Health Economics

Health Economics
Order Description
QUESTION: Should we leave consumption of health care to the market? Why? (provide references as necessary)
MAKING DECISION IN PUBLIC HEALTH
WORKSHOP LECTURE DAY1

ECONOMIC EVALUATION&INCENTIVES
OUTLINE

› Quick recap on key concepts
– Efficiency
– Equity
› Economic evaluation
› Incentives
2
DEFINITION OF ECONOMIC
The study of how men and society end up choosing with and
without the use of money, to employ scarce productive
resources that could have alternative uses, to produce
various commodities and distribute them for consumption,
now or in the future, among various people and groups in
society.
It analyses the costs and benefits of improving patterns of
resource allocation.I
› Efficiency: allocating resources in such a way that maximises
the (health) benefits to society and minimise costs.
– Value for money
– Allocative efficiency:
– Is something worth doing (benefits exceeds costs)
– Right mix of health care services
– Technical or Operational efficiency:
– if something is worthwhile doing (allocative efficiency), what is the best
way of providing it (at lowest cost)?
– maximum output for a given level of resources / minimum cost for a
given level of outputncen

EQUITY
› How benefits are distributed and who receives them
› Notion of justice or fairness
› Health inequity:
“…differences in health that are not only unnecessary and avoidable,
but in addition unfair and unjust.”
Margaret Whitehead, 1991tives

ECONOMIC EVALUATION
› AIM – Efficiency: allocating resources in such a way that
maximises the (health) benefits to society and minimises
costs
– Measure of efficiency is the incremental cost-effectiveness ratio or
incremental net benefit
› How:
– Cost Minimisation Analysis (CMA)
– Cost Effectiveness Analysis (CEA)
– Cost Utility Analysis (CUA)
– Cost Benefit Analysis (CBA)

› Incremental cost-effectiveness ratio (ICER)=
› Measure of the extra cost of a health care program, relative to the extra
benefits
– Lower ICER is better value for money
– Why?

ECONOMIC INTENCIVES AND CONSUMER BEHAVIOUR
› What are incentives, and who is homo economicus?
› Influencing consumer behaviour:
– Incentives to increase the use of health services
– Incentives to decrease the use of health services
› Influencing provider behaviour
– GPs
– Hospital management

WHAT IS INCENTIVES
› Factors that make one sort of behaviour more likely than
others
› Mainly (not exclusively) financial
› Can be manipulated in the interests of policy

ECONOMIC MAN-HOMO ECONOMICUS
› Current economic thinking (neoclassical economics) is
individualist and rationalist
› The individual in question is homo economicus (Becker,
1993):
– Best judge of own interests (consumer sovereignty)
– Self-interested
– Rational

COSTS AND BENIFITS OF IMMUNISATION
Costs
› Financial (if any)
› Time and effort to attend clinic
› Risk of side effects
Benefits
› Reduced risk of infection

APPLYING THE ECONOMIC MODEL
› The economic viewpoint says that rational parents will weigh
up the costs and benefits of vaccination before deciding
whether or not to go ahead
› BUT let’s look at the benefits again…

SOCIAL VS PERSONAL BENIFITS
› Immunisation also decreases the risk of infection in the
broader community (“herd immunity”)
– This is an example of a positive externality
› BUT, as immunisation levels in the community increase, the
personal benefits decline (Why?)
– Social and personal benefits diverge…
› Once “herd immunity” is achieved, personal costs of
immunisation begin to exceed personal benefits
– Rational parents may refuse to have their children vaccinated
› Financial incentive to parents may be seen as an attempt to
increase the personal benefits of immunisation

INCENTIVES TO INCREASE UTILISATION

Immunisation policy: Australia 1998
› Payments to parents (April 1998)
– Childcare Assistance and Childcare Rebate ($20.50-$122 per week)
– Maternity Immunisation Allowance (one-off $208)
– Means tested
– Exemptions: medical/philosophical
› Payments to GPs (July 1998)
– GPII Scheme: monitoring, promotion, provision
– Payment for notification to ACIR
– Payment for outcome: tiered, based on % fully immunised
– Infrastructure funding

