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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. Health economics is important in determining how to improve
health outcomes and lifestyle patterns through interactions between individuals,
[2]
healthcare providers and clinical settings. In broad terms, health economists study the
functioning of healthcare systems and health-affecting behaviors such as smoking,
diabetes, and obesity.
A seminal 1963 article by Kenneth Arrow is often credited with giving rise to health
economics as a discipline. His theory drew conceptual distinctions between health and
[3]
other goods. Factors that distinguish health economics from other areas include
extensive government intervention, intractable uncertainty in several
dimensions, asymmetric information, barriers to entry, externality and the presence of a
[4]
third-party agent. In healthcare, the third-party agent is the patient's health insurer,
who is financially responsible for the healthcare goods and services consumed by the
insured patient.
Health economists evaluate multiple types of financial information: costs, charges and
expenditures.
Uncertainty is intrinsic to health, both in patient outcomes and financial concerns. The
knowledge gap that exists between a physician and a patient creates a situation of
distinct advantage for the physician, which is called asymmetric information.
Externalities arise frequently when considering health and health care, notably in the
context of the health impacts as with infectious disease or opioid abuse . For example,
making an effort to avoid catching the common cold affects people other than the
[5][6][7]:vii–xi[8]
decision maker or finding sustainable, humane and effective solutions to
the opioid epidemic.
Contents
1Scope
2The development of health economics
3Healthcare demand
4Health technology assessment
5Healthcare markets
6Economic Rationale for Government
Intervention in the Healthcare Markets
7Other issues
o 7.1Medical economics
o 7.2Mental health economics
8Health and utility
9See also
o 9.1Journals
10References
11Further reading
Scope[edit]
The scope of health economics is neatly encapsulated by Alan Williams' "plumbing
[9]
diagram" dividing the discipline into eight distinct topics:
Healthcare demand[edit]
The demand for healthcare is a derived demand from the demand for health. Healthcare
is demanded as a means for consumers to achieve a larger stock of "health capital."
The demand for health is unlike most other goods because individuals allocate
resources in order to both consume and produce health.
The above description gives three roles of persons in health economics. The World
Health Report (p. 52) states that people take four roles in the healthcare:
1. Contributors
2. Citizens
3. Provider
4. Consumers
[21]
Michael Grossman's 1972 model of health production has been extremely influential
in this field of study and has several unique elements that make it notable. Grossman's
model views each individual as both a producer and a consumer of health. Health is
treated as a stock which degrades over time in the absence of "investments" in health,
so that health is viewed as a sort of capital. The model acknowledges that health is both
a consumption good that yields direct satisfaction and utility, and an investment good,
which yields satisfaction to consumers indirectly through fewer sick days. Investment in
health is costly as consumers must trade off time and resources devoted to health, such
as exercising at a local gym, against other goals. These factors are used to determine
the optimal level of health that an individual will demand. The model makes predictions
over the effects of changes in prices of healthcare and other goods, labour market
outcomes such as employment and wages, and technological changes. These
predictions and other predictions from models extending Grossman's 1972 paper form
the basis of much of the econometric research conducted by health economists.
In Grossman's model, the optimal level of investment in health occurs where
the marginal cost of health capital is equal to the marginal benefit. With the passing of
time, health depreciates at some rate . The interest rate faced by the consumer
is denoted by . The marginal cost of health capital can be found by adding these
variables: . The marginal benefit of health capital is the rate of return from this
capital in both market and non-market sectors. In this model, the optimal health stock
consumer sets out of pocket, and so the "effective demand" will have a
separate relationship between price and quantity than will the "marginal benefit curve"
or real demand relationship. This distinction is often described under the rubric of "ex-
post moral hazard" (which is again distinct from ex-ante moral hazard, which is found in
any type of market with insurance).
Healthcare markets[edit]
The five health markets typically analyzed are:
Healthcare financing market
Physician and nurses services market
Institutional services market
Input factors markets
Professional education market
Although assumptions of textbook models of economic markets apply reasonably well to
healthcare markets, there are important deviations. Many states have created risk
pools in which relatively healthy enrollees subsidise the care of the rest. Insurers must
cope with adverse selection which occurs when they are unable to fully predict the
medical expenses of enrollees; adverse selection can destroy the risk pool. Features of
insurance market risk pools, such as group purchases, preferential selection ("cherry-
picking"), and preexisting condition exclusions are meant to cope with adverse
selection.
Insured patients are naturally less concerned about healthcare costs than they would if
they paid the full price of care. The resulting moral hazard drives up costs, as shown by
the famous RAND Health Insurance Experiment. Insurers use several techniques to
limit the costs of moral hazard, including imposing copayments on patients and limiting
physician incentives to provide costly care. Insurers often compete by their choice of
service offerings, cost-sharing requirements, and limitations on physicians.
Consumers in healthcare markets often suffer from a lack of adequate information about
what services they need to buy and which providers offer the best value proposition.
