Unit 1 Part 1 of HEHF.

1. Notes on Health Economics (Part 1) (Aug., 2020)
By:
Prof. JagatMan Shrestha
NationalAcademy for MedicalSciences
Introduction of Health Economics
Conceptof Health Economics:
The concept of Health Economics was established nearly during 1973 when WHO realized:
1. Costs of health services were increasing
2. Poor quality of information of costs to the public
3. Lack of objectivity
In this line, there are certain issues which should be made clear:
 The Economic approach to the health services
 Examine the benefits to the consumer
 Reasonable price to pay for health
 Relations between consumers and health services
 Do consumers receive value for money?
 To what extent consumers and producers benefit from health services
All the answers sighted above can be given only by a specific study which is called Health Economics.
Thus, Health Economics can be discussed as “Economics applied to the health field”. Further, it can be
understood as: the application of principles of economics to the administration of public health.
Role of Health Economics
1. Health Economics enables planners to hold their own thoughts in discussions with:
• other planners
• Planning commissions
• Key government departments i.e. finance ministry
2. In addition, it also helps those responsible for the management of the considerable and increasing share
of nation resources being devoted to health services to meet the growing demand on the part of:
• governments, legislatures and public for an explanation of the increasing per capita expenditure
• and spiraling costs of their services
3. For the better understanding of the use of health economics, following situations have come across:

2. • Health and socio-economic planning would be linked if health planners are aware of economic
impact of health services and other health promotion actions
• Rather than national income, better health
4. Health economics in the health planning require numerous specialized techniques like:
• Statistical analysis
• Benefit – cost analysis
• System analysis
Principles of health economics (including the notions of scarcity, supply and demand,
marginal analysis, distinctions between need and demand, opportunity cost, margins,
efficiency and equity)
Principles of Health Economics
Introduction
From a Public Health point of view, health economics is just one of many disciplines that may be used to
analyze issues of health and health care,in particular as one of the set of analytical methods labeled health
services research. But from an economics point of view, health economics is simply one of many topics to
which economic principles and methods can be applied. So, in describing the principles of health
economics, we are really setting out the principles of economics and how they might be interpreted in the
context of health and health care. As Morris, Devlin and Parkin (2007) put it: Health economics is the
application of economic theory, models and empirical techniques to the analysis of decision-making by
individuals, health care providers and governments with respect to health and health care.
There are many different definitions of economics, but a definition given in a popular introductory textbook
(Begg, Fischer and Dornbusch, 2005) is instructive: The study of how society decides what, how and for
whom to produce. In analyzing these issues, health economics attempts to apply the same analytical
methods that would be applied to any good or service that the economy produces. However,it also always
asks if the issues are different in health care.
Production, resources, scarcity and opportunity cost
The definition of economics above includes the term to produce, emphasizing that economics deals with
both health and health care as a good or service that is manufactured, or produced. All production requires
the use of resources such as raw materials and labor, and we can regard production as a process by which
these resources are transformed into goods:

