JIGAWA STATE POLYTECNIC
COLLAGE OF HEALTH SCIENCE
DEPARTMENT OF PUBLIC HEALTH
COURSE HEALTH ECONOMICS
LECTURE NOTE
Introduction
Health economics is a relatively young subdiscipline, and the measurement of inequalities in the
health domain has only relatively recently received attention from health economists.
Nevertheless, and perhaps unsurprisingly, the topic has a very long history outside health
economics, in particular in public health, demography, sociology, and epidemiology. The notion
of a ‘gradient in health’ across measures of socioeconomic status has been the subject of
empirical analysis and speculation regarding its causes for more than a century. For example, in
the mid-nineteenth century, William Farr proposed a law relating mortality with population
density. At around this time, the famous political economist William Stanley Jevons examined
variation in the rate of mortality in different English cities, attributing differences to the
proportion of poor Irish immigrants (Jevons, 1870). In the early part of the twentieth century,
there were also several empirical examinations of income-related gradients in mortality,
including analyses by Hibbs (1915) and Woodbury (1924) of the gradient in infant mortality in
the US using information collected from household surveys. A key issue then (as now) was
whether the relationship between health and income was purely a correlation, or implied some
form of causation. However, most of these early studies reported the health–income gradients
only in a tabular or graphical form and did not apply any of the measures the authors examine
here.
In this article, the authors give a non-exhaustive overview of the techniques that economists have
developed to measure inequality and inequity in health and health care. These measures have
their origins in univariate measures such as the Gini coefficient and the Lorenz curve that were
developed in the early twentieth century to measure income inequality. Economists also
developed bivariate inequality measures, particularly for quantifying the distribution of
categories of expenditure across income (Wiśniewski, 1935). Some of these early studies used
measures such as concentration curves and indexes to examine health care spending as a
component of household expenditure at different levels of income (Iyengar, 1960; Ghezelbash,
1963).
It has only been in the past few decades that these measures have been used specifically for
health economics applications. Probably the first proposal for the use of the Gini coefficient in a
health economics context can be attributed to Chen (1976), who formulated the K index as a
proxy measure of health care quality. The rationale for using this measure was as a way of
penalizing situations where avoidable morbidity was concentrated in a small number of
individuals rather than being spread more evenly across a community. Le Grand (1987) also
applied the Gini coefficient to quantify inequalities in age at death in his international
comparisons across a range of high- and middle-income countries. However, more recent
applications of the Gini are less common than studies focusing on bivariate inequality, i.e., the
correlation between health and measures of socioeconomic status such as income. Here, the
measure traditionally adopted is the concentration index, stemming from proposals of Wagstaff
et al. (1991), which has been widely employed in international inequality comparisons (e.g., see
Van Doorslaer et al., 1997). In the past few years, there has been a considerable interest in
developing new uni- and bivariate health inequality measures, in part to address some of the
aspects of health such as the bounded nature of many health measures (e.g., rates of mortality
must fall in the 0–1 range).
The authors' overview focuses on the most important contributions since 2000 and is intended
primarily as a catalog of what is available at present. They therefore confine themselves to a
short presentation of the various measurement techniques developed by economists; for more in-
depth discussions or the literature on the causal mechanisms linking health and income the
authors refer to the literature list at the end of this article. The remainder of this article contains
four sections. The authors discuss the measurement of inequality in the next section. Next, the
authors deal with decomposition methods and introduces methods to measure health inequities.
The final section concludes. For brevity, the authors refer to health variables in what follows, but
all methods described in this article can be applied to any variable measuring health, health care
use, and health care expenditures.
WHAT IS HEALH ECONOMICS?
Health economics is the discipline of economics applied to the health care. Broadly defined,
economics concerns how society allocates its resources among alternative uses. Scarcity of these
resources provides the foundation of economic theory and from this starting point, three basic
questions arise:
OR
Health Economics is an applied field of study that allows for the systematic and rigorous
examination of the problems faced in promoting health for all. By applying economic
theories of consumer, producer and social choice, health economics aims to understand
the behavior of individuals, health care providers, public and private organizations, and
governments in decision-making.
