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Slide 6.1
Chapter 6
Health Economics
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide6.2
• Public spending on healthcare in the UK (i.e.
on the NHS) has increased from 4.5% of GDP
in the late 1980s to around 8.5% of GDP in
2010/11
• Total spending on healthcare services in the
UK (public and private) was around 10.5% of
GDP in 2010/11 , close to the EU average of
10.6% but well below the US figure of 13.6% of
GDP
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.3
• Varies widely even between the advanced industrialised
economies of the OECD; e.g. Japan 82.6 years, Hungary
73.3 years
• Varies widely by gender; e.g. males in Japan 79.2 years,
females 86.0 years; males in Hungary 69.2 years, females
77.3 years
• Is correlated with total expenditure on healthcare services,
but also with other factors, e.g. the coefficient of
determination (R2) is only around 0.55 as between national
life expectancy and national healthcare expenditure
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.4
• Relief of poverty and redistribution of
income
• Evening out of income over a person's life
• Insurance against life's risks
• Redistribution towards needy sectors of the
population
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.5
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High income elasticity of demand
An ageing population
Increased deprivation/economic recession
Advances in medical technology
Higher expectations
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Price
Slide 6.6
S1
S2
S3
D2
D1
P2
P1
0
Q1
Q3
Q2
Treatment per year
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.7
• Providing health services ‘free at the point of use’
can lead to excess demand and queuing
• In diagram, with demand D1 and supply S1, at
zero price there is excess demand Q2 - Q1
• In a free market, price rises to P1 to bring about
an equilibrium, but not possible if provision of
health care is free
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.8
• If Q2 treatments are to be provided at zero
price, then supply of healthcare must increase
to S2. This requires more resources
• If demand for healthcare increases to D2 , then
supply of healthcare must increase still more to
S3, if it is to be provided free at the point of use
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.9
• Asymmetry of information
• High transaction costs
• Monopoly provision
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.10
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Cost Minimization Analysis
Cost Utility Analysis
Evidence-based Medicine
Quality Adjusted Life Years (QALYs)
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.11
• Choose the cheapest. The choice is between
in-patient treatment and out-patient treatment
(day-surgery).
• out-patient treatment reduces the hotel
services associated with keeping a patient in
hospital overnight.
• in-patient treatment reduces the risk of
infection.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.12
• This generic term is applied to situations where
the choice is between two competing
procedures but the outcomes are not the same
and neither are the costs.
• For example, urinary catheter is a narrow tube
placed in the body to drain and collect urine
from the bladder.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.13
• If there are silver coated catheters cost more
than non-coated equivalents – say 10 L.E.
each rather than 5 L.E. is it worthwhile to use
the more expensive catheter rather than the
cheaper alternative?
• To answer this question, we should compare
the additional cost with the additional benefit.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.14
• The benefit of the use of the silver coated catheter
is the (Urinary Tract Infection) UTIs prevented as
the incidence of UTI decreases from 22/60 to
6/60. thus 16/60 UTIs are prevented.
• The additional cost to the hospital resulting from
these had they not been prevented can be thought
of as the cost of keeping these patients in hospital
for additional days while the infection is treated
and the cost of drugs required to do so.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.15
• The economic evaluation can only be as good as
the clinical evidence on which it is based.
• It is two –stage process.
• The first stage is clinical evidence of the improved
efficacy of the new technique ( silver coated
catheter)
• The second stage is the evaluation of the change
in costs and of benefits that result from the
adoption of the new technique.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.16
• The term evidence-based medicine related to
efforts to use the results of this research in a more
systematic way.
• There is Randomized Controlled Trial (RCT) which
acts as the gold standard research.
• It should be blind.
• Use statistical and meta analysis.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.17
• This method tries to measure the quality of
additional life years gained as a result of the
intervention.
• The effect of an intervention ( a new clinical
procedure) is measured not just on one dimension
but on two.
• The first dimension is the additional life years
gained.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.18
• This is multiplied by the second dimension, the
quality of life of the patient in those remaining
years.
• This produces a measure of QALYs.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Quality of the life index
Slide 6.19
Line B (treatment)
0.9
0.5
0
Line A (no
treatment)
1
2
3
Years after diagnosis
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 6.20
• The additional quality adjusted life years gained
as a result of the treatment:
• (3*0.9)-(1*0.5)=2.2 QALYs.
• If the treatment costs, say L.E. 60,000 then the
cost per QALY would be 60,000/2.2=L.E. 27,272.
• This figure can be compared with the cost per
QALY associated with other forms of treatment.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011