IS THE INCREASE RELATED TO THE INCENTIVES?
› 2001 survey: increase greater for families receiving child care
benefits (10% vs 7%, difference not significant)
› Would we expect a relationship?
› 2016 Expected change in legislation:
– Complete immunisation required in order to receive Child Care Benefit,
Child Care Rebate, Family Tax Part A end of year supplement
– Parents with children who are not immunised and do not have a medical
exemption will not be able to access these payments

INCENTIVES TO REDUCE THE UTILISATION
› GP consultations – “Overutilisation”
– Medicare reduces the price of the consultation (to $0 if GP bulk bills)
– Rational consumer is more likely to consult a GP for minor, self limiting
conditions than if they had to pay full cost
› Co-payment: patient pays the first few dollars of the cost of consultation

EFFECT OF CO-PAYMENT
› RAND Health Insurance Study (Manning et al 1987)
› Fewer GP consultations among groups facing higher copayment
› Utilisation of lower income groups fell more than that of higher
income groups
– higher price elasticity
› BUT families did not cut back on less effective or medically
unnecessary payments…..

WHAT DO THESE RESULT TELL US?ll us?
› Patient is not fully informed about the need for and
effectiveness of health care (not a “sovereign consumer”)
› After the initial consultation, demand is likely to be initiated by
the doctor
– Incentives to reduce utilisation of GP consultations would be better
targeted at the doctor
INFLUENCING PROVIDER BEHAVIOUR
› GPs are paid in different ways
› In Australia and US: mainly by fee per item of service
› Alternatives include capitation payments, budgets and
salaries (Scott and Hall, 1995)
› Evidence suggests the way GPs are paid does affect the way
they practice:
– e.g. in Denmark, a switch from capitation to fee per item of service was
associated with an increase in the number of consultations and a
reduction in their length (Kransik et al, 1990)
– e.g. in UK fee-for-service payments were associated with higher levels of
volume, lower referral rates and lower prevention activity compared to
fixed payment schemes of capitation and salary (Peckham S, 2013)

› GP response to financial incentives can be exploited, e.g.
through the use of target payments, UK 1990; (Quality and
Outcomes Framework, 2004)
– A new contract was introduced that included special payments to GPs
who achieve pre-set targets for cervical cancer screening and
immunisation
– Proportion achieving targets rose substantially
› Australian immunisation coverage incentives

› Hospital management
– Hospitals may also be reimbursed in different ways
– Examples include global (capped) budget, case-mix funding through
DRGs, and contract under a managed care or purchaser-provider
system
– 2013, Activity based funding for public hospitals (National Efficient Price)

RATIONAL BEHIND CASE-MIX
› Hospitals are generally non-profit organisations g? no
incentive to maximise profits
› Unfortunately they may not have incentive to minimise costs,
either
› Case-mix: seeks to pay hospitals according to what they do,
not what they cost
› Hospitals are paid a fixed amount based on the number and
type of cases treated
› Seems logical and simple…

RESPONCES TO CASE-MIX
More complex than expected!
› Hospitals can adopt strategies to protect revenue base:
– “DRG creep”: reclassify patients into more complex DRG g?higher case
payment
– Cost-shifting e.g. reduce length of stay g?shift costs to community sector
› So the effects of the incentive may be perverse
CONCLUSIONS
› The way we choose to finance health services generates
incentives
› These incentives make some choices more likely than others
› The study of incentives provides an analytic framework for
predicting their effects
– But the outcomes can be complex: naïve application of economic
principles often leads to simplistic predictions
– The framework does not tell us whether the effects of incentives
are desirable (need normative economics to explore this)
EQUITY IN HEALTY CARE

OUTLINE
› What is equity and why is it a public health objective?
› Overview of theories of justice
› Inequality vs inequity
› Equity vs efficiency
› Horizontal vs vertical equity
› Equity and health economics
– Understand the likely need for trade-offs between efficiency and equity during
the process of priority setting
– Have a critical appreciation of the “fair innings argument” and the “rule of
rescue”
– Appreciate the importance of incorporating community values into priority
setting

