HEALTH ECONOMICS

INTRODUCTIONS

Modern health care has made it possible for large section of the people to
enjoy the fruits of a healthy life, and to contribute their might to the economic
growth and development of the community.

Most countries, especially the developing countries are concerned about

the resources of health sector that are.

1) The Sources of Finance for health services.

2) The ability to maintain at least the past funding levels.
3) Resource allocation patterns and
4) Economics efficiency, with equity, of health services delivery.

Economic concern about the rising cost of health services formed an

important part of the political agenda during the presidential campaign of Bill
Clinton in USA. It is important for all public health specialists, specially the health
administrators, to know and apply the principles of economics in the field of
health.

The W.H.O. organized in 1973 a seminar on health economics in which 18

countries from various regions participated. It is interesting to note that the
following questions, to which clearer answers were sought at that seminar, are
relevant even today:

1) What is a reasonable price to pay for health ?

2) What are the relations between consumers and health services?
3) Do consumers of health services receive value for money?
 4) To what extent do consumers and products benefit from health
services?

DEFINITION AND MEANING OF ECONOMICS

1. ECONOMICS
It has been variously described as the study of wealth, study of welfare
and study of scarcity. The related definitions are given below:
(I) STUDY OF WEALTH
Adam Smith, the father of economics, defined economics as a science
which studies the nature and causes of national wealth. As a matter of
fact, the book he wrote in 1776, commonly known as the Wealth of
Nations, is titled "An Enquiry into the Nature and Causes of the Wealth of
Nations".
(II) STUDY OF WELFARE
Mai-shall considered economics as a means or an instrument to better the
conditions of life. He defined economics as "a study of mankind in the
ordinary business of life; it examines that part of the individual and social
action which is most closely connected with the attainment and use of the
material requisites of well being".
(III) STUDY OF SCARCITY
Robbins, who propounded economics as the fludy of scarcity, defines it as
"the science which studies human behaviour as a relationship between
ends and scarce means which have alternative uses".

Positive and Normative Economics

Economics is to study and analyse the questions of scarcity and choices.
This can be done from two angles:
a) To study and analyse how resources were/are/will be employed. This area
of Economics is called Positive Economics.
b) Making judgments about how resources should be employed. This area
is called normative economics. It deals with such questions as how much
price should be charged to people with different income levels.

Positive Economics is the study of what is in the economy. It refers to

statements of facts, relationships among facts, and projections based upon facts.
For example, the statements;

a) Infant mortality rate in 1994 was 73 per 1000 live births.

b) If facilities of safe excreta disposal are provided to the community there
will be decrease in spread of disease through orofaecal route.

Normative Economics is the study of what ought to be in the economy. It

refers to statements which" include value judgments. For example a) We should
eliminate poverty, is a judgement, b) Because many people cannot afford the
cost of health care services, government ought to provide free services, c) Since
we are aware of economic manifestations of ill health and disease, government
ought to allocate more budget to health sector.

 HEALTH ECONOMICS
DEFINITION
1. Health Economics is the discipline that determines the price and the
quantity of limited financial and non-financial resources devoted to the
care of the sick and promotion of health.
Health Economics covers the medical industry as a whole and extends to
such fields as the economic analysis of the cost of diseases, benefits of health
programs and .returns from investment in medical education, training and
research.
WHAT IS HEALTH ECONOMICS?
 Health Economics is a sub discipline of economics. There are two distinct
branches of health economics. The first branch of economics uses
 economic theory to explain and predict the operation of the health system
(positive economics).
 The second branch of health economics is most relevant to decision
makers and facilitates decisions about making the most efficient use of
limited resources (normative/welfare economics) (Kernick, 2002).
 The practical expression of this search for efficiency in healthcare is the
conduct of economic evaluation. It is economic evaluation that provides
the bulk of health economists' work and is of most relevance to managers
and practitioners.

IMPORTANCE OF ECONOMIC EVALUATION

Health economics addresses the issue of how to meet the ever increasing
demand for health care, given our limited resources. The key concept underlying
economic evaluation is that an effective health care intervention, such as the
prescribing of an appropriate drug, can be recommended for patients who will
benefit, but if the drug is not cost-effective these patients will be using resources
that would produce greater benefit for other patients at the same cost.
The National Health Service of the UK has responded to the need to
priorities among the available health care resources by creating the National
Institute for Clinical Excellence (NICE) in 1999. NICE is responsible for providing
national guidance on clinical practice decisions based on evidence of clinical
effectiveness as well as cost-effectiveness (Fleurence, 2003).