Health economics addresses these questions primarily from the perspective of efficiency—
maximizing the benefits from available resources (or ensuring benefits gained exceed benefits
forgone). Equity concerns are also recognized—what is a fair distribution of resources.
Considerations of equity often conflict with efficiency directives. However, due to the contested
nature of this area and the difficulties in quantifying equity dimensions, this element has not been
a major focus of health economist’s work.
WHY IS HEALTH ECONOMICS IMPORTANT?
Thirty years ago, there were limited options for doctors making treatment choices and patients
did as they were told. Any values that contributed to the decision-making process were implicit
and determined by the physician. However, against a background of limited health care
resources, an empowered consumer and an increasing array of intervention options (see fig 1)
there is a need for decisions to be taken more openly and fairly.
Diagrammatic background to health economics—increasing demands on limited resources (area
of each circle reflects size of each variable). The importance of the economic model is that it
provides useful insights into how health care can be organized and financed and provides a
framework to address a broad range of issues in an explicit and consistent manner.
Organizational changes such as the development of the National Institute for Clinical Excellence
and the devolution of decision making to primary care organizations have led to an increasing
interest in the subject and its influence on health care organization and decision making.
Importance of heath economics
[Link] analysis is an important tool in deciding how to allocate scarce public health
resources
2. To determine their current use of health economics and to identify barriers to use as
well as potential strategies to decrease those barriers in order to allow them to more
effectively incorporate economic analyses into their work
[Link] information to decision makers for efficient use of available resources for
maximizing health benefits
[Link] is a tool for comparing costs and consequences of different interventions. serve as a
tool for
Roles of government in economics system
However, according to Samuelson and other modern economists, governments
have four main functions in a market economy — to increase efficiency, to
provide infrastructure, to promote equity, and to foster macroeconomic stability
and growth.
1. Efficiency:
First, the government should attempt to correct market failures like monopoly and
excessive pollution to ensure efficient functioning of the economic system.
Externalities (or social costs) occur when firms or people impose costs or
benefits on others outside the marketplace.
2. Infrastructure:
Secondly, the government should provide an integrated infrastructure.
Infrastructure (or social overhead capital) refers to those activities that enhance,
directly or indirectly, output levels or efficiency in production.
Essential elements are systems of transportation, power generation,
communication and banking, educational and health facilities, and a well-ordered
government and political structure. Since the cost of providing these essential
services are very high and benefits accrue to numerous diverse groups, such
activities are to be financed by the government.
3. Equity:
Markets do not necessarily produce a distribution of income that is regarded as
socially fair or equitable. As market economy may produce unacceptably high
levels of inequality of income and weather. Government programmes to promote
equity use taxes and spending to redistribute income toward particular groups.
4. Economic Growth or Stability:
Fourthly, governments rely upon taxes, expenditures and monetary regulation to
foster macroeconomic growth and stability to reduce unemployment and inflation
while encouraging economic growth.
Macroeconomic policies for stabilization and economic growth includes fiscal
policies (of taxing and spending) along with monetary policies (which affect
interest rates and credit conditions). Since the development of macroeconomics
in the 1930s governments have succeeded in bringing inflation and
unemployment under control.
MARKET THEORY
The market system allows individuals to exchange goods and services voluntarily, based on
prices, without knowing one another. For instance, the cup of coffee a person drinks in the
morning was brought to that person by thousands of strangers, who cultivated, harvested,
processed, manufactured, packaged, shipped, stocked, and sold goods at various stages of
production along the way.
One way to appreciate the distinctiveness of market-mediated trade among strangers is to
contrast it with other ways in which people transact with one another. The anthropologist Alan
Fiske (2004) suggests that all interpersonal transactions can be sorted into four relational models:
In a communal sharing transaction, such as a family dinner, every member in the
relationship is entitled to share in what is available.
