Concepts in Health Economics


Neoclassical economics view

Assessment of ill health

Financing of health care

Systems of payment

Health implies complex interaction between

  1. biological environment
  2. physical environment
  3. socio-economic factors

Development is the process of improving the quality of all aspects of human life. Health sector functions as a part of the whole economy. Reciprocal and synergistic interrelationship exist between health and development, however, correlations between GNP and population health are not straightforward. Often the phenomenon of “lengthening life but worsening health”, due to chronic but not fatal morbidity.

There 3 groups of problems:

  1. Health hazards associated with development (pollution, occupational risks, side-effects of agricultural expansion, accidents, drug-abuse, depletion of ozone layer, extension of warm climatic zones)
  2. The cost of diseases caused by industrialisation (Illnesses of poverty, environmental diseases, psycho-social diseases);
  3. Cuts in health budgets due to macroeconomic adjustment [“Macroeconomic adjustment” usually refers to corrective measures to eliminate internal or external imbalances (government budget deficit, trade balance deficits, unsustainable international debt levels, inflation, unemployment, etc.)].

Key issues in health and development:

Free market from the point of view of neoclassical economics

Two main forces create a circle - demand of informed consumer which the producer supplies.


Features of healthcare:


  1. Generally, every economy consists of
  2. There are three basic questions:
    1. What and how much to produce?
    2. How to produce?
    3. Who gets what?
    [questions 1. and 2. - are related to efficiency; 3 .- is related to equity]
  3. Efficiency is a maximum output for a given input.
  4. Equity applies to issues of income distribution. Generally, any redistribution of welfare from the better off to the worse off is equity enhancing.
  5. There are three mechanisms to answer these basic questions:
  6. Market failure – situation when the market cannot allocate resources effectively. Three main areas:
  7. Merit good is a good that society is concerned about its level of consumption.
  8. Costs are the value of resources that must be withdrawn from the economy for a given program.
  9. The interest rate (rate of discount) expresses time preference: the present value (the amount borrowed – 100$) is less than the future value (105$ = the amount borrowed 100$ + interest 5$ -> the interest rate is 5%)
  10. The marginal concept – costs per unit of providing any commodity vary with the amount provided (changes in costs and related changes in benefits – “marginal cost” and “marginal benefits”). Additional expenditures on a health program may return lower benefits than expenditures of an equal amount. It can be measured, for example, in deaths averted, of every additional dollar spent on the program.
  11. “Catastrophic” event is a health condition requiring large and extraordinary medical expenditures.
  12. The tax is “progressive” if the ratio of taxes to income rises with income (the rich pay the bigger proportion of their income than the poor).
  13. Key issues of health economics – efficiency, equity and sustainability.
  14. Health is not a commodity, but health care is.

Societies differ in their willingness to subsidize curative health care. Some societies argue that health care is a «basic need» or «merit good», and therefore that the government should assure access to basic health care for all citizens regardless of ability to pay. Other societies are skeptical of the claim that health care is different from many other goods and services with claims to being basic needs (education, basic nutrition, housing, roads and telephone service).