INTRODUCTION

In todays healthcare environment, where financial realities play an important role in health services
decision making, it is vital that managers at all levels understand the basic concepts of healthcare finance
and how these concepts are used to enhance the financial well-being of the organization.

BASIC CONCEPTS

HEALTH
A state of complete physical, mental and social well-being and not merely an absence of disease or
infirmity.
-WHO definition
It is a state that would enable an individual to lead a socially and economically productive life.

-Operational definition
ECONOMICS:
It deals with human relationships within the specific context of production, distribution & consumption
including ownership of resources (goods and services). Economic considerations play a key role in all
aspects of living:- agriculture, housing, industry, trade including health sector .
Study of Wealth:- Adam Smith

(Father of Economics)
The world economics literally means house-keeping. It deals with the human relationship in the specific
context of production, distribution, consumption, ownership of resources, goods and services, Economics
and sociology overlap in many areas.
FOR THE COMMON MAN
Economical means:-
Less costly/cheap
Saving
Producing more result with less resources
Producing some result with same resources

HEALTH ECONOMICS
Health economic is a branch of economic concerned with issues related to scarcity in the allocation of health
& health care. Broadly, health economics study the functioning of the health care system at the private &
social causes of health affecting behaviors such smoking. It is the discipline of economics applied to the
health care. Broadly defined, economics concerns how society allocates its resources among alternative
uses. Scarcity of these resources provides the foundation of economic theory.It provides a useful conceptual
basis for many health-related disciplines and as a framework for health policy

Health Economics deals with-

Allocation of resources between various health activities.
Quality of resources used in health-care
Organization of healthcare institutions.
The efficiency with which the resources are allocated & used for health-care purpose.
The effects of comprehensive health services on individual and society.
It covers the medical industry as a whole and also extends the economic analysis to costing of disease,
benefits of a health programmes and returns from investments

IMPORTANTANCE OF HEALTH ECONOMICS

It is a relatively new concept. Resources crunch compels to make choices.

To study the pattern of allocation of budget is effectiveness and efficiency.
To study health expenditure vs health status.
To minimize wasteful expenditure.
To formulate health services

To establish the true costs of delivering health care or to estimate all real costs like the use of
patients' time, loss of output elsewhere in the system etc

To evaluate the relative costs and benefits of particular policy options

To estimate the effects of certain economic variables like user charges, time and distance costs of
accessibility, etc on the utilization of health services

COMPONENTS

The relationship between economic growth and health

Health sector budgeting and planning
National health systems
Equity in health outcomes and in health care
International health

SCOPE OF HEALTH ECONOMICS:

The scope of health economics is neatly encapsulated by Alan Williams Plumbing diagram dividing the
discipline into eight distinct topics:-

1. What influences health? (other than health care)

2. What is health & what is its value
3. The demand for health care?
4. The supply of health care
5. Micro-economics evaluation at treatment level
6. Market equilibrium
7. Evaluation at whole system level
8. Planning, budgeting & monitoring mechanisms.
MACROECONOMICS
It is a study of aggregate national income and expenditure, aggregate demand and consumption, aggregate
investment level in both private & government sectors. Macroeconomics by contrast is usually defined in
conventional terms as the sum total of economic activity, dealing with the issues of growth, inflation and
unemployment. At a national or international level, macroeconomics deals with the performance of an
economy as a whole. Macroeconomics provides models to help countries understand and influence
economic growth and to develop economic policy

MICROECONOMICS

It is a study of individual economics units . Microeconomics enables the study of the economic activities of
individuals who make decisions about relatively small resources. This is most usually in a context where
individuals purchase products or services. Individuals make purchasing decisions based on price, quantity
and quality and so microeconomics examines these factors in detail. Price, quantity and quality are
inextricably related and so microeconomics examines all three and examines the effect that each has on the
others.

CHANNELS THROUGH WHICH MICRO AND MACRO ECONOMICS ACT

ISSUES
A macroeconomic approach to medical education will result in adequate numbers of healthcare professional
education programmes that the population needs with little or no medical unemployment and thus little
financial or human wastage.Macroeconomics in medical education will not solve all of our problems but
should enable us to view these problems in a new light. These problems might be a shortage of healthcare
professionals overall or a shortage in certain specialties or in certain territories. These issues are current in
the Western world, in emerging economies and particularly so in the world's poorest countries. The
problems will not be solved by thinking in microeconomic terms. Put simply we have got to think big.

