* PUH 607

Introduction to Health
Economics

By
Dr Esan, O.T.
* At the end of this class, students should be able to:
* Discuss the role of economics in health
* Differentiate between economics and health economics
* Mention the effects of good health on the economy and the effect of
good economy on health
* Discuss in detail the important concepts in economics as they relate
to health

*Objectives
* Introduction
* Definitions of economics and health economics
* Effects of good health on economy and vice
versa
* The important concepts in health economics

*Outline
* Where would one naturally see an economist and why?
* In the business world
* because they often talk about money, profit, production costs
and markets.
* Whereas, in the hospital, the more familiar terms are drugs,
nursing, caring, treatment, investigations and managing the
differences between life and death.

*Introduction
 *Introduction cont.
* In principle, Economics is about
* making choices,
* efficient use of resources.
* growth and development
* For any country to experience growth and development, there
must be
* an improvement in the rates of survival, quality of life and equitable
access to effective health services.
* Also health resources are limited and scarce while health needs
are unlimited
* Hence, economics is needed for the allocation of resources amongst
competing demands
 * Definitions
* Economics is defined as:
* “the study of how scarce productive resources are allocated among
competing alternative uses and subsequently to distribute these
products among members of the society.”
* Health Economics is defined as:
* The application of the discipline of economics in health care
* the study of how scarce productive resources are allocated among
alternative uses for the care of sickness, the promotion, maintenance
and improvement of health.
* the study of how health care and health related services, their costs
and benefits and health itself are distributed among individuals and
groups in the society.”
 * As a health economists
* In the face of scarce resources, you are faced with answering the
following questions:
* Which health goods and services need to be produced?
* How do you produce them?
* Who do you produce for?
* How can you be fair to all concerned in the production and the
distribution of the health goods and services produced?
* It Helps to meet the increasing demand and competing
demands in the health sector in the face of limited
resources.

* It helps in the prioritization of health interventions such

that maximum health benefits are provided for the people
within the available constraints

*Rationale for Health

Economics
 * As a health economists
* You must be interested in knowing the following:

* Ability to measure health status and put a value to it.

* Identify other non- health factors that influence health and how to
control for them
* Identify the factors that influence the demand for health and how to
manipulate such
* Determine alternative ways of producing health care
* Planning, budgeting for and monitoring health services
* Conducting economic evaluations- Analyzing the costs and
consequences of health interventions
* The effect of good health on economics
and good economics on health

* There is an interrelationship between good health and economics.

