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Health Economics

Free «Health Economics» Essay Sample

Healthcare is a crucial human need. Over time, people have substantially increased the amount of money they spend in this regard. It is obvious that good health is essential in terms of everyday activities such as work, sport, and even relax among others (Hurley 13). This need for a proper health as well as respective investments have necessitated a considerable interest in healthcare economics. It has been noted that about one trillion dollars was used for healthcare purposes with approximately 40 percent being used in hospitals and 20 percent in doctor services (Bhattacharya, Timothy & Peter 41). Healthcare amounts to approximately 16 percent of the collective cost of household goods and services produced in the US. Health sector is, thus, described as a branch of economics dealing with matters concerning the competence, success, significance and performance in the production and consumption of health products and healthcare. It is basically the study of systems regulating healthcare and how the latter functions as well as assessment of behaviors that affect health such as alcohol consumption, smoking among others. It is a field that applies tools applied in the sphere of economics to healthcare financing, delivery and organization. Its principles focus mainly on the decisions made by people concerning expenditures on their health in comparison with other competing needs, including food, housing, clothing, education, and travel among others (Hurley 19).


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The three fundamental aims of health economics and its studies are coming up with a deeper understanding of the significance of ideas of economics applied to the area of health care. It also aims at expounding further on the health care system and its ways of finance and delivery of respective services. Lastly, it focuses on conveying an overall understanding of the function of economic factors and how they contribute to the public policy with reference to health and in addition to health care. There are various factors that differentiate health economics from other fields. In this sense, it is associated with a widespread government intervention, obstinate uncertainty in numerous magnitudes, entry barriers, external influences, erratic information and existence of agents who are the third parties. The agents (physicians) make decisions on matters pertaining to medical prescriptions, surgery performance and arrangements for conducting laboratory tests (Hurley 34). As a rule, they are exempted from the costs that come with services or products. Health economists assess the information concerning finance in the health care sector, including expenses, charges and finally expenditures. It is commonly observed that the uncertainty is natural in regard to health, especially because the physician accumulates more knowledge compared with that of the patient, thus, creating an asymmetric information. Externalities arise remarkably in the area of diseases that are infectious and are normally frequent during health care applications. Physicians have no control over occurrences of such situations (Bhattacharya, Timothy & Peter 32).

Health economics involves a scope that comes in various subjects ranging from health influences, values, healthcare demand and supply, market equilibrium, planning, monitoring and budgeting mechanisms among others. Healthcare demand is secondary to the demand for health and is usually sought by consumers mainly to attain a state of the health capital. Health demand is different in a manner that people have to spend the wherewithal before they can either consume or produce it. There are four roles of people in health economics pertaining to healthcare, namely contributors, citizens, providers and consumers. Each individual is viewed as both a consumer and a producer of health: health is perceived to be a stock that depreciates with time when not invested in. The Grossman’s model supports the fact that health is a good for consumption which yields the utility and satisfaction directly. Additionally, it is the asset for investment that creates indirect benefits to consumers in the form of the improved productivity, lesser sick days and ultimately higher wages. Health investments are seen to be costly in that consumers have to exchange their time and resources, devote themselves to health boosters such as exercises and rest, rather than to other goals that might be of essence in their lives. The Grossman’s model predicts the consequences related to the changes in costs of healthcare as well as other goods, outcomes of the labor markets in terms of services and wages, as well as changes in the technology (Bhattacharya, Timothy & Peter 55). Heath economists use such predicted information as a basis for their research (Culyer, Joseph, Mark, Thomas & Pedro 57).

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The best possible level of health investment is when the subsidiary health capital cost is of the same value with the subsidiary benefit. Over time, the quality of health may tend to fall to a considerable degree. This downgrade is caused by the increase in populations’ age, amount of income as well as the education level of the consumer. Aging people have a higher probability of spending more on their health as compared to the younger ones. They also have a declined health stock and its accompanying benefits. The fundamental demand for healthcare comes from a desire to attain good health. Since the introduction of health programs, such as Medicare and Medicaid in the 1960s, the Americans, unlike people in some other countries, have adopted the policy of health insurance to enjoy the resources they would have consumed in healthcare (Bhattacharya, Timothy & Peter 17). Health insurance helps consumers to obtain healthcare services at subsidized costs, especially when compared with the normal market rates.

