Health Economics - Term 2 PDF

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Topic 1: Introduction to health economicsTopic 1: Introduction to health economics Health Economics - Term Topic 1: Introduction to health economics Health & healthcare Healthcare as an economic good What and how can economists contribute? Economic framework of health and healthcare Topic 2:...

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Health Economics - Term 2 Topic 1: Introduction to health economics

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Health & healthcare

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Healthcare as an economic good What and how can economists contribute? Economic framework of health and healthcare

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Topic 2: Financing healthcare systems

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Who are the agents involved within a healthcare system? Options for financing healthcare systems How do agents within a healthcare system interact?

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Uncertainty and risk in healthcare financing

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Topic 3: Demand for healthcare

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Demand

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Determinants of demand Elasticity of demand Empirical evidence on healthcare demand (RAND)

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What is different about healthcare? Needs, wants and demands

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Topic 4: Grossman model

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The model

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Changes in equilibrium The integrated Grossman model Conclusions on the Grossman model

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Topic 5: Health insurance

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Why do markets fail in healthcare?

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Uncertainty and the demand for healthcare insurance Problems with healthcare insurance

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Conclusions

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Topic 6: Supplier-induced demand Origins of SID Models of supplier-induced demand

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Empirical studies

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Addressing supplier-induced demand

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Topic 7: Externalities

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Externalities

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Vaccinations

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Topic 8: Structural change and competition

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Overview of competition in healthcare The question of competition in healthcare

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Two cases studies of competition in British healthcare

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2 Current levels of competition

Topic 9: Payment incentives Payment systems

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Payment-by-results (PbR)

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Quality and outcomes framework (QOF) Summary

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Topic 10: Introduction to economic evaluation

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Economic evaluation

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Types of economic evaluation Welfarism as the basis for Cost-Benefit Analysis (CBA)

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Extra-welfarism as the basis for Cost-Utility Analysis (CUA)

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Topic 11: Costs and perspective

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Steps in cost estimation How to measure resource use

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How to value resource use

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How to analyse and report cost data

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Topic 12: Cost-benefit analysis (CBA)

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Introduction to CBA

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The Human Capital approach

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The Contingent Valuation approach

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Case study

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Topic 13: Cost-utility analysis (CUA)

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Economic evaluation

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Distinctive characteristics of CUA

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Different ways of measuring and valuing preference-based QoL Calculating QALYs

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Analysis and presentation of results

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Empirical application of CUA

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Topic 14: Introduction of decision modelling Limitations of trial-based economic evaluations for decision making Decision models

Topic 15: Equity

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What is equity? Different concepts of equity

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Measurement of equity and inequalities

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Topic 16: NICE and healthcare rationing

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Background of rationing (priority setting) NICE

Topic 1: Introduction to health economics

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Health & healthcare ● Health is a key determinant of both quality of life and survival, and also has spillover effects/externalities on others if we are unwell ● Healthcare is one mechanism through which to modify the incidence and impact of ill health and disease ○ We demand healthcare as a means of improving our health ○ Healthcare is NOT the only means of modifying the incidence and impact of ill health and disease, e.g. housing, water supply, diet, air pollution etc. ○ Healthcare may not improve health, but general wellbeing or anxiety about health etc. ● Decisions about how healthcare is funded, provided and distributed are strongly influenced by the economic environment and economic constraints ● Healthcare is important to the economy ○ £8.5bn spent on ‘health relevant R&D’ in the UK in 2014 ○ Over 1 million people work in the UK NHS ○ AstraZeneca (UK based pharmaceuticals company) predict an annual revenue above $40bn by 2023 ○ Healthcare is the largest sector of the US economy ○ Total UK healthcare expenditure in 2017 was £197.4bn ○ Total current healthcare expenditure in the UK accounted for 9.6% of GDP in 2017

○ ■ UK is about in the middle in terms of healthcare expenditure as a % of GDP ■ The US has a clearly inefficient system ○ In countries where the size of health spending is small, there is an issue of how low it is ○ Governments face decisions about: ■ How much should we spend on healthcare as a country? ■ How much of the healthcare budget is allocated to each state/region/HCP? ■ What share of the HCP’s budget should we devote to each type of healthcare service or product? ■ Which patients should get access to the treatments we have decided to fund?

