Economic issues in health planning and policy

The Contribution of Health Economics to Health Planning

Health planning is basically about choice: choice between one future or another; choice between various ways of
achieving that future. Health economics is also interested in choice, so there is an obvious affinity between health
economics and health planning.

Economic considerations play a key role in all aspects of life: in agriculture, housing, industry, trade and in health. In
addition, the nature and level of a country's economic development is a major determinant of the health status of its
inhabitants and is associated with the level of health service and health-related activities a country can support.
Health policy and its implementation is thus strongly influenced by macro-economic considerations.

At the same time, the health of a population can itself influence economic progress. Health programmes have
therefore come to be seen as part of a comprehensive strategy aimed at improving the social and economic welfare
of populations. Such a strategy demands the selection of those programmes which improve health most efficiently:
health services, the provision of other infrastructure such as water and sanitation, or actions aimed at improving
nutrition, for example. Health economics can help to evaluate such choices.

The recent reappraisal of health policies in a number of countries has involved questioning the merits of many
existing forms of care and of past strategies and priorities. Choices on how best to improve health exist everywhere,
but such choices in poor countries are both crucial and difficult. Efforts to widen the choices to be considered for
delivering health services and for encouraging health-promoting activities are therefore highly relevant.

They are particularly relevant in the economic context of lower income countries. Health services absorb a significant
proportion of both government expenditure and family budgets. They also demand scarce foreign exchange for
drugs, equipment and transport. Governments are actively seeking ways of containing costs, increasing efficiency
and tapping additional resources. Health economics is attractive to them since it promises to help improve the
allocation of health resources, increase their efficiency, identify more cost-effective technologies and evaluate
alternative sources of health finance.

Table 1 attempts to elaborate the connection between economics and health planning in the following manner. The
first column identifies a number of issues that are of direct relevance to planners (items A-G inclusive). Not
infrequently the economist, in looking at such issues, needs to generate further questions which require answering
before the issue can be tackled. These further questions appear in the second column under the heading 'Prior
Questions'. The final column is intended to show what economists can contribute in that area and offers pointers to
those parts of economic theory that can best help to elucidate the planning issues.

It is important to emphasize, however, that health economics does not have all the answers. There are particular
difficulties in applying some of the traditional conceptual and technical tools of economics to health. These difficulties
may make health economics of great intellectual fascination to economists, but they hamper the application of health
economics to health planning. While health economics certainly does have quantitative techniques to offer health
planning, an equally important contribution is its distinctive mode of thought. The kind of approach characteristically
adopted by the economist has been described by Culyer (1981) as:

“the desire to specify an unambiguous objective or set of objectives against which to judge and monitor policy; the
desire to identify the production function; the recognition of the importance of human behaviour, as well as technology
and the natural environment, in the causes, prevention, cure and care of disease”.

The economist's views, of course, will represent only one input to planning and planners will weigh up views from a
variety of sources in making their decisions.
Table 1. The relevance of economics to planning.
Some health
planning/management issues
I Health and economic 1.
e.g. development
How much should be
spent on health?
How much should be
spent on health services?
2.
3.
II Organization and 1.
e.g. delivery systems
How should health
services be organized?
2.
3.
III Finance of the health 1.
e.g. sector
How can more resources
be obtained for health?
2.
3.
IV Demand analysis 1.
e.g. Why do consumers prefer
one health agency rather
than another?
Some prior questions Relevant corpus of economics
What constitutes health and Identification and measurement issues of
health improvement? health and illness/disease; basic needs
measures.
Macroeconomic models of economic
development; determinants of growth.
Human capital theory: investment and
consumption elements of health
expenditure; household production functions
for health; ill-health and the productivity of
labour.
What are the determinants of
health improvement?
How does health (and health
services) affect production
and the economy?
What are the economic Welfare theory and market failure:
characteristics of health care rationality, consumer sovereignty, income
and health related activities? and wealth issues, indivisibilities,
externalities, public goods and merit goods.
What is the relevance of these
characteristics for the pursuit
of health through market and
non-market mechanisms?
How do different health care
systems handle their
organization and distribution
decisions?
What are the sources of Social accounting systems and public
health care financing? finance: revenue generation and tax
incidence; self-financing, insurance and pre-
payment mechanisms; ability and
willingness-to-pay concepts.
What type and quantity of
resources are being utilized to
finance the health sector?
What do alternative financing
methods achieve both in
terms of yield and of incidence
(burden)?
What determines the demand Theories of household, individual and
(or absence of demand) for supplier-induced behaviour: generation and
specific health services, and interpretation of demand schedules;
for traditional healers, determinants of demand, price, income and
 How can the utilization herbalists and practitioners? cross-elasticities; time costs.
pattern of health services
be influenced?