The comparison of two or supplementary substitute courses of action in terms of costs and outcomes is known as the economic evaluation. There are various types of economic evaluation, depending on how the abovementioned outcomes are measured. Such evaluations include the cost-minimization analysis, cost-effectiveness analysis, cost-benefit analysis, cost-utility analysis and most importantly the cost-consequence analysis. The cost-minimization analysis (CMA) ensures that the effectiveness of the comparative factors involved is equal (Braverman 36). The cost-benefit analysis measures costs and benefits in the form of cash. The cost-efficiency analysis measures the outcomes in ordinary units like symptomatic days, while the cost-utilization analysis measures the same in a complex metric consisting of both the duration and quality of life. Another economic evaluation approach is the cost of illness which examines all the accrued expenses of an illness on a consumer. The costs may be direct, when money is directly involved, or indirect – for instance, losses in the productivity during sick days and the pain suffered by an individual during the time of illness (Hurley 34).

Direct costs are perfectly correlated with a healthcare event; for instance, the cost of a reagent needed to conduct a certain lab test. Indirect costs are also known as overhead costs and can be deduced as the support that enables the performance of lab tests, including variables such as quality control measures conducted during tests among others. Fixed costs do not vary in any possible manner: that is, in the output or production, for instance, in the case of costs, such as x-rays machine, will not change regardless of the number of films produced during its use. Variable costs are those that change in relation to the production of results; for instance, the cost of leaded fill used during the production of healthcare files. Opportunity costs are the values of those alternate decisions that are forgone after an individual has made their choices. As a rule, they are ignored, especially when less than ideal decisions are made (Bhattacharya, Timothy & Peter 22).

In healthcare economics, a considerable amount of attention is given to consumers and providers. Within a respective market place some may will to supply a good that others may be interested in acquiring. In such a case, the supplier intends to make profits by obtaining a larger amount from the transaction of the particular good or service to the consumer who, on the other hand, will also prefer to minimize their expenditure when collecting the good. The transaction is only completed when the two parties reach an agreement, where they are both comfortable, hence, known as the equilibrium price/cost. Elasticity is a term used to define a setup, when a product’s (dependent variable) demand is affected by a change in its cost (independent variable). When the costs are not increased, the demand will be labeled as inelastic, but when prices increase, the demand will become elastic.

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Market equilibriums involve various healthcare markets analyzed in health economics (Sloan & Chee-Ruey 30). These healthcare markets include the financing market, physician and nurse services, institutional services, input factors and professional education market among others. The research has shown that patients who are insured are normally less bothered by the costs of their healthcare, unlike those who are not insured and who pay more for their health (Culyer, Joseph, Mark, Thomas & Pedro 112). This leads to a moral hazard on their part which eventually escalates the costs of healthcare. For this reason, insurers are forced to conduct various techniques in order to control the costs involved owing to moral hazards, including the limitation of incentives from the physician involved in the provision of costly healthcare services as well as imposing copayments on patients that are associated with the moral hazard. This problem of moral hazard has, hence, created a base, in terms of which health insurers compete by providing the choice of services they offer, limitations on nurses and physicians and the requirements regarding the cost sharing with patients (Braverman 48).

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As a rule, consumers in the healthcare markets suffer due to the lack of sufficient information regarding what services to buy and where to get the best value for their resources. This has necessitated health economists to notice instances, where healthcare is based on the supplier induced demand. Some healthcare providers have based their treatment recommendations on the economic criteria and not the medical one as they should. Practice variations have also been noted by health economists. The healthcare market in the U.S. has basically exploited the dynamics of competition to manage costs and advance the quality. Thus, the competition effect has caused a reduction in costs. Nevertheless, insurers and providers have offered s consolidation which has seen the effects of competition reduce. The U.S. government has issued abundant regulations to slow down the market inefficiency, for example, through offering of medical licenses (Braverman 48). In this regard, some health economists have argued that doctors and health service providers with mandatory medical licenses have placed constraints in their inputs, inhibited the innovation and have a likelihood of increasing expenses to consumers, while at the same time benefitting from the medical services. Market failures emerge in the delivery and financing markets owing to two main reasons. First, there is the lack of perfect information concerning the prices of healthcare products. Second, certain entry barriers exist, especially in the financing markets such as the formation of monopoly in the insurance industry (Sloan & Chee-Ruey 45).