GROSSMANS THEORY OF THE DEMAND FOR HEALTH CARE

Michael Grossman is an American health economist and economics professor, was born in 1942. He
received his doctorate degree from Columbia University 1970. He earned his professorship in 1978 and in
1988 he became Distinguished Professor of Economics. Field of Research Distinguished Professor
Michael Grossman serves on the doctoral faculty in economics and as Health Economics Program director,
research associate at the National Bureau of Economic Research. He has many publications apart from
Health Economics like Agricultural Economics, Corporate Finance, Demographic Economics,
Environmental Economics, Management, Insurance Economics, Law & Economics and so on.

Main Contribution in Health Economics and Modelling

His main contribution in health economics is the demand-for- health model (Grossman model, or the health-
production model). His research has focused on economic models of the determinants of health and the
economics of substance use and abuse. His 1972 monograph introduced the concept of the individual as
producer of his or her own health. It was a major achievement and a seminal contribution to economic
theory. The Grossman model has been extremely influential on the development of health economics

FACTORS INFLUENCING HEALTH ECONOMICS

Extensive government intervention

Intractable uncertainty in several dimensions

Information asymmetric

Barriers to entry

Externalities and the presence of a third-party agent

Tools Used in Economic Analysis

WHY WE STUDY HEALTH ECONOMICS?

Application of economic principle proved powerful addition to the decision-making process in the health
sector. Medical (Health) care services are growing both in quantity & quality ,with resources being devoted
increasing day by day. Empirical need (elaborate & complete) for development of theory & testing; in order
to understand economic behaviour.

TOOLS USED IN ECONOMIC ANALYSIS

Economic Variables

Relationships between Economic Variables

Graphical Representation of Relationships

The Direction of the Relationships

ECONOMIC EVALUATION OF HEALTH CARE PROGRAMME

Aims:-

To aid decision-makers with their difficult choices in allocating health care resources, setting priorities and
moulding health policy.

Definition:-

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

METHODS & TECHNIQUES

There are many methods and techniques, which have been derived from the field of economics, successfully
applied in the health management, some of them are discussed here;

COST ACCOUNTING
It is defined as a set of procedure for determine the cost of the product or services and various activates
involved in the manufacture and sales, for planning and measuring performance. Therefore, the functions of
the cost- account are;

(a) To determine and analysis the cost which help in evaluating the operating efficiency at each stage.
(b) Accumulation and utilization of cost data and
(c) Aid to management to arrive at the cost of production, work order, processes etc.

In health sector, the application of cost-accounting is not as easy as it does not allow the comparisons of the
cost and benefit in given problems. There are many situation and programmes which are using the resources
jointly, viz., teaching, training, and provision of medical care. It is further quite difficult to find out the
proportional expenditure in different categories. In health management, the cost accounting methods are
required to be standardized for each programme and broken down by the type and resource such as staff
equipment, drugs, etc. the cost accounting as per unit of service organization such as primary health centre
is feasible and it would be possible only it essential records are well maintained.
COST BENEFIT ANALYSIS-
Cost-benefit analysis is a practical way of assessing the desirability of projects, where it is important to take
a long view (looking at the repercussion in the future as well as in the near future and a wide view in the
sense of allowing side effects of many decisions) Le. it implies the enumeration and evaluation of all the
relevant cost and benefits -Prest and Terkey

It is a method of comparing the cost of providing service with the gain accruing or likely to accrue from it
or, in other words, it pertains to the ratio of the benefit to he cost. It is often not possible to measure benefits
of a particular programme accurately in terms of monetary gains, disease prevented or overcome , death
prevented, birth avoid, etc Thus, it is a technique of measuring various alternatives. In practice, it is
mainly used to justify a particular health service or programme. The main problem in cost benefit analysis
is that the costs and benefits are likely to spread over time, and are usually not measured at the same time.
Jules Dupuit, a French engineer proposed this in an article in 1848 says CBA estimates and totals up the
equivalent money value of the benefits and costs to the community of projects.

IMPORTANCE

Cost Benefit Analysis is used for determining priorities among various alternative programs or
interventions. It provides an estimate of the potential value of undertaking a course of action, i.e. instituting
a new program or intervention or revising the old one. It can also be used to compare health-related
interventions to those in other economic sectors It enables policy makers to determine whether the value of
its positive consequences exceeds the value of societal resources required to implement the program. It
estimates and totals up the equivalent money value of the benefits and costs of projects to establish whether
they are worthwhile. .It is a powerful and relatively easy tool for deciding whether to make a change or not.
PRINCIPLES

The benefits are usually measured by market choices.

