HEALTH ECONOMICS

Plan standard
Oregon Health
for able-bodied adults
eligible for insured
low
-

income

-not public insurance in Oregon

Eligibility requirements
① 19-64 years of age
② Oregon residents (U Scitizens or legal immigrants) .

③ religible for other public insurance

④ uninsured for theprevious 6 months
⑤
Income below 100 %
of the federal poverty level
⑥ Assets of less than $2000.

The Plan provides comprehensive medical benefits , including

prescription drugs with no-patient cost sharing & low
,

monthly premiums ($0-$20).

GROSSMAN MODEL
Assumptions
① individuals produce health
② individuals value health (but not inf initely)
③ There is a budget
constraint to finite health

consumption Investment
Tu (H c) =
,
u= U(C)
Y =
PMM + Pc C W(H) XT =
PMM + Pc C
H =
f(M) f(M) H =

-Marketluputs
He =
H(HT -
1
,
TE ,
Mt) TP =
G75 -

It =
z
Z
(Tt Mt)
2
0 =
1 + 7 + y* + 7)
,

H =
+ -

6H1 +
Melducationent
u =
U[(HT ,
Ct) (HTH (TH)
, ,
. . . .
(Hw , (n)]
 Free Lunch Zone

Acceptable Zone
Trade off Zone

?
d -f
.

C b

U+ 8

u+ 82

U + S1
1 MEC
d

H(0(d) * Health
Kenneth J. Arrow's seminal article "Uncertainty and the Welfare Economics of Medical Care,"
published in the December 1963 issue of The American Economic Review, Volume LIII, Number 5,
revolutionized the understanding of healthcare economics. Here's a detailed summary:

*1. Introduction:*
- Arrow begins by acknowledging the uniqueness of the medical care industry compared to other
sectors of the economy.
- He highlights the prevalence of uncertainty and information asymmetry in medical transactions,
which distinguishes healthcare economics from traditional economic models.

*2. Traditional Economic Analysis:*

- Arrow contrasts the assumptions of traditional economic analysis, such as perfect competition and
perfect information, with the realities of medical care.
- He argues that these assumptions do not hold in the healthcare sector due to the complexities of
medical decision-making and the inherent uncertainty involved.

*3. Information Asymmetry:*

- Arrow emphasizes the crucial role of asymmetric information between patients and healthcare
providers.
- Patients typically lack the medical expertise to fully evaluate treatment options, leading to reliance
on the advice of physicians.
- Physicians, in turn, may have incentives that are not aligned with the patient's best interests,
leading to potential moral hazard and adverse selection issues.

*4. Market Failures in Healthcare:*

- Arrow identifies several market failures in the healthcare sector, including:
- Imperfect competition due to barriers to entry and limited consumer choice.
- Externalities arising from contagious diseases and public health concerns.
- Incomplete markets for health insurance, particularly for catastrophic events.
- Uncertainty surrounding the efficacy and risks of medical treatments.

*5. Implications for Healthcare Policy:*

- Arrow discusses the implications of these market failures for healthcare policy.
- He argues that government intervention may be necessary to address these failures and ensure
equitable access to healthcare.
- Potential policy solutions include regulation, public provision of healthcare services, and the
establishment of comprehensive health insurance systems.

*6. Conclusion:*
- Arrow concludes by emphasizing the importance of recognizing the unique characteristics of the
healthcare industry in economic analysis.
- He calls for further research and policy development to address the challenges posed by
uncertainty and information asymmetry in medical care.

*Significance:*
- Arrow's article laid the foundation for the field of health economics, highlighting the complexities of
healthcare markets and the limitations of traditional economic theory in understanding them.
- It sparked a paradigm shift in healthcare policy discussions, leading to increased emphasis on
government intervention and regulation to address market failures in healthcare.
- Arrow's insights continue to influence contemporary debates on healthcare reform and the design
of healthcare systems worldwide.