3. The inputs to this productive process are resources such as personnel(often referred to as labor), equipment
and buildings (often referred to as capital), land and raw materials. The output of a process using health
care inputs for example health care professionals, therapeutic materials and a clinic - could be, for example,
an amount of health care of a given quality that is provided. How inputs are converted into outputs may be
affected by other mediating factors,for example the environment in which production takes place, such as
whether the clinic is publicly or privately owned.
The key observation of economics is that resources are known to be limited in quantity, but there are no
known bounds on the quantity of outputs that is desired. This both acts as the fundamental driving force for
economic activity and explains why health and health care can and should be considered like other goods.
These issues, known as the problems of scarcity of resources mean that choices must be made about what
goods are produced, how they are to be produced and who will consume them. Another way to view this is
that we cannot have all of the goods that we want and in choosing the basket of goods that we will have,
we have to trade off one good for another.
The term economic goods are sometimes used to describe goods and services for which economic analysis
is deemed to be relevant. These are defined as goods or services that are scarce relative to our wants for
them. Health care is such an economic good: first, because the resources used to provide it are finite and
we can only use more of these resources to create health care if we divert them from other uses; and
secondly,because societies wants for health care, that is what society would consume in the absence of
constraints on its ability to pay for it, have no known bounds. Nowhere in the world is there a health care
system that devotes enough resources to health care to meet all of its citizens' wants.
Of course, in a national health system, it is likely that the aim is to meet needs rather than wants; this
distinction is discussed below. But it is also the case that meeting one need may mean that another is not
met and that no-one has discovered a limit to need.
To summarize: in the economy as a whole, there are not enough scarce resources to meet all of the wants
that people have, so we have to choose which wants are met and which are not met; in the health care
system there are not enough health care resources to meet all of the health needs that people have, so we
have to choose which needs are met and which are not met.
Economics suggests that scarcity and the resulting necessity to choose are ubiquitous and unavoidable. This
observation leads directly to an important and fundamental economics concept, which is opportunity cost.
If scarce resources are used to produce a good or service, those resources cannot be used to produce other
goods or services. Opportunity cost derives from the benefits that are forgone by not producing those other
goods. Because there are many possible uses for resources, the opportunity cost of using resources in a
particular way is defined as the benefits that would have resulted from their best alternative use.
When economists refer to costs, they usually mean opportunity costs. This is quite different to the more
familiar concept of financial costs,the costs of goods and services and of scarce resources in terms of
money. Very often, financial costs are used to measure opportunity costs, but this is not always the case.
Opportunity costand financial costsare different waysof thinking about costs,ratherthan separate elements
of overall costs it would make no sense to calculate them separately and add them together, for example.

4. Role of Health Economics in "Reforming the health sector in developing countries: the
central role of policy analysis".
The role of health economics can be observed in policy analysis and health planning in a way that:
Policy analysis is an established discipline in the industrialized world, yet its application to developing
countries has been limited especially health sector in particular appears to have been neglected. This is
surprising because there is a well-recognized crisis in health systems, and prescriptions abound of what
health policy reforms countries should introduce.
However,little attention has been paid to how countries should carry out reforms, much less who is likely
to favor or resist such policies. Health policy wrongly focuses attention on the content of reform, and
neglects the actors involved in policy reform (at the international, national and sub-national levels), the
processes contingent on developing and implementing change and the context within which policy is
developed.
Focus on policy content diverts attention from understanding the processes which explain
why desired policy outcomes fail to emerge.
The third investigates what other disciplines have written that help to develop a framework of
analysis. And the final section suggests how policy analysis can be used not only to analyze the
policy process, but also to plan. (Source: GILL WALT and LUCY GILSON, © 1993 Oxford University Press)
Social factors affecting Health and Development
1. Gross inequalities in health that we see within and between countries present a challenge to the
world.
2. That there should be a spread of life expectancy of 48 years among countries and 20 years or more
within countries is not inevitable.
3. A burgeoning volume of research identifies social factors at the root of much of these inequalities
in health.
4. Social determinants are relevant to communicable and non-communicable disease alike.
5. Health status, therefore, should be of concern to policy makers in every sector, not solely those
involved in health policy.
6. As a response to this global challenge, WHO is launching a Commission on Social Determinants
of Health, which will review the evidence, raise societal debate, and recommend policies with the
goal of improving health of the world's most vulnerable people.
7. Amajor thrust of the Commission is turning public-health knowledge into political action. Copyright
© 2005 Elsevier Ltd. All rights reserved.
Risk and protective factors affecting adolescent reproductive health in developing countries: an analysis of
adolescent sexual and reproductive health literature from around the world. Over the past decade,
adolescent sexual and reproductive health concerns have increasingly been on national agendas. For many
countries, this concern has been driven by the high prevalence of HIV/AIDS among young people. In other
countries, a central concern has been early childbearing; and still others have focused predominantly on
sexual behaviors among adolescents.
Increasingly research and program experience has shown that it is neither feasible nor productive to focus
on one isolated behavior without addressing a broader set of adolescent sexual and reproductive health
concerns. In addition, there is mounting evidence that the most effective interventions enhance protective
factors of young people and do not simply attempt to reduce risk.