* Good health has a positive effect on economics and the economy
in general
* Good economics or the right application of economic principles
also has a positive effect on the health of the people
* How?
 * Good health on the economy
* Better health improves productivity
* Better health increases individual and national income
* Better health promotes high rates of National Savings-
* By reducing spending on curative, more income and more potential
to save nationally.
* Better health increases the human capital base-
* more healthy people to work, less cases of absenteeism.
* Better health enhances positive socio-demographic
characteristics and positive changes-
* everybody has the capacity to learn and have better educational
profiles,
* there will be less widows / widowers,
* the socio-economic statuses will be on the high levels.
 * Good economy on health
* Provision of functional infrastructure and equipment leads to
* the delivery of health care easier and more effectively.
* Provision of the right kind and number of human resources for
health
* ensures the availability of the health services in the right manner.
* This will promote good health in the populace.
* Appropriate and right pricing mechanism in place to access the
medical goods and services-
* ensures financial access to health services and promote good health.
* Right allocation of resources-
* ensures the availability and physical accessibility of the health services
* Regular capacity building and institutional reforms-
* allows for improvement in the system which will also impact on the
health of the consumers and the populace at large.
*CONCEPTS IN HEALTH
ECONOMICS
 *Production
* This can be defined as:
* the various activities aimed at the creation of goods and services and
the distribution of these goods and services to the final consumer for
the satisfaction of human wants”.
* It is also the process of changing the form or arrangement of matter
to adapt it better for the satisfaction of human wants.
* Production is complete when the goods and services have been
consumed by the consumers and they are satisfied.
 * Production in health
* All the activities put in place to deliver a health service are all
production activities.
* If services are produced and there is failure to utilize the services,
then production is not complete and all efforts have been wasted.
* These production activities include,
* the provision of the infrastructure
* the daily schedules to provide service
* the provision of human resource, the clinics, the operating sessions in
the theater
* all activities to provide vaccines and the vaccination process itself to
mention a few.
* Production is achieved when various materials, skills and
equipment are put together to provide a service or produce a
useful product.
 *Production cont.
* Production usually requires the combination of a range of inputs
such as
* The factors of production- Land, Labor, Capital and Entrepreneurship
* buildings, equipment, vehicles, skilled staff, semi-skilled staff, energy
and consumables.
* A good health manager must be conscious of the “Laws of
Diminishing Returns”
* whereby after effective rise following the addition of some of these
factors of production, it gets to a time that an increase in inputs will
not necessarily yield an increase in output.
* At this time, the health manager needs to know when to stop adding
more human resource, and some other factors of production.
* He will also need to be skilled in how to combine these resources to
achieve the organizational goals effectively and efficiently.
 * Goods and services
* The types of goods and services produced in the health industry is
somewhat unique.
* They have the following characteristics
* Intangible
* Simultaneity or inseparability
* Perishable
* Inconsistency
* Heterogeneity
* Consumer participation/ Patient participation
 * Characteristics of the goods and
services in the health industry
• Intangible-
* The goods and services provided may not be seen in some cases.
* The service a patient desires is to feel well or better.
* This is a product that is not tangible.
* And the patient experiences it minutes or hours to days after leaving the
point of obtaining the service
• Simultaneity or inseparability-
* health service is produced and consumed at the same time.
* Sometimes, health service is not a product that is created, stored,
inspected and to be sold later.
 * Characteristics of goods and services cont.

* Perishable-
* If a service is not utilized in a day, for example a theater space not
used to conduct surgeries in a day, the capacity of that surgical
theater for that day is lost so also the revenue that should have been
generated.
* Inconsistency-
* Several procedures or days may be needed to address even similar
cases.
* For instance, the time and process of fracture fixation may vary from
one patient to another.
* Or the time taken to manage a case of malaria may vary from one
individual to another
 * Characteristics of goods and services cont.

* Heterogeneity-
* Several categories of health care providers and other support staff are
involved in the final delivery of services to a consumer.
* This also includes the gatemen, the cleaners and so on.
* Consumer participation/ Patient participation-
* The consumers or patients are involved all through the delivery of the
service.
* They interact with their health care provider all through the process
and their opinions are important in the provision of quality services
and goods.
* Goods and services produced must be of
GOOD QUALITY
* Quality must be in three dimensions
* Structural quality:
* the locating or siting of the health services
* the proper organization of the processes of providing service.
* It must be convenient for the people.
* There should be a systematic flow in the process of obtaining the service.
* Process quality:
* This speaks to the actions and reactions of the health care providers
themselves.
* How is their attitude towards their clients? Are they empathic,
* Do they take time to provide complete information to their clients?
* Outcome quality-
* What is the impact of the services and goods provided to the clients/
consumers/ patients. Were they satisfied?
 *Choices
* Making of choices is the process of selecting one out of a number
of alternatives.
* Choice arises as a result of numerous human wants in the face of
scarce resources to satisfy these wants.
* All societies must make choices as to how to allocate whatever
resources available to them for the production of their health
services
* Make choices on how to distribute these health services that have
been produced equitably.
 * Choice making cont.

* Choice making is the core of economics and health economics.