The marginal benefit should be equal to the market price.
The gross benefits of an increase in consumption are an area under the demand curve
Some measurements of benefits require the valuation of human life. These values can be used to
estimate personal costs in terms of increased risk or of reduced risk.

The alternatives must be explicitly specified and considered in the evaluation.

The impacts of the programmes must be defined

ADVANTAGES
It helps to allocate scarce resources to programs that maximize societal economic benefit It studies the full
economic impact of all potential outcomes of an intervention. It makes possible to compare different
programs having different health outcomes, or health programs to non health programs. lt allows analysts to
examine its distributional aspects; who will receive these benefits and who will bear the costs.

DISADVANTAGES
It measures costs and outcomes in monetary terms and not disease specific .There is difficulty in assigning
monetary values to all pertinent outcome including changes in the length or quality of human life. The
results of CBA are only as good as the assumptions and valuations on which they are based.

COST- EFFECTIVENESS ANALYSIS

It is a method pertaining to the best ratio of benefits and cost. I.e. finding the least costly way of reaching an
objective or getting on the greatest value for given expenditure, cost effectiveness analysis concentrates on
one major outcome or benefit. Such as health improvement or reduction of incidence of one particular
diseases in terms of effectiveness, rather than valuing it in terms of money. In this method, effectiveness has
to be kept constant while different option are considered and compared, to seek which alternative is likely to
be most effective. The cost-effectiveness analysis does not say whether or not a particular policy is worth
pursuing. To find out the answer to this question, one must weigh the total cost of the programme against
total benefits.

ELEMENTS
A clear study perspective, time frame, and analytic horizon
An explicitly defined study question
Relevant assumptions underlying the study
Detailed descriptions of the interventions
Existing evidence of the interventions' effectiveness
Proper identification of all relevant costs
A comprehensive discussion of the results

STEPS
1. Defining the Problem
2. Adopting a Research Strategy
3. Specify Audience
 4. Define Perspective
5. Specify the Time Frame Work
6. Prepare the Analytic Horizon
7. Decide the Type of Study Design
8. Identify the Outcome Measures or Variable
9. Search for Available Alternatives
10. Identify the Types of Costs to be included in CEA
11. Analysis

ADVANTAGES
This method is easy to understand and more readily suited to decision making.
It provides empirical results for the decision makers to compare the costs and consequences associated with
alternative programmes.

DRAWBACKS
The data regarding direct costs such as doctors' or nurses' time and supplies used; indirect costs such as a
portion of administrative costs, the cost of equipment are usually not readily available.
It does not facilitate comparisons across different diseases when different outcomes have been used.
Cost-effectiveness is the only one criterion for judging whether an intervention is effective or not

MARGINAL ANALYSIS
The terms marginal benefits have already been defined. The basic piece of economic theory is the Law of
Diminishing marginal Benefit which states that once a certain level of operation has been reached, than
increased cost per positive result or, in other words, decreased success rate per unit of expenditure on the
programme. The marginal analysis approach is useful in knowing whether.
The exiting deployment of resources in a particular health programme with associated benefits can be
shifted to some other programme, i.e., with a low marginal benefit to another with higher marginal benefit,
Additional funds are required to be spent, and where they should be directed to achieve greater additional
benefits,
The resources are required to be reduced,
It helps the planner in allocation of resources between the health programmes.

METHODS FOR COST CONTAINMENT

In order to reduce the cost, one is required to distinguish between down-sizing and right-sizing.
Down-sizing is reducing fixed costs, while right-sizing is identifying the right number of people to
conduct the right activities. The following methods may be applied for cost containment

A) Directive method- it is also called as top-down method. It ensures certain coherence in rapid decision
making and implementation. It takes lesser time.
B) Participatory method- it is also called as bottom up method. It involve peoples participation and
identifies the hidden costs and function deficiencies. It takes into consideration the peoples experience
which perpetuates the saving, but is usually slow and takes a longer time.
Whatever method is applied, a significant reduction is seen after the first few month of implementation, but
the costs will be gain to increases again which is slow in the participatory method than the directive method.
In order to succeed in the long run, the use of the skills of the personnel and critical analysis of the
activities, which consume most of the resources, is a most.