Health economists have documented a problem with supplier induced demand,
whereby providers base treatment recommendations on economic, rather than medical
criteria. Researchers have also documented substantial "practice variations", whereby
the treatment also on service availability to rein in inducement and practice variations.
Some economists argue that requiring doctors to have a medical license constrains
inputs, inhibits innovation, and increases cost to consumers while largely only benefiting
[22]
the doctors themselves.
Other issues[edit]
Medical economics[edit]
Often used synonymously with health economics, medical economics, according
[27]
to Culyer, is the branch of economics concerned with the application of economic
theory to phenomena and problems associated typically with the second and third
health market outlined above: physician and institutional service providers. Typically,
however, it pertains to cost–benefit analysis of pharmaceutical products and cost-
effectiveness of various medical treatments. Medical economics often
uses mathematical models to synthesise data from biostatistics and epidemiology for
support of medical decision-making, both for individuals and for wider health policy.
Mental health economics[edit]
Mental health economics incorporates a vast array of subject matters, ranging
from pharmacoeconomics to labor economics and welfare economics. Mental health
can be directly related to economics by the potential of affected individuals to contribute
as human capital. In 2009 Currie and Stabile published "Mental Health in Childhood and
Human Capital" in which they assessed how common childhood mental health problems
[28]
may alter the human capital accumulation of affected children. Externalities may
include the influence that affected individuals have on surrounding human capital, such
[29]
as at the workplace or in the home. In turn, the economy also affects the individual,
particularly in light of globalization. For example, studies in India, where there is an
increasingly high occurrence of western outsourcing, have demonstrated a growing
hybrid identity in young professionals who face very different sociocultural expectations
[30]
at the workplace and in at home.
Mental health economics presents a unique set of challenges to researchers.
Individuals with cognitive disabilities may not be able to communicate preferences.
These factors represent challenges in terms of placing value on the mental health status
of an individual, especially in relation to the individual's potential as human capital.
Further, employment statistics are often used in mental health economic studies as a
means of evaluating individual productivity; however, these statistics do not capture
"presenteeism", when an individual is at work with a lowered productivity level, quantify
the loss of non-paid working time, or capture externalities such as having an affected
family member. Also, considering the variation in global wage rates or in societal values,
statistics used may be contextually, geographically confined, and study results may not
[29]
be internationally applicable.
Though studies have demonstrated mental healthcare to reduce overall healthcare
costs, demonstrate efficacy, and reduce employee absenteeism while improving
employee functioning, the availability of comprehensive mental health services is in
decline. Petrasek and Rapin (2002) cite the three main reasons for this decline as (1)
stigma and privacy concerns, (2) the difficulty of quantifying medical savings and (3)
[31]
physician incentive to medicate without specialist referral. Evers et al. (2009) have
suggested that improvements could be made by promoting more active dissemination of
mental health economic analysis, building partnerships through policy-makers and
[29]
researchers, and employing greater use of knowledge brokers.
Like other durable goods, the stock of health wears out over time, much like other
durable goods. This process can be called aging. When our stock of health has dropped
low enough, we will lose our ability to function. We can say, in economic terminology
that the stock of health depreciates. Since life expectancy has risen a lot during this
century, it implies that e.g., the depreciation rate has decreased during this time. Public-
health care efforts and individual medical care are in place to restore the stock of health
or to decrease the depreciation rate on the stock of health. If we were to plot an
individual’s stock of health throughout its lifetime in a graph, it would steadily increase in
the beginning during its childhood, and after that gradually decline because of aging,
[32]
meanwhile sudden drops created by random events, such as injury or illness.
There are many other things than “random” health care events, which individuals
consume or do during their lives that affect the speed of aging and the severity and
frequency of the drops. Lifestyle choices can deeply better or worse our health. If we go
back to X, the bundle of goods and services, can undertake numerous characteristics,
some add value while others noticeably decrease our stock of health. Outstanding
among such lifestyle choices are the decision to consume alcohol, smoke tobacco, use
drugs, composition of diet, amount of exercise and so on. Not only can X and H work as
substitutes for one another in producing utility, but X can also affect H in a production
sense as well. X can then be split into different categories depending on which effect it
has on H, for instance “good” types (e.g., moderate exercise), “bad” types (e.g., food
with high cholesterol) and “neutral” types (e.g., concerts and books). Neutral goods do
[32]
not have an apparent effect on individuals’ health.
See also[edit]
Gross domestic product § Further criticisms
Health administration
Health consumerism
Health crisis
Health equity
Health insurance
Health policy
Health system § International comparisons – tabular comparisons of the US,
Canada, and other countries not shown above
List of publications in economics § Health economics
Medical debt
Pharmacoeconomics
Pharmacoepidemiology
Philosophy of healthcare
Prescription costs
Priority-setting in global health
Public health
Journals[edit]
Health Economics
Journal of Health Care for the Poor and Underserved
Journal of Health Economics
Review of Economics of the Household
References[edit]