HEALTH ECONOMICS

INTRODUCTION

Health economics is an economic system related to medical, health and family

welfare services. Most countries, especially the developing ones, are concerned about the
resources to;

 The sources of finance for health services

 The ability to maintain at least the past funding level
 Resource allocation patterns and
 Economic efficiency, with equity, of health service delivery.

BASIC TERMS

Economics:

Social sciences concerned with the problems of using or administering scarce resources in
the most efficient way to attain maximum fulfillment of society’s unlimited wants ( Stanhope
&Lancaster 2006).

Economics as a science which studies the nature and causes of national wealth.

Adam Smith

Health Economics:

Health economics is concerned with the use of resources affect the health care industry.
(Jacobs-2002)

Health economics is the discipline that determines the price and the quantity of limited
financial and non financial resources devoted to the care of the sick and promotion of
health( Gupta &Mohanjan-2003)

Gross National Product: It also referred as cross national income. It is gross income generated
from within the country as also net income received from abroad. It is expressed either “at
current prices or constant prices.

Gross domestic product: It is gross income generated within a country, i-e,it excludes net
income received from abroad.

Net National Product: It is the GNP minus the capital we consume (eg; equipment, of all final
goods and services after providing for depreciation.

Net Domestic Product: It is the gross domestic product minus the value of depreciation of fixed
assets.

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Poverty Line: Defined in terms of minimum per capita consumption level of the people. (i-e
calorie intake of the people 2400 Kcal-adult)

GOALS OF HEALTH ECONOMICS

To provide the best quality health care to the largest number of people, given available
financial resources.

FACTORS INFLUENCING HEALTH CARE COST

1. Price Inflation
2. Changes in population demography
3. Technology
4. Chronic illness

1. Price inflation

Price is not constant, price of the health services increases day by day
accordance with social changes. Price inflation was the major overall economic problem between
1950 and 1980.By 1985 inflation began to decline. By 1991 physician services almost doubled
and hospital services almost doubled and hospital services almost tripled the overall inflation
rate.

Assumption regarding reason for price inflation in the health care delivery:

 As earnings increases and more people acquire health insurance, use of the system and
the demand for services also increases.
 Expenditure are rising in response to increased hospital wages, while lagging employee
productivity is down, requiring more personnel.
 Increase in supply, equipment and salary expenditure result from the growth and the
number of insurance plans(over 1500 today)
 New and costlier methods of care force prices up.
 Prices rise because of the building of costly, expensive-to-maintain hospital facilities that
already exist in sufficient supply.
 Changes in consumer life – styles and environmental hazards have created a new set of
health problems that requires services.
 Increased community-based care services add to the overall costs.
 Increased wages for the new categories of health care personnel such as nurse
practitioners, physician assistants and dental technicians, have also contributed to
increased costs.

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2. Changes in population trend

1. Increasing population rate is the major contributor to rising health care costs

2. Aging of the population

This is expected to lead to pressure to spend more money, especially for long term
disease, and care. Caring for the elderly client more expenditure, whereas the least expenditure
for people under 19 years of age.

Assumption regarding reason for increase expenditure for older population are

 They are likely to experience multiple chronic conditions that may become disabling.
 They are admitted to hospitals three times more than the general population
 The rapid growth of the numbers of elderly persons(due to increased life expectations,
because of scientific advantage)
 The decline in family social support requiring elderly persons to seek care and assistance
outside the family structure
 Greater use of more complex medical and surgical and the increased ability of elderly
persons to pay for services received.
 They visit physicians more often
 Their average length of stay is more than 3 days longer than the overall average.

3. Low class and remote people, has less access to health care services. As a result they will
need and deserve to have their basic health care needs met. To provide access to such services
adds to the overall health care costs.

4. The baby boom generation is becoming middle aged, requiring long term care for chronic
conditions.

3. Technology and intensity

 New technology enhances the delivery of care, but it also has the potential to
increase the costs of care. Health care professionals, such as physicians, have
become dependent on technology for diagnosis like C.T scan and MRIU etc.
 One of the most significant example of a technology contributing to increasing
costs is that of renal dialysis.
 Health care problems like AIDS contributed to the cost of health care through
medical care, research, development of new technologies and cash assistance to the
client.
 The adopting of new technology demands investigated in personnel, equipment,
and facilities. Furthermore new technologies add to administrative costs, especially
if the federal GOVT provides financial coverage for the services or are involved in
regulation the technology.

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  Federal Govt establishes various regulators mechanism to control the cost of
technology.