AREAS OF COST CONTAINMENT

THE HEALTH ECONOMIST MUST IDENTIFY the areas which consume most resources and apply one of
the above or both the methods simultaneously to contain the costs. Some of the areas for the cost
containment are manpower, building/space, equipments and instruments, supplies and materials, transport,
administration and establishment, meeting, training, research, technical complexities, and time frame.

COST UTILITY ANALYSIS

It is a form of cost effectiveness analysis . Preferred when there are multiple objectives of a program, when
quality of life is an important outcome, and when quality of life and quantity of life are both important
outcomes. Allows comparison of different health outcomes (prolongation of life, relief of suffering,
blindness) by measuring them all in terms of a single unit.

HEALTH INSURANCE

Principle:-Sharing of risks
A group of person put together current funds, financial or in kind, to minimize future uncertain risk.
Money needed for health care for this group become much more predictable. Risk for the group as a
whole eliminated. It can be either private based or public based.

ISSUES / PROBLEM
Moral hazard:-Over use of services by patients (Solution:-Deductible, Co- insurance, Group
insurance).
Adverse Selection:- Insurance market to be adversely affected, person not revealing their full
risk profile (Solution:- Compulsory universal coverage, long term policies)
Underutilization:- Preventive Care (Solution:- IEC, Cashless hospitalization)
Risk selection (skimming):- No insurance for sick & elderly (Solution:- Community Rating)
Insurance Cartelization:-Excess profits, Poor quality, Premium pricing (Solution:- Regulatory
Control).

BUDGET & BUDGETING CONTROL:

Budget: Systematic economic plan for a specified period of time. It indicates, in what way & for
what purpose various health resources are to be utilized.
Budgeting control: It designates the spending authority to ensure that the budget is spent
judiciously for various aspects of health programmes.

HEALTH FINANCING SYSTEM:

It refers to the raising of resources to pay for goods or services related to health. Now days, health
financing is facing a lot of problems due to lack of funds, unequal distribution and rising health care
costs. Health financing can be from
1. Public sources (General taxation)
2. Private (NGOs, corporate sectors)
3 .External sources (International agencies)
4 .Individuals and households

COST TRENDS.

The economic growth and social development are inter-related, particularly with regard to health.
The economic development enhances health status. The higher the level of GDP per capita, the
higher the life expectancy. Like education, Health is both satisfaction of a need and investment.
Moreover, people are more energetic & productive when they are in good health thus improve
health status should lead to more growth & grater wealth.
This is one of the reasons why economics want health expenditure to be considered and investment.
Further it is believed that better health would reduce the total volume of sickness in the community
& consequently the need for health services would decline. The state of health service is thus seen
not only as a wealth producing services but also a partially self-liquidating service.

It has been, however observed that expenditure on health is consuming the national income at an
increasing rate and, if this trend continues, several countries may be spending some 10 % of their
national income on health. There are various reasons for such increasing trends on the cost of health
services. Some of them are:

1. Changing demographic profile of the community.

2. Changing epidemiological picture of health & disease.
3. Changing in socio-economic policies of the government.
4. labor Intensive capture of health services
5. Better quality of health services.
6. Extensive healthcare services coverage.
7. Higher public expectations.
8. Organization & structure of health care services (Health care delivery system)
9. Availability of newer & costly technologies.
10. Natural escalation of cost with time.
11. Poor management of health services
12. Multiple agencies financing & delivering parallel
IMPORTANCE IN NURSING PROFESSION

The aggregate impact of the managerial decisions related to the nursing care on both
patient outcomes and healthcare costs has been well documented. A review of the existing
evidence can be found, for instance, in Aiken (2008). As was highlighted in the Aikens (2008)
review, studies examining the relationship between nursing staffing levels and patient outcomes
found that higher nurse-to-patient ratios are typically associated with better patient outcomes,
which in turn translates into cost offsets (Kane et al., 2007). Various other aspects of nursing
care or nursing characteristics have been examined (nurse workload, nurse education, among
others) and similar conclusions made: it is possible to significantly improve patient outcomes by
changing various parameters of the nursing care such as reducing workload or hiring more nurses
with baccalaureate degrees (Aiken et al., 2002, 2003).

Furthermore, the economic value of the nursing resource itself has been quantified.
According to Dall et al., (2009), the benefits of hiring one more Registered Nurse (RN) are
estimated to be at least $60,000 per year, which is admittedly is an underestimation, as additional
benefits to the society from higher nursing staffing ratios are many, but difficult to quantify

Nurse Shortage
For decades, nurse shortages have served as major obstacles to the introduction and sustainability of nursing
innovation. Nurse shortages have been offered as a justification for why improved nurse staffing in hospitals
should not be mandated and why policy requirements for nurse staffing in nursing homes should remain
impossibly low .

