemes: PM-JAY, ESIS, CGHS.

⭐ Out-of-Pocket Expenditure (OOPE) constitutes over 60% of Total Health Expenditure (THE) in India.

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  • Scarcity of resources forces choices and trade-offs in healthcare.
  • Opportunity cost is the value of the next best alternative forgone.
  • Efficiency: Allocative (right services for needs) and Technical (least cost production).
  • Equity in health: Fairness in distribution and access (e.g., horizontal, vertical).
  • Demand (desire + ability to pay) is distinct from need (capacity to benefit).
  • Market failures (e.g., information asymmetry, externalities) are prevalent in healthcare.

Practice Questions: Basic Concepts in Health Economics

Test your understanding with these related questions

Based on healthcare utility values and life expectancy, which of the following measures can be calculated? Consider a scenario where the average life expectancy for a woman in Japan is 87 years, and there is an increase in life expectancy due to healthcare advancements.

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Flashcards: Basic Concepts in Health Economics

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The _____ analysis provides information on how much input is needed to produce a unit amount of output.

TAP TO REVEAL ANSWER

The _____ analysis provides information on how much input is needed to produce a unit amount of output.

input-output

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