Kenneth J. Arrow's "Uncertainty and the Welfare Economics of Medical Care" remains a seminal work
in the field of health economics, providing a comprehensive analysis of the unique challenges facing
the healthcare industry and offering valuable insights for policymakers and researchers alike.
1. The paper explores the distinctive aspects of medical care from a normative
economics perspective.
2. It argues that economic challenges in medical care arise due to uncertainties in
disease occurrence and treatment effectiveness.
3. Emphasizes the focus on the medical-care industry, not overall health,
discussing services around physicians, practices, hospitals, and public health.
4. Compares the medical-care industry to the norms of welfare economics,
particularly the competitive model, for efficiency evaluation.
5. Introduces the First Optimality Theorem, stating that a competitive equilibrium is
optimal if it exists and all relevant commodities are priced.
6. Discusses the definition of optimality and the value judgment associated with
achieving optimal states.
7. Introduces the Second Optimality Theorem, suggesting that optimal states can
be achieved through redistributing purchasing power without changing resource
allocation.
8. Highlights the role of taxes and subsidies as tools for redistributing purchasing
power in achieving optimal states.
9. Notes that if the real-world market aligns with the competitive model, social
policy can focus on redistributive steps to achieve optimal states.
10. Concludes that if the actual market deviates from the competitive model, or if
the optimality theorems' assumptions are unmet, the separation of allocation and
distribution becomes challenging.

1. The first step in analyzing the medical care market involves comparing the actual market
with the competitive model.
2. M. Friedman argues that models, including the competitive one, should be tested based
on their predictive ability.
3. The paper includes institutional organization and observable practices of the medical
profession in assessing market competitiveness.
4. Competitive preconditions like the existence of equilibrium, marketability of relevant
goods, and nonincreasing returns are discussed.
5. Marketability extends beyond private and social costs, including cases like
communicable diseases where traditional market mechanisms fail.
6. Nonmarketability, especially in risk-bearing, significantly influences the medical-care
market and affects the desire for certain services.
7. The absence of markets for some risks reduces welfare, leading to compensatory
institutional changes to address the lack of optimality.
8. The paper suggests that societal recognition of market failure prompts the emergence of
nonmarket social institutions to bridge the optimality gap.
9. Redistribution in taxation and expenditure policies can be seen as a form of insurance,
addressing the desire for optimal outcomes in the presence of uncertainty.
10. The plan for the paper involves a catalog of stylized generalizations about the medical-
care market, a comparison with the competitive model disregarding uncertainty, and a
comparison with an ideal competitive market considering uncertainty.
11. The discussion aims to provoke thought rather than provide definitive policy
inferences, with an emphasis on framing the groundwork for further research.
 13/03/24
-EAL TH
ECONOMICS
#End-Terms will be

1) Highly melastic completely .

theoretical

2) consumer
surply =
Profit #
Thorough notes for
3) CS + PS End-se required
4) Competitive Equilibrium # No MCQs .

3) CS from consumers to Producers

important Points for Wagstaff

-
Answer

① A the other
important factors are constant .

Only one variable is

allowed to
change
.
② make a
graph
. Through it
, explain => lower health , lower consumption
,
lower
inputs ,
because of Ain Budget
③ conclusion : -

Supplementing the income

④ unequalities in income
.
(Example-Britain) -
Dist in
.
health stays the
.
same
⑤ unemployment
in income in health
⑥
larger fall larger fall ,

is health and income

⑦
Figure 13.
. -
Relationship of not linear
Explain with

⑧ more deamatic change in health for poor than those in rich income
, groups
.
Redistribution will benefit more than the loss of poor
.
Policy Rich people are taxed and poor
->
given are the benefits
⑨ mequality is more in low per-capita income
.

Health

- I

Income

X -

X
① Evolution/Emergence of Neo liberalism Market should be the leader

&
.

