Work Area / Health
Economics
Introducing Health Economics
Economics is the science of resource scarcity and choice. Health economics is a sub-discipline of economics, and covers the following ground:
- needs, demands and wants
- the nature of health and health care
- consumer theory and principal-agent relationships
- economic evaluation
- theories of organisational behaviour
- efficiency, equity, priority-setting and resource allocation
- organisation, funding and regulation of health care
This is a broad territory, and is included here simply to make the point that health economics is more than economic evaluation (a popular misconception). Nevertheless economic evaluation is an extremely important area of health economics and therefore merits a separate section later in this paper.
Health economics is therefore concerned with questions such as:
- what is the optimum size of a hospital?
- how can informal carers' time be costed?
- what are the barriers to labour market entry for particular professions?
- how can prescribing incentive schemes be designed to maximise outcomes?
- what do we know about the implications for quality of health care in different regulatory regimes?
- how should cancer funding be targeted?
- what is the most cost-effective way to improve physical activity levels in children?
- what incentives exist for cost-shifting between the NHS and local government?
Other resources on this site include
Structure of Discipline
Schematic presentation of the main elements in health economics, adapted from A Williams.
Williams A. Economics of coronary artery bypass grafting. British Medical Journal 1985; 291: 326-329.
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Ten popular health economic fallacies
Professor Charles Normand has published a paper entitled 'Ten popular health economic fallacies' (Normand, 1998). The paper discusses ten popular beliefs that health economists sometimes encounter. Each 'fallacy' is listed below. If you click on any one of these, an explanation is provided 'to suggest alternative beliefs that better match the theory or fit the evidence.'
Normand C. Ten popular health economic fallacies. Journal of Public Health Medicine. 1998; 20: 2:129-132.
http://jpubhealth.oxfordjournals.org/cgi/content/abstract/20/2/129
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Advances in medical care technology increase health care costs
WRONG. Assuming a new intervention/service does the same job as an old one, a decision maker can choose the least cost intervention. If a new intervention has potential benefits (e.g. in terms of quality and/or effectiveness) these need to be proven. Those proposing adoption of the new intervention would need to show how any additional costs are justified by additional benefits.
- The ageing of the population will result in a dramatic increase in health care costs
PROBABLY WRONG. The ageing of the population per se is unlikely to increase costs dramatically. It is likely that the health of a person at any age will improve. The cost of health care services is likely to be linked to a person's proximity to death rather than their age. The cost of terminal illness may fall with age, once the cause of death is adjusted for. The ageing of the population is increasing the supply of informal carers who are able to provide help. However, it is noted that the lower cost of terminal care in older age may reflect under-treatment. Also the proportion of people working in the economy may fall with an ageing population.
- Buildings are expensive
WRONG. Health care facilities and equipment are relatively cheap as compared to running costs and, in particular, the cost of employing health care staff. It is inefficient to use inappropriate buildings which increase staff costs. New buildings do not always offer cost advantages.
- We should use new hospital buildings to avoid wasting the money invested in building them
WRONG. If a health care facility which has been built increases costs or reduces the appropriateness of health care delivery it should not be used. The waste of resources relates to the decision to build the facility in the first place - not the decision not to use it.
- Governments cannot afford to pay for more health care services and therefore more reliance should be made on funds for capital development in the private sector, supplemented insurance with fees for service
WRONG. As income rises, the demand for health care services rises more than proportionately: as countries become richer they tend to choose to spend more on health care. The relative price of services produced in the health care sector (and in other sectors which have high levels of human inputs), compared to the price of services in other sectors where production can be mechanised, tends to increase as an economy grows. Greater levels of private expenditure on health services may crowd out investment. Shifting from public to private funding is likely to shift the payment burden from relatively rich people (those who pay higher taxes) to the relatively poor.
- We must accept increasing costs from malpractice and negligence claims
WRONG. To determine whether compensation should be paid requires a distinction to be made between bad outcomes which are avoidable and bad outcomes which are inevitable. Assuming that compensation should be paid, it is not clear that access to support should depend on successful litigation. There is uncertainty as to how well most treatments work. Many treatments are risky and patients might reasonably be expected to share in the risk. Incentives for good practice can have positive consequences. However, incentives which are based on the fear of litigation may not be effective, especially as compensation is paid by insurance and those with vicarious liability.
- Better health services pay for themselves by getting people back to work
WRONG. The benefits of health care tend to translate into better health. The link between health care services and ability to work is slight because only a few interventions increase ability to work and most are delivered to people above and below the working age.
- Costs of care will be lowered by 'rationalising' care and closing small hospitals
WRONG. Economies of scale in hospital services are hard to find. There is no evidence that widening the scope of a hospital's activity leads to lower costs. It is possible that mergers of particular services such as intensive care, A&E and cardiac surgery may be associated with cost savings and quality improvements. In many cases, the closure of small hospitals fails to release any funds as the services may be transferred to higher cost facilities.
- We should focus resources on those diseases which are responsible for the largest burden of morbidity and premature deaths
WRONG. To maximise the impact of health interventions it is worth focussing on the size of the solutions rather than the size of the problems. Diseases with the largest health burden may have expensive treatments and may be relatively ineffective. Assessment of the relative cost-effectiveness of interventions aids understanding of the resource implications of such decisions.
- It is better to focus health promotion on those who are young and fit
PROBABLY WRONG. There are costs associated with promoting health and these need to be considered alongside the benefits. The cost of preventing illness is affected by how easy it is to target the relevant population group and how easy it is to achieve behavioural change and compliance with treatment.