Fundamentals of

Health Economics
Dr. Jonathan J.D Majok
MBBS, MSc
 Overview
• Introduction to Health Economics.
• Concepts of Supply, Demands and Markets.
• Health Systems Financing.
• Equity in Health Services.
Introduction to Health Economics

• What is economics?
• What is “Health”?
• What is “Health Economics”?
 Introduction to Health
Economics
• What is Economics:

• Economics is the study of how people allocate scarce

resources for production, distribution, and consumption,
both individually and collectively.
 Introduction to Health
Economics
• Economics is about:

• Limited resources
• Unlimited ‘needs’
• Choosing between which ‘needs’ we can afford given our
‘resources’.
 Introduction to Health
Economics
• Economics is about choice.
 Introduction to Health
Economics
• Economist view of the world:
• Pessimist: bottle ½ empty
• Optimist: bottle ½ full
• Economist: bottle ½ wasted
 Introduction to Health
Economics
• Concepts of Economy:
• Macroeconomics studies an overall economy on both a
national and international level.

• Microeconomics focuses on how individual consumers and

firms make decisions.
 Introduction to Health Economics

• Opportunity Cost: The value of forgone benefit which could be

obtained from a resource in its next-best alternative use.
• Investment: is the purchase of goods that are not consumed today
but are used in the future to generate wealth.
• Cost: is the measure of the alternative opportunities foregone in
the choice of one good or activity over others
• Efficiency : implies an economic state in which every resource is
optimally allocated to serve each individual or entity in the best
way while minimizing waste.
 Introduction to Health
Economics

• Gross Domestic Product (GDP): It represents the total

market value of all finished goods and services produced
in a country in a given year or any other period.
 Introduction to Health
Economics
• Capitalism: is defined as a system of production whereby
business owners (capitalists) produce goods for sale in
order to make a profit and not for personal consumption.
• Socialism: is defined as a system of production whereby
workers collectively own the business, the tools of
production, the finished product, and share the profits
 Introduction to Health
Economics
• Economics is concerned with…
• costs
• benefits
• choice
• efficiency
 Introduction to Health
Economics
• What is Health:

• Health is a state of complete physical, mental and social

well being and not merely absence of disease or infirmity.
 Introduction to Health
Economics
• Social determinants of health:
• Age, sex and ethnicity.
• Income and social status
• Stress – control over our life
• Early childhood development and education.
• Employment and work conditions.
• Diet and lifestyle choices.
Introduction to Health
Economics
 Introduction to Health
Economics
• Alma Ata Declaration:

• “ The main social target of governments and WHO in the

coming decades should be the attainment by all citizens
of the world by the year 2000 of a level of health that will
permit them to lead a socially and economically
productive life”
 Introduction to Health
Economics
The Alma Ata Declaration was based on the following
understandings
• 1. The importance of health as a fundamental human right that
should be achieved through collective action by societies and is a
responsibility of governments.
• 2. The unacceptability of the “gross” inequities in health status
especially those between poor and rich countries.
• 3. The understanding that good health for all will advance social
and economic development and world peace.
 Introduction to Health
Economics
• 4. The importance of people’s participation in health care
as both a right and duty.
• 5. The recognition that achieving health for all will require
coordinated effort from all sectors that have an impact on
health.
• 6. The acceptance of the inter-dependence between
countries and that the attainment of health by people in
any country directly concerns and benefits every other
country.
 Introduction to Health
Economics
• 7. The recognition that armaments and military conflicts
take away resources from achieving health for all and that
peace and disarmament will release resources for social
and economic development.
• 8. The recognition that primary health care should be
universally accessible in a manner the community and
country can afford and should bring health care as close
as possible to where people live and work and should
include “promotive, preventive, curative and
rehabilitative” services.
 Introduction to Health
Economics
• What is Health Economics:

