university of lusaka  · web viewhealth economics and financing is concerned with the alternative...

62
UNIVERSITY OF LUSAKA DISTANCE EDUCATION MODULE HEALTH ECONOMICS AND FINANCING COURSE CODE: BSPH 322 Course Instructor: Mr. Felix Mwenge, MPH-Health Economics Contact # : 0976257740 Email: [email protected] August, 2014

Upload: tranmien

Post on 11-Apr-2019

214 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

UNIVERSITY OF LUSAKA

DISTANCE EDUCATION MODULE

HEALTH ECONOMICS AND FINANCING

COURSE CODE: BSPH 322

Course Instructor: Mr. Felix Mwenge, MPH-Health Economics

Contact # : 0976257740

Email: [email protected]

August, 2014

Preface

Page 2: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Health Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization of economic resources such as Human resource, material and financial resources. Every health worker needs to acquaint him/herself with the basic concepts of economics and its application to the health sector in order to manage health institutions and health delivery system efficiently.

“Health economics and Financing” as a course is meant to give medical, health officers and other paramedical students the basic principles regarding economics and its application to the health sector.

Therefore, this material should be regarded as an introduction to Health Economics and Financing rather than to economics. The module on “Health Economics and Financing” is prepared in line with the set curriculum, which is currently in use in health professionals training institutes. The materials in this lecture note are compiled from different books that are published by different authors and also from the Internet.

Most books in the field emphasize only on some detailed and specific aspects of health economics. The objective this module is, therefore, to introduce the basic concepts of economics and their application to the health sector and not to exhaustively present all that is important about the subject matter of health economics. Thus, the need for supplementary reference books could be of paramount importance. Concepts and the analysis presented in this document will help to serve as working material so that students could understand and apply basic ideas of economics to the health sector.

By the end of the module students must be able to:

1. Define basic concepts of economics and health economics2. Describe various health care financing schemes3. Demonstrate understanding of economic evaluation tools

Page 3: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

The compiling of this material was made possible through the teaching and learning process of the course “Health Economics and Financing’ at the University of Lusaka. I do not claim that the material is an original work, hence due gratitude is extended to the previous authors of those lecture notes and books that served as sources for this instruction material.

COURSE OUTLINE

COURSE AIM:

To equip students on financing of health services and basic economic evaluation

techniques.

COURSE OBJECTIVES:

By the end of the module students must be able to:

1. Define basic concepts of economics and health economics

2. Describe various health care financing schemes

3. Demonstrate understanding of economic evaluation tools

COURSE CONTENTS:

Page 4: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Introduction to economics and health economics Week 1- 3

1. Definition of terms (economics, health economics, microeconomics,

macroeconomics)

2. Why health economics?

3. Concept of development

4. Concept of scarcity

Basic tools of economic analysis Week 3-7

a. Markets in Traditional Economics

Theory of Demand (consumer behaviour)

Theory of Supply (firm behaviour)

b. Types of Market Structures

Perfect competition

Monopoly

Other

c. The Market for Health Care

Demand for health and health care

Market failure in health care markets

Government intervention in health care markets

d. Economic efficiency and effectiveness

Economic evaluation Week 8-11

a. Costing of health programmes

b. Measuring effectiveness of health programmes

Page 5: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

c. Cost-effectiveness analysis

d. Cost utility analysis

e. Cost benefit analysis

Financing health care Week 12- 14

a. Financing of health care

b. Resource mobilization

i. Cost sharing,

ii. User charges,

iii. Community financing

iv. Prepayment schemes

v. Social health insurance

vi. Private insurance

vii. Out-of-pocket payment

c. Resource allocation

d. Equity

ASSESSMENT

Continuous Assessment (tests and assignments) 40%

Final Examinations 60%

Page 6: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

PRESCRIBED READINGS:

1. Kutzin J. (1995) Experiences with organisational and financing reform of the

health sector. World Health Organisation. WHO/ARA/CC/97.5. Geneva

2. The Economic Development Institute of the World Bank. (1998). Introduction to

the Concepts and Analytical Tools of Health Sector Reform and Sustainable

Finance. Washington.

3. McIntyre D. (Learning from experience: health care financing in low and middle

income countries. Global Health Research Forum. 2007. Geneva

RECOMMENDED READINGS

1. Schieber G, Maeda A. A Curmudgeon’s Guide to Finance Health Care in

Developing Countries. The World Bank

2. McIntyre D et al. (2008) Key Issues in equitable health care financing in East

and Southern Africa. EQUINET Discussion Paper No. 66. Harare

3. Roberts M et al. Getting Health Reform Right: A Guide to Improving

Performance and Equity. Oxford University Press. New York. 2004

Topic 1

Introduction to Economics and Health Economics

1.0 Introduction and Basic Concepts

What is Economics?

Page 7: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Social science that aims to study how the society makes choices on how to allocate its scarce resources to satisfy the society’s unlimited needs and wants in the most efficient way.

Since resources are limited (scarce) and the needs and wants are unlimited economics is the study of how people make choices regarding such things as :

o What to produce/consume?o How much to produce/consume?o How to produce/consume?o Who produces/consumes? o For whom to produce?

Economics is concerned with…o costs (resource use)

o benefitso choiceo efficiency

Scarcity In economics scarcity refers to the limitedness or inadequacy or insufficiency

of resources to meet unlimited needs and wants of society. Scarcity is the basis for the study of economics. As resources are limited

society tries to find ways of satisfying the different needs and wants with what is available.

Resources These represent inputs into the process of producing goods and services.

They can be classified into three main elements: land, labour and capital also referred to as Factors of Production

– Land refers to natural resources e.g. Land and its location, minerals, climate, water, and vegetation on it.

 – Labor refers to human resource e.g. people and all contributions they

make when they work.

Page 8: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

– Capital refers to:• Physical capital (buildings, equipment, & machinery) • Human capital (accumulated training and education of

people/workers)

Opportunity cost (economic cost) As resources are scarce, an individuals or society, in choosing to consume a

good, in principle, chooses the good which gives them the greatest benefit, and thus forgoes the consumption of a range of alternative goods of lesser value.

The opportunity cost is the value of the benefit of the next best alternative. For example: o Choosing to come to class instead of listening to music at home. o Depositing K1000 in the bank instead of holding it or spending ito Taking up a job paying K2000 instead of the one paying K5000 

Goods and services Refer to outputs of a production process that involves the combining of

factors of production. Goods and services are valuable in the sense that they provide some utility or usefulness to individual consumers. They are termed ‘goods’ because they are desirable in their own right.