People & Capitalists ↳ Gout Should have lowest

changes in
policy of health
.

should same
& be
interference
money
into ! Classical Economics-18th & 19th
Century Adam Smith Ricardo , Mill
bought
-

investments thus
into the markets
.
, Adam Smith : Wealth of Nations IInvisible Hand Automatic Correction of Markets
:

century Alfead Marshall Utility maximiz

H Economics-Earlier 20th >
-
Social we are 2 inNeo-Classical -

Bought mathematic
.

the
↓ -
Economic congrun-technical aspects ecuniaein
compared to classical Economics Carand
Brings .

Growth
-
But Neo-classical Econ failed and led to Great Depression in 6
-

classical Economics
US Gout goes to an economist , to revive the demand
.
Keynes
.

S
Gout .

interfered ,
taxed the rid created demand
. ,

1929 and perpetuated till 1930s

.

- This led to loss of demand

. =) increased
unemployment
Economics-casted till
Keynesian
3
. 1960s
.

Government It should take corrective measures

.
plays a role
-
.

(But rich were taxed , and rich were in

↓
power)
Price <4 .

Neo-Keynesian Economics-1970s Rich were not

happy for paying
stickiness for the poor
.
lesser
government intervention
-

Neo-liberalism-1990s (focus on Neo-liberal

.
5
↓ Lesser focus on fiscal policies
&
↓ Health)
focus Monetary policy Aspects
more on on
New No Gout Interference .
interest rates
.

printing of money
-PoliticalandEconomicphilosophya got.
-

less intervention
, privatization
.

-
core Principle : ① Market should be competitive
② individual should have the demand/choice to buy
.
③ reduction in
public expenditure
Eg : Minimum
Expenditure for MNREGA should be done , to ensure free &
competitive
market)

* Survival Fittest/Code
of the word for Neo-liberalism)
* Individualism = core Idea for Neo-liberalism
.

economic of investment.
-
Also promotes growth through ,
the channel

(No taxes , savings investment innovation shift in

more
,
more
,
more
, production curve
,
more
efficiency ) .

Neo-liberalism
Paper to Read McGregor : : & Healthcare : 2008

18/03/24
1929 Classical & Neo-classical Economists could not
-
Great Depression -

cope with unemployment & low demand

.

Keynes kicked in So ,

WW1 ->
Germany Europe UK Russia.
he
-

, ,

1945
-

companies making a lot of profit.

oil
-

similarly for can industries

.

attacked UK
* Germany They have 3 times . more
aircraft but it
still wasn't able to .
win

1950s
Higher
have
morality to fight .

Theories developed after a

background of Wac
.
 table-ripple effect of sector

Leontiff- Input/output
one

Lewis
RR Hischman , A the other sector
on .
, ,

of
-
connection sectors

((
Bigpush
↓
-
Post Was

economy grow from

-

How an can
Underdeveloped countries are
Gont needs
underdeveloped to
developing
.
-

is socialles
to unvest usually agracian . There .

in several .
labor They have
surplus
sectors at manufacturing units as

.
well
one point of
Twen ancedshiftoe
is of

neingacture
ultu

to manufacturing sector
.

The
wages of the employees
need to
↑
change over time
.

+
Aged
-

Dynamic
interaction in various sectors
.
>
underdeveloped
is
↳ pushed
growth
& self-sufficiency
Posel
Externality
-ve
Infrastructure Imigration more ,
etc .
wages
self-sustainance
,

Agriculture ,
Better
food quality
.

