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Economics is the
social science
that analyzes the production, distribution and
consumption of goods and services. Health economics involves the application of various
microeconomics tools such as demand and cost theory to health issues and problems. The health
economics is to promote a better understanding of the economic aspects of health care problems
so that corrective health policies can be designed and proposed and health economics is also
essential for conducting health economic analyses.
At the time of the creation of the World Health Organization (WHO), in 1948, Health was
defined as being a state of complete physical, mental, and social well-being and not merely the
absence of disease or infirmity.
The Economist's Dictionary of Economics defines economics as "The study of the production,
distribution and consumption of wealth in human society."
Economics enquires in to the nature and causes of the wealth of nations. Adam Smith
Three fundamental elements of economics are:
Scarcity: needs, wants and demands are greater than resources available to meet them
Choosing: analyses and assists decision making
Alternative uses: opportunity costs
Health economics is a branch of economics concerned with issues related to scarcity in the
allocation of health and health care. It is the study of how resources are allocated to and within
the market for health care. It combines the study of health as it relates to economics and the
study of economics as it relates to health.
There are many conditions that may be different for health-related goods and services compared
to other products. These include:

Information: Consumers may not be informed about * the nature and quality of health
care being purchased.
Uncertainty: Randomness in the cause and timing of ill health.
Barriers to competition: Limitations may be placed on health care labor, the use of
hospitals, or other resources.

Externalities: One persons or firms action can affect those of a third party separately
from financial effects in the marketplace.


General definition of health care economics is as follows: .The study of how scarce resources are
allocated among alternative uses for the care of sickness and the promotion, maintenance and
improvement of health, including the study of how healthcare and health-related services, their
costs and benefits, and health itself are distributed among individuals and groups in society.
Health economics studies the supply and demand of health care resources and the impact of
health care resources on a population.
[Mosby medical encyclopedia, 1992)
Health economics is the discipline that determines the price and the quantity of limited financial
and nonfinancial resources devoted to the care of the sick and promotion of health.
Klarman, H.E
Health economics can, broadly, be defined as the application of the theories, concepts and
techniques of economics to the health sector (Lee and Mills, 1983).
Health economics, which is a branch of economics concerned with issues, related to scarcity in
the health markets. The five health markets typically analyzed are:

Healthcare Financing market

Physician services market
Institutional services market
Input factors market
Professional education market

Topics related to various aspects of health economics include the meaning and measurement of
health status, the production of health and health care, the demand for health and health services,
health economic evaluation, health insurance, the analysis of health care markets, health care
financing, and hospital economics.
In every country, health economics plays, or should play, an important role in critical policy and
operational decisions,
These decisions include:

The appropriate role of government, markets and the private sector in the health sector.
Resource allocation and mobilization functions critical to addressing equity and
efficiency of public spending.

Resource transfer mechanisms to hospitals and health care providers and the incentive
systems that underlie them.
Organizational structures at the system level and the linkages between the levels.
Organizational structures at the facility level.
Mechanisms to change behaviors of the population at large and health system providers
in order to achieve better health.

Health economists can contribute to better decision-making. Long term capacity building efforts,
through degree programs in universities, should develop the human capital needed in health
economics to address needs.
It is a broad sub discipline of economics.
Overlaps with a number of topics, both within and apart from health and medicine.
It is concerned with maximizing benefits within available resources.
Encompasses more than economic evaluation alone.
It interacts with many other disciplines like finance, insurance, education, law, geography,
information technology, business management etc.
Has significant role in health care decision making at policy and clinical level.
Has the objective of achieving efficiency and equity in health care services.
It introduces to the application of economic thinking to the analysis of health policy and health
Organization and financing of health care
Priority setting and resource allocation
Economic evaluation of alternative ways of providing health care
1. Health Economics lies at the interface of economics and medicine and applies the discipline
of economics to the topic of health
2. There is rapid growth in health expenditure:

demographic changes
technological advance

changing expectations

3. Resources available to health care are scarce and finite. A choice must be made about which
resources to use for which activities. With scarcity, what is required is an efficient allocation or
decision making system to determine how much of which kinds of health care is provided to
different individuals and it is the role of economics.
4. Choices must be made as to what health care should be provided, how it should be provided,
in what quantities and how it might be distributed
5. Health economics provides a way of thinking and a set of techniques which assists in decision
making in health care sector which promotes efficiency and equity. Economy is producing
exactly the quantity and type of health care that the population wants (allocative efficiency) and
is producing that health care for the lowest possible cost (Productive efficiency).
6. Health economics is about maximizing social benefits subjected to the constraint
imposed by resource availability
7. Most health care related issues have an economic dimension to them. These include
medical insurance coverage, the overall demand for health care services, prescription of drug
prices etc. The most important aspect is the proper allocation of resources, which is perhaps the
cause of all problems in health care.
The scope of health economics is encapsulated by Alan William's "plumbing diagram" dividing
the discipline into eight distinct topics:
The scope of health economics includes the following:

What influences health? (Other than health care);

What is health and what is its value?;
The demand for health care;
The supply of health care;
Microeconomic evaluation at treatment level;
Market equilibrium; and price mechanism;
Evaluation at whole system level; and
Planning, budgeting and monitoring mechanisms

Indicators of Health Status

Birth rate: It means number of live births per 1000 people in a year. In western countries the
birth rate is very low. Generally, higher the birth rate higher will be the health problems.
Death rate: It means number of deaths per thousand populations in a year. It is very high in
Asian countries. This is due to lack of medical facilities. Death is high also because of low
literacy rate.
Infant mortality rate: Number of deaths of children less than 1 year of age per thousand live
births is called Infant Mortality Rate. In other words, it refers to number of children die before
their first birth day, per thousand populations in a year. This is mainly because of lack of
maternal education and unhygienic environment.
Total fertility rate: It means the number of children delivered by a woman.
Life expectancy: It means longevity of life or the number of years a person can live. Due to
decline in birth rate, death rate, infant mortality rate and fertility rate, life expectancy has gone
up from 37.1 years to 63 years in 2001, in India.


Major areas or applications of health economics are as under:
l. At family level
At family level, aim of health economics is to help its members in spending their money
effectively and efficiently for safe guarding their health and welfare. There are number of ways
by which a family can practice health economics.
(a) The family takes advantage of (and even demands) the routine immunization services.
(b) They scrupulously follow healthy life styles by avoiding smoking, drinking, animal fats,
excess salt, sugar preparations, and junk foods, and indulge in regular physical activities,
meditation and diversional pursuits.
(c) They obtain health insurance for themselves.
(d) When they feel ill, they at once seek consultation from a qualified medical practitioner.
2. Maximum Utilization of the Limited Resources

The financial resources for health care are limited. They should therefore be used in the most
profitable way for the control of diseases and promotion of health. Following help in the
optimum use of health investment:

Prioritization: The health administrator studies the magnitude, severity, disability and
prevents ability of the prevalent diseases in the community to determine which of them need to
be controlled on a priority basis. He then allocates a lions share of available budget for tackling

Geographic urgency: The health authorities determine which particular areas within the
state or a district need urgent medical and health services. Funds are preferentially allotted for
health care in these areas.

Planning: At the stage of planning for a health program, the planners choose the most
effective course of action. For this purpose they carry out the analyses of cost-benefit, costeffective, cost-utility, etc. Based on the result of these they select the best of the available

Administrative streamlining: For effective use of money, the health care provider
should be knowledgeable about the principles of financial management. He must enforce
interdepartmental coordination. Also he must ensure that duplication of work does not occur.
Consumers demands and satisfaction: The health administrator should assess peoples
felt health needs and demands. He must make budgetary allowance for satisfying these on a
priority basis. Health economics focuses on the care provider to spend money in such a way that
the needy who receive the services are satisfied with them. People in general should believe that
the government is using the taxpayers money judiciously.

