1 - Introduction To Health Economics 2020

12/20/2020
Dr. Abdullah Alsabaani,

MBBS, MPH, PgCHE, PhD, MACPM, FRSPH, MAPHA
Fundamentals of Health
Economics
1
Contents
• Basic principles in economics
• What are economics & health economics?
• Some concepts in health economics
– Resources
– Utility and Welfare
– QALYs
– Scarcity, Choices, prioritization
– Opportunity cost
– Efficiency
– Equity
– Discounting
– Types of costs & benefits
• Economic Evaluation
Principles in economics
• Resources are scarce
• Needs are unlimited
• Desires are infinite
Therefore, we have to make “choices”
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Maximize benefits (outputs) and minimize

resources (inputs) = efficiency
Making choices
(comparing needs and
available resources) to be
more efficient needs you
to make tradeoffs.
Tradeoff
A technique of reducing or forgoing one
desirable outcome in exchange for obtaining
other
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What are economics?

Definition of Economics
• Economics is the science of choice
• Economics is the science of scarcity
• It analyses how choices are structured

and prioritized to maximize welfare
within constrained resources
• How best to employ scarce resources

that have alternative uses
Definition of Economics
• The study of how men and society end up CHOOSING, with
or without the use of money, to employ SCARCE productive
RESOURCES that could have ALTERNATIVE uses, to
produce various COMMODITIES and DISTRIBUTE them for
consumption, now or in the future, among various people
and groups in society
• It analyses the costs and benefits of improving patterns of

resource allocation.
Paul Samuelson
Health Economics
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What are health economics?

• Health economics applies economic thinking to the benefits and costs of
the production of health.
• A branch of economics concerned with issues related to efficiency,

effectiveness, value and behavior in the production and consumption of
health and health care.
• Maximum value for money

– Clinical effectiveness
– Cost-effectiveness
10

• Ability of healthcare systems to provide good care:
– Decision-makers----Difficult choices----competing interventions
– Fair methods and strategies to make tradeoffs between these
interventions ( analysis of costs & benefits)
Economic evaluation
11

• The attempt to analyse, understand and improve the ‘health
care industry’.
INPUTS OUTPUTS
PROCESSES
(COSTS) (HEALTH OUTCOMES)
• Health outcomes
– The end result of medical care, measured in clinical, economic and
humanistic terms
• HE identifies, measures, compares the costs (i.e. resources
consumed) and consequences (i.e. clinical, economic &
humanistic) of healthcare products and services
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Why is health economics

needed?
• Tough economic times / Government health budgets are
going down
• Help healthcare planners make informed decisions related
to resource allocation & services
• Cost of new drugs & devices are increasing
• Determine factors that could help contain the increase in
healthcare costs
• Lack of economic studies related to new healthcare
interventions
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needed? Clinical Evidence
http://clinicalevidence.com/x/set/static/cms/efficacy-categorisations.html 21 Feb 2014
14
Example-1
• Brief case notes for a ‘standard case’ 45 year-old woman
with localised breast tumour were circulated to 170
consultants around the UK
• They adopted 51 different treatment strategies.
• “They can’t all be right!”
• Karol Sikora (RCR)
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Example-2
• Midwife managed or consultant led delivery?

• Patterns of care were a little different
– Monitoring, foetal distress, analgesia, mobility, episiotomy
• Foetal outcome was unchanged
• Consultant care cost more (around £45/case)
• Hundley et al (1995) Midwifery, 11, p103
16

needed?
• To answer questions like:

– Is prevention better than cure?
– Should X hospital be closed?
– Which better to open a trauma centre or a cardiac centre?
– How will doctors/hospitals react if you change the way you pay
them?
– What happens if patient charges are introduced/raised?
– What will happen if health insurance introduced?
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What is the objective of any

health care system?
• To maximise the amount of ‘health’ produced?
• But what is health?
– WHO (1978): “Health is a state of complete physical, mental and social
well-being and not merely the absence of disease or infirmity”
– A dynamic state that is multidimensional in nature and results from a
person’s adaptations to his or her environment
• Successful adaptation
• Satisfactory functioning
• What determines health?