Nursing and cost offsets

Nursing is generally considered a cost rather than revenue in a hospital context, which makes nursing a
constant target for cost reductions. Because institutions are not directly compensated for providing nursing
care, unlike physician services, there is little motivation for providing the right dose of nursing to meet
patients varying needs. Some argue that direct reimbursement for nursing in hospitals would have a positive
impact on quality of care by better aligning intensity of nursing care with hospital reimbursement levels and
thereby reducing incentives to inappropriately ration nursing care

Hospital cost containment

Payment reforms that focus on producing higher quality care and/or that bring more resources to support
nursing care are intriguing opportunities that deserve attention, study, and potential advocacy by nurses.
However, there is much evidence that major, long-lasting policy and industry directions and decisions about
cost containment in health care have had important but largely unrecognized and/or unacknowledged
negative impacts on nurse workforce sufficiency and, possibly, care quality and safety

RESEARCH INPUT 1

The Gallup institute recently conducted a unique poll among 1,504 opinion leaders in the
US soliciting their perceptions about the role of nurses in the workplace decision making
(Gallup, 2010). Overwhelming majority of the respondents (72% or more) agreed that the nurses
should have greater decision making power in all nine healthcare areas specified in the poll, with

84% of the votes allocated to the area Improving healthcare efficiency and reducing costs in
particular. This compares to only 23% of respondents believing that nurses currently have great
deal of influence on the same area. Overall, the cost/affordability of health care was ranked as
the top concern in the modern health care system (37% of votes).

The Gallup poll also solicited feedback on whether the current work environment actually empowers
nurses to initiate and take cost-saving decisions, and if there are proper incentives in place. The
respondents indeed identified substantial barriers in the current design of the healthcare system
whicheffectively prevent the nurses from realizing their full leadership potential. The poll revealed that
the most commonly mentioned barrier was the public perception of nurses as not being as important
decision makers compared to doctors, healthcare executives, insurance executives, and others.

RESEARCH INPUT 2

A systematic survey of nursing programs documenting the state of HE education in US baccalaureate

nursing programs was conducted. The lists of baccalaureate nursing programs accredited by both the
Commission of Collegiate Nursing Education (CCNE) and National League for Nursing Accrediting
Commission (NLNAC) were accessed from their respective websites. The entire sample (N=548, as of
January 26, 2011 for CCNE and N=209 for NLNAC as of March 7, 2012 was surveyed for the presence of
HE education in the nursing curriculum: either in the form of a separate course (i.e. Health Economics)
or in combination with other content areas Survey results demonstrate that only 19 (3.5%) out of 548
CCNE accredited and 4 (1.9%) out of 209 NLNAC accredited nursing schools in the United States feature a
HE course in their curriculum: either as a separate course (13) or in combination with other content areas
(10) in the course name. These statistics suggest inadequate inclusion of HE content in the nursing schools
baccalaureate curricula across the United States

CONCLUSION
Study of Health Economics essential for planning and evaluation. While complex problems may be
worked out by experts, decision makers require a sound understanding of health economics
fundamentals. More health from the money and more money for health- Economic Imperative.

BIBLIOGRAPHY

Goodman A.C. Health Economics Methods for a New Field. In G. Hoyt, & K.
McGoldrick (Ed) Publishers.2011(vol 4, 224-245

Aiken, L. (2008). Economics of nursing. Policy, Politics, and Nursing Practice,park well publishers.
9(2), 73-79

Northampton, MA.International handbook on teaching and learning economics .: Edward Elgar

Publishing, Inc (pp.556-564).

The current state of health economics education in nursing programs in the United States (PDF
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HP/Documents/HCE/hce/importance%20in%20nursing.mht [accessed May 3, 2017].

Cooke M. (2010). Cost consciousness in patient care -- what is medical education's

responsibility? The New England Journal of Medicine, 362(14), 1253-1255

Chiang, B. (2008). Estimating nursing costs: a methodological review. International Journal of

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Greenfield, J. (1990). We cannot afford to ignore economics in nursing curricula. AORN Journal
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Gallup (2010). Nursing Leadership from Bedside to Boardroom: Opinion Leaders Perceptions.
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