Supplier induced demand: Manufacturers of health goods, the condoms, oral

rehydration salt packets, iodized salt, rejuvenating potions, Cure-all elixirs, etc., and private
providers of health services. The abortion operations, fertility regulation, prenatal sex
determinations, etc., often boost the demand for their goods/services through publicity or other
means. The health authorities should differentiate between desirable and undesirable
goods/services and curb the later through education and/or legislation.
3. Financing in Health care Services
Financing in health care services refer to the amount of money available for health care and
related activities the medical education, health research, population control, nutrition promotion,
Some of the other sources of health financing are the following:

(a) External aid/loan: International agencies and banks have, from time to time, provided
grants and interest free loans for health
(b) Health insurance: Both private companies and the government run health insurance
schemes. Private health insurance is not yet popular in India. The major schemes that the
government runs are Employees State Insurance Scheme and the Central Government
Health Scheme that benefit industrial workers and government employees respectively.
(c) Health financing by corporate bodies, voluntary agencies and philanthropic
individuals. Many industrial establishments provide free health care for their better paid
employees. Rotary Club, Lions Club, Family Planning Association of India (FPAI),
National Tuberculosis Association (NTA), India Red Cross Society (IRCS), among
others, run free clinics, maternity centers and hospitals. Also they conduct periodic
diagnostic, blood-donation, cataract and sterilization camps.
(d) Users fee: The consumers pay for health care. Many prefer to obtain paid treatment and
hospitalization from private dispensaries and nursing homes.
The role of health in economic development is analyzed via two channels:

The direct labor productivity effect and

The indirect incentive effect.

The incentive effect is borne of the theoretical literature, and individuals who are healthier
and have a greater life expectancy will have the incentive to invest in education as the time
horizon over which returns can be earned is extended. Education is the driver of economic
growth, and thus health plays an indirect role. Accounting for the simultaneous determination
of the key variables: growth, education and fertility, the results show that the indirect effect
of health is positive and significant.
Economic development is one of the main contributors of the health status of the people.
Health economics combines the economics perspective of production with the social
objectives of health sciences. The concepts of this new discipline are common in the
academic health field and in the professional literature, thus, health professionals adopt and
use regularly these terms.
Health economics in nursing is extremely important in patient care. It can explain noncompliance with meds (too expensive), nutrition problems, and many other factors you will
encounter when dealing with and assessing your patient.


Economic evaluation is the comparative analysis of alternative courses of action in terms of
both their costs and consequences in order to assist policy decisions (Drummond et al, 1997).
Economic evaluation is not choosing the cheapest. Economic evaluation is used to ensure that
limited resources are allocated as efficiently as possible. Society may have other goals when
allocating resources: equity or ethical issues. There are many methods to evaluate for health care

Marginal Analysis
Cost minimization Analysis (CMA)
Cost-effectiveness Analysis (CEA)
Cost-utility Analysis (CUA)
Cost-benefit Analysis (CBA)

This is one of the simplest methods of micro economic evaluation. In this method there is no
need to know the total exact costs or benefits of the various services or treatments. It involves a
comparison of the marginal costs and benefits of the alternative services, and it leaves much to
the judgements of the decision maker. It provides estimates of the implications of redeploying
resources within, to, or from a programme where alternative patterns of care are possible. If there
is no budget restraint then a programme should be expanded or contracted to the where marginal
benefits equals marginal cost; if there is a budget constraint, then all programmes should operate
at a level whereby the ratio of marginal benefit to marginal cost is the same for all programmes
The technique identifies the least cost intervention and is based on prior epidemiological
findings .e.g. if reduction of disability is achieved to the same degree by two intervention than
which is the least cost intervention to achieve reduction of disability
Cost effectiveness analysis (CEA) measures outcomes in 'natural units', such as mmHg,
symptom free days, life years gained. 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 their effectiveness in meeting a given
objective can be compared systematically. The main aim of cost- effectiveness analysis is how
at least cost to meet a particular objective? and is labeled as X- efficiency by economists. Or
given a fixed budget to meet a particular objective, how best to deploy this budget? In order to
answer these questions one has to define:

The objective
The possible options
The effects and relevant costs of each possible options.