• Genes? Environment? Lifestyle choices?
• Oh yes, and health care…!
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Central issues in health care

• The need to determine
– What services to provide, when and at what level of
provision
– How to provide these services
– Who should get the services
• Issues of
– Effectiveness
– Efficiency
– Equity
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The Role of Health Economics
• To provide:
– a way of thinking
– a set of techniques
• To assist decision making in health care to promote:
– efficiency
– equity
• Health economics may be used to consider:
– Allocation of resources within the health sector
– Resource allocation between health and other sectors
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CONCEPTS IN HEALTH
ECONOMICS
21
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Resources
• Resources
– LAND: all natural resources
– LABOR: human resources
– CAPITAL: goods used to produce other goods or services
– Others? Entrepreneurship? Technical expertise?

– Money is NOT a resource
– Resources combined (production) Commodities
22
What is a market?
• In economics, the term ‘market’ is used to describe any
situation where people who demand a good come together
with suppliers.
• The amount of money that is exchanged for a good is the
price.
• Price influenced by:
– Number of suppliers
– Number of buyers
• Governments role to regulate
the market: fixing prices…
The flow of money, resources and commodities
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Utility and Welfare

• Utility and Welfare
– Utility (individuals): a term used to signify the satisfaction
or benefit accruing to a person from the consumption of a
good or service.
– Welfare (populations)
– Satisfaction or happiness provided by commodities
• Utility: to measure utility

– Quality Adjusted Life Years (QALYs)
– Willingness To Pay (WTP) – contingent evaluation
– Discrete choice experiments (DCE)
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QALYs
• QALYs: aim of healthcare intervention is to increase

– Quantity of life
– Quality of life (Health State or Health Utility)
QALY: ‘Quality weights’ for each additional year of life experienced
after treatment.
QALY: A year of life adjusted for its quality or its value.
– QALY= (life expectancy)×(Health Utility)
– A year in perfect health is considered equal to 1 QALY
25
Calculating QALYs
Health state Utility • If an implantable defibrillator extends life

Perfect health 1.0 by 20 years at a utility of 0.76
Remission of disease 0.92
• Then what are the QALYs?
Mild disease 0.74
Moderate disease 0.55 • QALY = (life expectancy)×(Health Utility)
Sever disease 0.35 = 20 years × 0.76
Death 0.0 = 15.2 QALYs
26
Willingness To Pay (WTP)
• Asks people directly about their

maximum willingness to pay for
a treatment or a service.
• The maximum price at or below
which a consumer will definitely
buy one unit of a product.
• WTP measures how much the
buyer value the product.
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Discrete choice experiments

(DCEs)
• A quantitative technique for eliciting preferences over
hypothetical alternative scenarios.
• Each alternative is described by several attributes with
different level for each attribute.
• Ask to choose which one is preferable.
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Discrete choice experiments

(DCE)
29
The Concepts of Economics -3

• Scarcity, Choices, Prioritization
– Resources are inevitably scarce relative to human wants
– Human wants are infinite
– Scarcity of resources requires individuals to choose which goods

and services they consume.
– The basis for their choice is the relative value that they place on
each good or service.
– The structure of these relative values is the basis for their system of
prioritization.
30
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• Opportunity cost
– Opportunity cost is the central concept of economics
– Resource scarcity means every use of resources involves giving up
other opportunities
– Doing A means not doing B
– The cost of A is the benefit forgone by not doing B
– Every time you hear the word “COST” think “BENEFITS ARE
GIVEN UP”
Cost = what is sacrificed!!
31
• The opportunity cost (also known as the economic cost) of

any good (including service) is the satisfaction or benefit
forgone in not being able to use the resources involved to
obtain some other good which is also desirable and
provides satisfaction.
32
The margin
• Marginal refers to ‘the next unit’.
• E.g. a doctor choosing whether to work an extra day.
• The reason why this is relevant is that, in making decisions,
our interest is essentially on change in costs and benefits
rather than their totals.
• Decisions are rarely made on an ‘all or nothing’ basis;
• instead they often tend to be made at the margin:
– if marginal benefit (the change in benefit) is greater than marginal
cost (the change in cost), we go ahead;
– if marginal benefit is less than marginal cost, we do not.
33
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Diminishing marginal utility