In an authority ranking transaction, such as a decision made in a traditional military unit
or a corporation, there is a clear hierarchy, with people lower in the hierarchy deferring to
those who are higher up.
In an equality matching transaction, such as taking turns going through a four-way stop,
people operate according to an intuitive sense of balance and fairness.
In a market pricing transaction, such as buying a used car, people make decisions on the
basis of their calculations of the costs and benefits.
The cognitive psychologist Steven Pinker, author of The Blank Slate (2002), argues that among
these four modes of transactions market pricing is a relatively new phenomenon in the
development of the human species:
Market Pricing is absent in hunter-gatherer societies, and we know it played no role in our
evolutionary history because it relies on technologies like writing, money, and formal
mathematics, which appeared only recently (Pinker 2002, p. 234).
An important aspect of hunter-gatherer societies is that people belonged to tribes or bands of
fewer than 150 people. Everyone knew everyone else, and people expected to interact with one
another repeatedly. Small groups with repeated interactions are conducive to establishing trust
and confidence in reciprocity, which are requirements for communal sharing and equality
matching. When societies become larger and people must interact with strangers, something
must replace trust and confidence. Only authority ranking or market pricing can "scale up" to
large groups.
There are four Central Theories of the Market Economy traces the root of the theories, their
conception and articulation, as well as their evolutions to the present time. It focuses on the
four theories that are generally recognized as fundamental to the discipline of economics:
a, the invisible hand
The invisible hand is a metaphor for how, in a free market economy, self-interested individuals
operate through a system of mutual interdependence. This interdependence incentivizes
producers to make what is socially necessary, even though they may care only about their own
well-being. What is invisible hand example?
The Invisible Hand of the market creates predictable economic systems such as supply and
demand, because humans are relatively predictable in their behavior. For example, you predict
that when you go to the supermarket there will be eggs and milk for sale.26 Aug 2021
b. comparative advantage,
Comparative advantage is an economy's ability to produce a particular good or service at a
lower opportunity cost than its trading partners.
Comparative advantage is used to explain why companies, countries, or individuals can benefit
from trade. Comparative advantage is the ability of a country to produce a good or service for a
lower opportunity cost than other countries.
Opportunity cost measures a trade-off. A nation with a comparative advantage makes the
trade-off worthwhile. This means the benefits of buying its good or service outweigh the
disadvantages. The country may not be the best at producing something, but the good or
service has a low opportunity cost for other countries to import.1
This economic theory was developed by David Ricardo. It was originally applied to international
trade, but it can be applied to any level of business.
c. law of markets,
the actions of buyers and sellers that cause the prices of goods and services to change without
being controlled by the government: the economic forces of supply and demand The value of
these commodities is determined by market forces.
d. Quantity theory of money.
Quantity theory of money states that money supply and price level in an economy are in direct
proportion to one another. When there is a change in the supply of money, there is a
proportional change in the price level and vice-versa.
Supply and demand
Supply and demand are the economic forces of the free market that control what suppliers are
willing to produce and what consumers are willing and able to purchase.
The term supply refers to how much of a certain product, item, commodity, or service suppliers
are willing to make available at a particular price. Demand refers to how much of that product,
item, commodity, or service consumers are willing and able to purchase at a particular price.
In other words, supply pertains to how much the producers of a product or service are willing
to produce and can provide to the market with limited number of resources available. Whereas,
demand is how much of that product or service the buyers desire to have from the market.
Law of Supply and Demand
Demand and supply play a key role in setting price of a particular product in the market
economy. Since demands of buyers are endless, not all that is demanded can be supplied due
to scarcity of resources. This is where the relationship of demand and supply plays a significant
role, allowing efficient allocation of resources and determining a market price for the product
or service, known as equilibrium price. This price reflects the price at which suppliers are willing
to supply and the buyers are willing to buy from the market.
