Health Economics and

Health Policy
Victor R. Fuchs
Henry J. Kaiser Jr. Professor Emeritus
Stanford University

Department of Health
London
9 May 2003
“…the age of chivalry is gone. That of
sophisters, economists, and
calculators has succeeded; and the
glory of Europe is extinguished
forever”

Edmund Burke
“When the sentimentalist and the
moralist fails, he will have as a
last resource to call in the aid of
the economist.”

Edwin Chadwick
What Are Policy-Makers Trying To Do?
 Assure access to medical care
 Control the rate of growth of expenditures for
medical care

• Protect and improve the health of the population

• Achieve efficient use of health care resources

This above all: Avoid bad headlines

How Is Britain Doing?
• Fewer physicians per 1,000 population
than most other “western” countries.
Approximately 35 percent below the
mean of 12 countries

• Fewer hospital beds per capita than

most other countries. ( Exact
comparisons are suspect because beds
serve different purposes in different
countries)
• Lower health expenditures per GDP than
other countries. Approximately 22 percent
below mean of 11 countries (U.S. not
included)

• Higher (8 percent) age-adjusted death rate

than 12 country mean. Slightly slower rate
of decline in age-adjusted mortality since
1961, -1.28 vs. 12 country mean of –1.42.
Excluding Japan, the mean is -1.33.
 Health Care Expenditure As Percent of
GDP 149 Countries in Late 1990’s
Averages by Decile of Real GDP per Capita
Percent Percent
10.0 10.0
9.0 9.0
8.0 8.0
U.K.
7.0 7.0
6.0 6.0
5.0 5.0
4.0 4.0
3.0 3.0
0.0
2.0 0.0
2.0
500 1,000 2,000 5,000 10,000 30,000
GDP per capita, 1999 U.S. dollars (logarithmic scale)
Life Expectancy at Birth, 149 Countries in late 1990s,
Averages by Decile of Real GDP per Capita
Years
90 90

80 80

U.K.
70 70

60 60

50 50

40
U.S. 1900 40

0 030
30
500 1,000 2,000 5,000 10,000 30,000
GDP per Capita, 1999 U.S. dollars (logarithmic scale)
 Efficiency
Who knows?

Extremely difficult to measure output

Two principal aspects of efficiency
A. Efficiency in utilization of services
Demand side constraints
Supply side constraints

B. Efficiency in production of services

Scale of production
Mix of inputs
Getting the right scale and mix requires…
Knowledge:
data, analyses

Incentives:
physicians, administrators,
planners
What Do Economists Have To
Contribute to Health Policy?
• Realistic approach to life’s problems:
neither romantic nor monotechnic

• Aptitude and training for quantitative

analysis

• Some understanding of decision-making

in the face of uncertainty

• Experience in comparing benefits and

costs (risks)
• Ability to think in systemic terms: “you
can’t change only one thing”

• Appreciation of the difference between

average and marginal measures

• Appreciation of the difference between a

movement along a function and a shift in
the function

• Appreciation of the difference between

endogenous and exogenous variables
 Some Specific Areas For
Collaboration Among
Economists, Physicians, and
Policy-Makers
• Evaluation of benefits and costs of new
technologies

• Measurement of how incentives affect

the behavior of patients, physicians, and
hospital administrators

• Analysis of time trends and cross-

sectional differences in utilization of
medical care
• Analysis of time trends and cross-
sectional differences in health

• Monitoring results of demonstration

projects

• Keeping policy-makers from making

really big mistakes
 Current and Future Challenges
to Health Policy
• How egalitarian a system does society want?
• How to find the right balance between
administrative control and the market?
• How to determine an appropriate number and
mix of health care personnel?
• How to finance health care expenditures?
• How to reimburse hospitals and physicians?
• How to deal with advances in medical technology?
“The organization of medicine is not a
thing apart which can be subjected to
study in isolation. It is an aspect of culture
whose arrangements are inseparable from
the general organization of society.”

Walton H. Hamilton