Utility The happiness or satisfaction an individual gains from consuming a good or

service. The more utility an individual derives from the consumption of a good, all else being equal, the more they would be willing to spend their income on it.

Efficiency• A general term used to describe the relationship between inputs and outputs.

It is concerned with maximizing benefits with the resources available, or minimizing costs for a given level of benefit.

Page 9: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Market• A situation or arrangement where people who have a demand for a good or

service come together with suppliers and agree on a price at which the good will be traded.

Demand• willingness and ability to pay for goods and services

Supply• Amount of goods and services producers are willing to sell at a given price

The Central Economic Problem• Also known as the scarcity problem; refers to the fact that society has

limited resources to use to satisfy unlimited needs and wants.• This implies that choices have to be made. We always have to choose among

different alternatives. • Every choice we make therefore involves a sacrifice of some sort, i.e. One

thing has to be given up or foregone to obtain another.• This phenomenon is what gives rise to Opportunity Cost which has already

been explained earlier• In economics Opportunity cost is very important and is an important basis for

decision makingTwo Branches of Economics • A major distinction is made between microeconomics and macroeconomics:

Microeconomics• Concerned with the decisions taken by individual consumers, households and

firms and with the way these decisions contribute to the setting of prices and output in various kinds of market (‘micro’ implies small scale); in other words, individual decision-making units.

Macroeconomics

Page 10: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

• Concerned with the interaction of broad economic aggregates (such as general price inflation, unemployment of resources in the economy and the growth of national output). It is also concerned with the interaction between different sectors of the economy (‘macro’ implies large scale).

Concept of Development

• The modern view of development perceives it as both a physical reality and state of mind in which society has, through some combination of social, economic and institutional processes, secured the means for obtaining a better life.

• The definition of “a better life” may vary from one society to another. Development in all societies, however, must consist of at least the following three objectives: 

– To increase the availability, distribution and accessibility of life-sustaining goods such as food, shelter, health, security and protection to all members of society; 

– To raise standards of living, including higher incomes, the provision of more jobs, better education and better health, and more attention to cultural and humanistic values so as to enhance not only material well-being, but also to generate greater individual community and national esteem; and

– To expand the range of economic and social opportunities and services to individuals and communities by freeing them from servitude and dependence on other people and communities and from ignorance and human misery.

What is Health Economics?

• Economics: refer to earlier slide for definition

• Health:

– “State of complete physical, mental and social well-being”

Page 11: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

– Health is not only the absence of disease or illness.

– Health economics: 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.’

• Study of the allocation of resources to and within the health economy or health sector. Folland, Goodman, Stano(2007, p. 8)

• But we will be focusing more on “Health Care” which is an input to health.

 Useful Concepts in Health Economics

Health Care

• The prevention, treatment, and management of illness and the preservation of mental and physical well-being through the services offered by the medical and allied health professions.

• Health care is generally defined to include those goods, services and activities that the primary purpose is the maintenance or improvement of health (Hurley 2001).

• While good health is the ultimate outcome of interest, the study of health economics focuses more on health care than on health itself. This is because health care goods have characteristics of economic goods and can be traded in the market.

Health sector

• Consists of organized public and private health services, the policies and activities of health departments and ministries, health-related nongovernment organizations and community groups, and professional associations.

Health services

Page 12: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

• The range of services undertaken primarily for health reasons and that have a direct effect on health, including health care programmes such as health promotion and specific disease prevention and treatment.

Providers

• Those people or institutions that are responsible for providing health care or services for improvement of health

Patients

• The people that seek health care and other activities to improve or maintain good health

Treatment

• Activities undertaken, mainly administration of drugs or other therapeutic activities to improve or maintain good health

Health Insurance

• Form of contract that patients or a national board may seek to pay for health care

Issues of Concern in Health Economics

1. Health sector leaders:

– At what level should hospital fees be set?

– What mechanism should we use to finance health care

– Which is the more effective method of increasing the take-up of health services: price controls or subsidies?

– How should doctors be paid?

– Which treatments are the most cost-effective for people with Malaria?

2. Patients: 

Page 13: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

– Do prices matter in how much medical care is utilized?

– Lifestyle: how many hours to invest into health e.g. exercise, routine checks etc?

– How much money should we set aside to meet health care costs?

3. Doctors:

– Urge the patient to undergo chemotherapy?

– How many hours to work in the practice?

– Charge different fees to different patients?

4. Hospitals:

– Do the expected benefits justify the cost of a new medical center?

– What treatments for what patients?

The Relevance of Economics to Health and Health Care

• The health sector everywhere in the world is presented with unlimited needs and wants but limited resources.

• Usually, resources are always not enough:

– There are more HIV patients than there are ARVs

– There are more malaria cases than available treatment

– There are more patients than there are doctors or health workers

– There are more people than health facilities (hospitals, health centres, etc.)

– There are more treatment options but lesser money

Page 14: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

– There are other sectors of the economy needing a share from the national budget other than the health sector

– Households do not have enough money to get all health care they need

– Households cannot afford to live healthy lives

• For these and many other reasons, decisions at individual, societal and state level have to be made

 

Topic 2

Basic Tools of Economic Analysis

Markets in Traditional Economics

For many people, the word market brings up a picture of a town square with lots of small stall holders selling everything from fruit and vegetables to meat and fish. For economists, the term has a much wider meaning. It is used to describe any process of exchange between buyers and sellers.

Formally, a market can be defined as any set of arrangements which allows buyers and sellers to communicate and thus arrange exchange of goods, services or resources. A free market is where such exchange occurs without interference from the government.

Page 15: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

The decisions about what, how and for whom to produce, in most modern economies are largely made through markets. Market is the interaction of those who wish to buy (buyers or consumers) and those who wish to sell (sellers, or suppliers).

A market therefore brings together the demand for goods from consumers and the supply of those goods from suppliers. Consumers and suppliers base their buying and selling on the price that they have to pay or will receive.

Price therefore acts as a signal to both groups as to what they should do in the market.

So a market for health care must involve two groups: the buyers and the sellers, who interact to trade health care.

Who would the buyers and sellers be in such a market? We all want good health and so most of us would be prepared, if necessary, to purchase medical treatment to cure an illness. This suggests that everybody is potentially a buyer (or consumer) of health care. More precisely, at any moment, a buyer would be anybody who was ill or who wanted preventative medical treatment such as vaccination or who wanted guidance about their health.