• The marginal benefits of most goods tend to diminish as the
consumption of those goods increases.
• the first ice cream will generally be more enjoyable than the
second, which in turn will be more enjoyable than the third
and so forth.
• Activity: Consider Table 1.4 that includes data on screening for colon cancer.
Complete Column 3 (additional cases detected) and Column 6 (marginal cost
per case). We have started the process for you.
34
Table 1.5 presents the completed table. Additional cases detected were 71.90 – 71.442 = 0.4580 for
the third test and 0.000028 for the sixth test.
The marginal cost per case was found to be over $47 million ($176,331 – $163,141)/0.00028) for the
sixth test.
35

• Why might screening exhibit diminishing marginal
benefits(diminishing additional cases detected) as is the
case here?
• Screening, for example, twice as frequently could theoretically double the

number of cases detected but this is rarely observed in practice.
• As you expand screening, it is harder to detect additional cases.
36
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• What is the most ‘efficient’ number of screening tests to
conduct?
• This example shows that the cost per additional case identified (marginal cost per
case) mounts rapidly with the number of additional tests. Ultimately it is rational for a
policy-maker to continue to fund a program when marginal benefit exceeds marginal cost
but to stop once they eventually become equal. In this instance as marginal benefit
diminishes. In this instance, this would mean stopping at two tests as ‘pursuing such a
screening program to the last degree of perfection is inefficient’ (Shepard and Thompson
1979: 540).
In summary, marginal analysis is

about getting the most value out
of the resources used.
In practical terms entails

measuring the costs and
benefits of expanding or
contracting an activity, program
or service.
37

• Efficiency
– How well resources are used to achieve a desired outcome.
– Greatest benefit achievable from a given resources.
Concept Definition
Technical Efficiency Maximum output for given inputs or minimal inputs needed for
(operational efficiency) a given output .
Happens when there is no possibility to increase the output
without increasing the input.
Economic Efficiency Maximum output for a given expenditure or minimal costs
(productive efficiency) needed for a given output .
Happens when the production cost of an output is as low as
possible.
Allocative Efficiency Efficient budget to produce the goods according to demand,
(Statins for high risk or low risk patients)
Resources are allocated to those who can benefit most.
Pareto efficiency The point at which no one can gain without someone else being
made worse off.
38

• Equity
– Fairness
– The degree to which some distribution or other is judged to be
‘FAIR’.
Concept Definition
Equity Fairness
Equality Same for all
Efficiency Greatest benefit achievable from a given resource
– An intervention is efficient if it produces the GREATEST net health

gains in a population for a given budget, whereas to be equitable it
should be distributed FAIRLY within the population.
39
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• Discounting
– Positive time preference (PTP)?
– The value now for ONE RIYAL received after 20 years
– The future is uncertain (inflation)
– Allow fair comparisons of costs and benefits at different times
– PTP is compensated for by means of DISCOUNTING
– Strength of PTP is reflected in the discount rate (r)
– The value of 1 million now is not the same value after 20 years from
now
– If an intervention (vaccination) will save 100 million$ in 20 years,
how much it is worth now??
40
Discounting
41
Discounting
42
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The value of $100 @ 5%

discount in….
43

• Costs & benefits of illness or healthcare interventions
Type of costs Examples
Direct medical costs Drugs, lab tests, hospitalization, salaries,
Direct non-medical costs Transportation, lodging of family members during a
patient’s hospitalization
Indirect costs Days lost from work, reduced productivity of a patient
Intangible costs Pain, psychological harm
Type of benefits Definition Example

