Understanding Health Economics

October, 2018

Say the word economics and images of statistics, graphs, and boring lectures comes to mind. While there are various meanings for the word, but all concur that it’s the science that deals with how a service or goods is produced, distributed and consumed by the society.

In contrast health economics describes how healthcare and its associated factors influence the way technology, policies, governance and regulations are applied to this sector. It is the allocation of resources within the health system in the economy and the functioning of the healthcare market.

In health economics like any other branch of economics, the primary motivation is to obtain the best value for your investment. Whether it’s in terms of opportunity costs, efficiency or productivity, they are the byproduct of a healthy economy.

There are various aspects to why we need health economics.

  • Medical advances

  • Advances in Healthcare research

  • Increase in life expectancy and public awareness

  • Changing family and societal dynamics

  • Human expectation with respect to medical care

The desire to achieve value for money is intrinsic to health economics. To achieve this, healthcare organization must have a plan to maximize the benefits passed on to the patients, with the limited available resources. This means the services needs to be subjected to economic evaluation.

Types of economic evaluation

  • Cost Benefit Analysis - In here the benefit is measured as the related economic benefit of an intervention. Therefore, both costs and benefits are expressed in money. The drawback of this analysis is that it sometimes ignores benefits that cannot be measured in monetary terms (ex: relief from pain). This is not a widely accepted approach in health economics.

  • Cost Minimization Analysis – This analysis is applicable only in situations where the clinical outcome is identical for different healthcare treatments (ex: prescribing a generic drug instead of a brand name drug which offers the same result at a lesser cost).

This analysis requires proof that the outcomes are clinically equivalent. But, what is clinical equivalence and how to decide on factors that support this equivalence? These questions need to be answered before using this analysis as a valid technique of economic evaluation.

  • Cost Effectiveness Analysis – This analysis is applicable where the financial cost of healthcare outcomes can be directly measured in terms of health effects like for example the years of life saved etc. It is the most commonly applied form of economic analysis and is frequently used in drug therapy. However, in cases where there are completely different therapeutic outcomes, it does not allow for comparison.

  • Cost Utility Analysis – It is similar to cost effectiveness analysis as there is a defined outcome and the cost to achieve that outcome is measured in money. But, here the outcome is measured in terms of survival and quality of life (QoL).

Why do we need health economics?

There is distinction between what an economic and financial cost is? Financial cost refers to any monetary transaction that is involved with respect to a goods or service, while economic cost encompasses a wider aspect of how the resources are consumed. When the resources are consumed in a particular way, they might be unable for utilization by another service. This represents an “opportunity cost”.

Opportunity cost represents an important thought in health economics as it presents the explicit trade-offs that underlie resource usage in the health services.

Health economics is vital to determine and identify the measures to ascertain the health, diseases, policies and other health related factors. By conducting a formal economic evaluation, health economics can help to inform and improve decision making by the policy makers. Through the practical and systematic application of the results of this evaluation, it can symmetrically balance costs and benefits.

Health economics represents an indispensable tool for improving the information database upon which healthcare decisions are made. The decision-making process is accelerated through a systematic and insightful approach and thought. This process is essential to identifying alternate options to balancing resources and passing on the benefits to the patients.

– Shantha Kumari,
Sr. Technical Writer,
Infoholic Research