The sellers would be those people who could provide medical and health care services, such as doctors, nurses, Pharmacists, physiotherapists, dentists etc

i. Theory of Demand (consumer behaviour)

Demand can be viewed as the schedule of amounts of any product that buyers will

purchase at different prices during some stated time period. Demand is

distinguished from desire in the sense that money or a medium of exchange is

required to obtain goods and services. It is not only the desire for things but also

the ability to pay for them.

Page 16: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

This definition of demand indicates that there is a relationship between the goods

and services that people can acquire (quantity demanded) and the money they

need to provide (price) to obtain them.

Usually if the price of goods and services is lower, consumers can acquire more

goods and services from the same money provided they still want the same goods.

This relationship between quantity demanded and price can also be represented

graphically using a demand curve as shown below:

You can observe that a fall in price (from P to P1) leads to an increase in the quantity

demanded from (Q to Q1). This is called a movement along the demand curve. The

opposite would be true.

ii. Theory of Supply (firm behaviour)

Supply is the amount of goods and services producers are willing to produce or sell

at a given price. This definition of supply indicates that there is a relationship

between the goods and services that producers/firms can produce or sell acquire

(quantity supplied) and the money (price) at which they want to exchange them.

Usually if the price of goods and services is higher, producers/firms want to produce

or sell more goods and services. If the prices are lower producers do not have

incentives to produce or sell more of their products. This is because their main

Page 17: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

objective is to make profit. This relationship between quantity supplied and price

can also be represented graphically using a supply curve as shown below:

You can observe that a change in price leads to a movement along the supply

curve. When the price is P1 producers will sell Q1 and when the price is P2

producers will sell Q2. The opposite would be true.

iii. Market Equilibrium

The market is said to be in equilibrium when the price level of the quantity

demanded by consumers is equal to the quantity that producers will supply. When

the market is in equilibrium the demand and supply curves intersects at one point.

The price at this point is called the equilibrium price which is also the market price

for a given commodity. This is shown in the following graph:

Page 18: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Prices below this level result in excess demand; prices greater than this level will

result in excess supply.

a. Excess demand: exists when the price level is lower than the equilibrium

price and the quantity supplied is much less than quantity demanded. This

can be presented graphically below:

At low price consumers may bid more, or suppliers may see the possibility that they

can raise their price but still be able to sell all that they want.

If there is excess demand, consumers bid up the price. At price Pe consumers

demand Qe.

The price is low so a lot of people are willing and able to buy the products supplied.

However, the low price means that there aren’t enough suppliers prepared to

provide goods and services. They are only prepared to provide Q11.

The excess demand (Q1 – Q11) causes the consumers to bid the price up to the

equilibrium price Pe. At the end demand and supply through price interactions will

force itself back into equilibrium and the market will clear.

Page 19: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

b. Excess supply: Excess supply exists when the price level is higher than the

equilibrium price and the quantity supplied is much more than the quantity

demanded. This can be presented graphically below:

Suppliers will reduce their prices until they reach the equilibrium price. So the free

interaction of buyers and sellers in the market automatically leads to a single price

at which the quantity traded ‘clears’ the market, i.e. the quantity supplied equals

the quantity demanded.

At P11 the price is too high. Consumers only demand Q. So there is an excess of

supply (Q1111 – Q111).

This will lead to suppliers to cut their prices (to encourage more consumers to buy

products). As sellers, they will have to reduce their prices until they reach the

equilibrium price Pe.

So the free interaction of buyers and sellers in the market automatically leads to a

single price at which the quantity traded ‘clears’ the market, i.e. the quantity

supplied equals the quantity demanded.

Types of Market Structures

Page 20: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Markets can be classified differently depending on the nature of market

characteristics. The structure of a particular market to a large extent determines

the allocation of resources in the economy. The common market structures are

Perfect Competition and Monopolistic Competition.

i. Perfect Competition:

Large number of buyers and sellers

Homogenous product

Free entry or exit

Perfect knowledge

Absence of transport costs

Free mobility of factors of production

ii. Monopolistic Competition

Single producer or seller

Homogenous products

Market for Health Care

We have so far defined the meaning of a market in traditional economic theory.

Indeed a market plays a very important role in the allocation of resources and helps

economic agents make decisions regarding what, how and for whom to produce. We

now turn to health and examine the role of the market in the distribution of health

care and how it impacts the way health care players make decisions.

1. Demand for health and health care

Health is an economic commodity which consumers demand for two reasons;

Page 21: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

a. As a consumption commodity: human beings enjoy being in a state of good health. Ill-health is a source of disutility.

b. As an investment commodity that determines the total amount of time available for market and nonmarket activities. Therefore, if an individual is sick they are deprived of the time to involve in activities that will enhance their lives such as going to work, going to school, visiting friends, doing physical exercises, and so on.

Every individual is initially born with a stock of health which depreciates with time, and this stock of health can be affected by consuming market goods such:

o health care, o housingo dieto recreationo cigarette smokingo Alcohol consumption.

Although health care is not the only thing consumers need to enhance

their health, it has remained the main subject of focus in health

economics. This is so because of the important role it plays in

enhancing health even though it is not the sole determinant of health

outcomes.

Health care is generally defined to include those goods, services and

activities that the primary purpose is the maintenance or improvement

of health.

Because of this, Grossman described the nature of demand for health

care as a ‘derived demand’, in the sense that it is not demanded and

purchased for its own sake per se, but for the good health that can be

derived from its consumption. Whereas in economics consumers

demand goods and services for their own sake, it is not the case for

Page 22: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

health care goods. Consumers of health care do not demand health

care for its own sake per se but for the good health that they acquire

from the consumption of health care goods.

In fact health care goods are actually ‘bads’ since they are not

desirable in their own right. For example most people do not enjoy

being injected; taking bitter bills or even doing exercise, but the

improved health status that follows the consumption of these kinds of

goods

Health care presents its consumers with opportunities to improve their

health and lives without which they will not be able to function

properly.

Health care actually represents a very broad set of goods and services

that spans the entire spectrum from a purely private consumption

goods (say, face surgery), to purely social goods such as immunisation

that the society wishes to make available to all citizens.

2. Market failure in health care markets

Market failure occurs when the market forces (demand and supply) fails to allocate scarce resources equitably to satisfy society’s unlimited needs and wants. One of the main reasons why markets fail is due to the fact that health care markets are imperfect. We earlier explained the meaning and implications of a perfect market:

i. Problems of Risk and uncertainty

If we are going to buy health care in a free market, then we have to have enough money to pay for it. Nevertheless, health care is expensive and we cannot predict when we are going to be ill. But postponing buying health care is even more risky as we do not know the extent to which our ill health can go. So, we face the problems

Page 23: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

of risk and uncertainty. The problem is that no one can be insured from all risks in health especially that ill health is unpredictable.

ii. Moral hazard

Having insurance is a way of cushioning consumers from the risks and unpredictability of occurrence of ill health. Once we know that we are insured against ill health we are likely to behave in a less responsible way than if we did not have insurance. This is because we know that whatever the case we do not bear the cost of treatments. Economists refer to this behavior as moral hazard.