HEALTH SYSTEM OBJECTIVES
Two main goals:
› Efficiency
Getting maximum health benefit for scarce health dollars
› Equity
– Notion of fairness or justice

UTILITERIANISM
› Utilitarianism
– “..that action is best, which procures the greatest happiness for the greatest
numbers…” Hutcheson (1725) ;
– Utility = happiness/satisfaction
– maximisation of the “good”: utility
› Problems in accounting
– Adding up the happiness
› Consequences to society in aggregate, not individual
UTILITERIANISM AND EFFICIENCY
› Economic evaluation
› Consequentialist
› Focus on maximisation
– Life years
– Utility (preference): QALYs
› Insensitive to distribution: before, after

MAXMIN THEORY
› Rawls’ “justice as fairness”
– Social choices must be fair
– Maximin principle: Maximise the position of the worst off
– Theory assumes each of us behind the veil of ignorance is risk averse
– Also assumes a bottomless pit
– Social Contract theory
– Where the government takes a role in enforcing harmony in society, and people
agree to obey the rules of this authority
– Maximise the benefit to those who stand to gain the most
– Similar to Sen’s notion of capacity to benefit

EGALITARIANISM
› Equality (comparability) of outcome
– Essentially flattens the distribution of health
– In health – in some cases – asks to bring best health down and worst health up
to reach some equal ground
› Net welfare over a lifetime
› Different to maximin approach when it considers programs that benefit
both the better-off and the worse-off

INEQUALITY VS INEQUITY
› To define inequality, we measure differences in the health
experiences of individuals
– Lifetime
– Use of health care
– Access to health care
“People in group A live longer than those in group B.”
› To define inequity we need to apply (some) principle of justice
to the inequality in question:
“It is not fair that people in group A live longer than those in group B.”
› Degree of inequity will reflect society’s strength of aversion to
the inequality

› May be necessary to tolerate or even create inequalities in
access to health care in order to reduce inequities
› Horizontal vs vertical equity: positive discrimination
– HE – equal treatment of equals
– VE – unequal but equitable treatment of unequals

APPROCHERS TO EQUITY
› What is to be equalised?
– expenditure/resources
– access
– utilisation
– health (what is “health”?)
› How will the equalisation proceed?
– per capita
– on the basis of equal need (what is “need”?)
– on the basis of capacity to benefit

SOME POPULAR FORMULATION
› Free to choose, user-pays
› Equal spending for equal need
› Equal use for equal need
› Equal access for equal need
› Equal lifetime experience of health (e.g. quality-adjusted life-expectancy)
– Fair innings argument (Williams 1997)
› Capacity to benefit approach (Sen 1999)
– Range of options available for the individual to choose from and the freedom to
exercise that choice
– Focus on value added by resources (Mooney 2004)

EQUAL SPENDING FOR EQUAL NEED
› Can result in horizontal inequities in outcomes if:
– There are differences in costs of providing services across populations
– Differences in productivity of resources
– Differences in capacity of individuals to get healthy from a given
investment
› Advantage: relatively easy to measure and implement

EQUAL ACCESS FOR EQUAL NEED
› Defining access
– Geographical
– Financial
– Cultural
› Gives individuals the same opportunity to use services

EQUAL UTILISATION FOR EQUAL NEED
› One step further than access – ensuring equal use
– Eg. Antihypertensives for people with high blood pressure
› Difference with access occurs if individuals have different preferences for
health and health care
› Underpins cross-country studies e.g. ECuity project (Wagstaff et al 1997-)

EQUAL HEALTH
› ‘Strongest’ criterion
› Incorporates vertical equity
› Forms basis of ‘fair innings’ argument
› Difficult to operationalise
– Health often determined by non health care factors
– Limited resources – ‘levelling up’ but also ‘levelling down

EFFICIENCY VS EQUITY IN PRIORITY SETTING
› Will these dual goals necessarily coincide?
› g?Need for a trade-off
› Notion of sacrifice:
– opportunity cost
– the margin
› Some alternative ways of thinking about this:
– Fair innings argument
– Rule of rescue