4. Chronic Illness

Spending for the 15 highest- cost conditions accounted for 44.2% of total health care
spending in 1996.using medical expenditure panel survey (MEPS) data, chronic medical
condition were identified by those costing the most, the number of bed days, work- less days,
and activity impairments. The most costly (IHD) was ranked tenth in terms of impairment of
ADL/IADL. These chronic illnesses account for a great portion of total health costs annually.

FINANCING OF HEALTH CARE

1. PUBLIC SUPPORT

Govt involved in health care financing for population groups. Includes the health care
contribution by the central, state, Dist and local bodies. Care is provided to the great extent
through central institute of medical education and research center, state, regional, Dist,
CHC,PHC, railway hospital and indigenes system of medicine at free of cost. Source of financial
support for the Govt is primarily tax, various activities like transport, export etc,.

Other Public support:

The federal Govt finances health services for retired military persons and dependents
through the following.

 TRICARE for the uniformed services and their dependants.

 Veterans Administration ( VA)
 Indian health services (HIS)

2. PRIVATE SUPPORT:

Private health care payer source includes

1. Insurance: Insurance for health care was first offered by the private sector in 1847 by a
commercial insurance company.

The purpose of the insurance to provide security and protection when health care services
were needed by individuals. The idea behind insurance was that it provided security,
guaranteeing monies to pay for health care services to offset potential financial losses from
unexpected illness or injury related to accidents, catastrophic communicable diseases such as
malaria and scarlet fever.

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2. Employers: As the cost of health insurance increased, some employers, in an effort to bypass
the costs established by insurers, found it less costly to self- insurers, found it less costly to self –
insure.

The employer did this by contracting directly with providers to obtain health care services
for employees rather than going through health insurance companies. Some large businesses
directly employed onsite providers for care delivery or offered onsite onsite wellness program.
These opportunities for nurses to provide wellness programs and health assessments to screen
and monitor employees and their families. This move to self- insure resulted in savings to
companies, with reduced overall sick care costs, until the 21st century.

3. Individuals: Out Of Pocket (OOP) is the individual payment system. India has one of the
world’s highest shares of total health spending paid for OOP by the consumers. The share of
private expenditure on medical and health services within total private consumption has been
rising in the last 6-7 years, reaching 6.5% in 2005-2006. High OOP spending on health is one of
the major sources of improvement in the country.

4. Managed care arrangements: Managed care is the term for a variety of health care
arrangements that integrate the financing and the delivery of health care. Concept of managed
care is based on the notion that the use of costly care could be reduced if consumers had access
to care and services that would prevent illness through consumer education and health
maintenance. Therefore managed care uses disease prevention, health promotion, wellness, and
consumer education. In addition to prevention and health promotion, managed care also makes
use of utilization management – process that determines how necessary and appropriate the care
is utilization management includes;

i. Using less expensive alternative services to ensure that care occurs out of hospital
ii. Preauthorizing hospital admissions when essential
iii. Reducing length of stay

5. Medical saving account: MSAs are tax-exempt accounts available to individuals who work for
small companies, established usually through a bank or insurance company that enable
individuals to save money for future medical needs and expenses. Money is contributed to an
MSA by the employer, and the initial money put into an MSA does not come out of taxable
income. The features of MSA are

a. it would require that individuals become knowledgeable about health care

b. with it, individuals would become involved in health care decisions making.

HEALTH CARE PAYMENT SYSTEMS:

I. Paying health care organizations

II. Paying health care practitioners

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Paying health care organization

a. Retrospective reimbursement: It is the traditional reimbursement method; where by fees for

the delivery of health care services in an organization are set after services are delivered. Fees
are negotiated between the payer and provider and include items such as depreciation of
building, equipment, and administrative costs (eg: administrative salaries, utilities, office
supplies)

b. Prospective reimbursement: It is a more recent method of paying an organization, where by

the third- party payer establishes the amount of money that will be paid for the delivery of a
particular services before offering services to the client. The basis for prospective payment
system is the 468 diagnosis- related groups (DRGs).Based on previous experience companies
attempt to predict an agency’s costs for the year. The third party payer’s reimburse an
organization (hospital/agency) on the basis of the payer’s prediction of the cost to deliver a
particular services; these predictions vary by case mix ( i-e,different types of clients, with
different types, levels, and intensities of health problem),the clients diagnosis, and geographical
location. This process is used in the DRG system of the hospital.

c. Cost- plus reimbursement: An agency may be reimbursed for the actual costs of treatment and
care plus added allowable costs. These added costs include depreciation of costs, of a building
and equipment and administrative costs, of a building and equipment and administrative costs
(e.g; administrative salaries, utilities and office supplies)

