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FERNANDO M. SISON, MD, MPH
EMERITO JOSE FARAON, MD, MBA
Department of Health Policy and Administration
College of Public Health
University of the Philippines Manila
Session Objectives
At the end of the presentation, participants should be able to:
Give a definition of Economics;
Explain the key concepts / principles of economics as applied to health; and
Understand the various methods of economic evaluation.
Economics
From the Greek words oikos (house) and nomos (custom or law), hence rules of the household
Economics is the study of how people and society end up choosing to employ scarce productive resources which have alternative uses to produce various commodities and distribute [allocate] them for consumption, now and in the future, among persons and groups in society. (Samuelson)
Macro Economics
the study of economic phenomena at the level of the entire economy or large aggregates.
Micro Economics
the study of economic phenomena at the level of small units, the individual, the firm, the market, and the industry.
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Scarcity
A situation wherein the amount of good or service demanded exceeds the amount available.
Problem of limited resources and unlimited wants/desires
Challenge: allocating resources among competing objectives/alternatives.
Economics
Studies how society allocates the limited resources of the Earth to the insatiable appetites of humans.
Law of Supply and Demand
Economics
Q&A
What are trade-offs? What does tradeoff imply?
Have you ever been faced with tradeoffs? What are these?
Production Possibility Frontier a curve or schedule which depicts the trade-off between two goods which shows the frontier of all various production possibilities for these two goods
Opportunity Cost
The cost of deciding among alternatives based on the value of foregone opportunity.
Time and resources used to satisfy one set of desires cannot be used to satisfy another set.
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Marginal Analysis
The economic way of thinking about the optimal allocation of resources.
Choices are seldom made on an all-ornothing basis but rather are made at the margin (incremental benefit and incremental costs).
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No. of Admissions 20 22 23 27 31 33
What are the average and marginal values in the above Table?
Fig. 2.3 Average & Marginal Benefits from Alternative Health Programs
Production Function for Health Summarizes the relationship between health status and the various factors that maybe used to produce good health
Health Status
PF
HS0
Q0
Q*
Health Status
PF2 PF1
HS2 HS0
Q0
Q*
Self-Interest
A behavioral assumption that individuals are motivated to promote their own interests.
People respond to incentives and practice economizing behavior only when they individually benefit from such behavior.
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Supply Curve
Equilibrium point
Demand Curve Q
Q&A: When price of a commodity / service changes, what is the effect on quantity demanded?
P = percentage change in Q
percentage change in P
Perfectly Elastic
Elastic
Unit Elastic
Inelastic
Perfectly Inelastic
||=
1<||<
||= 1
0<||<1
||= 0
Nature:
The prices of resources used to produce the commodity Producers expectations about future prices of the commodity / service
Competition
Forces resource owners to use their resources to promote highest possible satisfaction of society.
Promotes more efficient methods of production
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Efficiency
Measures how well resources are being used to promote social welfare.
Consumers: better off by allocating limited budgets.
Producers: seek maximum profit by using cost-minimizing methods.
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Comparative Advantage
Explains how people benefit from voluntary exchange when production decisions are based on opportunity cost.
Everyone specializes in the activity that they do best: the one with the lowest opportunity cost.
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Market Failure
A situation in which a market fails to produce the socially optimal level of output.
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What will be the health consequence? unreasonably high prices for services which are beyond the reach of many consumers.
Even if not necessary, a healthcare provider will provide the service Ex. In Quezon City, most government hospitals are located here & networking is crucial; 1 CT scan / MRI / linear accelerator Problem of where to invest, what equipment Asymmetric information such that patients dont know what they need (MDs know it all) so need for CPGs
Public Goods
Non-rival: ones consumption does not reduce the amount available for others.
Non-excludable: if they are made available to everyone, they are made available to all.
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Public Goods
Ex. flood control projects; sanitation; police protection; national defense
Externality
the economic effect of production or consumption that is felt by parties beyond the immediate producer or consumer.
