Health Economics

1. Health Economics

2. Topic Objective • Critically discuss health economics and financial management as applied to hospital environment.

3. Content • 1. Discuss and elaborate on health economics and clinical research. • 2. Critically discuss on clinical economics and clinical decision making. • 3. Discuss and elaborate on corporate and business finance. • 4. Elaborate health care accounting and budgeting. • 5. Discuss and elaborate on performance measurement; clinical and nonclinical.

4. 1. Discuss and elaborate on health economics and clinical research

5. . • The evolution of the discipline of economic evaluation in health care shows that clinicians must play a decisive role if we are to achieve the target of having a more efficient health service. • Interventions are not efficient or inefficient per se, their efficiency is determined when they are used in clinical practice.

6. Even if the practice of personalized medicine may seem challenged by ethical issues, social and individual value judgments are not mutually exclusive. • Health economics is not the end of clinical freedom but the start of it. Doctors take up a central position in the health care system and they may contribute to finding the right balance between clinical freedom and social responsibility..

7. The pressure for health care systems to provide more resource-intensive health care and newer, more costly therapies is significant, despite limited health care budgets. • It is not surprising, then, that demonstration that a new therapy is effective is no longer sufficient to ensure that it can be used in practice within publicly funded health care systems. • The impact of the therapy on health care costs is also important and considered by decision makers, who must decide whether scarce resources should be invested in providing a new therapy.

8. The impact of a therapy on both clinical benefits and costs can be estimated simultaneously using economic evaluation, the strengths and limitations of which are discussed. • When planning a clinical trial, important economic outcomes can often be collected alongside the clinical outcome data, enabling consideration of the impact of the therapy on overall resource use, thus enabling performance of an economic evaluation, if appropriate.

9. Introducing Health Economics • Economics, Health and Health Economics • Key Economic Concepts • Exercise • Seminar Allocation

10. Economics, Health and Health Economics 1. What is “Economics”? 2. What is “Health”? 3. What is “Health Economics”?

11. What is “Economics”? Economics is … • concerned with money? • the same as accountancy? • only practised by economists? • objective?

12. Economics in a nutshell • Resources are scarce • What we “want” is unlimited • Therefore involves “choice” • Max. bens/min. resources = efficiency

13. Pessimist: bottle ½ empty Optimist: bottle ½ full Economist: bottle ½ wasted inefficient!

14. Economics and Money ECONOMICS = costs (resource use) benefits choice efficiency MONEY = store of value means of exchange

15. Economics  Accountancy ECONOMICS = costs (resource use) benefits choice efficiency ACCOUNTANCY = monitor of financial transactions

16. Only Economists Practice Economics? ECONOMICS = costs (resource use) benefits CHOICE efficiency Weigh-up relative benefits of each course of action and choose the action which maximises well-being.

17. Economics  Objective All decisions are based on subjective value judgements. Economics makes these explicit.

18. Topic Versus Discipline TOPIC = area of study DISCIPLINE = conceptual apparatus Health economics is the discipline of economics applied to the topic of health.

19. What is “Health”? World Health Organisation: Health is a “state of complete physical, mental and social well-being “Health Economics” is often “Health Care” Economics.

20. Task of Economics Descriptive = quantification Predictive = identify impact of change Evaluative = relative preference over situations

21. What is health • Health is a multifaceted concept and not easily measurable. • WHO definition: • Health is a state of complete physical and mental well-being and not merely the absence of disease or infirmity (WHO, 1948) • Refer to peoples’ health status (how healthy they are).

22. What is health • Important part of human capital • Human capital: value of learning, experience and ability embodied in workers which increases productivity and income. • Asset: accumulates and depreciates • Individual or households can improve their health through use of health care, diet .. • Production of health • Health Production Functions • Determinants of health

23. What is health care? Definition: The prevention, treatment, and management of illness and the preservation of mental and physical well-being through the services offered by the medical and allied health professions.

24. What is health care? • Important difference between health and health care • Health care can be traded on the market but health cannot. • Demand health care to improve our health • Demand for Health Care • Health care markets differ from markets for other commodities • Role for Government

25. Roots of health economics Emerged as a sub discipline of economics in the1960s with the publication of two important paper: • Kenneth Arrow (1963) “Uncertainty and Welfare Economics of Medical Care” The American Economic Review. • Mark Pauly (1968) “The Economics of Moral Hazard: Comment” The American Economic Review. • Concerned with the health market not with health or health status.