What are the reasons these countries are

underdeveloped ,
area - Overall Geographical

S
south
the
he
Economists
O PaulBeam ,192 aste
and
wealth
inequality
will not
mostof wat including
small dites and these elites
don't
india)
invest that
>
-
They
d a (Developed count ) allow a level .
much there is each
Thenfon of investment
.

reasons
③ Samie Amin , 1976
equate change breakforpool which leads to
production
underdevelopment.
unemployment
④ Prebise &
Singer dynamics) another will create
of investment
-
as
part of GDP is
share
(Not allowing issues increasing
↑
Primacy Goods ↑Prices t their for tes
decreasing but
. Terminally
need to
,

County development of underdeveloping counties

understand
Goods
manufactured country ,
but
pushingin global power dynamics
.
(developed) Prices to sell their products
that
country)
·

Relationship (for eg
Dependency : India was developed even for food tile 1999)

Theory of Foreign Exchange Rates

① Friedman (1961)
(1953C ↓
② Mundell
(OCA) optimal Currency Areas #India
floating/flexibleExchange Less & surcharges (out

giant ratelig a
Rate is better than cent
fixed exchange rate
.
it of divisible pool
similar economic structures
It is based on
monetary
can - most of the
money
.....
form they
-

is
are
going to the center
as
factors (supply
a demand less
receptable to asymmetric gont .

for money) shocks and benefit from

to similar economic .
policies
It allows countries to
have their own
tailored
monetary policies
domestic
,
their
for own

.
needs

Adjustment to
external stocks
legt Recession)
N
Economic Stability
 McGregor .

in Public Finance
Development
Equity and Efficiency Trade-off
Wissell (1896) based on 5
concepts
-

We need to maintain equity ,

but also maintain efficiency
.
cannot
compromise efficiency
-

on
.
# Philosophy taken ahead
by Samuelson (1954)
↳ to
Public Health - Public Goods -
Non rivally why gont needs interfere for
public goods ?
collective
Goods Non
Excluding -
market cannot correct the
deficencies
of supply & demand .

<teamsf
-
Gout. will have to
interfere
Rent money from
side to
pool)
(1967) Seeking Education and health are the 2 sectors in
Tullock and
Kengo (1974) -
Behaviors which
gont · intervention makes .
sense

influential people intervene in their

gont policies for own
purpose
.
-
·

① leads to inefficient resource allocation

Resources
-

are
x -
x
fixed Economic Evaluation of Healthcare 22/03/2024
② Opportuwity
- -
-

cost ① Partial Evaluation Raw material

+ ② Full Evaluation >
- Intermention
I
& Technical know how

Partial cost R& D

↓

of Cost comparates
- < gainedyears -
no

Evaluation Intervent -on

comparator &

S
<consequences
consequences
-
opportunity
cost b/w /Education/Sanitation/Poverty Eradication > CROSS
-
-

TIONAL
tr ↓ ANALYSIS
L
Evaluation within Evaluation Amongel other Sectors (Cross Sectional)
HealthCare long-lag
effect

·economiqualuation ofaDrugs launching Understanding Analyzing a e

cost

for
it . and

Read : officiency

then the intervention is .

of consequences' benefit > cost
.
,
good
This is partial
analysis

O Cost Minimization
Evaluation
Method :
Minimizing the cost
given that the output
of Drug remains the
same
.

Partial Evaluation drug

1
only
->

should be
full Evaluation >
-
comparison with another
ding
& Disability Adjusted life years
more .

Quality Adjusted QALY and DALY can also be a unit .

Simplest unit is MONEY

.
ufe years
Expectancyis
life good
also a mene
e
 Cross Sectional Evaluation
most commonly ,
the unit used is
Money ,
for .

> how
Willingness to
Pay Approach much someone is
willing to pay for their health
.

& ·

cost-benefit analysis can be used to consider the optimal allocation

of
its broadest because have been connected
resources in sense once the
benefits
into monetary terms
,
then the net economic
benefit of different
outside healthcare sector
activities can be compared , including those . It

can
,
therefore ,
consider allocative efficiency across different sectors
or across
society
.
intervention
commonly summarized by estimating benefit of
C-B the net
analysis
· are

cost latio
.
or benefits to
·

If ,
in
monetary terms
,
benefits cost
,
intervention is
good.