Moral hazard can affect any insurance market, but is a particularly serious problem for health care insurance. Consumers who are insured have an incentive to over-consume health care - to demand operations and treatments, which they would not choose if they were directly paying for them. They may also not bother to follow a healthy lifestyle or to get preventative checkups. As a result, when they do fall ill, the cost of treatment is higher than it would otherwise have been.

Doctors too are affected by moral hazard. They know that the costs of treatment are covered by insurance so the temptation is to over-treat and over-prescribe medicines for their patients. Moral hazard thus leads to an inefficiently large quantity of resources being allocated to health care.

iii. Adverse selection

A company selling health care insurance has to estimate the level of risk accurately. This is difficult because they will not have complete information on the risk status of the person they are insuring. One solution is to set the premium at an average risk level. But this makes the policy expensive for low risk customers who therefore may choose not to buy the insurance. The process whereby the best risks select themselves out of the insured group is called adverse selection. Insurance companies know that this is likely to happen so they offer different premiums according to the level of risk and the person’s experience of ill health. This is why most companies will offer non-smokers a lower premium than smokers. Offering low insurance premiums to low risk groups, often called ‘cream skimming’ or ‘cherry

Page 24: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

picking’, means high premiums have to be charged to high risk groups such as the elderly or chronically sick. Therefore, in a free market, healthcare insurance is likely to be too expensive for many people, and especially for those most in need of health care.

iv. Imperfect Knowledge or Unequal information

Moral hazard and adverse selection help to explain why a free market in health insurance is unlikely to be efficient. However, health care markets face even more fundamental information problems. We are now going to examine the problems caused by unequal information and the consequent role of doctors as agents for patients.

Rational choices

When you go into a shop to buy a CD, you have enough information to make a rational choice and you do not need the shop assistant to tell you what you should buy. Going to the doctor is very different. You know that you perhaps do not feel well and that you have particular symptoms, but most people are not able to diagnose their complaint and they want the doctor to do that. What is more, you then rely upon the doctor to specify the treatment – if the doctor says you need an expensive operation then you buy it. In the health care market, information is not equally shared between buyers and sellers, instead, the seller, the doctor, has far more information than the buyer does, the patient does. This asymmetry of information undermines the separation of buyers and sellers. This situation is not unique to health care, but there are a number of factors, which make this information asymmetry particularly acute there.

Information problems

Most medical information is technically complex and so not easily understood by a layman and this is made worse by the fact that many illnesses do not repeat themselves, so that the cost of gaining the information is very high. You could argue that the only way a patient could become fully informed wouldbe by training to be a doctor! The costs of a mistaken choice are much greater and less reversible than in other cases in the worst situation if you make the wrong

Page 25: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

decision you will be dead. It is also often difficult to postpone treatment and so virtually impossible to shop around, and anyway how do you judge between different doctors’ opinions?

Doctors as agents

The asymmetry of information makes the relationship between patients and doctors rather different from the usual relationship between buyers and sellers. We rely upon our doctor to act in our best interests, to act as our agent. This means we are expecting our doctor to divide herself in half -on the one hand to act in our interests as the buyer of health care for us, but on the other to act in her own interests as the seller of health care. In a free market situation where the doctor is primarily motivated by the profit motive, the possibility exists for doctors to exploit patients by advising more treatment to be purchased than is necessary – supplier induced demand. Traditionally, doctors’ behaviour has been controlled by a professional code and a system of licensure. In other words, people can only work as doctors provided they are licensed and this in turn depends upon their acceptance of a code, which makes the obligations of being an agent explicit.

Supplier Induced Demand (SID)

The change in demand associated with the discretionary influence of providers, especially physicians, over their patients. Demand that is provided for the self interests of providers rather than solely for patients interests.

Example:

If doctors behaved like some financial advisers or computer salespersons in the past and maximized profits without any limit from a professional code.

v. Presence of ExternalitiesExternalities or spillover effects are external effects involving positive and negative results for others that are the consequences of one’s own actions.

Page 26: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

E.g a vaccination against whooping cough benefits even those who have not paid for it since they are now protected against catching whooping cough from you.

Smoking cigarettes affect the health of those not smoking

Government Intervention in Health Service ProvisionBased on the problems mentioned, which may arise as a result of market failure, it makes sense for governments to be involved. Market failures in health insurance also mean government intervention can raise welfare by improving the way those markets function. Clearly, governments have a responsibility to spend wisely and to evaluate carefully exactly what form their involvement should take. The World Bank recommends four main policies to overcome the existing weakness of health systems in developing countries.

Governments should finance a nationally defined package of essential public health and clinical care, especially for the poor, and should ensure the widespread and efficient delivery of such a package.

The public sector should devote far fewer resources or none at all, to financing health services outside of the essential package which are of lower cost effectiveness.

Governments should promote such types of health insurance that not only achieve broad coverage of the population, but also build in payment mechanisms that control the cost of health services.

Governments should encourage diversity and competition in the supply of health inputs, particularly drugs, supplies and equipment, as a means of

Page 27: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

improving quality and driving down costs. They should also foster a competitive private sector to provide the full range of health services including financial publicity.

Government Failure in Health Service Provision Unfortunately the involvement of government in the delivery of health services does not solve all problems in the health sector. Governments can also fail, this is called government failure. It occurs when government intervention also fails to allocate resources efficiently. Like the market governments also fail for a lot of reasons, including:

Political reasons: sometimes the desire to fulfil political promises tend to allocate health resources in areas of lesser needs

Lack of resources: sometimes governments lack both financial and human resources to fulfil its plans

Demographic factors: sometimes the size, composition and structure of the population may make it difficult for government to provide health services e.g people who chose to live far from everyone else may not be reached by health services

Equity: sometimes certain sections of society are marginalised based on race, gender or other affiliations

Economic efficiency and effectiveness

In setting economic objectives, most health care systems will want to pursue both efficiency and equity. Efficiency is a general term used to describe the relationship between inputs and outputs; which in turn can be valued respectively in terms of costs and benefits. Efficiency is concerned with maximizing benefits with the resources available, or minimizing costs for a given level of benefit. In health care, benefits may be interpreted as health gains, although health services produce a range of benefits including less tangible things like information and reassurance. There are a number of different types of efficiency and we will explore each of these in detail later.