Example of cost effectiveness analysis

Cost effectiveness can be expressed in terms of the total cost of each option, or cost per unit of
output of the option, or the number of units of output obtainable for this budget for each of the
Cost Utility analysis is a type of economic evaluation that compares the degree to which quality
of life is improved per unit of money spent. It is a form of cost effectiveness analysis but it
measures effect of the project or programme in terms of utilities. Like cost effectiveness analysis
it can focus either on minimizing cost or maximizing effects. A quality of life index is used to
compare the interventions. Results are expressed in terms of Quality Adjusted Life Years or
QALYs per monetary unit. It permits wide range of options. This measures allocates a quality of
life value between 1(perfect health) and 0 (death) and combines quantity and quality of life to
derive the quality adjusted life years {QALY}. QALY is important in representing the value of a
treatment on the health status.
In cost benefit analysis (CBA) costs and benefits are both valued in cash terms. Cost benefit
analysis asks the question is the treatment valuable It investigates whether the benefit of a
project or programme exceeds costs. It involves identifying measuring and valuing all relevant
costs and benefits over an appropriate time period. In cost benefit analysis objectives can be
questioned. It values both costs and benefits in monetary terms and is expressed by benefit/cost
ratio i.e. benefits divided by costs. If the cost-benefit ratio is more than one, the
project/programme is worthwhile. It also helps to answer the question, how to maximise the
benefit from available resources? which is labelled as allocative efficiency by economists.
The most commonly used techniques of economic evaluation are cost benefit and cost
effectiveness analysis


Technical problem due to lack of information and the shortcoming of units of effect.
Efficient is not always sufficient as the sole criterion for decision making. Final approach
which is sometimes classed an economic evaluation is a cost of illness study.
It is not a true economic evaluation as it does not compare the costs and outcomes of alternative
courses of action. Instead, it attempts to measure all the costs associated with a particular disease
or condition. These will include
Direct costs; (where money actually changes hands, e.g. health service use, patient co-payments
and out of pocket expenses).
Indirect costs: (the value of lost productivity from time off work due to illness).
Intangible costs: (the 'disvalue' to an individual of pain and suffering).
INTRODUCTION; Over all development takes place in a healthy environment. Both the health
and illness of the individual is depended upon the environment in which the individual live in.
health care providers play a major role in an individuals health and illness.

Environment refers to the sum total of conditions which surround a man at a given point in the
space and time.


Comprehensive health environment encompass four areas of aspect like:

Health promotion
Prevention of disease and injury
Diagnosis and treatment of disease and injury


Health care services are classified into three levels: primary, secondary and tertiary. The trends
towards holistic care i.e. care of the entire person, including physiological, psychological, social,
intellectual and spiritual aspects.
1. Primary care: the major purposes of primary care are to promote and prevent illness or
disability. Promotion of wellness is mainly through regular exercise, reducing fat in the
diet i.e. diet control, reducing pollution etc.
2. Secondary care: services within the realm of secondary care include diagnosis and
treatment which occur after the client exhibit symptoms of illness.
3. Tertiary care: restoring an individual to the state of health that existed before the
development of an illness is the purpose of tertiary care.
Areas of health care environment are the areas through which health care services are provided
and they are
Physicians office :

Physicians either have their own offices or work with several other physicians in a group
of practices.

Physicians are mainly concerned with the diagnosis and therapy pertaining to the
patients immediate illness or injury.

Hospitals :

Hospitals are the institution through which the restoration care to the ill and injured
traditionally has been provided.

They vary with size.

