CHAPTER TWO

MAIN FEATURES OF THE HEALTH CARE SERVICE AND ITS RELATION WITH
ECONOMIC DEVELOPMENT
Health economics is a branch of economics concerned with issues related to
efficiency, effectiveness, values, and behavior in the production and consumption of
health and health care.
Health economics is an applied field of study that examines and finds systems-based
solutions to make health care more equitable, accessible, and affordable for all.
Health economists seek to understand the role that a broad range of stakeholders
(such as health care providers, patients, insurance companies, government agencies,
corporations, and public organizations) play in health care spending.
Why is health economics important?
Health economics is important because it focuses on how the economic behavior of
stakeholders and recipients affects the quality and cost of medical care.

General features of the health Care

the WHO definition of health as “a state of physical, mental and social well-being and
not merely the absence of disease or infirmity” indicates a clear shift away from earlier
narrow organic or functionally-based definitions of health to a more holistic view, it sees
the health of an individual or community as being concerned not only with physical (and
mental) status, but also with social and economic relationships.
Perspectives of Health
a) Health as a right
the WHO constitution states that ‘…the enjoyment of the highest attainable
standard of health is one of the fundamental rights of every human being without
distinction of race, religion, political belief, economic or social condition’.
b) Health as consumption good
The Role of the state under such a view might be limited to Ensuring that the
health care provided is of an adequate quality (such as ensuring professional
standards in the same Way that it would monitor the quality of any good or
service, Such as food).
c) Health as an investment
A third view of health is that it is important, but largely it affects the productive
ability of the workforce. Illness may affect overall production, either through
absenteeism or by lowering productivity through its debilitating effects.
Distinctive characteristics of the health Care services from other commodities
Case against a free market:
 Market failure
 Problems of Risk and uncertainty
 Unequal information – Doctor’s agents
 Consumers as satisfaction maximizers
 Imperfect competition
 Externalities
 Equity and health care

 Market failure
-Market imperfections may lead to inefficient or inequitable distribution of
resources.
Definition of Market
 It is used to describe any process of exchange Between buyers and sellers.
 Formally, a market can be defined as any set of Arrangements that allows buyers
and sellers to Communicate and thus arrange exchange of goods, Services or
resources.
 A free market is where such exchange occurs without Interference from the
government.
 Information is a vital ingredient for any market. Both buyers and sellers need to
have access to sufficient information to allow them to make rational decisions.

1. An information system
-A market is an information system. We get the right goods at The lowest possible cost
since the market is able to transmit all The information about benefits and costs
between producers And consumers. If this information is less than perfect, then The
market will fail.
2. Perfect Competition
-An efficient free market requires producers to be operating Under conditions of perfect
competition. This requires a Stringent set of conditions – perfect information, many
buyers and sellers, a uniform product and freedom of entry and exit - which ensure that
firms are price takers, producing for the lowest possible cost in the long run and only
earning normal profits.
  Problems of Risk and Uncertainty

1. Moral Hazard refers to the risks that someone or something becomes more
inclined to take because they have reason to believe that an insurer will cover the
costs of any damages.
2. Adverse Selection refers generally to a situation in which sellers have information
that buyers do not have, or vice versa, about some aspect of product quality.
3. Unequal Information a gap in knowledge between consumers and professionals
regarding price and quality.

 Rational Choices
 Information Problem
 Doctors as Agent

 Consumers as Satisfaction Maximizers

1. Maximizing Utility
2. Another view of Consumers
The idea that consumer utility just depends on the bundle of Goods and services
consumed. If this were true then people in Rich developed economies ought to be
appreciably happier Than people in poor developing economies.
Traditional theory ignores the issue of how tastes are determined. Evidence from social
psychology suggests that tastes are determined by people’s past and present
environments.

 Imperfect Competition
-The free market models predict large numbers of buyers and sellers - all of whom have
no power individually to influence the market price.

1. Monopolies
2. Economies of Scale
3. Economies of Scopes
4. Price Maker

 Externalities The economist defines external effects as involving positive And

negative results for others that are the consequences of One’s own actions.
Externalities or spillover effects provide Another source of market failure.
  Equity and Health care

1. Equity is more efficient than efficiency Efficiency is not everything. We are also
concerned with what Is fair. If we had a market distribution of health care, then
only Those who could afford to pay would be able to purchase it.

 As Donaldson and Gerard put it: “Within most societies there exists, in
some form or another, a concern that health care resources and benefits
should be distributed in some fair or just way”.

 William Beveridge, the architect of the welfare state, argued for a health
service which would provide treatment “to every citizen without exception,
without remuneration limit and without an economic barrier at any point to
delay recourse to it”.

Demand for health services

 Grover C. Wirick has identified five fundamental factors that Can have an impact
on the demand for health care services.
 The first is need, when a person suffers from a condition that requires attention,
or he/she has some other reason for seeking medical care or examination.

 Secondly, there must be a realization of the need. Either the individual or

someone acting in his/her behalf must know that the need exists.
 Third financial resources must be available to implement the care.

 Fourth, there must be a specific motivation to obtain the needed care even with
the availability of the other forces such as need, realization and resources,
something must initiate the action.

 Fifth is availability of service.

Changes in demand for medical care

1. Income
-Income of consumers is generally assumed to be positively related to demand. That is,
if income increases, the quantity demanded at each price will be greater.
2. Price of related commodities
-The demand for a particular commodity is also influenced by The quantities of related
commodities consumed. The Quantities of these related commodities are, in turn,
influenced By their prices. Two classes of commodity relations are of Concern to us:
complements and substitutes.
3. Tastes
-Tastes have sometimes been called wants, a term connecting The intensity of desire
for particular commodities. The Elements that influence the intensity of an individual’s
desire For medical care include health status, educational Background, sex, age, race
and upbringing.