Page 28: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Here is a short list summarizing them.

• Technical efficiency: where a given output is produced with the least inputs (i.e. minimizing wastage). Also known as operational efficiency;

• Economic efficiency: where a given output is produced at least cost. Also known as productive efficiency;

• Allocative efficiency: where the pattern of output matches the pattern of demand;

• Pareto efficiency: the point at which no one can gain without someone else being made worse off.

Every level of a health system faces questions about efficiency. For example, there are several ways in which hospitals might seek to improve the efficiency of their operations including:

• Length of stay could be reduced;• Staff productivity could be increased;• Equipment could be fully utilized and maintained regularly;• Over-prescribing of drugs could be avoided;• Drug ordering and storage could be managed properly to avoid wastage;• Nurses could replace doctors when appropriate;• Low-cost equipment could replace staff when appropriate;• Day surgery could replace inpatient stays.

If you have worked in a hospital, perhaps you have already experienced or attempted some of these measures. Were they successful? Implementation might be difficult, although some measures will be harder to enforce than others. To encourage the efficient use of resources, hospitals should collect financial data and managers should be trained to carry out cost analyses. There is also a need for staff

Page 29: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

to be aware of the financial constraints of the hospital if implementation is to be effective.

Equity

Equity is another important concern of economists as well as of health services. Equity is about the distribution of benefits as opposed to their maximization (as in efficiency).

First, equity usually has something to do with fairness and justice. It is subjective, as it will mean different things to different people and different communities.

Second, equity is different to equality. Equity is about fairness but this may or may not mean the equal sharing of a good or service. It may for example be deemed fair that a disadvantaged group in society receive a greater share of resources.

Third, equity and efficiency are often conflicting objectives. For instance, it may be efficient to fund health services concentrated in a small number of large centers but more equitable in terms of access to services to fund a larger number of dispersed smaller services.

Topic 3

Economic Evaluation of Health Care Programmes

What is Economic Evaluation?

We have so far learned that resources are limited while needs and wants are unlimited. Because of this society has to make choices every time concerning the efficient use of what is available. Economic evaluation derives its importance from this perspective.

Page 30: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Economic Evaluation deals with both the inputs and outputs, sometimes called costs and consequences, of activities. It is the linkage of costs and consequences, which allows us to reach our decision.

Economic Evaluation concerns itself with choices. Resource scarcity, and our consequent inability to produce all desired outputs, necessitates that choices must, and will, be made in all areas of human activity. These choices are made on the basis of many criteria, sometimes explicit, but often implicit Economics evaluations:

Always compares any health care programme with an alternative, for example, no treatment or routine care.

Always measure the benefits produced by all alternatives compared. Always measures the cost of any programme.

Economic evaluation is therefore the comparative analysis of alternative courses of action in terms of both costs (resource use) and consequences (outcomes, effects) (Drummond 2005). Economic evaluations aims to describe, measure and value all relevant alternative courses of action (e.g. intervention X versus comparator Y), their resource inputs and consequences. 

The above characteristics of economic evaluation/analysis lead us to define economic evaluation as the comparative analysis of alternative courses of action in terms of both their costs and consequences.

Therefore, the basic tasks of any economic evaluation are;

To identify, measure, Value, Compare the costs and consequences of the alternatives being considered.

Economic evaluation of health care programmes aims to aid decision- making with their difficult choices in allocating health care resources, setting priorities and moulding health policy. But it might be argued that this is only an intermediate objective. The real purpose of doing economic evaluation is to improve efficiency: the way inputs (money, labour, capital etc) can be converted into outputs (saving life, health gain, improving quality of life, etc).

Page 31: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Measuring costs in health programmes• Costing - determining the expenditure required to purchase the resources

needed to achieve an activity or strategy.• Budgeting - the allocation of resources to match requirements.• Once the cost of an activity is determined, the total number of desired

activities will then determine the desired funding. The number of activities will be adjusted to fit the amount of funds allocated, which will become the budget.

• Cost in economics includes all the financial costs, costs of donated goods or in-kind services, and all opportunity costs

• Opportunity cost: potential benefit sacrificed or forgone from using resources in one program. If usage in one program precludes usage in another program, there is an opportunity cost.

• For instance, deciding where to allocate one extra nurse among one of the following programmes in a PHC center: Hypertension control, Immunizations or Antenatal care

• Other examples: the OC of your attending this lectureCost definitions

• Total cost: – All the costs incurred to produce a given level of output/final health

outcome (e.g. R8 000 over 8 years of life-expectancy; also known as LIFE YEARS)

• Average cost: – The cost per outcome gained. Total cost / Quantity of output or final

health care outcome (e.g. R8000 / 8 Life Years is an average cost of R1000 per Life Year)

• Marginal cost: – The extra cost of producing an additional unit of health care outcome

or the change in costs associated with small changes in outputs (e.g. the additional cost from each additional Life Year) within the same programme

• Incremental cost:

Page 32: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

– The additional cost of moving from one programme to another in order to increase outputs. (e.g. R4000 for 2 additional years with Programme2)

Types of costs• Direct – all the expenses incurred in delivering the health service, including

shared costs• Indirect costs – those additional costs, usually from the perspective of the

patient, in accessing treatment, eg. Transport, loss of productivity, etc• Intangible costs – those difficult to identify and measure eg. The drawbacks

due to illness, depression, loss of quality of life

Direct cost categories• Recurrent costs: resource costs which may vary from year to year or costs

that are consistently incurred on a regular/yearly basis (staff time, supplies including medicines and diagnostic tests, general operating costs); also known as variable costs

• Capital costs: costs associated with inputs that last for more than one year (buildings, equipment, staff training); also known as fixed costs

Measuring Effectiveness in health programmes

In order to carry out a cost effectiveness analysis it is necessary to have suitable measures of effectiveness. These will depend on the objectives of the particular interventions under review. In all cost effectiveness analysis, however, measures of effectiveness should be defined in appropriate natural units and, ideally, expressed in a single dimension. Common measures used in several studies have been “lives saved” and “life years gained”.

Several other measures of effectiveness have been used by different researchers (see the box below), these have included the number of pain or symptom free days resulting from alternative drug regimens in the treatment of duodenal ulcers; and the number of episodes of fever cured and deaths prevented in the treatment of chloroquine resistant malaria in African children.