• Health Economics is a branch of economics concerned

with issues related to efficiency, effectiveness, value and
behavior in the production and consumption of health and
healthcare.
 Introduction to Health
Economics
• Aims to understand the behavior of individuals, health
care providers, public and private organizations, and
governments in decision-making.
• Application of Economic Theories to better inform the
public and private sector on the most efficient, cost-
effective and equitable course of action.
• Obtain maximum value for money by ensuring not just the
clinical effectiveness, but also the cost-effectiveness of
healthcare provision.
 Introduction to Health
Economics
• Why is Health Economics Important?
• Provides useful insights into how health care can be organized and financed.
• Provide a framework for open and fair decisions taken in the context of limited
health care resources, empowered consumer and an increasing array of
intervention options.
• Offers a framework for measuring, valuing, and comparing the costs (negative
consequences) and benefits (positive consequences) of different health care
interventions.
• Offers alternative ways of production and delivery of Health Care.
• Planning, Budgeting and Monitoring of Health Care.
Introduction to Health
Economics
Introduction to Health
Economics
Demand, Need and Use

Need

Dema Suppl
nd y
 Need, Demand and Utilization
• Unfelt Need (Asymptomatic diseases): diseases that are
not perceived by the individual.
• Felt Need: subjective need for health.
• Unexpressed Need: needs that are not expressed to
formal careers.
• Expressed need (demand for care) : needs that lead to
action in search of care.
Need, Demand and Utilization

Demand
Felt but
Unexpressed
Unfelt Need

Healthy
Need, Demand and Utilization
Health

Unfelt
Felt Need
Need

Expressed
Unexpress
Need Screening
ed Need
(Demand)

Met Need Unmet

(Use) Need
 Need, Demand and Utilization
• Factors affecting the demand for a good:
• Availability of substitute goods.
• Necessity
• Percentage of income.
• Who pays.
• Brand loyalty.
 Need, Demand and Utilization
• What differentiates demand for healthcare from the
conventional economic model of demand:
• Demand for healthcare is a derived demand.
• Demand for healthcare is often for a single one-off intervention.
• Demand for healthcare is strongly influenced by medical
doctors.
• Healthcare expenses are usually covered from a third party.
• Patients’ sovereignty is limited
 Need, Demand and Utilization

• Health Care Utilization refers to the use of health care

services.
• People use health care for many reasons including
preventing and curing health problems, promoting
maintenance of health and well-being, or obtaining
information about their health status and prognosis.
 Need, Demand and Utilization
• The purpose of health care is to help each person achieve
four major goals:
• Prevention of premature death and disability.
• Maintenance and enhancement of quality of life.
• Personal growth and development.
• A good death.
 Need, Demand and Utilization
• Health-care utilization can be:

• Appropriate or inappropriate.

• High or low quality.

• High or low cost.

 Access to Health Services

• Gaining entry into the health-care system.

• Receive needed services.
• Finding providers who meet the needs of patients.
• Has the ability to pay for the service.
Access to Health Services
Approachabi
lity

Affordabilit
y Acce Acceptability
ss

Availability
 Access to Health Services
• Other barriers to health services access:
• Inadequate transportation.
• Language barriers.
• Excessive waiting times.
• Racial and cultural disparities.
Access to Health Services
Access to Health Services
 Health Care Financing

• Health Care Financing is system in which revenues are

collected from primary and secondary sources to purchase
goods and services from public and private providers for
identified needs of the population.
 Health Care Financing
• Objectives of Health Care Financing:
1. To ensure equity and efficiency in use of healthcare
spending.
2. To ensure the affordability of high quality care.
3. To ensure the availability of essential healthcare goods.
4. To ensure the financial protection of healthcare seekers.
 Health Care Financing
• Sources of the funds:

• Taxation.
• Health insurances.
• Out of Pocket (OPP).
• Donor funding.
 Tax-based Health Systems
• Taxes are “compulsory payments exacted by the state, and
do not confer any direct individual entitlement to specific
goods or services in return’’.
• Taxation is governed by legislations that defines in
advance the basis of individual tax liability.
• Taxes are the most important source of governments
revenues.
 Tax-based Health Systems
• Types of taxes:

1. Direct taxes: e.g. personal income tax, Social insurance

contributions.
2. Indirect taxes: taxes on businesses, Value Added Tax
(VAT) & Earmarked taxations.
 Tax-based Health Systems
• Distributive incidence of a tax: how is the economic burden
of a tax is distributed between the rich and the poor?
1. Proportional Tax: the percentage of household income
devoted to taxes is the same at all income levels.
2. Progressive Tax: the percentage of household income
devoted to taxes is higher as income rises.
3. Regressive Tax: the percentage of household income
devoted to taxes is higher at low levels of income
 Tax-based Health Systems
• Characteristics of Tax-based Health Systems:
• The Health System is funded through taxation.
• Universal and free at the point of use.
• Health care is provided by public providers.
• Publicly administered and usually decentralized.
 Tax-based Health Systems
Notable countries using tax-based health financing
United Kingdom
Sweden
Norway
Australia
New Zealand
Canada
Argentine
Botswana
 Tax-based Health Systems

• Most countries using this method financing had achieved

Universal Health Coverage (UHC).
 Health Insurances
• Health insurance is a type of insurance coverage that
typically pays for medical, surgical, prescription drug and
sometimes dental expenses incurred by the insured.
• Health insurance can reimburse the insured for expenses
incurred from illness or injury, or pay the care provider
directly.
• The insurer can also be the provider of the health
services.
 Health Insurances

Pooling
Resources
Insura
nce
Risk Sharing
 Types of Health Insurances
• Public Insurance:
• Also known as social insurance.
• Government can be both financier and provider.
• It is complemented by taxation.
• It is compulsory and linked with employment and the
workplace.
 Types of Health Insurances
• Advantages:
• Spending per capita on health services is higher than in tax-based
systems.
• Equitable allocation of resources (access to services is the same
for the rich and poor).
• ‘Forced’ solidarity through the inability to drop out.
• Disadvantages:
• Moral Hazard – the insured tend to use health services extensively.
 Types of Health Insurances
• Private Health Insurance:
• Refers to plans provided by private companies, and are
often provided by an employer.
• It can be purchased on a group basis or by individual
consumers.
• The costs of those plans vary greatly depending on the
choice of the services.
 Types of Health Insurances
• Disadvantages:
• Premiums must be sufficient to pay not only possible claims,
but also administration costs and profit margins.
• Does not necessarily promote social values (such as equity of
access).
• Disease or service exclusion lists.
• Advantages:
• You choose your health provider.
 Types of Health Insurances
• Community Insurance:
• It is a voluntary health insurance that target the informal
sector or rural areas where people are not covered.
• Popular in low income countries.
• The scheme of pooling resources is organized either by the
Government or NGO’s.
• Had been promoted as a form of financial protection for the
vulnerable population.
 Out of Pocket Payments
• Out of Pocket Payments (OPP) are payments made directly
by a patient to a healthcare provider. They include:
1. Direct private payments e.g. to private consultation with
doctors, payments for over the counter drugs.
2. Co-payments: are flat rate payments made by covered
users of health services as a contribution to their cost.
3. User fees: are flat amount payments made by covered
users of health services as a contribution to their cost.
 Out of Pocket Payments
4. Informal payments: also called unofficial payments or
envelope payments or under-the table payments or
gratitude payments or bribe payments.
These are additional payments in-kind or cash (besides
official fees) made by users mainly to healthcare workers, to
ensure prompt attention or a minimum standard of care.
 Donor Aid
• Aid is the transfer of capital, good or services from a country or
international organization for the benefit of a recipient country or it’s
population.
• International Aid is directed towards reducing the burden of certain
diseases and subsequently increase the life expectancy.
• Majority of aid is provided through the Official Development Assistance,
other ways includes private voluntary assistance and the Development
Assistant Committee of OECD.
• The amount of aid going to low income countries is decreasing and for
most donor countries is well below the 0.15-0.2% of national income target.
Donor Funding
Health Care Financing
 Health Care Financing
• Ultimately health financing for the Health System
originates mostly from the household.
• It represents a flow of funds from patients to health care
providers in exchange for services.
• A good healthcare financing system must be able to
mobilize resources for healthcare.
 Health Care Financing

• Which system is South Sudan using???