THE FAIR INNINGS ARGUMENT
“..while it is always a misfortune to die when one wants to go
on living, it is not a tragedy to die in old age; but it is…both a
tragedy and a misfortune to be cut off prematurely..”
Harris (1985)
› Key exponent: Alan Williams (1997)

WHAT IS A FAIR INNING?
› e.g. biblical “3 score + 10”
› ideal: quality-adjusted life expectancy (QALE)
› determined by social judgement

IMPLICATION IN PRIORITY SETTING
› Considers total lifetime health experience
› Sacrifice (specified amount of) population health gain to reduce
inequalities in QALE (by a specified amount)
› Explicit about opportunity cost
› Operates alongside maximisation
› Extent of sacrifice depends on the strength of society’s aversion to that
particular inequality
› Inequality vs inequity

THE SAME INNING FOR EVERYONE?
› Notion of just desert
› Attitudes to discrimination: positive, negative
› May feel differently in the case of
– Smokers vs non-smokers
– Women vs men
– Rich vs poor
› Again, a matter for social judgemen

FAIR INNING ARGUMENT:SUMMARY
› Operates alongside maximisation
– Balance: efficiency, equity
› Explicit about opportunity cost
› Works at the margin
› Aim: reduce inequities in lifetime health experience

THE RULE OF RESUCE(RR)
“…the imperative people feel to rescue identifiable individuals facing
avoidable death.”
McKie and Richardson (2003)
FECTURE OF THE RR
› Life-threatening situation
› Identified person(s)
› Belief that death can be averted by prompt action
› Neglect of opportunity cost
› Shock/horror g? suspend customary (rational) approach to decisionmaking
› Eg. Rescue following a natural disaster; mine shaft collapse
› PBAC may invoke ‘rule of rescue’ for reimbursement of drugs

PRINCIPLE UNDERLYING THE RR
› Moral obligation – duty?
› Sympathy?
› Value: caring gesture
“…man prefers to see gestures than to hear reasons.”
– Nietzsche
› Empirical support: priority setting based on severity

IS IT APPROPRIATE TO NEGLECT OPPORTUNITY COST?
› Opportunity cost = benefits forgone
› What if the benefits forgone are greater than the benefits that accrue to the
rescued?
› Identified vs non-identified beneficiaries

CAN WE IGNOR THE RR?
The Oregon priority-setting exercise:
› Hadorn (1991; 1996)
› Initial priority list:
– outcomes and cost
– not enacted
› Revised list:
– Lifesaving treatments in separate (high priority) category
› Oregon Health Plan 2012
– Focus on prevention and primary care; cost-effective treatments covered
– Expensive technologies (eg. cancer drugs) threaten viability
“…any plan to distribute health care services must take human nature into
account if the plan is to be acceptable to society. In this regard there is a
fact about the human psyche that will inevitably trump the utilitarian
rationality that is implicit in cost-effectiveness analysis: people cannot
stand idly by when an identified person’s life is visibly threatened if rescue
measures are available.”
Hadorn (1991)
THE DILEMMA AT THIS POINT
› Competing goals: efficiency, equity
› Principles + different general approaches to achieving a
balance between them
› Which way to go?
– Whose principles?
– How do we ask them?
– How to incorporate these views into policy?

ASKING THE GENERAL PUBLIC
› Do they want to be involved?
› Arguments for/against
– commitment to democratic process
– “dictatorship of the uninformed”
– “tyranny of the majority”

COMMUNITARIANISM
› Individual is not abstracted from context:
– Social
– Cultural
– Historical
› Community as source of all values
› Opposition to liberalism
› e.g. Margolis 1982: “participation utility”
– Utility from giving
– Utility from knowledge of equal access

A WORKING DEFINITION OF EQUITY
› Citizens’ Juries: WA (Mooney 2001, 2002)
› Medical Council of WA
› Random selection from electoral roll
“Equal access for equal need, where equality of access means that two or
more groups face barriers of the same height and where the judgment of
the heights is made by each for their own group; where need is defined as
capacity to benefit; and where nominally equal benefits may be weighted
according to social preferences such that the benefits to more
disadvantaged groups may have a higher weight attached to them than
those to the better off.”