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■ How much of our limited income as consumers should be spent on health-related vs. non-health related goods and services? ● UK healthcare ○ NHS was launched in 1948 by the then Minister of Health, Aneurin Bevan, and was based on 3 core principles: ■ That it be based on clinical need, not ability to pay ■ That it meet the needs of everyone ■ That it be free at the point of delivery

○ ○ But a predominantly public healthcare system does have problems… ■ Difficulty of assessing need, e.g. do you define need as having ill health OR the ability to benefit? ■ Emotive decisions such as treating 10 severely ill patients or 100 moderately ill patients ● US healthcare ○ The US is a clear outlier in terms of their healthcare spending as a % of GDP

○ ○ US system looks closer to Mexico’s than other high income countries ○ They have a predominantly market-based healthcare system ○ “The US is in the midst of the longest sustained drop in life expectancy in at least 100 years. Relative to other wealthy countries, lives in America are short and getting shorter” - The Washington Post ○ 25% of Americans delay treatment for a serious medical condition due to the cost

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○ Healthcare as an economic good ● Economics is concerned with the issue of scarcity ○ What is/should be produced? ○ How is it/should it be distributed? ○ To whom is/should it be distributed? ● Demand for healthcare ○ Derived from the demand for health as health is a fundamental commodity ○ Resources for healthcare limited ○ Potential uses of resources are unlimited ○ Resources have to be diverted from other uses, i.e. there is an opportunity cost to healthcare provision ● Opportunity cost = the next best alternative forgone ○ Reframes the cost of production in terms of the value of the benefits forgone in the use of resources to produce the next-best good ○ This notion brings out the economic reality of resource scarcity as to consume something means to give up something else ○ e.g. to study a degree you have direct costs of accommodation, tuition etc., but also the opportunity cost of the time spent where you could’ve been working or enjoying leisure time ● What is health economics? ○ The application of: ■ Economic theory ■ Models ■ Empirical techniques ○ ...to the analysis of decision making by: ■ Individuals (tax payers, citizens, patients - it is unclear as defining the individual isn’t easy) ■ Health system organisations

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■ Governments ○ ...with respect to healthcare ● Health economics is a branch of economic science but not merely the application of economic theory to economic theory to health and healthcare… ○ Also comprises of a body of theory developed specifically to understand the behaviour of patients, doctors and hospitals ○ Analytical techniques developed to facilitate resource allocation decisions in healthcare ○ It has evolved into a highly specialised field ○ Encompasses health services research ● There is only value to healthcare if it improves health and it may be unpleasant in the SR, but if we have a fixed budget then we cannot afford to fund every possible form of treatment and need to prioritise/decide which types of healthcare should be provided What and how can economists contribute? ● Positive economics ○ The description of behaviour of the prediction of outcomes ○ Investigating the relationship between variables ○ Testable descriptions of how the world works ○ Economics can provide empirical analysis of trends and relationships and predictions about the possible consequences of new policies or interventions ● Normative economics ○ Concerned with judgments about what we ought to do ○ Assertions about what is best for society and how we should respond to challenges and problems such as scarcity ○ Economists and provide judgements regarding the use of scarce resources by weighing up options in terms of efficiency and equity ● There is often a trade off between efficiency and equity to economists help us deal with this most effectively ● It is usually assumed that perfect competition results in an efficient allocation of resources, but the healthcare market is different ○ Large number of consumers ○ Not a large number of providers ○ Not price takers ○ Often not a homogenous product ○ No free entry & exit ○ Not perfect knowledge and actually large asymmetries of information ● Arrow (1963) ‘Uncertainty and the Welfare Economics of Medical Care’ ○ A principal characteristic of healthcare is uncertainty ■ When will we become ill?