The mechanism of determining market price through demand and supply can be better
understood by observing the market economic theories.
According to the law of supply, as the price of a product increases, the suppliers will be more
willing to supply that product as they can enjoy higher profits by selling that product or service.
Insurance scheme
Most people have some kind of insurance: for their car, their house, or even their life. Yet most
of us don’t stop to think too much about what insurance is or how it works.
simply insurance is a contract, represented by a policy, in which a policyholder receives
financial protection or reimbursement against losses from an insurance company. The company
pools clients’ risks to make payments more affordable for the insured.
Insurance policies are used to hedge against the risk of financial losses, both big and small, that
may result from damage to the insured or their property, or from liability for damage or injury
caused to a third party.
Insurance Policy Components
When choosing a policy, it is important to understand how insurance works.
A firm understanding of these concepts goes a long way in helping you choose the policy that
best suits your needs. For instance, whole life insurance may or may not be the right type of life
insurance for you. Three components of any type of insurance are crucial: premium, policy limit,
and deductible.
[Link]
A policy’s premium is its price, typically expressed as a monthly cost. The premium is
determined by the insurer based on your or your business’s risk profile, which may include
creditworthiness.
For example, if you own several expensive automobiles and have a history of reckless driving,
you will likely pay more for an auto policy than someone with a single midrange sedan and a
perfect driving record. However, different insurers may charge different premiums for similar
policies. So finding the price that is right for you requires some legwork.2
[Link] Limit
The policy limit is the maximum amount that an insurer will pay under a policy for a covered
loss. Maximums may be set per period (e.g., annual or policy term), per loss or injury, or over
the life of the policy, also known as the lifetime maximum.
Typically, higher limits carry higher premiums. For a general life insurance policy, the maximum
amount that the insurer will pay is referred to as the face value, which is the amount paid to a
beneficiary upon the death of the insured.
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The deductible is a specific amount that the policyholder must pay out of pocket before the
insurer pays a claim. Deductibles serve as deterrents to large volumes of small and insignificant
claims.
Deductibles can apply per policy or per claim, depending on the insurer and the type of policy.
Policies with very high deductibles are typically less expensive because the high out-of-pocket
expense generally results in fewer small claims.
Types of Insurance
There are many different types of insurance. Let’s look at the most important.
[Link] Insurance
With regard to health insurance, people who have chronic health issues or need regular medical
attention should look for policies with lower deductibles. Though the annual premium is higher
than a comparable policy with a higher deductible, less expensive access to medical care
throughout the year may be worth the tradeoff.
[Link] Insurance
Homeowners insurance (also known as home insurance) protects your home and possessions
against damage or theft. Virtually all mortgage companies require borrowers to have insurance
coverage for the full or fair value of a property (usually the purchase price) and won’t make a
loan or finance a residential real estate transaction without proof of it.
[Link] Insurance
When you buy or lease a car, it’s important to protect that investment. Getting auto insurance can
offer reassurance in case you’re involved in an accident or the vehicle is stolen, vandalized, or
damaged by a natural disaster. Instead of paying out of pocket for auto accidents, people pay
annual premiums to an auto insurance company; the company then pays all or most of the costs
associated with an auto accident or other vehicle damage.
[Link] Insurance
Life insurance is a contract between an insurer and a policy owner. A life insurance policy
guarantees that the insurer pays a sum of money to named beneficiaries when the insured dies in
exchange for the premiums paid by the policyholder during their lifetime.
[Link] Insurance
Travel insurance is a type of insurance that covers the costs and losses associated with traveling.
It is useful protection for those traveling domestically or abroad. According to a 2021 survey by
insurance company Battle face, almost half of Americans have faced fees or had to absorb the
cost of losses when traveling without travel insurance.4
Health insurance is a type of insurance that helps cover the cost of an insured person’s
medical and surgical expenses.