Page 33: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Most of the above mentioned studies express effectiveness in terms of a single dimension and thereby permit direct comparison between alternative procedures in terms of their marginal cost per unit of outcome

Types of Economic EvaluationThe different ways of looking at benefits combined with cost analysis represent the different techniques of economic evaluation:

Cost Effectiveness Analysis (CEA), Cost Utility (CUA) Cost Benefit Analysis (CBA).

When to use each of the above techniques will depend on the nature of the question to be addressed, which may be a choice between alternative clinical strategies for a condition: timing of an intervention; settings for care; types and skill-mix of personnel proving care; programmes for different conditions; scale or size of a programme; or other ways to improve health.

a) Cost-Effectiveness Analysis

When different health care interventions are not expected to produce the same outcomes both the costs and consequences of the options need to be assessed. This can be done by cost-effectiveness analysis, whereby the costs are compared with outcomes measured in natural units-for example, per life saved, per life year gained, and pain or symptom free day.

Examples of measures of effectiveness

Cases treated appropriately Lives saved Life years gained Pain or symptom free days Cases successfully diagnosed Complications avoided

Page 34: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Many cost-effective analyses rely on existing published studies for effectiveness data, as it is often too costly or time consuming to collect data on costs and effectiveness during a clinical trial.

CEA is concerned with technical efficiency issues, such as: what is the best way of achieving a given goal? Comparisons can be made between different health programmes in terms of their cost effectiveness ratios: cost per unit of effect. Under CEA effects are measured in terms of the most appropriate one-dimensional natural unit. So, if the question to be addressed was: what is the best way of treating renal failure? Then the most appropriate ratio with which to compare programmes might be ‘cost per life saved’.

The advantage of the CEA approach is that it is relatively straightforward to carry out. It is often sufficient for addressing many questions in health care.

However, it is not comprehensive. The outcome is one-dimensional under this analysis, but often health programmes generate multiple outcomes. A further problem with CEA is comparability between very different health programmes. Health programmes with different aims cannot be compared with one another using CEA.

If the outcomes of alternative procedures or programmes under review are the same, or very similar, then attention can focus upon the costs in order to identify the least cost option the method of evaluation will be cost- minimization analysis. If, however, the outcomes are not expected to be the same, then both the costs and consequences of alternative options need to be considered. Cost-effectiveness analysis is one method of economic evaluation that allows this to be done.

Advantages

- Relatively simple to carry out.- Often able to use outcome measures which are meaningful in a particular field.

Disadvantages

Page 35: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Since outcome is uni-dimensional, cannot incorporate other aspects of outcome into the cost-effectiveness ratio;

Interventions with different aims/goals cannot be compared with one another in a meaningful way;

Meanings of outcome measure not always clear, i.e. what is value of a case detected in a screening programme; and

May have situations when the option with the highest cost effectiveness ratio should be chosen.

c) Cost-Utility Analysis

CUA is concerned with technical efficiency and allocative efficiency (within the health care sector). It can be thought of as a sophisticated form of CEA, since it also makes comparisons between health programmes in terms of cost effect ratios. However, CUA differs in the way it considers effects. These are multidimensional under this form of analysis. CUA tends to be used when quality of life is an important factor involved in the health programmes being evaluated. This is because CUA combines life years (quantity of life) gained as a result of a health programme with some judgment on the quality of those life years. It is this judgment element that is labeled utility. Utility is simply a measure of preference, where values can be assigned to different states of health (relevant to the programme) that represent individual preferences. This is normally done by assigning values between 1.0 and 0.0, where 1.0 is the best imaginable state of health (completely healthy) and 0.0 is the worst imaginable (perhaps death).

This approach of using utility is not restricted to similar clinical areas, but can be used to compare very different health programmes in the same terms. It is possible to compare surgical, medical, pharmaceutical and health promotion interventions with each other. Comparability then is the key advantage of this type of economic evaluation. For a decision-maker faced with allocating scare resources between competing claims, CUA can potentially be very informative.

However, the key problem with CUA is the difficulty of deriving health benefits. Can a state of health in fact be collapsed into a single value? If it can then, whose values

Page 36: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

should be considered in these analyses? For these reasons, CUA remains a relatively little used form of economic evaluation

When should CUA be used?

The following are a number of situations where you might wish to use CUA:

1. When health-related quality of life is the important outcome. For example, in comparing alternative programmes for the treatment of arthritis, no programme is expected to have any impact on mortality, and the interest is focused on how well the different programmes will be improving the patient’s physical function, social function, and psychological well being;

2. When the programme affects both morbidity and mortality and we wish to have a common unit of outcome that combines both effects. For example, treatments for many cancers improve longevity and improve long-term quality of life, but decrease quality of life during the treatment process itself;

3. When the programmes are being compared have a wide range of different kinds of outcomes and we wish to have a common unit of output for comparison. For example, if you are a health planner who must compare several disparate programmes applying for funding, such as expansion of neonatal intensive care, a programme to locate and treat hypertension, and a programme to expand the rehabilitative services provided to post-myocardial infarction patients;

4. When we wish to compare a programme to others that have already been evaluated using cost-utility analysis.

When CUA should not be used?

1. When only intermediate outcome data can be obtained. For example, in a study to screen employees for hypertension and treat them for one year, intermediate outcomes of this type cannot be readily converted into QALYs for use in CUA.

Page 37: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

2. When the effectiveness data show that the alternatives are equally effective in all respects of importance to consumers (e.g. including side-effects). In this case, cost-minimization analysis is sufficient; CUA is not needed;

3. When the effectiveness data show that the new programme is dominant; that is, the new programme is both more effective and less costly (win-win). In this case, no further analysis is needed;

4. When the extra cost of obtaining and using utility values is judged to be in itself not cost effective. This is the case above in points 2 and 3. It would also be the case even when the new programme is more costly than the old, if effectiveness data show such an enormous superiority for the new programme that the incorporation of utility values could almost certainly not change the result. It might even be the case with a programme that is more costly and only somewhat more effective, if it can be credibly argued that the incorporation of any reasonable utility values will show the programme to be overwhelmingly cost-effective.

Measuring Quality

Measuring a person’s quality of life is difficult. Nonetheless, it is important to have some means to have for doing so since many health care programmes are concerned primarily with improving the quality of a patient’s life rather than extending its length. For this reason, various quality of life scales have been developed in recent years.

The Nottingham health profile is one quality of life scale that has been used quite widely in Britain. This comprises of two parts. It measures health status by asking for yes or no responses from patients to a set of 36 statements related to six dimensions of social functioning:

Energy Pain Emotional reactions, Sleep, Social isolation,

Page 38: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Physical mobility.