26. What is health economics? • Health economics is the study of how (scarce) resources are allocated to and within the health economy. • Production of health care (doctors, specialists, or nurses). • How do we distribute health care across the population? • Based on who can pay or who needs it or some combination. • How much money should the government spend on health care?

27. What is health economics? • Demonstrates the magnitude and importance of the health sector e.g. How fast it might be growing and why • What makes it different from other markets and how our analysis may need to adjust • Models the determinants of health status and looks and how government policy might improve health status in short and long run

28. Why is it important? • The size of the health economy is large and growing • Role of government in the health care markets • Health care market is difference from other markets • Externalities

29. Why is it important? • Health economy is large and growing Source: Organization for Economic Cooperation and Development, Health Data 2005.

30. The size of US health economy • GDP: The market value of final goods and services produced within the borders of a country in a year. • 1980s: Rise in shares • Increase in insurance coverage and FFS system • Introduction of more market based policies • 1990s: Expenditures flattens out • Managed care introduced • Could just be an decrease in the denominator.

31. National US Spending on Health Care Numerator is increasing NHE = National Health Expenditures (In billions of dollars); * = projection

32. Out-of-Pocket and Federal Expenditures -Table 1-5 FSG (In billions of dollars)

33. Medical care prices (CPI), 1960-2004 Hospital services Presc. drugs ALL

34. Personal Consumption, 2001 Source: FSG Table 1.2

35. Personal Expenditures • Medical care is the largest category. • Most of this is for hospitals/nursing homes • Need to think how policy affects this category • Uninsured go to emergency rooms • In 1960 food was 25%, housing 15%, and medical care 5%. • There has been a big shift in spending patterns. May represent a richer society.

36. Personal Expenditures What have we not accounted for in personal expenditures? • Opportunity cost of your own time • Time spent caring for sick or disabled • Decreased with more spent on nursing home? • Very important in developing countries

37. US compared to OECD countries Table 1-1: health expenditures % GDP, OECD • Health expenditures grew rapidly between 1960-1980 for most countries. • Rates continued to rise in1990s in US. • US is the biggest spender. • Twice as much as the UK (national health insurance).

38. Questions for you to think about • Why do you think health care spending is higher in the US than in other countries? • Is the fact that the US population spends more per capita on health care than people in any other developed country evidence of a failure of the US system?

39. Why is it important? • The size of the health economy is large and growing • Role of government in the health care markets

40. Role of Government Participate because of market failures • Demand side • Provision of insurance • Effort to affect health behavior • Supply side • Price controls • Restriction of entry/exit • Subsidize research • Tax policy and much more …

41. US health care spending, 2003Government is 45 % of total health spending Source: DHHS, http://www.cms.hhs.gov/statistics/nhe/historical/chart.asp

42. Percent of health care expenditure 80% 60% 40% 20% Federal State and local Private

43. Why is it important? • The size of the health economy is large and growing • Role of government in the health care markets • Medical Market is difference from other markets

44. How is the medical care market different from other markets? • Presence of Uncertainty • Demand is irregular and uncertain • Accidents, can you deny someone lifesaving care if they don’t have the money?

45. How is the medical care market different from other markets? • Supply–hard to understand the product • Asymmetric information • When we are sick we don’t understand the treatment we need and must trust our doctor in their diagnosis. • Different doctors may suggest different treatments due to uncertainty of outcome. • Hard to judge quality • Governments establish licensing requirements to ensure minimum level of quality

46. How is the medical care market different from other markets? • Prominence of Insurance • People buy insurance to cover themselves against the risk of illness. • With third party financing most of the cost of medical care, individuals are insulated from the full cost of the care they receive. • Demand for medical care may rise if you don’t pay the full cost. • Treatment recommendations are adjusted to insurance status.

47. How is the medical care market different from other markets? • Large role of not-for-profit providers • Economists usually assume firms maximize profits. • There are many not-for-profit hospitals (85%). How should economists model their behavior? • Role of equity and need • Belief that people ought to get health care whether or not they can afford it. • Economists need to take this feature of the good into consideration.

48. Why is it important? • The size of the health economy is large and growing • Role of government in the health care markets • Medical Market is difference from other markets • Externalities

49. Externalities • Communicable disease • A disease that is transmitted through direct contact with an infected individual or indirectly through a vector (e.g. mosquito). • Significant reduction in their spread account for much of the improvement in health in developed countries • Malaria, TB, vaccine preventable diseases • Still a significant problem in less developed countries

50. Externalities • Individual behaviors (smoking, over eating) • Direct impact on health of person and others • Impacts the cost of health • premiums –i.e. lung cancer • Impact on demand for health care