5. Concurrent with this increased focus on young people has been a vast proliferation of research exploring
factors associated with a number of health outcomes. So too, there has been a rising interest in identifying
those factors that not only predispose to harm but also diminish risk. (excerpt)
Author: Blum R; Mmari K, Geneva, Switzerland, World Health Organization [WHO], Department of Child
and Adolescent Health and Development, 2004.
Risk and protective factors affecting adolescent reproductive health in developing countries:
an analysis of adolescent sexual and reproductive health literature from around the world.
• Over the past decade, adolescent sexual and reproductive health concerns have increasingly been on
national agendas.
• For many countries, this concern has been driven by the high prevalence of HIV/AIDS among young
people.
• In other countries, a central concern has been early childbearing; and still others have focused
predominantly on sexual behaviors among adolescents.
• Increasingly research and program experience has shown that it is neither feasible nor productive to
focus on one isolated behavior without addressing a broader set of adolescent sexual and reproductive
health concerns.
• In addition, there is mounting evidence that the most effective interventions enhance protective factors
of young people and do not simply attempt to reduce risk.
• Concurrent with this increased focus on young people has been a vast proliferation of research
exploring factors associated with a number of health outcomes. So too, there has been a rising interest
in identifying those factors that not only predispose to harm but also diminish risk. (excerpt)
Author: Blum R; Mmari K
Source: Geneva, Switzerland, World Health Organization [WHO], Department of Child and Adolescent Health
and Development, 2004.
Relationship between Health and development
Better health brings human happiness and well-being. It makes an important contribution to economic
progress, as healthy populations live longer, are more productive, and save more. Many factors influence
health status and a country's ability to provide quality health services for its people. Ministries of health are
important actors, but so are other government departments, donor organizations, civil society groups and
communities themselves.
For example:
1. investments in roads can improve access to health services;
2. inflation targets can constrain health spending;
3. civil service reform can create opportunities - or limits - to hiring more health workers.
4. It is concerned with the impact of better health on development and poverty reduction, conversely,
with the impact of development policies on the achievement of health goals.
Source: WHO/Virot, The Tappankala resettlement area, Delhi, India

6. Similarities and Differences between Economics and Health Economics
Similarities:
• Basic principles and tools are almost same: unlimited wants and scarce resources
• Both are based on the principles of demand and supply of goods and services
• Both create market and follow the rules of market to some extent
• Both are evaluated in the term of money
• Evaluation of products and projects are made on the basis of costeffective analysis and benefit cost
analysis
• The economic terms used in both economics are almost same
Differences
• In economics, goods and services are measured in term of quantity where as in health economics
potential inputs and benefits are principally measured in term of quality.
• In economics, goods and services are based on market products including health products where as
in health economics products are based on health man power (physicians, surgeons, nurses,
technicians) and health services (health care, operation, check - up).
• In economics, evaluation of goods and services are easy while in health economics evaluation is
relatively difficult as it is measured in term of life saving, patients relief, quality of life, longevity.
• The impact of projects in economics can be measured easily because it has certain time period
where asin health economics it is difficult because some time impact is measuredaftermany years.
• In economics, market mechanism is based on profit motives where as in health economics social
welfare is involved.
• In economics, the features of market is in some form of competition where as in health economics
it is mixed (monopoly and monopolistic competition)
• In economics, quantities of goods and services are purchased (demand) on the basis of the wants
of the consumers whereas in Health Economics goods and services (health care, health services
demand) are purchased on the basis of the needs and necessities. None of the person will want to
be sick and want to stay in hospital. Since the health services come under the essential services.
The economic agents in health sector
The economic agents in the health sectors basically are producers, consumers and the roles of
government which can be elaborated by following:
• Producers are manpower for health services in the form of physicians, nurses, technicians and
trainers and infrastructures form of hospitals, PHCs, HPs, SHPs and clinics.
• Producers of manpower can also be categorized as the medical institutes and training centers.
• Consumers in the form of drugs, supplies, services are patients, in the form of intermediate
consumers are pharmacists, hospitals, and health facilities and in the form of manpower are
hospitals and health facilities.
• The roles of government mainly should focus on to identify the average health service cost for
quality health services is provided in a way of maximum health care with given input or health care
with minimum health services cost.