Or
OR IRR -

Internal Rate of Return

27/3/24
Revision
: .
Example a
ffectiveness million.
: =

, this
So intervention

Effectiveness = 2 times the cost E is

good.
But this is
, partial analysis .

isting
Dug
comparate
millionon
=
3

cost

so
, the
existing drug is more
efficient thanthe new

drug
.
This is
why full analysis is important .

Benefit in
CBA Cost
Analysis Measuring the
Benefits
⑧ -

↓ &
↓ ·
No .

of lives saved
monetary
teems is
very
MONEY cost of who did net

producing
- No
of people
difficult There certain
.

a are
particular disease
.

get a

drug .

lived etc . to do that :

Units of years
ways
: No ·

,
↳ units are connected into
money
.
 willingness to Pay Approach
The willingness to
pay technique is based on the premise that the max amt . an

individual willing to pay indicator of

is or sacrifice for a
given commodity is an

its value to them

.
Using the willingness to pay technique could involve estimating
what individual is
an
willing to pay for certain health benefits thus estimating ,

value of health benefits of an intervention in monetary terms for that

individual

Cross-sectional
Analysis
in terms
drug
# The to introduce
cost
of public resource new
a
.

, ,

considering thei millingnes

that whenanindividua
i is
a
Iagued
max

pay , they take into account

,
all the attributes of the service of importance

Disadvantage largely representative for people

: with
money .
So
,
there's a bias for rich and

wealthy
.
Survey Method
LRevealed Preferences
-

·
for MCC
2 methods in the market
only .

and ask about

stated preference metered typically use
survey questions
their
willingness to
pay for an outcome .
In contrast
,
revealed

preference method
indirectly
uifers the value of non-market outcomes

like health benefits from observed behaviours or

prices for related
market .
goods life years ↑

gamed
↑
of Benifit
Quick measures
(LYG]
of HealthCare
-C
Measures
of Economic Evaluation
Review r
① Cost
Benefit Analysis money Money
AC
② cost
Effectiveness Analysis Money Natural Health Units -

③ cost
-
Utility Analysis extension of money DALY O QALY
-
A

ARALY
C
Effectiveness
OR LYG

④ cost
minimization constant A cost
Approach money -

rarely used) L
↑

I final
Measure
of cost measure
 CostEffectiveness Analyses #comparator
ICER
ACER-Average Cost Effectiveness Ratio cemental Cost -

#Partial Effectiveness Ratio

Analysis
=costof intervention
a Cost-Costa
-=
=

on

L Effectiveness-affectiveness A
↓
E

B >
- New
strategy cost
Switching
of Price
of additional outcome
A - old
Strategy from Strategy A to purchased by switching from
.
B
new
Strategy current
strategy to new strategy
.

In some people to
cases
,
are ready
forego the effectiveness for the cost
-
.

24 ↓
QALY and DALY are the same
.

-
quality xufe years
Quality ↑

of life went down because of depression

1
Quality
.

:E
-

T measured bl 0 and 1
.
↓
perfect health
Deteo
-
! life years
 of Uns
cost teedical
- -
cost- cost of Medicine ② Direct Non-Medical .
costs

consultation Fees
③
-
IndirectCost -

Transportation (Ambulance)
-
sick leaves Tests and Diagnosis -
Medical Devices
-

Productivity loss Nursing services

-

Early Retirement

MEASURES
Book
Hypertension - 2015
measured based 1 2010
Q Prevalence Based Estimates
>
-
- on

Pg24 .

year .

disease started
②
Incidence Based -> Based on when the .

Human Capital Method -

People get their mages based on what value they produce .

wages are proxy to

value
a
of human capital
.

Eg Person aged 30 Death because of heart attack

:
·
.

Based on HC method , estimating the

mages he would've

earned it he would've survived

.

Fiction Cost Method More

practical used in European countries
usually .
-

If someone
falls ill/passes away the job will be filled
,

by the market (by a new employee existing emp ). or .