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■ How will health respond to healthcare? ■ What healthcare will we require? ■ What will be the cost? ○ Insurance can help to solve the problem of uncertainty but it causes other market failures ○ Patients don’t behave in the same way as consumers (can’t shop around or test it), and doctors don’t behave the same way as firms ○ Qualifications and regulation mean barriers to entry for individual clinicians and healthcare providers (HCPs) ○ Few patients have medical training and patients have better knowledge of their lifestyle etc. than do the insurance companies or HCPs, causing asymmetries of information both ways ○ There are positive and negative externalities associated with healthcare and ‘health-related behaviours’ (diet, exercise, smoking, alcohol use…) ○ Hence, most healthcare systems comprise of a complex mix of public and private provision, together with regulation ● Key issues for health economics ○ There is only value from healthcare if it improves health ○ Affordability = a health intervention which is considered to be good value for money in a high income country (HIC) context may not be affordable for a low or middle income country (LMIC) ○ Efficiency = maximising the achievement of a particular aim ○ Equity = do we care who benefits and who doesn’t, and are we prepared to make some people worse off in order to make others better off? Economic framework of health and healthcare ● Important element of the demand for health based on the production function ○ Inputs are resources such as personnel, equipment, buildings and raw materials ○ Outputs could be amount of healthcare of a given quality ○ Mediating factors (such as market conditions) affect how inputs translate to outputs ● Using a production function approach allows analysis of many issues in the same framework ● One way to make decisions is to allow market forces to determine who gets what through supply and demand (normal supply and demand curves) ● In case of NHS, supply curve is vertical due to a fixed budget and effective demand is higher than if patients had to pay Topic 2: Financing healthcare systems Who are the agents involved within a healthcare system? ● There are 3 main elements to the framework for financing healthcare systems: ○ Relationship between households, HCPs and third-party payers (TPPs)

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○ Method of raising finance for the health system, and the associated types of TPP ○ Method of reimbursement of HCPs

● Options for financing healthcare systems 1. User charges 2. Private health insurance 3. Social health insurance 4. Direct taxation 1. User charges ● Not favoured in high income countries ● Although some charges exist in NHS, e.g. prescriptions, dental care, eye tests ● Even when there are no user charges for treatment, patients may still incur associated costs such as parking charges ● In low and middle income countries, user charges can dominate (as in India) ● Problems with user charges: ○ Depend directly on ability to pay ■ Inequitable ■ Danger of catastrophic health expenditure as when you’re ill you can’t work and so have a low ability to pay ○ Perverse incentives for HCPs as a form of market failure ○ Failing to account for positive externalities associated with healthcare 2. Private health insurance ● The insurance company covers specified risks of ill-health and incurs the consequential expense ● Insurance premiums are paid by the consumer and/or employer

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● Premiums are based on risk status ● Coverage is often lacking for the poor and chronically sick (might not be accepted/might be too expensive if you’re already ill) ● Advantages: ○ Avoids catastrophic health expenditure through paying a certain and regular amount (the insurance premium) to avoid the need to pay an uncertain and potentially very significant amount ○ Access to healthcare services when needed ○ Can increase choice through complementary and supplementary insurance, i.e. relying on both NHS with some private care ○ Continuity of care ○ Quality and cost efficiency of private HCPs as they are competing ● Disadvantages: ○ Inequitable as coverage is limited by ability to pay ○ Conditions covered are limited ○ Expertise may be limited and there could be gaps in private provision, e.g. there are no private A&Es in the UK ○ Company adverse selection in the determination of insurance premiums ○ Patient moral hazard of those who know they are covered 3. Social health insurance ● Based on the notion of ‘solidarity’ where premiums are paid by workers, employers or government ● Workers’ premiums are fixed or related to income, NOT risk ● Universal or part coverage ● Compulsory participation ● Contributions to one designated agency (e.g. social insurance fund) or a choice of funds ● France, Germany, Luxembourg and the Netherlands have this type of system ● Advantages: ○ Universal or near universal coverage when it is compulsory ○ Premiums can be lower than in private insurance because payment is according to ability to pay ○ Role for employers in taking care of workers’ health ○ Promotes equity in the covered population across high and low risk groups ● Disadvantages: ○ The poor/unemployed are excluded unless subsidised by the government ○ Cross subsidisation encourages free-riders ○ Service costs may not reflect market prices ○ It is complex to manage because of the governance and accountability 4. Direct taxation ● Funds principally raised by general or hypothecated (ring fenced) taxation