7. • For this, the concept of opportunity cost be applied among both in producers and consumers of
health services.
Micro-economics and Macro-economics
The complete study of economics is studied under two divisions. Micro-economics and Macro- economics.
Microeconomics
Microeconomics studies the economic actions and behavior of individual units and small groups of
individual units. In microeconomics, the study of economy is done at microscopic way. There are thousands
of industries, factories, producers or firms. The microeconomics studies the economic activity of individual
firm viewing the economic activity of the other firms of the market.
Thus in short it studies:
• Demand of an individual consumer for a good and derives the market demand
• Mechanism of economy to attain the equilibrium of the market
• Allocation of resources for the production of particular goods on the basis of prices.
• Efficient use of resources.
• But it does not study the totality of the behavior
Hence,the concern of economists like:
a) What goods shall be produced and in what quantities?
b) How they shall be produced?
c) How the goods and services produced be distributed and
d) Whether the production of goods and services and their distribution for consumption is efficient – are
the sector of microeconomics.
Micro-economic Theory
Product Pricing
FactorPricing Theory of Economic
Welfare
Theory of
Production
Theory of
Demand ProfitsInterestRentWages

8. Macroeconomics
Macro is derived from makros meaning the large and therefore the macroeconomics is concerned with the
economic activity in the large. It analyzes the whole economic system in the totality or entirety. In other
words, it studies the behavior of large aggregates such as:
• Total employment
• National Product or Income
• General price level of the economy
Therefore sometime it is known as aggregate economics. It does not deal with individual quantities,
individual income, and individual output.
Macro-economic Theory
Application of Micro and Macro Economics in health
Micro economics usually deals deeply with the components of production function of health services.
Health services are produced with various level of inputs like manpower (doctors, nurses, technicians and
paramedics), structures (building, laboratory, wards,cabins,), drugs (chemicals, medicines), equipment (x-
ray, USG, CT scanning, ECG, Sphygmomanometers, stethoscopes and supplies like beds, cots, linens,
cotton, bandages).
The formula of production function is
• P (Health services) = f{M +S+D+E+S1}
• Here,the application of health services can be made by determining the costs of inputs of manpower,
drugs, infrastructures, equipment and supplies in the market to identify the total as well as average
cost for each health service.
• It should not be understood that above mentioned inputs are the health care but these (health services)
are only a part of health care where as other components of health care are schooling of the children,
housing, foods which are equally important for good health care.
Theory of Income and
Employment
Theory of general
price level
Theory of
economic growth
Theory of
distribution
Theory of
Consumption
Theory of
Investment
Theory of fluctuation (Business Cycle)

9. Macro - economics in health sector has great roles in identifying the cost trends in health services. It also
determines the reasons of cost trends so that it establishes the overall cost of health services and share of
health expenditure in total national health expenditure. The reasons of determining the cost trends of
health services are as following:
1. Demographic reasons
• To meet the declaration of WHO towards health states
• To allocate the proportion of resources to put in health services in a country
• To find out the proportion of health budget to keep pace with population growth
2. Labor Intensive nature of health
• Most of the health services are rendered by physicians. And in developing countries physicians are
utilized for most of the health services including the health services brought by poor personal
hygiene which increases labor cost (decrease in number of patients per physicians).
• This labor cost could be saved
3. Public Expectation
• With the pace of social and economic development, the demand for highly skilled health services
increases especially with new capacity
4. Changing Epidemiologic disease picture with pace of social and economic development
• For last few decades the situation of communicable diseases are brought under control and the cost
per case prevented is decreasing.
• In the other hand, chronic diseases and metabolic disorders are being increased.
• It has shifted the allocation of resources from communicable diseases to sophisticated diseases
5. Organizational and structures of health delivery system
• Poor organizational and structural health system goes from bad to worse with the social and
Economic development.
• This creates overlapping of health services.
• Most delivery system may be parallel and uncoordinated
• Creates wastage of resources especially when no Health Insurance
6. Extension of health services coverage
• In the very start, there is relatively the increase in costs proportionately to expand the range or
coverage, because of
• Low acceptance or low utilization of health services like family planning
• Difficulty in vector control and environmental health provision
• Lack of skilled manpower in remote areas
• Difficulty in establishing rationale health services with limited administrative structure
7. Benefit Cost Analysis
• The objective of any health delivery system especially in poor countries should be to attend same
health benefits with lower cost or increase health benefits without additional costs. For this Benefit
Cost Analysis approach should be performed

