Health Economics & Health Economics & PolicyPolicy22ndnd Edition Edition

James W. HendersonJames W. HendersonChapter 2Chapter 2

Using Economics to Study Using Economics to Study Health IssuesHealth Issues

Copyright 2002, South-Western, a division of Thomson Learning, James W. Henderson, Health Economics and Policy, 2e

Is Economics Relevant?Is Economics Relevant?

Economics is the study of human Economics is the study of human behaviorbehavior

Economics is a way of thinkingEconomics is a way of thinking Economics provides a systematic Economics provides a systematic

way of looking at a problemway of looking at a problem

Economic MethodologyEconomic Methodology

Critical assumptionsCritical assumptions– Rational self interestRational self interest

The scientific methodThe scientific method– ObservationObservation– TheoryTheory– EmpiricismEmpiricism

Model buildingModel building Problem solvingProblem solving

Economic OptimizationEconomic Optimization

Neoclassical frameworkNeoclassical framework– Rational decision makersRational decision makers– Optimizing behaviorOptimizing behavior– Predictable resultsPredictable results

Marginal decision makingMarginal decision making– Equate MB and MCEquate MB and MC– Flat of the curveFlat of the curve

Demand and Supply Demand and Supply

Most important modelMost important model EquilibriumEquilibrium Price floors and ceilingsPrice floors and ceilings

Elasticity of DemandElasticity of Demand

Sensitivity to changeSensitivity to change Price elasticityPrice elasticity

– Elasticity and expendituresElasticity and expenditures Income elasticityIncome elasticity

– Normal and superior goodsNormal and superior goods– Inferior goodsInferior goods

Competitive ModelCompetitive Model

AssumptionsAssumptions Graphical presentationGraphical presentation Applicability to medical careApplicability to medical care

Imperfect CompetitionImperfect Competition

Supply-side imperfectionsSupply-side imperfections Demand-side imperfectionsDemand-side imperfections

What is Health What is Health Economics?Economics?

Health Policy and Planning

Microeconomic Evaluation

Nature of Health

Macroeconomic Evaluation

Demand for Health Care

Supply of Health Care

Market Equilibrium

Production of Health

Source: Alan Maynard and Panos Kanavos, “Health Economics: An Evolving Paradigm,” Health Economics 9, 2000, 183-190.

1. Production of Health1. Production of Health

Income and wealthIncome and wealth EducationEducation Environmental factorsEnvironmental factors Lifestyle choicesLifestyle choices GeneticsGenetics Public healthPublic health Medical careMedical care

Health Production Health Production FunctionFunction

Health Status

Medical Care Spending

Marginal Change in Health Status

Medical Care Spending

0

0

Q*

TP’

MP

TP

Q0

HS0

HS1

2. Nature of Health2. Nature of Health

Quality of life issuesQuality of life issues Instruments and measures of Instruments and measures of

health statushealth status

3. Demand for Health 3. Demand for Health CareCare

Influences from items 1 and 2Influences from items 1 and 2 DemographicsDemographics Barriers to accessBarriers to access Agency relationshipAgency relationship Nature of demandNature of demand

4. Supply of Health 4. Supply of Health CareCare

Theory of productionTheory of production Theory of input marketsTheory of input markets Nature of incentivesNature of incentives

5. Microeconomic 5. Microeconomic EvaluationEvaluation

Informed decision making in fixed Informed decision making in fixed budget systemsbudget systems

Types of economic appraisalTypes of economic appraisal– Cost of illnessCost of illness– Cost effectivenessCost effectiveness– Cost-benefitCost-benefit

6. Market Equilibrium6. Market Equilibrium

Price determinationPrice determination– Money pricesMoney prices– Time costsTime costs

Non-price rationingNon-price rationing– Fee schedulesFee schedules– Waiting listsWaiting lists

7. Macroeconomic 7. Macroeconomic EvaluationEvaluation

System-wide analysisSystem-wide analysis– Identifying objectivesIdentifying objectives– Analyzing outcomesAnalyzing outcomes

International comparisonsInternational comparisons

8. Health Policy and 8. Health Policy and PlanningPlanning

BudgetingBudgeting Resource allocationResource allocation RegulationRegulation