WHAT ARE THE PUBLIC’S VIEWS ON PRIORITY SETTING
› Not cost-effectiveness alone
› Variation across settings and studies
› Consistent concerns
– Age
– Severity of illness
– Responsibility for unhealthy lifestyles
› Less consistent:
– Patient has dependents
› Generally unimportant:
– Patient in paid work
› Less important:
– Previously received health care

THE CHALLENGE
› Consensus: extent of trade-off
› Incorporate into decision-making:
– Consistent
– Accountable
SUMMARY
› System goals of efficiency and equity may conflict, making trade-offs
necessary
› The “fair innings argument” and “rule of rescue” are two potential
approaches to resolving the conflict
› Need to identify and incorporate community values into the decision
algorithm
MAKING DECISION IN PUBLIC HEALTH
WORKSHOP DAY2

WHAT IS POLICY?
• Purposive – goal driven – action
• ‘Health policy covers courses of action (and inaction)
that affect the set of institutions, organizations, services
and funding arrangements of the health care system
(both public and private)’.
Buse, May and Walt, 2005: 8

The WHO view
• Health policy refers to decisions, plans, and actions that are
undertaken to achieve specific health care goals within a society.
• An explicit health policy can achieve several things: it defines a
vision for the future which in turn helps to establish targets and
points of reference for the short and medium term. It outlines
priorities and the expected roles of different groups; and it builds
consensus and informs people.

Political Power and Policy
‘Practical politics consists of ignoring facts’
Henry Adams
‘Politics is not the art of the possible. It consists
of choosing between the disastrous and the
unpalatable’, J.K. Galbraith

What is policy?
• How do issues emerge, priorities get created?
• How – and by whom – are decisions (or nondecisions)
made?
• Who defines the ‘public interest’? Who makes
the decisions? Where does power lie?
• What scope is there for expertise, evidence in
policy-making?
• Who implements – or ignores – policies?
Public Policy
Who gets what, when, how? (Lasswell 1936)
• Distributional (what? how much to whom?)
• Inter temporal (when? transfers between generations)
• Process (how? fairness, transparency)

Varieties of health policy
• Clinical policy
• Administrative policy
• Public policy

Conclusion
‘It is not enough to propose a policy because it might
solve a significant problem. In order to be worth
making, a proposal should also be achievable in
contemporary … politics’.
Daniel M. Fox, Power and Illness, University of California Press, 1993,

Priority setting: a policy analysis perspective
Politics
• Working Definition
• Causes of Conflicts
1. Resource Conflicts
2. Problem-Based Conflicts
3. Evidence Conflicts
4. Ideological Conflicts
5. Interorganisational Conflicts

Garbage cans and policy streams
• Is policy making a
rational process?
• The ‘garbage can’
model (Cohen,
March and Olsen,
1972)
– ‘Policy based
evidence’
Problem stream
• Problem recognition
– agenda setting
– Why are some problems regarded as significant?
• Evidence
• Media
• Public advocacy
• Industry/ pressure group lobbying

Framing
Definition of the ‘problem’
Drug dependence:
Criminal, medical or social?

Policy stream
• The ‘policy primeval soup’
– Where do policy ideas come from?
– ‘Natural selection’ of ideas in policy communities
• Criteria for survival
– Technical feasibility
– Value acceptability
– Anticipation of future constraints
– The bureaucratic bottom drawer

Political capacity
• Policy instruments
– Carrots
– Sticks
– Sermons or
• Direct Provision
• Doing Nothing or Taking a Step Back

Political stream
• The wider political context:
– Issue attention cycle
• ‘National mood’, public opinion
– Pressure group campaigns
– Administrative or legislative turnover (eg change of
government).
– Crises

Agency
• Political entrepreneurs
– Activist models:
– Policy networks
– Advocacy coalitions
– The bureaucratic bottom drawer.
Policy windows
• Brief moments
when the streams
come together
• Problem windows:
crises
• Political windows

Why Windows Close
• Cause may pass: ‘focusing events’
• Problems Solved
• Action taken: legislation or administrative
decisions
• No viable alternative
• Exhaustion
– ‘Issue attention cycle’ short period of awareness and
optimism gives way to realization of financial and
social costs of action.

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