10. Macro – Economics and Health and Clinical Economics
• The challenge of making policy recommendations for an economy in a poor and unstable economy felt
many of the challenges of clinical medicine.
• Economists are not trained to think like clinicians and are rarely afforded clinical experience in their
advanced training.
The five key lessons of clinical medicine have clear counterparts in good economics practice as well.
1. Economies, like individuals, are complex systems.
• Like the circulatory, respiratory and other systems of a human being, societies have distinct systems for
transport, power, communications, law enforcement, national defense, taxation and other systems that
must operate properly for the entire economy to function appropriately.
• When the government sought to respond to the rising rural poverty with social and development
programs, the crisis became a fiscal crisis.
2. Economists, like medical clinicians,need to learn the art of differential diagnosis such as bulk of
key physical systems.
• Doctors know that lots of things can go wrong and that a particular symptom, such as high fever,
might reflect dozens, or hundreds, of underlying causes.
• It has trotted out standardized advice to cut budgets, liberalize trade and privatize state-owned
enterprises, almost without regard to the specific context.
• Clinical economics should train practitioner to learn more effectively on the key underlying causes
of economic distress and to prescribe appropriate remedies based on country’s specific conditions.
3. Clinical economics, like clinical medicine, should view treatment in “family” terms, not just
individual terms.
4. Good development practice requires monitoring and evaluation, and especially a rigorous
comparison of goals and outcomes. When goals are not being achieved,it is important to ask
why — not to make excuses for past advice.
5. The development community lacks the requisite ethical and professional standards.
It does not mean the practitioners are corrupt or unethical. Rather, the development economics
community does not take on its work with the sense of responsibility that the tasks require.
Organizational and structures of health delivery system
Poor organizational and structural health system goes from bad to worse with the social and economic
development. This creates overlapping of health services. Most delivery system may be parallel and
uncoordinated. Creates wastage of resources especially when no Health Insurance
Extension ofhealth servicescoverage
• In the very start, there is relatively the increase in costs proportionately to expand the range or coverage,
because of Low acceptance or low utilization of health services like family planning. Difficulty in vector
control and environmental health provision. Lack of skilled manpower in remote areas. Difficulty in
establishing rationale health services with limited administrative structure.

