Health economics

The scope of health economics is neatly encapsulated by Alan Williams' "plumbing diagram"[9] dividing the discipline into eight distinct topics:

• What influences health? (other than healthcare)
• What is health and what is its value?
• The demand for healthcare
• The supply of healthcare
• Micro-economic evaluation at treatment level
• Market equilibrium
• Evaluation at whole system level
• Planning, budgeting and monitoring mechanisms.

The demand for healthcare is a derived demand from the demand for health. Healthcare is demanded as a means for consumers to achieve a larger stock of "health capital." The demand for health is unlike most other goods because individuals allocate resources in order to both consume and produce health.

The above description gives three roles of persons in health economics. The World Health Report (p. 52) states that people take four roles in the healthcare:

1. Contributors
2. Citizens
3. Provider
4. Consumers

Michael Grossman's 1972 model of health production[10] has been extremely influential in this field of study and has several unique elements that make it notable. Grossman's model views each individual as both a producer and a consumer of health. Health is treated as a stock which degrades over time in the absence of "investments" in health, so that health is viewed as a sort of capital. The model acknowledges that health is both a consumption good that yields direct satisfaction and utility, and an investment good, which yields satisfaction to consumers indirectly through fewer sick days. Investment in health is costly as consumers must trade off time and resources devoted to health, such as exercising at a local gym, against other goals. These factors are used to determine the optimal level of health that an individual will demand. The model makes predictions over the effects of changes in prices of healthcare and other goods, labour market outcomes such as employment and wages, and technological changes. These predictions and other predictions from models extending Grossman's 1972 paper form the basis of much of the econometric research conducted by health economists.

In Grossman's model, the optimal level of investment in health occurs where the marginal cost of health capital is equal to the marginal benefit. With the passing of time, health depreciates at some rate ${\displaystyle \delta }$. The interest rate faced by the consumer is denoted by ${\displaystyle r}$. The marginal cost of health capital can be found by adding these variables: ${\displaystyle MC_{HK}=r+\delta \,}$. The marginal benefit of health capital is the rate of return from this capital in both market and non-market sectors. In this model, the optimal health stock can be impacted by factors like age, wages and education. As an example, ${\displaystyle \delta \,}$ increases with age, so it becomes more and more costly to attain the same level of health capital or health stock as one ages. Age also decreases the marginal benefit of health stock. The optimal health stock will therefore decrease as one ages.

Beyond issues of the fundamental, "real" demand for medical care derived from the desire to have good health (and thus influenced by the production function for health) is the important distinction between the "marginal benefit" of medical care (which is always associated with this "real demand" curve based on derived demand), and a separate "effective demand" curve, which summarizes the amount of medical care demanded at particular market prices. Because most medical care is not purchased from providers directly, but is rather obtained at subsidized prices due to insurance, the out-of-pocket prices faced by consumers are typically much lower than the market price. The consumer sets ${\displaystyle MB=MC}$ out of pocket, and so the "effective demand" will have a separate relationship between price and quantity than will the "marginal benefit curve" or real demand relationship. This distinction is often described under the rubric of "ex-post moral hazard" (which is again distinct from ex-ante moral hazard, which is found in any type of market with insurance).

Economic evaluation, and in particular cost-effectiveness analysis, has become a fundamental part of technology appraisal processes for agencies in a number of countries. The Institute for Quality and Economy in Health Services (Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen – IQWiG) in Germany and the National Institute for Health and Care Excellence (NICE) in the United Kingdom, for example, both consider the cost-effectiveness of new pharmaceuticals entering the market.

Some agencies, including NICE, recommend the use of cost–utility analysis (CUA). This approach measures outcomes in a composite metric of both length and quality of life, the Quality-adjusted life year (QALY).

The five health markets typically analyzed are:

• Healthcare financing market
• Physician and nurses services market
• Institutional services market
• Input factors markets
• Professional education market

Although assumptions of textbook models of economic markets apply reasonably well to healthcare markets, there are important deviations. Many states have created risk pools in which relatively healthy enrollees subsidise the care of the rest. Insurers must cope with adverse selection which occurs when they are unable to fully predict the medical expenses of enrollees; adverse selection can destroy the risk pool. Features of insurance market risk pools, such as group purchases, preferential selection ("cherry-picking"), and preexisting condition exclusions are meant to cope with adverse selection.

Insured patients are naturally less concerned about healthcare costs than they would if they paid the full price of care. The resulting moral hazard drives up costs, as shown by the famous RAND Health Insurance Experiment. Insurers use several techniques to limit the costs of moral hazard, including imposing copayments on patients and limiting physician incentives to provide costly care. Insurers often compete by their choice of service offerings, cost sharing requirements, and limitations on physicians.

Consumers in healthcare markets often suffer from a lack of adequate information about what services they need to buy and which providers offer the best value proposition. Health economists have documented a problem with supplier induced demand, whereby providers base treatment recommendations on economic, rather than medical criteria. Researchers have also documented substantial "practice variations", whereby the treatment also on service availability to rein in inducement and practice variations.

Some economists argue that requiring doctors to have a medical license constrains inputs, inhibits innovation, and increases cost to consumers while largely only benefiting the doctors themselves.[11]

• Alastair M. Gray, Philip M. Clarke, Jane Wolstenholme, Sarah Wordsworth (2010) Applied Methods of Cost-effectiveness Analysis in Healthcare, Oxford University Press. ISBN 0-19-922728-4
• Drummond, Michael F. (2005) Methods for the Economic Evaluation of Health Care Programmes, Oxford University Press. ISBN 0-19-852945-7
• Mahar, Maggie, Money-Driven Medicine: The Real Reason Health Care Costs So Much, Harper/Collins, 2006. ISBN 978-0-06-076533-0
• Siegel, Joanna E.; Russell, Louise B.; Weinstein, Milton C.; Gold, Marthe R. (1996), Cost-effectiveness in health and medicine, New York [u.a.]: Oxford Univ. Press, ISBN 978-0-19-510824-8
• Starr, Paul, The Social Transformation of American Medicine, Basic Books, 1982. ISBN 0-465-07934-2
• Wennberg J, Gittelsohn; Gittelsohn, A. (December 1973), "Small area variations in health care delivery", Science, 182 (4117): 1102–08, Bibcode:1973Sci...182.1102W, doi:10.1126/science.182.4117.1102, PMID 4750608, S2CID 43819003
• Whittington, Ruth (2008). Introduction to Health Economics: A Beginners Guide Preview. ISBN 978-0-9545494-5-9.
• Wise, David A. (2009), Developments in the Economics of Aging, University of Chicago Press, ISBN 978-0-226-90335-4
• A.J. Culyer and J.P. Newhouse, ed. (2000). Handbook of Health Economics, Elsevier. 1A. Description. Elsevier.
• _____ (2000). Handbook of Health Economics, 1B. Description. Elsevier.