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Inaugural KEYSTONE Course on Health Policy and Systems Research 2015

Economic Analysis in HPSRSession 1

Basic Principles of Health Economics

Basic Principles of Health Economics

KEYSTONE HPSR Course25 February 2015

Economic Analysis in HPSRSession 1

Session Outline

• Role of Economics in Health

• Demand for Health Services

• Production and Supply of Health Services

• Overview of Market Models

• Group Work

Economics in the Health Sector

• Choice of using available resources for production and distribution of health services

• Scarcity of resources makes these choices even harder, particularly in LMICs

• How does the society make this choice? Market or government?

Economics in the Health Sector

• Trade-off between efficiency and equityAchievement of better health OR fairer

distribution of health

• How does economics help policy makers to decide which is the best choice? Tools of economic evaluation

Factors of Demand

• Price of good• Price of substitute goods• Price of complementary

goods• Income• Tastes

How do consumers of health services express their preferences through their ability and willingness to pay?

Price

Quantity demanded

Is Demand for Health Care Different?

Yes and No

How is Demand for Health Care Different?

• Information asymmetry• Presence of “other parties” i.e. insurance

companies• Consumption of health services with respect

to life cycle • Severe illness and decisions of life and death• Do we really enjoy health services?

How is Demand for Health Care not Different?

• Not all health services are for severe illness but also needed for improving quality of life

• Many health services are “Normal” goods: quantity demanded increases with reduction in price

Why is it Important to Understand Demand?

• Predict likely changes in behaviors and reactionsWhat happens with introduction of user fees?

• Understand consumers’ value for servicesWhich services should be provided using scarce

resources?

Elasticity of Demand

• Price elasticity: measure of how much demand responds proportionately to changes in prices

• Income elasticity: measure of how much demand responds proportionately to changes in income

Efficiency in Production

• Technical efficiencyProducing most output from a set of inputs, or producing a

set amount of output using the fewest inputs

• Economic efficiency: Producing most output for a given cost, or producing a set

amount of output at the lowest possible cost.

• Allocative efficiency: One allocation is better than another if at least one person

is better off under the first allocation and no-one is worse off.

Factors of Production

• Technically skilled staff• Semi-skilled staff• Infrastructure• Equipment• Drugs and consumables• Energy• Caring and interpersonal skills• Teamwork, motivation

How Do We Choose Which Factors to Use?

5

Bicycle weeks

Personweeks

10

10

0

5 No. of children immunized =1000

Y Axis: 1 unit of capital= 1 bicycle in working order for one week

X Axis: 1 unit of labour = 1 person working for one week

Isoquant: represents the possible combinations of units of labour and capital that can be used to immunize 1,000 children

• Marginal Rate of Technical Substitution measures the average number of units of bicycles which can be substituted for an additional unit of staff in order to produce 1000 immunized children

Supply of Health Services

• We need a technically efficient combination of inputs that also minimizes cost of production

• Understanding relationship of cost and outputs helps to explain how services are supplied

Price

Quantity supplied

Markets

• A market brings together the demand for goods from consumers and the supply of those goods from suppliers.

• Consumers will want to buy more if the price is lower, but suppliers will want to sell more if the price is higher.

• Markets help to decide what to produce and how to produce it.

Market Equilibrium

Different Market Models

• Perfect competition: many small sellers and many buyers, a homogenous product and everyone is a price-taker

• Pure monopoly: only one supplier

• In between the extremes: monopolistic competition, oligopoly

Essential Conditions for Perfect Markets

• Perfect information across buyers and sellers

– Rational buyers and sellers

• Large number of buyers and sellers

• Homogeneity of product

• Free entry and exit for all players

Discussions in Group

• Topic 1: What are the demand and supply-side factors which influence utilization of institutional delivery in India? Discuss from an economic perspective, how interventions under NRHM aim to address these factors?

• Topic 2: Why is there a shortage of health workers in India? Why are health workers often absent from their positions in rural areas? Discuss from an economic perspective, how interventions under NRHM aim to address these challenges?

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