Economics and Financial
Management in Health
Sciences
CHAP.1 INTRODUCTION
Fundamental Concepts of
Health Economics
CHAPTER OUTLINE
In this lecture, you will learn about:
1. Definition of Economics
2. Rational Self-interest
3. Definition of major economic concepts (Markets, resources, efficiencies,
productivity, opportunity cost, positive vs normative economics, resource allocation,
economic evaluation, etc.)
4. Economics, health policy and equity
5. What is health economics?
DEFINITION OF ECONOMICS
Economics can offer a framework to study the implications of individual decision
making and help define the alternative mechanisms available to improve resource
allocation.
Economics explains how scarce resources are allocated among competing alternative
uses (demands) to satisfy unlimited human wants.
WHY ECONOMICS?
o Scarcity is a condition that in result imbalance between unlimited wants and the
relatively limited resources available for satisfying those wants.
o Rationing is unavoidable because not enough resources are available for everyone’s
needs.
o As result of scarcity, we need to choose among competing objectives.
o Scarcity is the reason that we study economics.
RATIONAL SELF-INTEREST
Individuals select the choices that make them happiest, given the information
available at the time of a decision.
Economic wants are those that can be satisfied by the consumption of the goods or
services.
✔ Goods are physically tangible things.
✔ Services are physically intangible.
✔ People usually want to have a wide variety of goods and services such as clothes,
food, insurance, etc..
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MARKETS
o A market is a mechanism that facilitates the efficient allocation of resources.
o
One assumption about markets is that resources are limited at best and often are
relatively scarce.
o The assumption of resource scarcity implies that the various parties involved in the
market (suppliers, sellers, consumers, payers) must make choices, such as what product
to produce, how these products are best produced and supplied, and who receives
these product.
ECONOMIC RESOURCES
Economic resources are classified into 3 general categories:
1. Land (natural resources) includes all natural resources minerals, water, oil, etc.
2. Labor (human resources) refers to the physical and intellectual services of people
and includes the training, education and abilities of the individuals in the society.
3. Capital refers to products such as machinery and buildings that are used to
produce goods and services
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EFFICIENCIES
o Adopting the goal of economic efficiency implies that choices should
be made that maximize the total benefit from all available resources.
o In the health economy, this involves the evaluation of healthcare
alternatives by calculating the benefits and costs of each alternative
and allocating resources in a way that maximizes the net benefits to
the population considered.
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PRODUCTIVITY
o Productivity is a measure of the amount of output (goods and service) produced per
unit of input (productive resources) used.
o It is expressed as the ratio of output to inputs used in a production process (output
volume÷ input used)
o Productivity is a central factor in production performance of firms and nations.
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MEANS OF INCREASING
PRODUCTIVITY
o Specialization occurs when an economic unit produces a narrower range of goods
and services than it can consume.
o Division of labor refers to the process whereby workers perform only a single or very
few steps of measure production task.
o Investment in human capital occurs when the health education training of population
are increased through the effort of individual business or government.
o Investment in capital goods: use saving in increasing the economy productive capacity
(savings).
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OPPORTUNITY COST
o Using resources in one alternative has the trade off of not being able to use the
same resources in a competing activity or alternative.
o For example, resources applied to the health economy cannot be concurrently
applied to housing or education.
o Trade off involve choosing less of one thing to get more of something else.
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POSITIVE VS NORMATIVE
ECONOMICS
Health economics (and economics in general) is often seen as having two branches:
o Positive branch : Describe and explain how choices are made (why are there so
many uninsured? characteristics of uninsured…)
o Normative branch: Judge which choices should be made (equity of access to health
services, ability to pay….)
ALLOCATION OF RESOURCES
Two ways to allocate resources:
1. Market choices: forces of demand, supply and market prices
2. Government task of collecting resources from the population,
allocating those to defined production activities and distributing the produced
services among the population .
ECONOMIC EVALUATION
Economic evaluation aims to consider:
1. whether appropriate services have been adopted in the health sector, or
2. whether there is a mix of technologies and interventions which would better meet
health sector objectives, such as the improvement of the population’s health, or the
equity of access to care.
Use both positive and normative assessments to study demand and supply of health
care and the need for intervention and change
ECONOMICS, HEALTH POLICY AND
EQUITY
Economic analysis in health and health care is often undertaken with a view to help
governments and other agencies better to achieve the goals of their health policies.
Two goals dominate:
1. Improving health status of the population
2. Improving fairness or equity
Choices between equity and health improvement must be made→ Health economics
is the study of these choices
EFFICIENCY VS. EQUITY
Efficiency means maximizing the production of goods or services while minimizing the
resources required for production, is an important concept in examining the health
care market.
VS.
Equity: Equity is the absence of avoidable or remediable differences among groups
of people, whether those groups are defined socially, economically, demographically,
or geographically. Health inequities therefore involve more than inequality with
respect to health determinants, access to the resources needed to improve and
maintain health or health outcomes. They also entail a failure to avoid or overcome
inequalities that infringe on fairness and human rights norms.
(WHO DEFINITION)
TRADE OFF BETWEEN EFFICIENCY
AND EQUITY
Government funding: based on needs of the population (age, gender, morbidity)
A) vertical equity: unequal support for unequals
B) horizontal equity: equal treatment of equals
Economists focus on the trade off between efficiency (the achievement of better
health) and equity (the fairer distribution of health).
1. Allocation is inefficient if more improvement in health can be achieved with
existing budget
2. Greater efficiency could also lead to greater equity
REALITY OF HEALTH CARE
Rules say health care should be offered based on need not income and ability to
pay.
But reality is different since there may be:
o user charges (whether official or unofficial),
o medicines may not be available at the hospitals,
o staff may be rude and careless with poorer patients,
o and buildings in a poor state of repair.
The design may be for a system of equal access, but the reality is that those with
more money get better access.
This may be contrasted with systems that do not aim to provide equal access.
WHAT IS HEALTH ECONOMICS?
o Decision makers with limited resources find it necessary to make comparison between
costs and consequences of diagnostic and treatment options.
o This helps in making informed decisions about efficient allocations of scarce resources
WHY IS HEALTH ECONOMICS
IMPORTANT?
Understanding the economics of health care is important for a number of reasons:
o Economic analysis offers a unique framework for analyzing important issues in health
care and for identifying solutions to common problems.
o Health care is a major component of spending, investment, and employment.
o The economic performance of the healthcare system is linked to the overall economic
well-being of a country and its citizens.
WHY IS HEALTH ECONOMICS
IMPORTANT?
Decisions about how health care is funded, provided, and distributed are strongly
influenced by the economic environment and economic constraints.
o It helps those working in health services to understand the context of a medical
practice.
o It provides policy makers an evidence on productivity, efficiency, and value of money.
SUMMARY
Economic models start by assuming that decisions are made rationally under
conditions of scarcity.
Decision making is dominated by the pursuit of self-interest.
People look or the best way to achieve goals.
When confronted with alterative actions, people choose the one that makes them better off.
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SUMMARY
o Economics is a way to organize our thinking about problems that confront us in our
daily lives.
o Economics is one of the social sciences that attempts to explain human behavior.
o Economics is unique among the social sciences in that it establishes a context of
scarcity and uncertainty.
o Economics explains how scarce resources are allocated among competing alternative
uses to satisfy unlimited human wants.
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CHAPTER ASSESSMENT QUESTIONS:
Identify and describe the fundamental concepts of health
economics discussed in this chapter