2. What factors determine the

provider response to an
individual's demands for
health care, including factors
such as the availability of
referral facilities?

3. How do health payment

systems (e.g. charges,
prepayment methods) affect
the demand for and utilization
of health services?

V Supply analysis
e.g. Are some health facilities
being run more efficiently
than others?
Can economies be made
in existing services?
What size facilities should
be built?
1. What determines the cost
behaviour of organizations
and health agencies?
Production functions and substitutability
between inputs. Estimation of short- and
long-run cost curves, average and marginal
costs, private and social costs. Determinants
of hospital and health centre cost variations
(case-mix, quality factors); economies of
scale.

2. How and why will costs vary

with changes in the scale,
location or type of medical and
health services (and facilities)
provided?

3. What mix of resources will

produce specific services?

VI Health manpower
e.g. What types of health
manpower should be
trained and employed?
How should they be
trained?
1. What determines the supply
and distribution of each type
of human resource?
Labour markets and the demand for and
supply of health workers. Marginal
productivity theory. Factors influencing
supply elasticities: impact of income levels
and financial incentives, leisure preferences;
private practice the brain drain.

2. How do forms of remuneration

and other determinants of
behaviour affect manpower
recruitment, absenteeism,
retention and geographical
distribution?

3. What are the productivities of

various types of health worker
in relation to their training
costs and rate of pay?

VII Financial management
e.g. How can financial
management procedures
be improved?
1. How is the budget divided,
who controls the budget, and
how is that control exercised?
Budgeting systems and accountability (cost
centres, cost units); inventory management.
Determinants of supplier behaviour (local,
national, multi-national).
Shadow pricing and social opportunity costs.

2. Can economies be effected in

the procurement and
distribution of resources?
 3. What is an 'appropriate'
technology?

VIII Organizational behaviour
e.g. How can managers and
health workers be
encouraged to increase
their efficiency?
1. Who makes the resource
allocation decisions to and
within the health sector, and
what are their objectives?
Managerial and behaviour theories of
government, not-for-profit, profit and
voluntary organizations. Notions of efficiency
and the role of inducements (rewards and
penalties).

2. What is the feasibility of

reconciling the conflicting
goals, values and interests
involved in the health sector?

3. What types of controls or

incentives (monetary or
otherwise) can be introduced
to encourage efficient
behaviour?

IX Project Evaluation
e.g. Which health programmes
or services should receive
highest priority when
allocating new funds?
1. Does the service do any good Micro-economic evaluation: cost benefit and
or have any discernable effect cost-effective analyses.
on health? For whom? Notions of 'effectiveness' and the 'margin';
size and incidence of costs and benefits.

2. What are the relative

efficiencies (merits and
demerits) of alternative health
activities?

3. What are the distributional

consequences of health
activities (who incurs the cost,
who receives the benefits?)

X Health policy, equity and
e.g. social justice
Does the operation of the
health sector reflect of the
government's objectives
e.g. for equity?
1. How best can resources be
matched to the population's
needs, mortality and morbidity
patterns, demands and
utilization?
Optimum welfare criteria and the concept of
the social welfare function.
Inequalities and inequities in health care:
definition and measurement issues.
Effect of socioeconomic variables and
physical access on utilization patterns.

2. What impact do different

health care systems have
upon eligibility, access, take-
up, and benefits received by
target groups in the
population?

3. What are the barriers, if any,

to the provision of an
equitable (fair) health service?