These responses are then “weighted” and a score of between 0 and 100 is assigned to each dimension. The Nottingham health profile has been applied, for example, in studies of heart transplantation, rheumatoid arthritis and migraine, and renal lithotripsy.

Other quite widely used measures include the sickness impact profile and the quality of wellbeing scale.

Quality – Adjusted Life – Years (QALY)

One of the features of conventional CUA is its use of the QALY concept; results are reported in terms of cost per QALY gained.

QALYs: - combine life years gained with a measure of the quality of those years. Quality is measured on a scale of 0 to 1. With 0 equated to being dead and 1 equated to the best imaginable state of health.Combine all dimensions of health & survival into a single index.

What is the QALY concept?

The advantage of the QALY as a measure of health outcome is that it can simultaneously capture gains from reduced morbidity (quality gains) and reduced mortality (quantity gains), and combine these into a single measure. Moreover, the combination is based on the relative desirability of the different outcomes.

The QALY approach, which forms a key part of most cost utility analyses, has been the subject of some criticism. It has been accused of discriminating against elderly people, making illegitimate interpersonal comparisons, disregarding equity considerations, and introducing bias into quality of life scores.

DALY: The Disability-Adjusted Life Year, a measure akin to the QALY in aggregating survival and quality of life effects, but normally advanced as a method of estimating

Page 39: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

the burden of illness associated with a disease, rather than the cost effectiveness of health care interventions.

d)Cost-Benefit Analysis

Cost benefit analysis is the most comprehensive and theoretically sound form of economic evaluation and it has been used as an aid to decision making in many different areas of economic and social policy in the public sector for more than fifty years.

Cost-Benefit analysis (CBA) estimates and totals up the equivalent money value of the benefits and costs to the community of projects to establish whether they are worthwhile. These projects may be dams and highways or can be training programmes and health care systems.

The main difference between cost-benefit analysis and other methods of economic evaluation that were discussed earlier in this series is that it seeks to place monetary values on both the inputs (costs) and outcomes (benefits) of health care. Among other things, this enables the monetary returns on investments in health to be compared with the returns obtainable from investments in other areas of the economy. Within the health sector itself; the attachment of monetary values to outcomes makes it possible to say whether a particular procedure or program offers an overall net gain to society in the sense that its total benefits exceed its total costs. Cost-effectiveness and cost-utility analysis do not do this because they measure costs and benefits in different units. CBA requires programme consequences to be valued in monetary units, thus, enabling the analyst to make a direct comparison of the programmes incremental cost with its incremental consequences in commensurate units of measurement, be they Birr, dollars, or pounds.

In simple terms, the goal of analysis is to identify whether a programme’s benefits exceed its costs, a positive net social benefit indicating that a programme is worthwhile. Because CBA converts all costs and benefits to money, it is not restricted to comparing programmes within health care, but resource allocation decisions both within and between sectors of the economy. CBA is broader in scope

Page 40: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

and able to inform questions of allocative efficiency, because it assigns relative values to health and non-health related goals to determine which goals are worth achieving, given the alternative uses of resources, and thereby determining which programmes are worthwhile.

Because CBA converts all costs and benefits to money, it is not restricted to comparing programmes within health care, but can be used (although not without problems) to inform resource allocation decisions both within and between sectors of the economy. CBA is broader in scope and able to informquestions of allocative efficiency, because it assigns relative values to health and non-health related goals to determine which goals are worth achieving, given the alternative uses of resources, and thereby determining which programmes are worthwhile.Both costs and benefits are assigned a monetary value. The benefits of any intervention can then be compared directly with any costs incurred.

If the value of benefits exceeds the costs of any intervention, then it is potentially worthwhile to carry that intervention out. If society funds projects for a given budget, then it can maximize the benefits generated by social spending. It is concerned with allocative efficiency. It is concerned with the question, is a particular goal worthwhile. Potentially it can answer questions such as should extra money be used for heart transplants or improving housing. Method requires that all resources and benefit generated by an intervention need to be assigned a monetary value. Therefore, needs to cost things which have no market value, i.e., changes in health, quality of life, length of life, pain, etc.

Methods of valuing

Willingness to pay (WTP) Human Capital Approach

The net welfare gain or net value of a project X (NVX) is equal to

NVX = WTPX – WTY

Page 41: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Where y refers to the next best alternative project.

If the latter is not or can not be defined

NVX = WTPX – WTPXi

Where WTPXi refers to society while WTP is for the inputs used alternatively in the economy at large.

If NVX is positive then, project X may be undertaken. When several projects compete with each other, it is evident that the one with the highest NV needs to be selected in order to maximize welfare. This shows the CBA for projects that have benefits or costs in the current period. It is evident that projects may also entail future benefits and future costs. Some modifications in the calculation of net value will be required in this case. Note that individuals prefer a net value of 1$ received now to 1$ in the future.

Topic 4

HEALTH CARE FINANCING

Definitions of health financing: raising revenue to pay for health services. Function of a health system concerned with the mobilization, accumulation and allocation of money to cover the health needs of the people, individually and collectively, in the health systems. The whole process of health care finance involves:

Where the money came from How it was collected Pooled Redistributed to the third party payers, finally Used to pay the providers for their services.

Factors influencing health care Financing

The form and level of health care financing are now major policy issues for most developing countries and it is essential that decision makers have a clear understanding of the implication of alternative approaches to financing health care.

Page 42: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

There is an increasing interest in how health services are funded, both in industrialized and developing countries. The following factors, among others, influence the health services sector and should be given due attention in health care financing.

i) Demographic changes

These have major effects on health care provision; firstly demographic change may lead to variations in the health coverage of the population. Rapid population growth rates can cause tremendous strains on the provision of social services including health care. Secondly, the age structure of the population has an important significance to the provision of health care. There are higher health service unit costs associated with the young and the old. Third, demographic factor relates to the relationship between economic producers and dependants of a country. High dependent ratio means an increased burden on the productive population for providing health care.

ii. Economic recession

This can be expressed by low or even negative growth rates, increasing debt burdens and high inflation rates. This has severe implications for the ability of governments to maintain, let alone expand, expenditure on health care. Such effects on the supply of health care are exacerbated by the increased need for health care brought about by the recession itself through the links between poverty and ill health.

iii. Rising expectation

Expectation of health care consumers specially, the middle classes, to receive high-technology medical care similar to that available in the industrialized world.

iv) Concerns about Equity

Governments committed to the principles of primary health care have a major responsibility to improve levels and depths of coverage. The concerns for equity

Page 43: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

may influence the choice and system of financing health care. To extend and improve basic health care at a time when there is such strong middle class pressure may only be available by providing substantial additional resources to the health sector.

v) Disease-pattern changes

Disease-pattern change may result due to changes in average income levels or due to changes in social development. Thus, as standards of living rise and morbidity patterns change, these changes are likely to have an effect on health care financing.

vi) Efficiency

Given the limited resources available for health in developing countries, it is essential to taste and use resources as efficiently as possible.