Insurers use the term “provider” to describe a clinic, hospital, doctor, laboratory,
healthcare practitioner, or pharmacy that provides treatment for an individual’s
condition.
The “insured” is the owner of the health insurance policy or the person with the health
insurance coverage.
Function of Health Insurance
1. Financial protection to individuals with catastrophic health events.
Health insurance, like car insurance, protects individuals from unpredictable and
financially catastrophic events. Like car crashes, catastrophic health events are both rare
and difficult to predict, and their costs are far beyond most people’s means. Drugs to treat
cancer or multiple sclerosis can run more than $10 000 per month, a crushing amount for
all but the few. Organ failure requiring a transplant can lead to hundreds of thousands of
dollars in costs. Policies aimed at improving this function of health insurance include
capping annual out-of-pocket expenses, ending lifetime benefit limits, and ensuring
coverage for people with preexisting conditions.
2. Broad access for small usage fees.
Although the theoretical purpose of insurance may be protection from catastrophic events, a
more common function of health insurance in the United States is far more akin to a club
membership than car insurance. In exchange for an annual fee, beneficiaries receive access to
free or low out-of-pocket cost services, such as routine doctor visits. These services are largely
predictable—such as well-child visits for people with children or medication refills for people on
lipid-lowering medications. Policies aimed at the club membership function generally aim to
customize policies to people’s needs. Medicare beneficiaries enrolling in Part D prescription
drug coverage, for instance, enter the medications they are currently taking to find the plan that
best subsidizes those items.
3. Negotiating health services.
Health insurers leverage their market power to obtain price concessions from clinicians or
hospitals and health care systems or, alternatively, to screen out high-cost providers from their
networks. Covered patients benefit from these discounts even when paying out of pocket for
services (with the exception of prescription drugs, for patients often pay list prices even when
they have insurance). Policies that focus on this function of health insurance affect the
negotiating leverage of clinicians and hospitals relative to insurers. Medicare, for example, sets
payment rates via fee schedules, rather than allowing health care systems to use their market
leverage to drive up the prices they charge. The Affordable Care Act (ACA) encouraged insurers
to construct “narrow” networks of clinicians and hospitals to help commercial plans obtain lower
rates through increased negotiating leverage. Insurance company consolidation strengthens the
insurer’s negotiating position as well.
4. Enhancing and ensuring the quality of clinicians and hospitals. Both commercial and
government insurers have developed measurement efforts that aim to monitor and improve the
quality of hospitals. Examples include both quality ratings that help patients and plans select
which hospitals to engage, and exclusion of certain hospitals from providing types of services
based on quality. Medicare Advantage plans have quality ratings. Medicare limits which
hospitals can perform the transcatheter aortic valve replacement procedure to those with
adequate volume and expertise. Policies focused on this function of health insurance focus on
more comprehensive measures and quality measurement.
5. Nudging individuals toward staying healthy. Health insurers for the past decade have
experimented with benefit designs that encourage healthy behavior. This includes premium
reductions for individuals who join health clubs or stop smoking. Value-based insurance design
(VBID) is another example. Under VBID-type policies, individuals pay little or nothing out of
pocket for health services deemed beneficial, such as preventive services and certain medications
that prevent complications of diseases like diabetes.
6. Wealth transfer.
Health insurance is the vehicle of sizable wealth transfers. The wealthy pay more than the
nonhealthy through taxes to fund Medicare and Medicaid. But the wealthy disproportionately
benefit from tax-subsidized health insurance premiums paid by employers. Policies often target
these transfers, such as the ongoing debate over the “Cadillac tax” that would reduce the tax
subsidy for especially generous insurance plans. As another example, the ratio of premium
differentials between young and old was limited to 1 to 3 in the ACA, but one of the bills
intended to repeal the ACA contemplated widening the ratio to 1 to 5 (lessening the wealth
transfer from younger to more elderly individuals). Subsidies for rural hospitals transfer wealth
out of cities and suburbs. And of course, health insurance works via risk pooling, which is to say,
transferring wealth from the healthy to the sick.