SCARCITY
Scarcity means inability of economy to meet the unlimited wants of the
society or individual or we can say that scarcity means and insufficient amount of
resources to satisfy the unlimited wants.

DEMAND
 It is the type, quantity and quality of services or commodities
wanted or requested.
 The demand for health and medical care in strict economic
sense, is a function of
(a) Consumer’s Income
(b) The price of medical care relative to the prices of other goods.
(c) Tasty and preference of consumers, including their perception
about health and health care.

 The services which are provided by the government, these should not be
considered, in strict economic sense, free or without cost. Thus even for
availing of the so called free services, one has to make sacrifice in terms
of traveling and waiting time and transportation cost.

GNP and GDP

 Gross National Product (GNP) and Gross Domestic Product (GDP) are
the conventional terms used to understand the performance of economy.
These indicate the sum total of three components in a country, namely: (a)
persona! consumption; (b) expenditure on goods and services, and (c)
investment expenditure.
 GNP and GDP serve as measures of total (gross) production of goods and
services in a country during a year. Only final products, goods and ser-
vices are added for this purpose.
 The difference between GNP and GDP is property income received from
or paid outside the country. Any net gain or loss on this account is added
or subtracted from Gross Domestic Product to derive the Gross National
Product (GNP).
 It may be mentioned that the National Income differs from GNP. It consists
of total income of all individuals in the country through means of salary,'
profits, interest etc. after allowing for the depreciation of durable capital
goods and items such as building, equipment, machinery etc.
POVERTY LINE
 Poverty line is generally defined in terms of minimum per capita
consumption level of the people.
 According to planning commission, The poverty line refers to the cut off
point of income below which people are not able to purchase food
sufficient to provide 2400 kcal/head/day.
 Income level has been fixed by the planning commission has Rs. 119.50
per head in rural areas and Rs. 138 in urban areas at 1987-1988 prices.
 According to sixth five year plan “A family having five members, whose
annual income is less than Rs. 3500 is said to be living below poverty line.
 The income limit was increased to Rs. 6400 in the seventh plan. It has
been further raised to Rs. 7200 as per the eighth plan document.

COST
Costs can be classified in many ways. In general, costs refer to the
resources which are spent in carrying out health activities so far as the health
care sector is concerned.
It is to be understood that "unrealized" or "non-realized" benefits also
count towards costs. An example could be the loss of productivity due to
morbidity, disability or mortality.
In general, costs can be classified into two broad groups: capital costs and
operating (sometimes known as recurrent) costs.
(I) CAPITAL COSTS: These costs are borne irrespective of the workload
of any health centre and are fixed. These may include:
(a) Building, i.e., the health centre, hospital etc.
(b) Major items of equipments. In order to compute the yearly costs of
such items as building, refrigerator etc., Capital costs are also
termed as capital expenditure; capital goods represent capital
investment.
(II) OPERATING COSTS: These costs are related to the level or type of
activity in a health institution.
 Some operating costs will change daily and some from year to year.
These operating costs include:
(a) Salaries, wages and allowances of health ' staff at different levels
(b) Medical supplies, drugs etc.
(c) Transport operating costs
(d) Maintenance and repairs
(e) Training
(f) Power
(g) Other miscellaneous items

Operating costs may also be seen as indirect or overhead costs related to

the expenses associated with utilities, administration and supervision.

 Other Concepts Related to Costs

(a) Marginal costs:
 These refer to the amount, at any given volume of output, by which
aggregate costs are changed if the volume of output is increased or
decreased by one unit. These costs occur when one more unit is added.
 The concept of marginality is also applicable to benefits, value, income
and production.
(b) Social cost: It is the cost of a health activity to the society and not merely
or solely to the agency, institution or sector carrying out the activity.
(c) Unit cost: It is also known as average cost. It is the total cost of an activity
divided by the number of units of output produced.
(d) Opportunity cost:
 This economic concept is quite important and usually forgotten in costing.
It is the value of the next best alternative forgone in order to achieve
something.
 Opportunity costs operate not from the angle of the provider manager
alone but also from the angle of the consumer or the beneficiary of health
services. Nothing is free for the consumer even if it appears to be given
 free; the consumer has to incur some opportunity cost in terms of
travelling time, transportation cost, loss of leave or wages etc.
(e) Cost accounting:
 Cost accounting can be defined "as a process of manipulating or rear-
ranging the data or information in the existing accounts in order to obtain
the cost of services rendered by an organisation".
 Cost accounting will not improve efficiency by itself; it has to be combined
with appropriate management techniques in an organisation.
 Cost analysis provides a tool of measuring success in monetary terms and
thus helps to control and monitor the costs.
Cost accounting assists health administrators in controlling the costs and
monitoring the progress of various services. Thereby it can lead to rational al-
location of scarce health resources.'

