Health Economics

1
Health Economics

• Unit 12

2
Definition of Economics

• Demand - relationship between quantities and
  prices that addresses how much bought at each
  price
• Supply relationship between quantities and
  prices that addresses how much sold at each price

3
Definition of Economics (cont.)

• As price increases, demand decreases but supply
  increases in free market
• Market reaches equilibrium when supply and demand
  are equal at a given price
• Economics is about choices made about production
  and consumption of goods and services

4
Economic Decision Making

• Scarcity choice of which services to provide
  with scarce resources
• Preferences refers to personal preferences or
  choices about a resource
• Opportunity costs - choices in saving money by
  providing alternative opportunities
• Uncertainty choices made when outcomes are
  uncertain

5
Basic Economic Reasoning

• Economic reasoning based on concept of making
  decisions at the margin
• Marginal benefit - spending one more dollar or
  trying to bring about one more positive health
  outcome
• Utility achievement of life satisfaction or
  usefulness without additional societal
  expenditures
• Profit net revenue of an action or product

6
Economic Evaluation

• Cost-benefit Analysis
• Compares costs of intervention with the dollar
  value of the benefits
• Limitations - difficult to put a dollar value on
  health
• Cost-effectiveness Analysis
• Compares costs of intervention with benefits

7
Economics of the Labor Market

• Labor supply describes how wages relate to the
  number of hours of work that can be obtained.
• Expected to indicate that an increasing number
  of hours of labor will be supplied as the
  wage increases.
• Does not indicate magnitude of response to
  increasing wages.

8
Example of Labor Supply and Demand of Nurses

• Decision to become nurse based on lifetime
  earnings and individual preferences (utility
  maximizing decision).
• As wage increases (price), number of nurses
  increases (supply), resulting in more hours of
  nursing time (demand) leading to lower wage
  (price) because prices decrease when supply
  increases.

9
Demand for Health Care

• Health insurance insulates individuals from cost
  of health care, leading to increase in demand for
  health care (moral hazard).
• Moral hazard leads to increase in demand for
  health care and increase in health care
  expenditures.
• Managed care attempts to decrease moral hazard.
• Main dilemma in US health care How to reach
  equilibrium in the supply and demand of health
  care, given health insurance and uninsured.

10
Supply of Health Care

• Suppliers of health care - health care providers
  and institutions of care.
• Provider-induced demand offering services not
  needed to compensate for reduced payment.
• Managed care attempts to decrease supplier
  tendencies to increase provider-induced demand.
• Minimal difference in cost containment between
  managed care and traditional insurance practices.