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The issue of resource allocation cannot be separated from the role of participatory politics and the reach of informed public discussions.. - Amartya Sen
It is important that we approach resource allocation decisions in health care in a clear and systematic way.
COST
CONSEQUENCE
DECISION
ALTERNATIVE 1 ALTERNATIVE 2
COST
CONSEQUENCE
The Diagram illustrates how a comparison of costs and consequences of two alternative programs provides a basis for a decision.
Cost-of-Illness Studies
DISEASE
Cost-of-Illness Studies
(in some literature, a.k.a. Cost Minimization Analysis)
Merely look at the question, what is the cost?, No outcome measure. ? whether it is an economic evaluation Provides important information to policy makers and health economists on the burden of a disease. CIS maybe a first important step in cost identification leading to an economic evaluation.
used to compare alternative interventions for the same disease or condition where it can be proved that the alternatives have identical outcomes. the technique requires a test of equivalence of outcomes rather than just the assumption that outcomes are equivalent. to test for equivalence, it is necessary to define an outcome indicator.
Illustration:
Analysis whether surgery (method 1) or injection (method 2) is an effective treatment for varicose veins
Outcome indicator: proportion of patients who had required no further treatment in 3 years. Once the outcomes of alternatives are shown to be identical, cost minimization employs the same technique as cost analysis.
Challenge
Results are interesting BUT.. do not answer questions related to the most effective options for treating the disorders.
Cost-Benefit Analysis
COSTS
BENEFITS
Cost-Benefit Analysis
CBA requires that benefits and costs both be measured in terms of money.
An analytical technique comparing all the costs and all the benefits arising from a program/project.
Aim: Maximize profits/net gain from the project
the price of the software (including interest and taxes) cost of hardware additional staff (IT personnel) space requirement for hardware and IT personnel the cost of the consultants to install and implement the software the cost of training for the users of the software insurance premiums
improved business processes (leading to an annual cost decrease) better available information being able to take better decisions (leading to additional cash-flows) increased staff morale from using the state of the art tools for running the business (increased productivity) reduced manpower requirement due to computerization.
COSTS
BENEFITS
Willingness-to-Pay Approach
When applied to health, willingness-to-pay depends on:
wealth
life expectancy
current health status
possibility of substituting current consumption for future consumption
Cost-Effectiveness Analysis
COSTS
HEALTH OUTCOMES
Cost-Benefit Analysis
COSTS
BENEFITS
Cost-Effectiveness Analysis
CEA measures the benefits of a health intervention in terms of physical units (i.e., #
of lives saved by the intervention)
Measures health benefit in terms of either the intermediate or the final health outcome, not the peso / dollar value of life
It represents the cost per unit of effectiveness for example, cost per life saved, cost per life-year gained, cost per correct diagnosis.
In general, the lower this ratio, the more efficient the program is.
CEA can be used to:
(1) Compare alternative designs of the same project (e.g., different methods of treating dehydration);
(2) compare unrelated programs if they have the same objective.
Measuring Costs
Direct associated with the use of resources
Medical the cost associated with the use of medical resources (hospitalization, outpatient visits)
Non-medical cost typically borne by the
patients/families (transportation expenses, home
service)
Indirect related to lost productivity
Sick leave; reduced productivity at work; productivity losses due to early retirement or premature death
Intangible associated with pain and suffering, grief,
anxiety, and disfigurement
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Challenges
Availability of quality data
Gold standard clinical trials
Shortcoming too short to capture longterm costs and consequences
Solution modeling of epidemiological history of disease and treatment
Cost utility analysis is based on cost effectiveness analysis. The first step is to estimate the number of life-years gained by an intervention. The extra years of life are then adjusted to account for changes in the quality of life. The CUA indicator of benefit is called a Quality-Adjusted Life Year (QALY).
MARAMING SALAMAT!