BENEFITS
The benefits of a health program or project are the desired effects of the
program. Conversely, the failure to use the available resources, technology, etc.
in the best possible way, results in a loss to the project, the program, the
institution and, ultimately, the community.

COST BENEFIT ANALYSIS (CBA)

It refers to a formalized way of comparing the advantages (benefits) and
disadvantages (costs) of undertaking an activity, project or program.

Cost-benefit analysis, as an economic technique applicable to health

planning, health management and evaluation, is the systematic comparison in
financial or monetary terms of all the costs and benefits of the proposed
alternative schemes with a view to determining:
(a) which scheme or combination of schemes will contribute most to
achievement at a fixed given investment or
 (b) the magnitude of benefits that can result from schemes requiring the
minimum investment.

 Cost benefit analysis attempts to value all socially relevant outcomes in

monetary terms. In day to day use, cost benefit analysis is primarily
utilised to justify a particular health service program. Although it is difficult
to express all possible health and social benefits in financial terms.
 Cost benefit analysis help in taking technical decisions backed by
economic logic. The ultimate unit of measurement in this technique is
money value to society.

COST EFFECTIVENESS ANALYSIS (CEA)

Cost effectiveness analysis is a formal planning and evaluation technique
having both economic and technical components.
It involves organizing information so that the costs of alternatives and
there effectiveness in meeting a given objective can be compared systematically.
CEA involves three distinct sub-processes: (a) Developing comprehensive
cost stream data and analysis of cost of each alternative; (b) An analysis of
effectiveness of each alternative; (c) An analysis of the relationship between the
costs and effectiveness of each alternative.

Examples of Cost Effectiveness Analysis

(i) to compare two alternative strategies for child survival. Strategy A is a
preventive approach, say immunization. Strategy B is a curative approach,
say treatment of tuberculosis. We want to use the fixed budget approach.
In this scenario, the CEA would take the following form:
Alternative Health impact or
Resources or financial
health program, strategy or effectiveness in CE ratio
costs
activity terms of lines saved
Rs. 250
A Rs. 25,000 100 lives saved
per life
Rs. 1677
B Rs. 25,000 15 lives saved
per life
It is clear that alternative A is more cost effective than 'B'.
(ii) there are 3 subalternatives to implement the strategy alternative A
selected above. We wish to find which of the three subalternatives is most
cost effective. We want to use the fixed target approach. In this scenario,
the CEA would be on the following lines:

Approaches for Strategy 'A' Effectiveness Cost (lis.) CE Ratio

which was found cost effective

(a) Campaign 15000 Rs. 75000 Rs. 5 per

immunizations immunization
(b) MCH clinic 15000 Rs. 45000 Rs'. 3 per
immunizations immunization
(c) Mobile clinic 15000 Rs. 65000 Rs. 4.33 per
immunizations immunization

Budget
 The budget is a systematic economic plan for a specific period of time.
 It incorporates politically and technically determined appropriations
indicating in what way and for what purpose various health resources are
to be used.
 The next stage after budgeting is control on budget or budgetary control.
This involves designating the spending authority for delivering the health
program and ensuring that the budget is spent judiciously for various
aspects of the program.
 Health budgeting and program budgeting are essential components of the
Managerial Process for National Health Development (MPNHD).

Allocations
In Health Economics the term 'allocations for health care' at a given point
in time or over a period of time, refers to the distribution of resources, both in
monetary and non-monetary sense, within a program.
Health Financing
There are several macro and micro aspects of economics relevant to the
health sector. Out of these, the aspect of Financing of Health Care is particular ly
important.
Health financing, in general, refers to raising of resources to pay for goods
and services related to health.
Sources of health care financing :
(i) Public sources (Government sources)
(ii) Private sources (including non-government, corporate and private
bodies)
(iii) External cooperation or aid (bilateral or international)
(iv) Individual or household
(v) Mixed sources
Major problems in health financing
(i) lack of funds
(ii) unequal distribution of health finances
(iii) rising health costs
(iv) lack of coordination in health financing unite
(v) wastage and inefficiency in spending the funds or resources available.