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Universal coverage Finance provided by a public monopoly (e.g. UK NHS) UK, Denmark, Finland, Ireland, Sweden, Italy, Portugal and Spain have this time of system Advantages: ○ Universal coverage ○ Equitable and ensures a full redistribution between high and low risk and high and low income groups in the population ○ Free at the point of use ○ Wide range of health service provision and hospitals can specialise etc. due to the interconnectedness ● Disadvantages: ○ Consumer moral hazard due to no cost or restriction to patients ○ Access, e.g. there is an 18 week waiting time target in the NHS between referral and treatment, 3hr waiting time target in A&E, both a long time and frequently missed ○ High cost to state and it’s a hard political decision to raise taxes ○ Challenges regarding the efficiency and quality of service ○ Politicisation of healthcare services

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● Different countries have very different approaches

● Medicaid & Medicare ○ Introduced in the 1960s in the USA ○ Examples of (limited) tax-funded healthcare programmes ○ Medicare is for the elderly ■ Managed by federal government who act as the TPP

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■ Payments made to individual HCPs who have signed up for the programme ○ Medicaid is for those in poverty (and some other defined groups) ■ The federal government provides a portion of the funding for Medicaid as the TPP and sets guidelines ■ Medicaid differs from state to state ■ Free or low cost health coverage ● Types of TPPs ○ Private insurance companies ■ For profit or not-for-profit ○ Social insurance funds ■ Usually independent of direct government control ■ Local, regional or national ○ Government authorities ■ Local, regional or national ■ e.g. Clinical Commissioning Groups and NHS England in UK How do agents within a healthcare system interact? ● Levels of integration between TPPs and HCPs ○ Separate entities ■ Can go to any HCP you want ■ Private insurance pays for services from an unlinked provider ○ Selective contracting ■ Patients seek treatment from Preferred Provider Organisations (PPOs) or other providers ■ Can only go to HCPs that TPPs have an agreement with or HCPs that have certain accreditation ○ Vertical integration ■ TPPs and HCPs integrate to form Health Maintenance Organisations (HMOs) ■ TPP directly controls the HCP, or a model like the UK NHS where there is no choice what HCP you go to if you want the government to pay as TPP ● Reimbursing HCPs ○ Retrospective: ■ Hospitals are paid the full expenditure incurred in a pre-specified time period ■ Limited incentive to promote efficiency ○ Prospective: ■ Hospitals are paid a pre-specified amount ■ Global budgeting or a cost per case ■ Some incentive to promote efficiency as the fixed payment means they get to keep the

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difference if operate cheaper than the cost ■ May lead to some cross subsidisation when a hospital who does something very efficiently uses their cost savings to fund something they do less efficiently Uncertainty and risk in healthcare financing ● Uncertainty exists when one of a number of states of the world may occur and we don’t know which one ○ Health is generally uncertain, unless you’re chronically ill but even then may be worse than expected, and so it’s impossible to predict the demand for healthcare ○ Healthcare is typically consumed under conditions of uncertainty with respect to the timing of healthcare expenditure and the amount of healthcare that is required ■ Potentially large unplanned expenditures ■ Risk of catastrophic expenditures meaning healthcare isn’t affordable ● Risk exists when the probability of each possible state of the world occuring can be estimated ○ Attitudes to risk can be estimated using the concept of a ‘fair gamble’ ○ Can then classify attitude to risk as risk-averse, risk-neutral or risk-loving ○ Risk attitudes arise from likes and dislikes AND the diminishing marginal utility of income Topic 3: Demand for healthcare Demand ● Demand = how much people are both WILLING and ABLE to buy ○ In a public system we want to be able to predict healthcare use so we can provide enough care ○ Insurance based systems will use demand to adjust premiums and co-payment rates ● Supply = how much a supplier is willing to supply for a given price

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● ● Demand for healthcare… ○ Need a theoretical fra...