Criteria for choosing a Financing system

In selecting a system of financing health care some criteria should be used. The first three criteria outlined below are general, while the last two have particular importance within the context of primary health care:a. Viability and ease of using the system

This implies bureaucratic and cost simplicity, social acceptability ad technical feasibility

b. Revenue generating ability

The administration of user-changes for example, may include the costs of billing, accounting and the safe storage and collection of funds. Even where additional staff is not employed and existing staff are used, it implies an opportunity cost to the health service in terms of alternative activities which the staff could have been engaged in had they not been involved in the revenue generating scheme.

c. Effects on service – provision

Page 44: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Systems of financing, for example which involve three parties – the patient the provider and an insurance company – may lead to over-provision of certain services.

d. Effects on equityThat is equal access to care for those in equal need.

Sources of National Health care Financing

Health care financing is a broad term used to define alternative arrangements for paying, allocating, organizing and managing health resources

It includes:

Defining a level/ quality of care preferably a minimum basic health services packages to be provided, in an accessible and equitable manner.

Identifying different modalities of financing to establish a financially sustainable system.

Institute different mechanisms for mobilizing funds and rationalizing the use of available resources including cost and risk –sharing mechanisms/insurances plans.

National Health care financing systems has pluralistic nature in funding: therefore, it has different sources of health care funding:

1. Public sources:

Direct government budgeting National health services and public services health systems Social health insurances sponsored or mandated by the government Community financing

Page 45: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

2. Private sources Direct payment by households Private voluntary health insurance Employers based health insurances Payments by community and other local Organizations

4. External financing

Foreign aid or development loans

f) Government financing

A. General tax revenues

General tax revenue is used in almost every country of the world to finance certain components of health care and, in developing countries; it is often the most important source of financing. General tax revenue is currently not the most reliable source of finance for the health sector in developing countries. This results from factors such as the low political priority frequently given to the health sector in national budget decisions; the instability of government finance in countries heavily dependent upon taxes on imports and exports; the frequent use of public expenditure as a tool of macro-economic policy; and frequent disparities between budgeted funds and their actual availability or disbursement. The net yield is usually high unless bureaucratic overheads are high.

There is a limit to what can be collected in tax revenue and how much can be allocated to the health sector without conflict with wider primary health care objectives. Taxes that make the poor poorer could seriously damage their health status and undermine their productivity; there are also many other fields of socioeconomic development that compete with the health sector for funds and yet give substantial support to primary health care (e.g. agriculture).

b. Deficit Financing

General tax revenue may be supplemented by deficit financing that is the decision to borrow and spend funds in the present and repay them over some period of time.

Page 46: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Deficit finance may be raised nationally or internationally. The cost enjoying the use of those funds in the present rather than the future is the interest that needs to be paid on the loan.

g) Social Insurance

Social insurance can finance health care, as well as other needs such as invalidity and old age support, for either the whole population or a part of it. It is conventionally financed by imposing mandatory insurance payments on employed workers as a percentage of their wages, and by imposing a similar or somewhat higher payroll tax on their employers. In order to include those workers outside the modern employment sector insurance payments may also be calculated on measured income or wealth other than wages, such as the value of crops produced.

The main problems of social insurance are related to issues of equity and efficiency. It is easiest to cover those in regular employment, who may be as little as little as 5 to 15% of the population in developing countries; and there are often marked inequalities in the quantity and quality of services available to those covered by insurance relative to those who are not. Overall, it is argued that social insurance reinforces the mal distribution of resources between rural and urban areas in developing countries.

It provides extra funds for largely urban, employed workers and leaves the large rural population and the informally employed urban population even further handicapped than before its introduction.

H. Private Financing

Private financing for health care can be direct or indirect:

a. Direct payment: This is personal payments made directly to a wide range of providers, including private practitioners, traditional healers and private pharmacists.

User fees, whether for government-provided or for privately provided health services, are an out-of-pocket payment and are therefore considered here as health finance from a private source.

Page 47: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

Similarly, charges to contributions or prepayments by members of community financing schemes are also considered as coming from private (non-government) sources.

b. Indirect payment: This is payments for health care services by employers (e.g. payment by large and privately owned industrial complexes in developing countries or sharing of health care costs by employers in industrialized countries) and health financing by other non-government bodies such as local charity fund-raising for health causes.

I. Health Insurance

Private Health Insurance

Private health insurance differs from social insurance in two main ways. First, private health insurance typically does not include pensions for invalidity or old age. Second, the price (or’ premium’) charged for private health insurance is not based on the pooled risks of a large population, but on personal risk characteristics and the likelihood of illness in the individual or group covered. As a result, premiums are likely to vary for different individuals or groups.

Employer-Financed schemes

In some instances employers may directly finance health care for their employees. They may, for instance, pay for private sector health services, employ medical personnel directly, or provide necessary facilities and equipment. Oil companies, mining and mineral industries, and large-scale export-centered agricultural enterprises usually provide for the health needs of their workforce. Benefits are seldom extended to families as employers are primarily concerned with maintaining the productivity of the work force. In developed countries the primary focus is on accident prevention and occupational health, and in developing countries also, employers may have a legal obligation to provide first aid or occupational health services (e.g. sugar and coffee plantations in Latin America, tea and rubber estates in Asia and Cocoa farms and mines in Africa).

Page 48: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization

j. Charity and voluntary contributions

It can take the form of financial support or in-kind donations (e.g. personal services, physical facilities, equipment and supplies), and may originate from business enterprises, wealthy families, religious organizations or private individuals. Often these resources are channeled through foundations or religious bodies.

The problem with this source of finance are often indirect for example, donors may have different priorities from the recipient nation and may not recognize their most urgent health needs. May prefer to fiancé visible evidence of their support such as physical facilities and equipment and there by commit the recipient country or contributions may also take the place of, or reduce, other sources of finance. For example, contributions may be eligible for tax relief, reducing general tax revenues for use elsewhere (although the effects in this instance are likely to be minor).Equity promotion strategies according to financing mechanism

Page 49: UNIVERSITY OF LUSAKA  · Web viewHealth Economics and Financing is concerned with the alternative uses of resources in the health services sector and with the efficient utilization