Fixed benefit Pre-determined i.e. a number 100 hip replacements
of operations
Clinical benefit Clinical endpoint 20 mm Hg drop in blood pressure
Utility benefit Expressed in terms of Utility Gain of 2.5 QALYs
Cost benefit Benefits are translated into Gain of 60,000 $
monetary values
44
Health Economics & Decision

Making
Workshop
45
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Discussion session
Should Expensive drugs be provided free?
Consider a rare disease for which there is a drug treatment but
the drug is very expensive (e.g. 2,000,000$ per year per
patient). Citizen’s group representing those affected by the
disease are requesting from the MOH to provide this
medication free of charge to everyone with the disease.
Now consider two contrasting perspectives:
1. The MOH perspective
2. The citizen's perspective
Justify your opinion???
46
Discussion session
MOH Citizens
• Opportunity cost • Patients with more
significant normal life (higher quality)
• Budget could be provided • Perform their duties
to other patients (productivity)
• Budget is limited • Reduced future utilization
• The best use of available of healthcare
resources • Lessen the burden on
families
47
Economic Evaluation
48
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49
Economic evaluation
“The comparative analysis of

alternative courses of action in terms
of both their costs and consequences
in order to assist policy decisions”.
50
Definition
• Economic Evaluation
– Main decision making tool in economics
– Explicit measurement of costs & benefits
– It is about efficiency and is:
‘the comparative analysis of alternative courses of action

in terms of both their costs and consequences’
(Drummond, 1997)
‘the systematic assessment & interpretation of the value

of a healthcare intervention. It is done by systematically
examining the relationship between their costs and
outcomes (benefits)’ (Wonderling, 2005)
51
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Economic Evaluation steps

• Three steps to undertake an economic evaluation:
1. Framing the evaluation by clear statement of:
• The purpose: the intervention, the health problem, the units of
analysis
• Time frame: different time patterns for costs & outcomes
• Perspective: whose costs and whose outcomes
2. Identifying, quantifying and valuing the resources

needed
3. Identifying, quantifying and valuing the health

consequences (outcomes or benefits)
52
Economic Evaluation techniques
• Economic evaluation estimates the incremental cost per

incremental benefit for two or more alternatives.
• Cost Minimization Analysis (CMA)

• Cost Effectiveness Analysis (CEA)
• Cost Utility Analysis (CUA)
• Cost Benefit Analysis (CBA)
53
Cost-Minimization Analysis
(CMA)
• Identical benefits (outcomes)
• The least expensive method of achieving a single outcome
• Simple and easy to interpret,
• Cheaper option would be chosen
• Rare to use = difficult to prove equivalence among
alternatives
• Example: Comparing the costs of Drug A & Drug B; Drug A

& Drug B have evidence supporting equal efficacy for a
given condition and equal safety.
54
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Cost-Minimization Analysis
(CMA) - Example
55
Impact of task-shifting
56
Cost-Effectiveness Analysis
(CEA)
• One dimensional outcome (clinical outcomes)
• Natural units e.g. mmHg drop in BP
• Costs measured in money
• Cost-effectiveness ratio (CER)= Cost A vs Cost B
Effect A vs Effect B
• Incremental Cost-Effectiveness ratio (ICER)

COSTA − COSTB C
ICER = =
EFFECTS A − EFFECTS B E
• Example: The costs per patient relieved of symptoms using

a proton pump inhibitor compared to those using H2 blocker
57
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(CEA) - Example
58
Difference in cost and efficacy
59
(CEA)
60
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Cost-Utility Analysis (CUA)

• A special form of CEA
• QALYs (effect of intervention on both morbidity & mortality)
• Allow comparison of completely different types of benefits
• Can compare different drugs or technologies
• Assess efficiency
• Complex to conduct
• Example: cost per QALY of coronary artery bypass grafting
versus cost per QALY for erythropoietin in renal disease
61
QALYs Gained by Health

Intervention
62

Example
63
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Example
64
Cost-Benefit Analysis (CBA)