* Health economics can be said to have two branches based on
choice. These are:
* A Positive branch which describes and explains how these choices
are made. For example:

*as a health economists studying the

proportion of people insured and the
characteristics of those insured against those
not insured
* A Normative branch which judges which choices should be made or
how the choices were made. For example:

*When the health economists goes ahead to

identify the criterion of ‘inability to pay’ as
being responsible for the poor access to
coverage and poor utilization of health services
as against another criterion of ‘poor health
seeking behavior’, the health economists may
judge the situation as “bad” and provide
alternative options or advice on how such a
problem of poverty influencing ‘ability to pay’
can be solved.

*CHOICE MAKING CONT.

 *
A Class activity to demonstrate Choice

* Requires a volunteer
* The teacher gives volunteer a material and allows him or her to
choose who he gives it to in the class.
* He or she should later explain what determines his or her choice.
* Other members of the class will then determine if the criteria
guiding his or her choice were fair enough or not and if not, they
are to offer alternative options.
 *
Factors that influence Choice

* Health economists, either advice on what choices are to be made

or evaluate the choices being made to determine if they were fair
or not & propose alternative courses of action.
* Factors that determine or influences choice are:
* The market forces- of demand, supply and price
* When organizations /societies allow market forces to influence the choices
made in the allocation of her resources to needs.
* the health economist in that organization needs to understand and be able
to predict the market.
* Being able to predict the market helps to know how the changes in the
market would impact on the choices made and other choices in the nearest
future.
* Through Planning:
* This means the organization plans ahead on the type of choices they
will make irrespective of the market forces
* If planning ahead is what influences choice, then the health economists
will be left with conducting economic evaluations to determine if the
choices made were the best or not.

* Factors that influence choice

making cont.
 *Productive Resources
* These are types of resources involved in the production of goods and
services include but not limited to the following:
* Land and natural resources (Air, water, minerals, E.t.c.;
* Time
* Capital facilities and equipment;
* Knowledge and abilities of an individual
* production procedures;
* Labor / Manpower
* raw materials.
* Money is not said to be a productive resource.
* Unfortunately, despite all investments in health, quality health service
delivery is yet to be at its optimum in the country.
* Hence the need for the role of an health economist in organizations to
advice on the choices being made and allocation of scarce resources
effectively and efficiently with equity in distribution amongst these
unlimited needs so that quality and effective health services that the
people need can be delivered. 
 *Scarcity
*Defined as the ‘limited supply of resources needed to satisfy unlimited
wants’.
*Demands are said to be ‘infinite’ as there is no end to consumption
aspirations.
*Resources in contrast are always ‘finite’.
*There is always a conflict between alternative uses of scarce productive
resources.
*Scarcity does not mean rarity; it is simply the comparability of
resource availability in relation to demand.
*In the health sector, despite all that has been invested in health, it
always seems never to be enough. This has generated several questions
such as-
* Are we investing in the wrong kind of health services?
* Are we engaging technologies with a low health output?
* Can we afford universal access to health services?
* Can we afford the delivery of so called ‘free health service’?
* Cost is simply the amount of money needed to buy, make or
do something
* It is also the efforts, losses, damages involved in order to do
something
* To the economist, the real cost of producing a good is the
opportunity cost

*Cost
* Direct cost- Costs borne by the health care system, community,
family, individual in directly addressing a health problem or disease
* Payment for treatment or services
* Indirect costs- Productivity losses caused by the problem or disease
borne by the individual, family, employee or society
* Inability to play the role of the breadwinner anymore
* Inability to offer the services at work anymore
* Intangible costs- Costs that exists but are difficult to express,
describe, understand or measure
* Grief, pain, suffering, loss of leisure time
* Opportunity Cost-

*Types of costs
 * Opportunity cost/ Alternative forgone

* It is defined as ‘an expression of costs in terms of alternatives’.

* It is the satisfaction of one want at the expense of another want.
* It is the value of other goods forgone by not employing the
resources in their best or most profitable alternative uses
* It is the other output that must be given up because productive
resources have been committed to another.
* Hence as an health economists, we need to evaluate and make
choices among alternative courses of action after considering the
costs and consequences of each.
*Thank you

* Questions for me?