11. Benefit Cost Analysis
• The objective of any health delivery system especially in poor countries should be to attend same health
benefits with lower cost or increase health benefits without additional costs. For this Benefit Cost
Analysis approach should be performed.
Market Economy
What is an Economy?
Some basic facts for economy:
Firstly, Human wants for goods and services are unlimited
Secondly, productive resources with which to produce goods and services are scarce
Thus if our wants are unlimited but the resources we have are scarce then we cannot satisfy all our wants
and desires by producing everything we want. But we have to decide or find some way to use the scarce
resources to get the maximum possible satisfaction by using specific tools. That tool or the way is called
the Economy. In a market, we have limited productive resourceslike land, rawmaterials, skilled manpower,
and capital equipment to be utilized because these resources are found in limited quantity and the goods
that can be produced by these resources are also in some limits.
Thus we face the question of choice. And the society has to choose among the number of wants to satisfy.
Suppose we are producing number of drugs A,B,C, and Dfrom the same rawmaterial R which is in limited
quantity. Now if we increase the portion of R to produce drug A then we have to reduce R to produce either
B or C or D. Hence we face the problem of choosing among the different channel of production.
This is the economic problem.
To solve this economic problem, we have to understand the economic system or economy of the society or
the market. This gave to the birth of Economics.
The content of Economic theory
• The content of economic theory has various controversy because of the definition of economics put by
various economists like:
• Adam Smith, Father of Economics: Economics is the science of Wealth. According to him, economics
enquires the nature and the causes of wealth of nations.
• Ricardo: Economics deals with the study of distribution of income and wealth. Or how the produce of
the earth is distributed.
• Alfred Marshal: Economics is the study of mankind in the ordinary business of life and examines that
part of individual and social action which is connected with material requisite of wellbeing.
Each definition given above is incomplete and inadequate because they do not describe the true scope of
the subject matter of economic. Some are too wide and some are too narrow. In the modern world the
subject matter of economics is so vast that it is very difficult to put the definition of economics. It has
created many questions as follows:
1. Are all of the available productive resources are fully being utilized?
2. What goods are produced and in what quantities by productive resources?
3. How are different goods produced and what production methods?
4. How the total goods and services distributed among the members?

12. 5. Are the production resources being utilized efficiently?
6. Is the economy’s productive capacity increasing or decreasing?
To answer above questions, different economists defined economics differently. And it can be seemed that
the definition of economics overall has three aspects namely wealth definition, welfare definition and
scarcity definition.
Wealth definition: Adam Smith in his book “An enquiry into the Nature and Causes of wealth of Nations”
has stressed wealth of Nations clearly stated that Economics is the science of Wealth. Smith was the father
of economics and the leader of classicalthought. There have been many criticisms on his definition because
it gave emphasis on economic man, emphasis on wealth.
Welfare definition: This concept of economics was initiated by Neo-classicaleconomists. Alfred Marshal
defined economics as “Economics is the study of mankind in the ordinary business of life and examines
that part of individual and social action which is connected with material requisite of wellbeing. This
definition has following conclusion:
Economics:
• Is a study of mankind
• Studies economic aspect of mankind
• Studies economic welfare of mankind
This definition of economics also is criticized mainly because
• It is difficult to separate materials and non-material things,
• Connection between economics and welfare and
• Welfare cannot be quantitatively measured.
Then came the scarcity definition which is the modern concept in defining the economics. Lionel Robbins
in his book “Nature and significance of Economics” in 1932 defined economics as the “Economics is the
science which studies human behavior as a relationship between ends and scarce means which have
alternative uses.
The basic concept on definition of Robbins are as follows:
The basis of Robbins definition are Wants or ends are unlimited, scarce means, and Scarce means
have alternative uses. This definition also is not free from criticism. The basis of criticism are:
Inclusion of materials welfare, pure science, Economic problems arise not only from scarcity and
Ignores the present day problem. Despite of the criticism, the Robbins definition has been widely
accepted because of the scarcity of the resources.
Scope or Subject matter of economics:
• Consumption
• Production
• Exchange
• Distribution and Public Finance

13. National Health Accounts
Introduction
• The National Health Accounts is a process through which countries monitor the flow of money in
their health sector.
• The National Health Accounts also called System of Health Accounts is an internationally recognized
methodology that tracks all health spending in a given country over a defined period of time regardless
of the entity or institution that financed and managed that spending. It ensures comparability of health
expenditure over time.
Why do we need National Health Accounts?
• If designed and analyzed properly (and considering the country context), NHA data can revealthe flow
of resources within a health system.
• NHA can be used to answer many essential questions, including:
 how much money is spent on health?
 what is the financial burden on private households in the form of out of pocket expenditure?
 what kind of services are being purchased?
Basic Structure
Every expenditure in the health system is classified according to characteristics.
The three major categories are:
1. Health Care Functions,
2. Health Care Providers, and
3. Health Care Financing Schemes.
The purpose of the Health Accounts is to generate consistent and comprehensive data on health spending
in a country, which in turn can contribute to evidence-based policy-making in the country.
Health Expenditure nationwide - 2011