Über die Autorin bzw. den Autor

Stephen Morris is a member of the Health Economics Research Group at Brunel University. He is the author of “Health Economics for Nurses: An Introductory Guide”, and has published over 20 academic papers in peer-reviewed journals. He has taught Health Economics at both Undergraduate and MSc level. and is a former Senior Lecturer at Tanaka Business School.

Nancy Devlin is Professor of Health Economics at City University, London. Nancy has published 23 papers on Health Economics since 2000, on topics including health care priority setting, economic evaluation of health care, management of waiting lists, measuring and valuing health states and health care reforms.

David Parkin is Professor of Health Economics at City University, London and is director of City’s MSc in Economic Evaluation. He has taught health economics for 25 years, at both undergraduate and postgraduate level, and has published 50 articles in peer-reviewed journals and books. He is also the organizer of the UK Health Economists’ Study Group.

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Economic Analysis in Healthcare is intended as a core textbook for both advanced undergraduate and postgraduate students of health economics. The authors provide comprehensive coverage of the field of economics in healthcare systems and the evaluation of healthcare technologies.

With up-to-date case studies and examples from both the UK, Europe and the rest of the world, Economic Analysis in Healthcare:

• Adopts an international perspective towards topics in health economics
• Creates a useful balance of theoretical treatment and practical application throughout the book
• Focuses uniquely on both market-related and economic evaluation aspects of health economics.

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Economic Analysis in Health Care

John Wiley & Sons

Chapter One

1.1 LIFE, DEATH AND BIG BUS NESS: WHY HEALTH ECONOMICS IS IMPORTANT

You may come to this book knowing a great deal about economics, but not a great deal about health care, other than your personal experience of ill health and its treatment. Alternatively, you may come to this book with experience in the health care sector, but no training in economics. Whatever background you bring to it, we are confident that you will find the study of health economics fascinating. Learning to look at health and health care issues through the distinctive lens of the economist will forever change the way you think about them.

Understanding the economics of health care is important for a number of reasons. First, health is important to us as individuals and as a society, and health care is one, though not the only, way of modifying the incidence and impact of ill health and disease. The availability of health care can determine the quality of our lives and our prospects for survival. Economic analysis offers a unique and systematic intellectual framework for analysing important issues in health care, and for identifying solutions to common problems. Quite literally, then, the economics of health care is a matter of life and death.

Secondly, the health care sector of the economy is very large. In the USA, spending passed the US$ 1000 billion mark in 1997 and currently accounts for just over 15% of the US Gross Domestic Product (GDP). Forecasts by the Office of the Actuary at the Centers for Medicare and Medicaid Services (2005) suggest that spending on health care will account for US$ 3600 billion - nearly one-fifth of all US economic activity - by 2014. Researchers from the US National Bureau of Economic Research suggest that it is entirely plausible that health care spending will reach 33% of GDP by the middle of the century (Hall and Jones, 2004). In the UK, where health care is predominantly funded by general taxation, spending on health care comprises 17% of all government spending (Chote et al., 2004) and health care is a major consideration in fiscal management of the economy. Indeed, health care is a major component of spending, investment and employment in every developed economy (Reinhardt et al., 2002, 2004; Fuchs, 2005), so the economic performance of the health care system is crucially linked to the overall economic well-being of a country and its citizens.

Thirdly, decisions about how health care is funded, provided and distributed are strongly influenced by the economic environment and economic constraints. Global, national and local policy responses to health issues are increasingly being informed by economics ideas and methods of analysis. One good reason for understanding health economics, even if you do not intend ultimately to practise as an analyst yourself, is to be able to engage in policy debates as an informed critic. As Joan Robinson commented: 'the purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists' (Robinson, 1980, p. 17). Less cynically, for those working in the health services, familiarity with the theory and methods of economic analysis is becoming essential, both to understand the context of your practice and because evidence on productivity, efficiency and value for money are increasingly the norm in modern health care systems.

Health economics is the application of economic theory, models and empirical techniques to the analysis of decision making by individuals, health care providers and governments with respect to health and health care. It is a branch of economic science - but it is not merely the application of standard economic theory to health and health care as an interesting topic. Health economics is solidly based in economic theory but it also comprises a body of theory developed specifically to understand the behaviour of patients, doctors and hospitals, and analytical techniques developed to facilitate resource allocation decisions in health care. Health economics has evolved into a highly specialised field, drawing on related disciplines including epidemiology, statistics, psychology, sociology, operations research and mathematics in its approach. Alternatively, it may be regarded as an essential part of a set of analytical methods applied to health, which are usually labelled health services research.

This chapter provides a gentle introduction to some of the basic economics concepts that underpin the more detailed and rigorous treatment of health economics in the remainder of the book.

1.2 HEALTH CARE AS AN ECONOMIC GOOD

Economics is a social science. Its central concern is the study of behaviour of economic agents - individuals, firms, governments and other organisations - when confronted with scarcity. Underpinning economic analysis are the general observations that:

resources are limited; and

potential uses of those resources are unbounded.

The focus of economic analysis is decisions and choices about the production and consumption of economic goods, defined as any good or service that is scarce relative to our wants for it.

Using this definition, health care is an economic good, in the following specific sense. The resources that are used to produce health care services, such as human resources, capital and raw materials, are finite: more of these resources can be devoted to the production and consumption of health care only by diverting them from some other use. Our wants for health care - what we would choose to consume, in the absence of constraints on our ability to pay for it as a nation or as a consumer - have no known bounds. No health care system, anywhere in the world, has achieved levels of spending sufficient to meet all its clients' wants for health care.

If we accept that health care is an economic good, the implications are quite profound. Choices must be made about what quantity and mix of health care to produce, how to produce it, who pays for it and how it is distributed. These basic economic questions are unavoidable. Health care is not available in endless supply, and the more health care we choose, the more of something else must be sacrificed. And because health care is so important to our welfare as human beings, these choices are particularly difficult and contentious ones to make.

The nature of choice, and the inevitable tradeoffs encountered in making these choices, are captured in what is probably the most fundamental notion in economics - opportunity cost. The opportunity cost of committing resources to produce a good or service is the benefits forgone from those same resources not being used in their next best alternative.

Each action taken by patients, by health care providers or by governments with respect to the use of health care involves the sacrifice of the benefits that would have been enjoyed by other, alternative uses of the resources used to provide that care. The concept of opportunity cost lies at the heart of all economic analysis: when economists refer to cost, we mean opportunity cost - not to an accounting procedure. For example, weighing up the costs and benefits of a decision to make beta-interferon available to all multiple sclerosis patients involves assessing the benefits to multiple sclerosis patients from that...