privatization
It is transfer of government services or assets to the private sector. State-owned assets
may be sold to private owners, or statutory restrictions on competition between
privately and publicly owned enterprises may be lifted. Services formerly provided by
government may be contracted out. The objective is often to increase government
efficiency; implementation may affect government revenue either positively or
negatively. Privatization is the opposite of nationalization, a policy resorted to by
governments that want to keep the revenues from major industries, especially those
that might otherwise be controlled by foreign interests.
Privatization is defined as a transfer of ownership, property or business from the
government to the private sector is termed privatization. The government ceases
to be the owner of the entity or business.
Types of Privatization
There are three types of privatization: selling, contracting, and limiting regulations.
Selling
Selling is what people first think of when they hear the word privatization. It normally applies to
the government selling one of its major corporations to raise funding and/or aid the efficiency of
a certain industry. Normally, companies are sold in an auction format to the highest bidder. In
certain situations, this bidder will agree to a set of obligations that the government previously
had to meet with the company (for example, providing utilities to citizens).
Privatization leads to increased growth. In this system, the government regulates and facilitates
the innovation and advancements that the private sector brings to the economy
Contracting
Contracting relates to outsourcing certain tasks, duties, and/or obligations. Considering the
efficiency that is normally found in the private sector, governments have much to gain by
contracting private entities. For example, since the governments of some third-world nations lack
the adequate infrastructure and production capital to fulfill certain obligations, the system is
better served if private contractors are hired to conduct specific tasks like waste hauling, and
road maintenance.
Limiting Regulations
Being the sovereign entities of economies, governments tend to tightly regulate most industries.
When the public sector withdraws from that industry and removes a series of regulations, that
industry can be considered privatized to some extent. Privatizing certain industries like this saves
the government money and allows those industries to capitalize on the forces of the free market.
Roles of private sector in achieving universal health coverage in Nigeria
[Link] quality products and services that consider the needs of all people including
poor and marginalized populations, and make these affordable, accessible and
sustainable
-The private sector is a significant provider of products and services in most countries.
This core offering of demand-driven products and services is its greatest contribution to
UHC.
2. Incorporate UHC principles, including to leave no one behind, in core business
models and objectives
- This may include, for example, looking beyond immediate results and taking a long-
term approach to business goals and impact, consistent with supporting development of
resilient and sustainable health systems. The same principles also apply to any
philanthropic or charitable activities
3. Develop, test and scale up innovative business models that align with UHC goals
-Innovation can happen on many levels, especially in approaches that help to drive
greater and more equitable access, quality and sustainability of health product and
service offerings.
[Link], adapt, apply and scale up innovations
-Private sector innovation is an engine for new products, techniques, and insights that
can improve healthcare, strengthen health systems, and increase efficiencies. Digital
health can be game changing for health system transformation. New technologies and
approaches can help countries to ‘leapfrog’ along health and development pathways
and rapidly accelerate progress towards UHC.
5. Help strengthen the health workforce, responding to local context, priorities and
needs
- The private sector makes important contributions to training health workers (providing
and supporting both pre-service training and continuing education), to knowledge
transfer that strengthens health workforce capacities, to workforce data and evidence,
and as a major employer of health workers
6. Contribute to efforts to raise the finance available for UHC
- Achieved through, for example: contributing to innovative finance models and tools,
engaging constructively in dialogue on corporate taxation, and supporting governments
to articulate the business case for investing in health and UHC
[Link] in, champion and build capacities for relevant policy dialogue and
partnerships with government and other stakeholders
-This is fundamental for identifying shared objectives and developing collaborations for
shared outcomes. It is also important for feedback on the effectiveness of existing and
proposed policies and regulatory regimes.
