ECONOMICS in HEALTH

CARE
C.S.Serrano-Tinio, MD, MPH, MBA-H, FPAFP
Department of Family and Community Medicine
Non-economists’ definition:
Economics is the role of
money in human affairs
 Economics
• a social science which studies how people
attempt to make use of resources which
are scarce to satisfy their wants which are
numerous and how attempts interact
through exchange
 Resources
• All inputs used to produce goods and
services
• Land – physical resources
• Labor – human resources
• Capital – created by humans to aid production
such as tools, machinery and factories
• Enterprise – the human resource of organizing the
other 3 factors to produce goods and services
 Wants
• Desires or needs
 Economics
• a social science which studies how people
attempt to make use of resources which
are scarce to satisfy their wants which are
numerous and how attempts interact
through exchange
Concepts attached with the
use of Money:
• Exchange
• Scarcity
• Choice
Exchange
• Money is the principal medium of
exchange in society

Php
Scarcity . . .
• deficiency in the quantity or quality of
available goods and services relative to
the quantity and quality desired
 Choice
• Choosing between commodities to satisfy
a need
 Health economics
• Branch of economics concerned with
issues related to scarcity in the
allocation of health and health care
 Health Economics

• The science that examines the ways in

which services and resources are
provided to the entire population and
the efficiency and equity of providing
these services.
• Efficiency – work gets done with the
minimum of financial inputs and as
quickly as possible

• Equity – ability to allocate the

interventions according to the needs
and expected health benefits
 How is Economics applied in Health?

• the analysis of the economic costs of diseases

• benefits of control programmes - returns from
investments in education and training
• aspects of health problems - type, quality, quantity
and prices of the resources used
• population problem, the quantity and quality of
resources allocated to the health area, the medical
industry’s efficiency, losses due to illness,
disability and premature death.
DECISION-MAKER
Some characteristics of the health system that are
of Economic significance:

• The demand for curative services in the

case of a life threatening condition is
not particularly influenced by the
patient’s income and price of service.
 Some characteristics of the health industry that
are of Economic significance:

• The demand for curative services in

non-life threatening conditions is
influenced by the patient’s income
and price of service. The higher the
income or the lower the price the
more demand will be made.
 Some characteristics of the health industry that
are of Economic significance:

• The demand for preventive health

services is not influenced by income
and price. The demand for these is
usually low.
 Some characteristics of the health industry that
are of Economic significance:

• The consumer of health services does not

determine the amount, kind and quality of
what he purchases.
• The economy of scale does not seem to
work in hospitals.
• Competition does not result in lowering
the charges for health services.
 Some characteristics of the health industry
that are of Economic significance:

• Marketing goal to maximize demands

for services apply only to preventive
and promotive health programs. It is
not the goal of a physician to stimulate
demand for his or her services.
 Why is health economics
important?
• Increasing demands in
the health care system Scarcity of
• Increasing costs of
medical expenses
resources
• New technology

CHOICES have to be made

DECISION-MAKER
 Principles in economics
• Efficiency – maximizing benefit for a
given set of resources

• Equity – distribution of resources within

society
 Types of Cost of Illness
• Direct
• Incidental
• Indirect
• Psychic
 Cost of Illness

• Direct costs of a disease

– accurately correlated with an illness
– Preventing, diagnosing, treating the
disease (hospital stay, professional
fee, drugs, laboratory exams, home
care)
 Cost of Illness
• Incidental costs – non-medical costs like
travel costs, food and lodging, costs of
attendants
• Indirect costs – production losses,
economic losses
– Loss of wages due to illness, disability,
premature death
 Cost of Illness
• Intangible costs or Psychic costs
– Unquantifiable
– Pain, suffering, disruption of normal lifestyle
 Opportunity Cost
• Potential benefit that could have been
received if the resources had been used for
another alternative
How do we measure economic
efficiency?
 Economic Efficiency

