An introduction to health economics

Laurens Niëns

 

The financial crisis has left the world economy in dire straits. Governments grow worried as decreasing demand causes cutbacks in production, massive layoffs and ever increasing budget shortages. In this line of events healthcare is an exception, i.e. in healthcare it is the ever increasing demand for health services that causes politicians headaches. How to keep healthcare systems affordable in societies that grow old? What to include in insurance benefit packages? Which healthcare programmes to implement? What constitutes a fair system of financing healthcare?

This article is about the discipline in which these questions are studied: Health Economics. Broadly speaking, the latter is a branch of economics concerned with issues related to scarcity in the allocation of health and healthcare. A general introduction, in what follows a number of issues studied, as well as some of the techniques used by health economists are looked at more closely.

Distribution of scarce resources

Healthcare plays an important role in the economies of the Western world. In the member states of the Organization for Economic Cooperation and Development (OECD) healthcare accounts, on average, for approximately 9% of the Gross Domestic Product (GDP), e.g. a good € 50 billion a year in The Netherlands. The USA, spending 15% of GDP on healthcare is the strongest outlier. Because resources are scarce, how to spend this money wisely is an ever returning question. Indeed, Hunter (1997) hits the nail on its head when he writes:  the demand, if not need for healthcare seems likely to forever outstrip supply. Continuous advances in medicine have heightened popular expectations of health and of what healthcare services can do to alleviate suffering. In short, healthcare services, and those who provide them, are victims of their own success.

This situation calls for hard choices. Should we spend on a pacemaker for the 85 year old, or on treatment for the 16 year old who suffered burning wounds? Should we direct many resources to treat a rare disease from which a few benefit much, or is it better to implement policies which benefit many, although just a little? What is fair? Although everyone has a right to healthcare, regarding the first question most people agree that it is justified to spend more on an injured child than on an old person who’s had 85 healthy life years. However, what if this 85 year old is your grandma who, before her heart attack, was perfectly healthy and enjoying life? In reality, what may seem logical at a macro level can have grim consequences at the micro level.  

 

Can we express the value of life in monetary terms?

 

In trying to shed some light on these, often ethical, issues health economists have developed several tools.  

An important analysis carried out in the field of Health Economics is the so called Health Technology Assessment (HTA). A HTA typically focuses on the economic evaluation of a healthcare programme. In comparing the latter’s costs with the outcomes, information is generated in which choices about implementing a health procedure, service or programme can be grounded.  

For many, viewing healthcare as any other commodity is still a bridge too far. How can you value and make choices about people’s health based upon simple economic principles? Isn’t it unethical to try to express the value of life in monetary terms?  

Although understandable at first, the scarcity of recourses in healthcare prompts us to look at this issue from a somewhat different perspective. The question we have to ask ourselves is not what the costs of a certain procedure are. Rather, we have to decide if a health procedure, service or programme is worth doing compared with other things we could do with the same resources. Economists talk about opportunity costs, i.e. spending on X takes away the opportunity to spend on Y.   Three types of HTA studies can help us in making these decisions. In increasing level of complexity these are Cost Effectiveness Analysis (CEA), Cost Utility Analysis (CUA) and Cost-Benefit Analysis (CBA). They differ mostly in how the consequences of the healthcare programmes compared are valued. In CEA the cost per effect is calculated, e.g. various cancer screening programmes are compared on the cost per case detected. In CUA, the costs of healthcare interventions are set against the utility people derive from these interventions. As such, CUA focuses particular attention on the quality of the health outcome. Finally, the broadest form of analysis, CBA, tries to express all costs and benefits in monetary terms.  

In sum, HTA-studies help us ensure that those health programs which resort the most effect/utility/benefits are implemented.

Social security

Besides looking at which programmes provide the best value for money, health economists also study the system of health financing as a whole. In the OECD healthcare is mainly paid for through various systems and levels of national health insurance. However, as people themselves do not feel the cost of healthcare (their insurer pays), insurance changes people’s behaviour, i.e. people are inclined to use more healthcare services than strictly necessary. This phenomenon, known as moral hazard, is partly responsible for the ever increasing demand for health services. Other causes are populations growing old and the development of new techniques and medicines. Health economists try to devise ways in which these undesirable consequences can be mitigated. The newly introduced health insurance scheme in The Netherlands is a good example. In an effort to curb increasing healthcare costs, the new system provides financial incentives for healthcare providers and users alike to act in a more cost-conscious manner. Although the final verdict on this insurance scheme is not out yet, all stakeholders agree ever increasing healthcare costs, in the long run, are unaffordable. Moreover, in light of scarce resources, optimal use of these resources needs to be ensured and (regulated) competition can help to do so.  

 

Again the concept of opportunity costs is important, i.e. money spent on healthcare cannot be spent on education, infrastructure and social welfare programmes. In fact, compared with healthcare services the latter are stronger determinants of levels of population health. When health issues do occur, a healthcare system acts as a final safety net. As Hunter (1997) states:  The best estimates are that health services affect about 10% of the usual indices for measuring health: infant mortality, absences through sickness and adult mortality. The remaining 90% are determined by factors over which doctors have little or no control: individual lifestyle, social conditions and the physical environment. 

Health economists also study those factors over which doctors have no control, e.g. the private and social causes of health-affecting behaviour such as smoking. Furthermore, the actual use of healthcare and its distribution are subject to study. It is well known people less well off suffer more health problems than people higher on the social ladder. Consequently, the first group uses more health services. However, when we standardize healthcare use on the basis of need, in about half of the OECD countries less well off people still see too little specialists. In other words, in these countries, when corrected for the need of specialist services, the chances that better of people see a specialist are higher than those at the bottom of the social ladder. This inequity in the use of healthcare services is studied by health economists as well.  

Combating poverty

So far the focus has been on the developed world. However, much of these issues are apparent in developing countries as well. Health economists more and more are involved in calculating the effects of implementing various healthcare schemes in developing countries. Often governments, with a certain amount of money, want to know which programme buys them the most health. Health economists can calculate how to best distribute resources to reach this end, by assembling regional databases on the costs of various health interventions, their impact on population health and their cost-effectiveness.  

In the developing world, the majority of the population does not have health insurance; implying healthcare is paid for out-of-pocket at the time of illness. Without insurance, the impact of disease on family income often is catastrophic, i.e. people need to spend a large portion of family income on healthcare. Often, families are being pushed into poverty solely because of healthcare costs. In studying the effects of out-of-pocket payments for healthcare in eleven Asian countries, Van Doorslaer et al. (2006) calculated that an additional 2.7% of the population under study (78 million people) was left with less than $1 a day because of these costs.  

Besides quantifying the economic consequences of disease in developing countries, health economists try to contribute to possible solutions as well. Setting up schemes that provide the poor with financial protection against healthcare costs is an example. Indeed, the success of so called Community Based Health Insurance (CBHI) is drawing interest from various governments. How to set up CBHI, which covers basic healthcare services for relatively small groups of (often illiterate) people, is also studied by health economists. As health and development are closely linked, health economists have an important role to play in fostering development as well.  

Conclusion

In both the developed and developing world many challenges in the economics of health and healthcare remain. Challenges in which, Health Economics will continue to be an ever more important branch of study.  

About the author

Laurens Niëns finished master programs in Public Administration and Health Economics, Policy and Law. He now works as a researcher for the Institute of Medical Technology Assessment (iMTA) at the Erasmus University Medical Center in Rotterdam.

Further reading

•  The WHO has a program on Health and development. 

References

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Photo by Gunnar Ries, shared under Creative Common License