Basic Concepts in Health Economics

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. 
• 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.

⭐ 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.

oka

• 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.