They can be classified based on its ownership.i.e. Governmental and nongovernmental

Hospitals also are classified by the services they provide. A general hospitals admits
patients requiring a variety of facilities including medical, surgical, obstetrics, pediatric
and psychiatry services. Other hospitals offer only specialty services such as psychiatry
or pediatric care.

Hospitals also provide health related research and teaching. Hospital personnel conduct
research and educational programs or they may provide resources for such personnel as
university teachers to carry out research and teaching responsibilities.

Daycare Centre:

Daycare centers are either attached to hospitals or independently to provide health care
services during day care services.

These centers have two advantages: they permit the patients to continue to line at home
while obtaining needed health care, and free costly hospital beds for seriously ill patients.

Nursing homes:

Many nursing homes are owned privately by individuals or group of individuals.

They provide long term care.

Rehabilitation centers:

Rehabilitation centers often exist as departments with hospitals and provide services to
patients admitted to the hospitals and to patients who come to the centers on an
appointment basis. These centers often combine of physical therapist, occupational
therapist, social worker and nursing personnel.

Community health centers:

Community health clinic provides medical, dental, nursing, counseling, legal and other
social services.

The often provide services to minority and low income groups and usually are available
free of charge or for a minimal fee.

Nurses provide services like immunization, screening test and home/ school visits to
provide counseling and health education.

Essential environmental health standards in health care contain guidelines for setting standards of
safety conditions to provide adequate health care.
develop specific national standards that are relevant to various health-care settings in
different contexts
support the application of national standards and set specific targets in health-care
assess the situation regarding environmental health in existing health-care settings to
evaluate the extent to which they may fall short of national plans and local targets
plan and carry out the improvements that are required
ensure that the construction of new health-care settings is of acceptable quality
prepare and implement comprehensive and realistic action plans so that acceptable
conditions are achieved and maintained.
These guidelines deal specifically with water supply (water quality, quantity and access), excreta
disposal, drainage, health-care waste management, cleaning and laundry, food storage and
preparation, control of vector-borne disease, building design (including ventilation), construction
and management, and hygiene promotion.

Disease risks and preventive measures in health-care settings

Steps in establishing and managing appropriate standards at national, district

and local levels

Roles and responsibilities for implementing guidelines and standards for

environmental health in health-care settings

Essential temporary measures required to protect health

Provide safe drinking-water from a protected groundwater source (spring, well or

borehole), or from a treated supply, and keep it safe until it is drunk or used. Untreated
water from unprotected sources can be made safer by simple means such as boiling or
filtering and disinfection.

Provide water for hand washing after going to the toilet and before handling food, before and
after performing health care. This may be done using simple and economical equipment, such as
a pitcher of water, a basin and soap, or wood ash in some settings.
Provide basic sanitation facilities that enable patients, staff and carers to go to the toilet without
contaminating the health-care setting or resources such as water supplies. This may entail
measures as basic as providing simple pit latrines with reasonable privacy.
Note that the risk of transmission of soil-based helminths is increased with the use of defecation
fields. The use of shoes or sandals provides protection from hookworm infections.

Provide safe health-care waste management facilities to safely contain the amount of infectious
waste produced. This will require the presence of colour-coded containers in all rooms where
wastes are generated.
Provide cleaning facilities that enable staff to routinely clean surfaces and fittings to ensure that
the health-care environment is visibly clean and free from dust and soil. Approximately 90% of
microorganisms are present within visible dirt; the purpose of cleaning is to eliminate this dirt.
Ensure that eating utensils are washed immediately after use. The sooner utensils are cleaned
the easier they are to wash. Hot water and detergent, and drying on a stand are required.
Reduce the population density of disease vectors. Proper waste disposal, food hygiene,
wastewater drainage, and a clean environment are key activities for controlling the presence of
Provide safe movement of air into buildings to ensure that indoor air is healthy and safe for
breathing. This is particularly important if health care is being provided for people with acute
respiratory diseases.
Provide information about, and implement hygiene promotion so that staff, patients and carers
are informed about essential behaviours for limiting disease transmission in health-care settings
and at home.