• Measuring both costs and benefits in monetary terms
• Comprehensive: all costs and all benefits
• Compare two or more diverse interventions
• Assess efficiency
• Practical difficulties of assessing benefits in monetary terms
• Rarely used in health care
• Two ways to express results:
I. Calculate the Benefit to Cost ratio (B/C)
II. Calculate the Net benefit (Benefit - Cost)
65

• Choose alternative with the highest net benefit or the
greatest benefit to cost ratio
• If the B:C ratio is >1, the treatment is of value
• If the B:C ratio is =1, benefits equal the cost
• If the B:C ratio is <1, the treatment is not economically
beneficial
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Example
67
68
Monetary valuation of health

• The practical difficulty of monetary valuation of benefits and
the fundamental problem in health of placing a dollar value
on human life (or other health outcomes) limit the use of
CBA.
• Is it ethical to assign a monetary value to human life???
69
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Types of Economic Evaluation

Types of Costs Consequences Formula Results
analysis
Cost Money Identical in all respects. ∆𝐶 Least cost
Minimisation alternative.
Cost Money Different magnitude of ICER= Cost per unit of

Effectiveness a common measure 𝐶1 − 𝐶2 consequence
eg., LY’s gained, blood 𝐸1 − 𝐸2 eg. cost per LY
pressure reduction. = ∆𝐶/∆𝐸 gained.
Cost Utility Money Single or multiple ICUR= Cost per unit of
effects not necessarily 𝐶1 − 𝐶2 consequence
common. Valued as 𝑄𝐴𝐿𝑌1 − 𝑄𝐴𝐿𝑌2 eg. cost per
“utility” eg. QALY = ∆𝐶/∆𝑄𝐴𝐿𝑌 QALY.
Cost Benefit Money As for CUA but B is = ∆𝐶/∆𝐵 Net $
valued in money. eg cost: benefit
willingness-to-pay ratio.
70
• Thank you
71
24

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12/20/2020

Dr. Abdullah Alsabaani,

Therefore, we have to make “choices”

Maximize benefits (outputs) and minimize

What are economics?

• Economics is the science of scarcity

• It analyses how choices are structured

• How best to employ scarce resources

• It analyses the costs and benefits of improving patterns of

What are health economics?

• A branch of economics concerned with issues related to efficiency,

• Maximum value for money

What are health economics?

What are health economics?

Why is health economics

Why is health economics

http://clinicalevidence.com/x/set/static/cms/efficacy-categorisations.html 21 Feb 2014

• Midwife managed or consultant led delivery?

Why is health economics

• To answer questions like:

What is the objective of any

• What determines health?

Central issues in health care

The Role of Health Economics

– Others? Entrepreneurship? Technical expertise?

The flow of money, resources and commodities

Utility and Welfare

• Utility: to measure utility

• QALYs: aim of healthcare intervention is to increase

Health state Utility • If an implantable defibrillator extends life

Willingness To Pay (WTP)

• Asks people directly about their

Discrete choice experiments

Discrete choice experiments

The Concepts of Economics -3

– Human wants are infinite

– Scarcity of resources requires individuals to choose which goods

The Concepts of Economics -4

Cost = what is sacrificed!!

• The opportunity cost (also known as the economic cost) of

Diminishing marginal utility

Diminishing marginal utility

Diminishing marginal utility

• Screening, for example, twice as frequently could theoretically double the

Diminishing marginal utility

In summary, marginal analysis is

In practical terms entails

The Concepts of Economics -5

The Concepts of Economics -6

– An intervention is efficient if it produces the GREATEST net health

The Concepts of Economics -7

The value of $100 @ 5%

The Concepts of Economics -8

Type of benefits Definition Example

Health Economics & Decision

Justify your opinion???

“The comparative analysis of

‘the comparative analysis of alternative courses of action

‘the systematic assessment & interpretation of the value

Economic Evaluation steps

2. Identifying, quantifying and valuing the resources

3. Identifying, quantifying and valuing the health

Economic Evaluation techniques