• Efficiency – work gets done with the

minimum of financial inputs and as
quickly as possible

• Total benefit MAXIMIZED

• Cost MINIMIZED
Economic Appraisal / Evaluation

Benefits
Immediate or direct effects:
- lives saved
Costs vs. - reduction in tumor size
- change in blood
pressure
Utilities: gen. well-being
- happiness, satisfaction
Valued in monetary terms
 Economic Appraisal /
Evaluation
• Systematic and comparative analysis
of 2 courses of action in terms of both
costs and consequences or benefits
• Economic evaluation is therefore an effort to
analyze inputs (resources) and outputs
(changes in health outcomes)
simultaneously, and
• help decisionmakers assess whether a
certain level of output is worth the
amount of resources expended to produce
it (given that resources are scarce and can
be used for alternative purposes).
Why Should Economic Evaluations
Be Conducted?
 ECONOMIC APPRAISAL
• Cost minimization analysis
• Cost-effectiveness analysis
• Cost benefit-analysis
• Cost-utility analysis

*Difference is in how consequences are

measured.
 Cost minimization analysis
• Consequences of competing interventions are
the same and in which only inputs, that is,
costs are considered
• Used when the effect of both interventions is
identical (or assumed to be identical). Thus,
there is no outcome measure - only costs are
accounted for.
• Aim is to decide the least costly way of
achieving the same outcome
 ANTIBIOTICS:

Retail Price/pc 200 mg Cap 500 mg Cap

Drug A 47.25 86.25

Drug B 80.50 142.00

7-day therapy 200 mg Cap 500 mg Cap

Drug A 661.50 1,207.50

Drug B 1,127.00 1,988.00
 Cost benefit-analysis
• Outcome of 2 programs differ
• All costs and consequences of a program are
expressed in the same units, usually money
• Comparison of costs and benefits across
programs serving different patient groups
• monetary value on all outcomes
 A Benefits Versus Costs Example
• Consider a vaccination program implemented by an employer to
vaccinate employees — healthy working adults — against
influenza. An economic study documents that the total cost of
vaccinating one person is $16.69, and
• benefits gained by each person vaccinated total $30.35.

• If the employer has sufficient health-care funds

to fund the program, should the employer do it?

• Because the benefits outweigh the costs, the employer

might consider investing in the program if it compares
favorably to other programs
 Cost-effectiveness analysis
• An economic evaluation in which the costs and
consequences of alternative interventions are
expressed as cost per unit of health outcome
• Used when there is differential success in outcome
but the outcome is present in both interventions
• A cost-effectiveness analysis (CEA) compares
interventions with a common outcome (such as
blood pressure level) to discover which produces
the maximum outcome for the same input of
resources in a given population.
• Interprets benefits in non-monetary terms
• Measures outcome in natural units – cases detected,
lives or life-years saved, heart attacks prevented
 Cost-effectiveness analysis (CEA)
• is used to compare the costs of alternative
intervention strategies that produce a
common health effect.
• compare a newly developed vaccine treatment with an
existing one in terms of cost per case of smallpox
prevented in the target population.
 Cost-utility analysis (CUA)
• combines life years saved with the quality
of life during those years
 Cost-utility analysis
• Patient’s preferences are considered with
respect to the effects of the intervention
• Used when treatments have a wide range of
outcomes and a common unit is required
• Outcomes are measured in a composite
metric of both length and quality of life
 Cost-utility analysis

• Outcomes measured using a common

scale
– DALYs – disability-adjusted life years
– QALYs – quality-adjusted life years
» # of years of life saved
» # of lives saved
» # of successful treatment
» # of cases of illness avoided
 Types of Economic Evaluation

Analysis Costs Consequences or

Outcomes
Cost- Php Identical
Minimization Php
Cost- Php Nat. units of clin. effects
effectiveness produced; life yrs. Gained,
mm Hg change
Cost-utility Php “quality of life
produced” QALY
Cost-Benefit Php Php value of consequences
produced