Other crucial factors that are associated with health economics may consist of medical economics, population’s behavioral economics as well as psychological wellbeing economics.  The term ‘health economics’ is in most cases used interchangeably with the term ‘medical economics’. Both terms refer to a branch of economic studies that is more involved in the use of the concept of economics in the provision of healthcare in a system, namely a state or a nation. The provision of health services involves activities that are predominantly associated with doctors and nurses’ services, markets and the entire system. Characteristically, it is more assessed in the cost-benefit analysis of products related to pharmaceuticals as well as the cost- effectiveness analysis of a variety of medical treatments (Braverman 23). In this regard, medical economics applies mathematical models to the manufacture data from biostatistics and epidemiology in order to support the decision making process in the medical field both for persons and for the wider health course of action (Sloan & Chee-Ruey 72). There has not been much noted about behavioral economics, but even so, some researchers concluded that it is an essential element in the improvisation of the system of healthcare. Nevertheless, little improvements have been noticed as compared to the retirement course of action.



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Economics of Mental Health is an integration of a wide array of subject affairs varying from pharmaco-economics to welfare as well as labor economics. Mental health influences the people’s performance, hence, their contribution in any given environment: this is because people are seen as the human capital in terms of the economic perspective. Increases in incidences of mental health problems among children leads to the loss of more man-hours as these children require care for a long time. Other externalities associated with mental health may take account of the pressure that individuals who are affected experience on the immediate human capital, for instance, at their homes or even workplaces. Therefore, mental health has posed a lot of challenges to health economic researchers, especially because individuals who are affected (people with cognitive disabilities) are potentially incapable of explaining their problems to specialists (Culyer, Joseph, Mark, Thomas & Pedro 87). In this regard, medical practitioners and health economists face the challenge of placing a cost on an individual’s mental health status. They solve this mostly by using the comparison of the individuals’ potential in terms of the human capital.

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The employment statistics have been used to gather the information, hence, analyze and evaluate a patient’s productivity. However, those statistics have not captured enough information that can be supportive. For instance, they do not show when the person involved has not been productive at work; they do not enumerate the loss of working time that is non-paid. In addition, they do not realize the externalities such as having a family member that is also affected. The study results emerging from such a work may not be necessarily applied internationally as it lacks the substantial amount of information owing to the variation in the rate of wages globally and societal values. This is commonly observed, once the statistics employed are being narrowed down both in terms of geography and perspective, as well. Nevertheless, according to studies, mental healthcare has improved in terms of the productivity levels of employees reducing their absenteeism as well as their general healthcare costs (Braverman 8).

Notably, in the United States, the economy has fashioned the composite relations among the employment, health costs and coverage, along with the monetary admission to healthcare. In most cases, employers have surrendered to offer a health coverage to their employees, especially during the economic recession. Some have gone ahead to restrict their employees’ eligibility to health cover. As a rule, most employees lose their healthcare insurance covers, when they lose their jobs. Nevertheless, the recession has affected a large population in the workforce (Sloan & Chee-Ruey 51). The research works conducted by health economists on the consequences of economic changes on health status of citizens cannot be perceived as reliable (Culyer, Joseph, Mark, Thomas & Pedro 64). Most employees have resolved to works without health benefits due to the times of recession which has also barred patients from seeking for being hospitalized or using outpatient services. More patients are enrolling to hospitals without the ability to pay for the healthcare services offered in these institutions. The economic downturn has seen most doctors and nurses to reinstate in the workforce longer than the normal protocol. Furthermore, there has been an establishment of the two trends that are structurally dominant, namely the growth and consolidation which will ultimately revolutionize the delivery of healthcare. Notwithstanding legislation reforms, certain factors have a likelihood of tremendously influencing the speed and direction of such changes.

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