Economics concerns how society allocates its resources among alternative uses. Health economics is therefore a discipline of economics applied to health care. Economic analysis is fundamentally about resource use and can serve an important role in health care decision making. Applying economic thinking to health care presents challenges to researchers and will require new approaches to analysis.
Health care economics is a term used to describe the various factors that converge to influence the health care industry’s costs and spending. It is commonly regarded as an applied field of economics. It draws its theoretical inspiration principally from four traditional areas of economics namely finance and insurance, industrial organization, labor and public finance.
Health economics is thus a branch of economics concerned with issues related to efficiency, effectiveness, value and behavior in the production and consumption of health and healthcare. It determines how to improve health outcomes and lifestyle patterns through interactions between individuals, healthcare providers and clinical settings. In broad terms, health economists study the functioning of healthcare systems and health-affecting behaviors such as smoking, diabetes and obesity.
Health economists analyze data, make assessments and provide advice on the cost-effectiveness of medicines, medical devices and diagnostic tests for health systems. They also evaluate the benefits of new or proposed public health policies to the health service and the public.
A seminal 1963 article by Kenneth Arrow is often credited with giving rise to health economics as a discipline. His theory drew conceptual distinctions between health and other goods. Factors that distinguish health economics from other areas include extensive government intervention, intractable uncertainty in several dimensions, asymmetric information, barriers to entry, externality and the presence of a third-party agent. In healthcare, the third-party agent is the patient’s health insurer, who is financially responsible for the healthcare goods and services consumed by the insured patient.
One of the biggest difficulties regarding healthcare economics is that it does not follow normal rules for economics. Price and Quality are often hidden by the third-party payer system of insurance companies and employers. Additionally, Quality Adjusted Life Years (QALY), one of the most commonly used measurements for treatments, is very difficult to measure and relies upon assumptions that are often unreasonable.
Health economists also evaluate multiple types of financial information including costs, charges and expenditures. Uncertainty is intrinsic to health, both in patient outcomes and financial concerns. The knowledge gap that exists between a physician and a patient creates a situation of distinct advantage for the physician, which is called asymmetric information. Externalities arise frequently when considering health and health care.
Health economics is therefore important in determining how to improve health outcomes and lifestyle patterns through interactions between individuals, healthcare providers and clinical settings. Health economists evaluate multiple types of financial information including costs, charges and expenditures.
Principles of health economics include the notions of scarcity, supply and demand, distinctions between need and demand, opportunity cost, discounting, time horizons, margins, efficiency and equity. Others are assessing Performance and optimal financial resource allocation.
Evolution of Health Economics
In the 17th century, William Petty, a British classical economist, pointed out that the medical and health expenses spent on workers would bring economic benefits. Nowadays, modern health economics have developed into a leading interdisciplinary science, which bridges the gap between economic theory and health care practice and the wide diversification in various sub-disciplines and research fields has been clearly visible.
Greater percentage of the nation budget is dedicated to health care across the world. In addition, the scale of health service has become larger, the technical equipment has become more and more advanced, and the level of division of labor and specialization has become higher and higher. The medical and health service has developed into a health care industry department which occupies a considerable amount of capital and labor and occupies an important position in social and economic life. Therefore, the research on the economic problems of the health sector has become an important topic of economic research.
Health investment has long-term beneficial consequences for the community. The demand for healthcare is a derived demand from the demand for health. Healthcare is demanded as a means for consumers to achieve a larger stock of health capital. The demand for health is unlike most other goods because individuals allocate resources in order to both consume and produce health. The above description gives key roles of persons in health economics as contributors, citizens, providers and consumers.
Michael Grossman’s 1972 model of health production has been extremely influential in this field of study and has several unique elements that make it notable. Grossman’s model views each individual as both a producer and a consumer of health. Health is treated as a stock which degrades over time in the absence of investments in health, so that health is viewed as a sort of capital.
The model acknowledges that health is both a consumption good that yields direct satisfaction and utility, and an investment good, which yields satisfaction to consumers indirectly through fewer sick days. Investment in health is costly as consumers must trade off time and resources devoted to health, such as exercising at a local gym, against other goals.
These factors are used to determine the optimal level of health that an individual will demand. The model makes predictions over the effects of changes in prices of healthcare and other goods, labor market outcomes such as employment and wages, and technological changes..
In Grossman’s model, the optimal level of investment in health occurs where the marginal cost of health capital is equal to the marginal benefit. With the passing of time, health depreciates at some rate. The interest rate faced by the consumer is denoted by The marginal cost of health capital can be found by adding these variables. The marginal benefit of health capital is the rate of return from this capital in both market and non-market sectors.
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3) What is health economics?
Health economics is the study of how individuals, organizations, governments, and markets make decisions about resource allocation to maximize welfare. For instance, you might want to know how an individual will allocate his or her resources in order to improve their health. Health economics can also be used for questions like what are the costs of implementing a particular program?
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