Paying health care practitioners

a. Fee - for - service: The traditional method of paying health care practitioners is known as fee –
for- service and is like the retrospective method described. The practitioners determine the costs
of providing a service, delivers the service to a client, and submit a bill for the delivered service
to a client, and submits a bill for the delivered service to a third – party payer, and the payers pay
the bill.

b. Capitation: It is similar to prospective reimbursement for the client care organization. The
practitioner and managed care organization come to a legal agreement or contract to provide
health care services to plan members for a preset and negotiated fee. Specifically, the third –
party payers determine the amount that practitioners will be paid for a unit of care, such as a
client visit, before the delivery of the services provided.

TRENDS IN HEALTH FINANCE:

The public’s demand for affordable health care has created a new environment for health care
financing. Competition among the health care providers and third-party payers has led to new
and innovative health care.

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a. Cost sharing: Aware of the amount that the employer is willing to contribute for basic
coverage, a third- party payer may propose several options, giving the employee freedom to
choose services desired. Employees willing to pay may be able to increase the covered services
not provided by the basic plan. Cost sharing may also require the consumer to pay a portion of
the bill for covered services in return for lower premium. The can result in increased consumer
control of health care.

b. Health care alliances: The creation of powerful regional or statewide insurance purchasing
pools or health alliances is seen as one means of reform for the health care industry. The
alliances would define basic benefits that all insurers would have to offer to everyone at the same
price despite their status, health alliances premiums and help consumers choose among
competing insurers and plan. Consumers’ choice would be based on published simple standard
information about benefits and outcomes of the different available plans. Plans have to compete
by offering better outcomes or less cost. Insurers would have to contract with provides that find
ways of evaluating cost –efficient care.

c. Self insurance: Some organization has used health care information collected by insurance
plans to self-insure their employees. This enables organization to reduce the administrative cost
of insurance, which has been estimated to represent 12.5% of the cost of insurance. Unlike the
large industrial health maintenance[ (HMO) A managed care plan that acts as an insurer and
sometimes a provider for a fixed prepaid premium], self- insured status organizations their own
health care plans but purchase health care services from an established insurance plan.

d. Flexible spending accounts: Another source of funding for uncovered services is the FSA. The
employee determine how much he or she will have to spend for uncovered services and has this
much deducted from his pay check when these services are incurred, the employee can secure
payment for these services from this account. The employee continues to pay into the account
until the estimated amount is reached. If the employee overestimates the cost, the remaining
amount is fortified. If the cost of the services exceeds the estimate, only the amount estimated
will be paid.

EVALUATION OF HEALTH CARE SERVICES

The outcomes of resources in health care may be measured by quantitative technique like Cost
minimization: in this cost of implementing two systems or programs or treatment regime is
compared. The results (outcomes) of both these intervention may be the same.

Cost-effective analysis: outcomes assumed in non-monetary units. This helps a planner to

compare between two programmes with the same objective and find out which program achieves
the health objectives at the least cost

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BIBLIOGRAPHY

Book:

Gupta MC et.al,(2003) ‘‘Text book of preventive and social medicine” 3rd,jaypee

brother, New Delhi, 478-485.

MersonH.Michealet.al,(2005)‘‘International public health-disease,

programs,systems and policies’’Janes&Bartlett,Boston, 617-635

Park. K (2007) ‘‘Text book preventive and social medicine’’ 19th ,Banarsidas
bhanot, Jabalpur,561-567

Stanhope and Lancaster (1996) ‘‘ Foundation of nursing in the community”4th ,

mosby Elsevier, china, 65- 85.

Journal:

Ray shoran Amit (2008) ‘‘ Financing of health care in India: Issues and
concerns”,Health for the millions, 34, 4-8.

Net Refence:

http///en.wikipedia.org/wiki/ health economics

Discussion

on

Community diagnosis &

Health care delivery system

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FINANCIAL MANAGEMENT

Submitted to: Mrs.Malathi M.sc (N)

Sr. Lecturer
VMACON,
Salem

Submitted by: P.Hemavathi

M.sc (N)1st
year
VMACON, Salem

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 CONTENT Page no

ntroduction
1. 1
Objectives
2. 1
Goals to be achieved by 2000 - 2005
3. 2
Policy prescription
4. 2-5
Achievements
5. 6
SWOT analysis
6. 6-7
Conclusion
7. 7
Bibliography
8. 8

INDEX

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