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 treatment, compared with the benefits that would have been possible by using those same resources to treat other patients, suffering other conditions. Box 1.1 illustrates the concept of opportunity cost in relation to a 2004 recommendation by the UK National Institute for Health and Clinical Excellence that the NHS should fund in-vitro fertilisation (IVF) services for infertility (NICE, 2004).

Focusing on opportunity cost provides a powerful way of sharpening thinking about decision making at all levels of the health care system. Table 1.1 represents these decisions as a series of choices, identifying the opportunity costs associated with each.

In a predominantly tax-funded health care system such as those in New Zealand and the UK, where the government fixes the budget at the start of each period, these choices are effectively a 'top-down' hierarchy of decisions, implemented in roughly the order shown. In other health care systems, such as Germany's social insurance system, or the complex mix of private insurance and federal- and state-funded programmes in the USA, there is no hierarchy - for example, how much is spent on health care overall is partly determined 'bottom-up', by decisions of individual insurers and patients.

Regardless of how the health care system is organised, the key point is this: the production and consumption of health care incurs real, human costs, as well as creating real, human benefits.

1.3 HEALTH AND HEALTH CARE

We have referred to the subject matter of this book as health economics, but we have so far mainly discussed health care. This is an important point: health economics is not shorthand for health care economics. Although health economists are interested in health care as a sector of the economy, it is recognised that the ultimate goal of health care is to improve health, and that other means by which health can be improved are of equal interest - as are the determinants of ill-health. Health economists may therefore be interested not just in the supply of treatment that hospitals provide but in the impact that this has on the health of patients and in the impact of housing, unemployment and lifestyles on the health of the population as a whole.

This is not to say that improving health is the only characteristic of health care that health economics takes into account. Many types of health care may impact on other aspects of a person's welfare - for example, providing reassurance or increased anxiety about their state of health, whether or not their health itself is changed. Some services offered by health professionals and health care organisations may be intended only to have such an impact, by simply providing information about health. And even when the main or sole purpose of health care is to improve health, the way in which it is provided may also be important - for example, the quality of meals that are provided during a stay in hospital may be important to people even if that aspect has no impact on health. But for most types of health care, their most important and interesting characteristic is that they are intended to alter health, not that they are services provided by the health care industry.

Given the importance of thinking about health itself, how is it to be conceptualised so that we can apply economic reasoning to it? The most powerful and important insight is that in addition to health care being an economic good, health itself can be thought of as a good, albeit one with special characteristics. It can be regarded as a 'fundamental commodity', one of the true objects of people's wants and for which other more tangible goods and services - such as health care - are simply means to create it. This theory originates from the work of Becker (1965) and Grossman (1972), but can be traced to eighteenth-century economists, principally Jeremy Bentham, who wrote of 'the relief of pain' as a 'basic pleasure' (Bentham, 1780). Economically relevant characteristics of health are that it can be manufactured by individuals and households; that it has an impact on people's welfare; that it is wanted and people are willing to pay for improvements in it; and that it is scarce relative to people's wants for it. Obviously is less tangible than conventional goods - though it may manifest itself in tangible ways such as episodes of sickness - and cannot be traded because it is intrinsic to people and cannot normally be transferred to others. Nevertheless, it is possible to derive important analytical insights by applying to it the tools of economic analysis such as demand and production theory, as will be demonstrated in Chapters 2 and 3. But in each case, as we discuss below, this application is not straightforward.

1.4 WANTS, DEMANDS AND NEED

If we accept that health is a 'fundamental commodity' we can analyse the demand for improvements in health in very similar ways to the analysis of demand for other goods and services. A key difference is that, because health is not tradeable, it is not possible to analyse it in the context of a market - improvements in health cannot be purchased directly. Instead, we focus on the production of health as the key means by which individuals express their demand for it, which may involve the purchase of goods such as health care, thereby indirectly purchasing health improvements. Health care therefore has a 'derived demand' from the demand for health. Of course, such analysis can be used for almost any goods or services but it is of particular importance in health because the consumption of health care is usually not in itself pleasurable - indeed it is often the opposite - but is undertaken simply to improve health.

In analysing the demand for most goods and services, economics distinguishes between a want, which is simply the desire by someone to consume something, and effective demand, which is a want backed up by the willingness and ability to pay for it. Although these concepts can easily be applied to the analysis of the demand for health care, there is a complication. There is a widespread view that what matters in health care is not wants or demands, but needs. 'Need' is a far less precise concept than demand and is open to a number of different definitions - see, for example, Bradshaw (1972). However, health economists generally interpret the need for health care as the capacity to benefit from it - that is, to obtain a valued improvement in health from it. It follows, therefore, that not all wants are needs and vice versa. For instance, many women are opting to give birth by caesarean section - it is one of the most commonly performed surgical procedure on women in the UK - and 42% of these procedures are elective (Jones, 2005). Clearly many women want caesareans, but largely for reasons which are not related to health; indeed, the procedure entails some risks. Further, some needs are not wants. For instance, a person may experience pain and discomfort relating to their teeth and recognise that they would benefit from seeking dental treatment, but they may not want to seek care.

As we will see, the implications of basing the allocation of health care resources on needs rather than demands are profound. They call into question some of the most deeply-held assumptions and convictions held in economics, such as the primacy of the consumer's viewpoint in assessing their own welfare and the reliability of market forces to create efficient outcomes.

1.5 THE PRODUCTION OF HEALTH AND HEALTH CARE

Like any other good or service, health care is produced, and an understanding of many important issues in health economics requires knowledge of production theory. It is important in the analysis of the costs and supply of health care, and will be discussed in more detail in Chapter 3. It is also a key input to the understanding and carrying out of economic evaluation, which is the subject of Part II of this book. It underlies some of the analysis of efficiency, which is, as has been noted, a key evaluative criterion. Moreover, as explained above, production is an important element of the theory of demand for health, so again some knowledge of concepts and tools of production analysis is required. It is therefore worthwhile considering briefly here the key elements and how they are applied in health economics.

(Continues...)

Excerpted from Economic Analysis in Health Careby Stephen Morris Nancy Devlin David Parkin Copyright © 2006 by John Wiley & Sons, Ltd. Excerpted by permission.
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