Health Economics & Policy 2 nd Edition James W. Henderson Chapter 2 Using Economics to Study Health Issues Copyright 2002, South-Western, a division of Thomson Learning, James W. Henderson, Health Economics and Policy, 2e

Is Economics Relevant? l Economics is the study of human behavior l Economics is a way of thinking l Economics provides a systematic way of looking at a problem

Economic Methodology l Critical assumptions –Rational self interest l The scientific method –Observation –Theory –Empiricism l Model building l Problem solving

Economic Optimization l Neoclassical framework –Rational decision makers –Optimizing behavior –Predictable results l Marginal decision making –Equate MB and MC –Flat of the curve

Demand and Supply l Most important model l Equilibrium l Price floors and ceilings

Elasticity of Demand l Sensitivity to change l Price elasticity –Elasticity and expenditures l Income elasticity –Normal and superior goods –Inferior goods

Competitive Model l Assumptions l Graphical presentation l Applicability to medical care

Imperfect Competition l Supply-side imperfections l Demand-side imperfections

What is Health Economics?

1. Production of Health l Income and wealth l Education l Environmental factors l Lifestyle choices l Genetics l Public health l Medical care

Health Production Function

2. Nature of Health l Quality of life issues l Instruments and measures of health status

3. Demand for Health Care l Influences from items 1 and 2 l Demographics l Barriers to access l Agency relationship l Nature of demand

4. Supply of Health Care l Theory of production l Theory of input markets l Nature of incentives

5. Microeconomic Evaluation l Informed decision making in fixed budget systems l Types of economic appraisal –Cost of illness –Cost effectiveness –Cost-benefit

6. Market Equilibrium l Price determination –Money prices –Time costs l Non-price rationing –Fee schedules –Waiting lists

7. Macroeconomic Evaluation l System-wide analysis –Identifying objectives –Analyzing outcomes l International comparisons

8. Health Policy and Planning l Budgeting l Resource allocation l Regulation