 Paying Health Care Providers
• Health workers wages is crucial to ensure availability,
accessibility, affordability, acceptability and quality of
health care services.
• The way health workers are paid makes a major difference
to what they deliver.
• The remuneration of health workers will depend largely
on the medical hierarchy.
Paying Health Care Providers
Third
Party
Payers

Health
Patients/
Care
Users
Providers
 Methods of Payment
• Prospective Payment Systems (PPS):
• prospective (or fixed) reimbursement is based on a predetermined payment
regardless of the intensity of the actual service provided.
1. Capitation
2. Capitation plus bonus
3. Per diem payments
4. Diagnosis Related Groups
5. Salaries
6. Global and clinical budgets
 Methods of Payment
• Retrospective payment systems(RPS):
• Retrospective payments for healthcare providers are based on
their actual actions and charges. The provider (hospital or
physician) treats a patient and submits an itemized bill to the
purchaser detailing the services rendered.
1. FFS payments for physicians.
2. FFS payments for hospitals.
3. Retrospective budgets for hospitals.
 Methods of Payment
• Fee-For-Service (FFS) payment:
• This is the payment of a price for each service provided
(e.g. consultation, surgical procedure, diagnostic test).
• Allocation of risk:
• The payer is at full risk for the number and type of
services provided (supplier induced demand).
• The provider bears little or no financial risk.
 Methods of Payment
• Paying physicians per time (Salary):
• This is an agreed amount of money in return for working a given
amount of hours.
• Salaries aggregate payment for all services delivered during a month
or year into one lump sum.
• Allocation of risk:
• The payer bears little financial risk.
• Salaried healthcare workers bear the risk of not getting extra pay for
extra hour work.
 Methods of Payment
• Paying physicians per patient (Capitation payments):
• The provider agrees to deliver a specified list of services to a
predetermined group (list) of individuals for a fixed amount per
person (per capita) per time period.
• Allocation of risk:
• The purchaser bears the risk for the number of individuals enlisted
in GP lists.
• The General Practitioner is at full risk for the quantity and type of
services provided to his enlisted group of patients.
 Methods of Payment
• Paying physicians per episode of illness:
• The physician receives one sum payment for all services provided during
one illness (e.g. surgeons receive one payment that covers both surgery
itself and postoperative care; obstetricians receive one sum payment for
delivery pre-, and post-natal care).
• Allocation of risk:
• The purchaser is at full risk for the number of surgical procedures
delivered.
• The provider is only at risk for the number of preoperative or
postoperative visits.
 Methods of Payment
• Paying hospitals per day (per diem payment):
• The hospital receives a lump sum for each day the patient is in the
hospital, regardless of the number or type of services provided
during hospitalization.
• Allocation of risk:
• The purchaser continues to be at risk for the number of admissions
and hospitalization days.
• The hospital is at risk for the number of services performed on any
given.
 Methods of Payment
• Paying hospitals per procedure (Fee-For-Service (FFS)
hospital payment):
• This is the payment of a price for each service provided during
hospitalization. (e.g. surgical procedure, diagnostic tests).
• Allocation of risk:
• The payer is at full risk for the number of admissions, the number
and type of services provided during hospitalization (supplier
induced demand).
• The provider bears little financial risk.
 Methods of Payment
• Paying hospitals per hospital episode [Diagnosis Related
Groups (DRGs)]:
• The hospital receives a lump sum for each hospital admission, with
the size of the payment depending on the patient’s diagnosis (and in
some cases severity).
• Allocation of risk:
• The payer is at risk for the number of admissions.
• The provider is at risk for the length of stay and the resources used
during the hospital stay.
 Methods of Payment
• Paying hospitals per time (Global budgets):
• The hospital receives a fixed payment for all services
provided within a financial year.
• Allocation of risk:
• The purchaser bears little financial risk.
• The provider is in full risk in terms of number of hospital
admissions and services provided within 1 year.