ECON 186 Midterms Summary PDF

I. INTRODUCTION AND OVERVIEW Why Health Economics Behavioral inputs of health so as to maximize utility given resources constraints → time and price of goods + behavioral inputs affecting health Emotional Significance Health is priceless in ethical sense Most precious good, you’ll d...

I. INTRODUCTION AND OVERVIEW Why Health Economics Behavioral inputs of health so as to maximize utility given resources constraints → time and price of goods + behavioral inputs affecting health Emotional Significance Health is priceless in ethical sense Most precious good, you’ll do everything to remain in good health Considered very expensive → if costs increase people wouldn’t be able to afford it Resource Allocation Decisions How much it wants to spend Best method of producing Best method of distributing Efficiency and Equity in Resource Allocation Efficiency: ○ Incentives for economic use of scarce resources: ○ Allocative efficiency: optimal production and allocation based on consumer value. Equity: ○ Fairness in distribution of goods and services: ○ Consumer sovereignty and public subsidies. ○ Economics clarifies distributional issues but cannot determine value preferences. Health Economics Scope ○ Efficiency and equity issues in resource allocation. ○ Adaptation of standard models to healthcare markets. ○ Policy tools for achieving health sector objectives. Health ○ Defined as complete physical, mental, and social well-being: Negative: absence of illness. Functional: ability to cope with daily activities. Positive: fitness and well-being. Normative: weighing health against other objectives. Health Care ○ Goods and services aimed at improving or preventing illness: Positive: demand, determinants, consequences of ill health. Normative: welfare aspects, distribution, policy effects. Health and Consumption of Services ○ Interrelation: Link between health economics and healthcare through health status and medical service consumption. ○ Production Function of Health: Relationship between medical services and health status: Positive influence with a time lag. ○ Demand Function of Health Services: Relationship between health status and healthcare service consumption:  Expected negative relationship (worse health leads to increased consumption). Market and Allocation Markets Interrelated Markets: ○ Healthcare is a complex system with various submarkets and components. Types of Markets: ○ Institutional markets, manpower and factor markets, educational markets. Model Outline Demand for Treatment: ○ Patient demand expressed through physician consultation and treatment decisions. Demand for Institutional Settings: ○ Physician selection of settings based on prices, costs, and treatment efficacy. Demand for Human Resources and Inputs: ○ Institutional demand for manpower and other inputs based on changes in institutional settings. Demand for Education: ○ Prospective health professional demand based on market demand for professionals. Market and Allocation in Health Sector Price as an Allocation Tool: ○ Market system uses prices to allocate resources ○ Determining healthcare service output based on: Consumer choice is influenced by income and prices. Assumption of rational choice and complete information. Allocation of scarce resources for maximum benefit. Equilibrium price reflects value placed on the last unit purchased. Competitive Market: ○ Prices reflect production costs. Efficient Price System: ○ Marginal benefits equal marginal costs. Functions of Price: ○ Incentives for consumers to limit service use. ○ Rationing of available services. ○ Information to providers about demand changes. Production of Medical Services Optimal Production Method: ○ Marginal productivity of inputs and relative costs determine the least costly method. Technical Efficiency: ○ Maximizing output from given inputs. Economic Efficiency: ○ Choosing the least costly combination of technically efficient inputs. Optimization Issues: ○ Using specific standards may hinder economic efficiency. ○ Input combinations change over time due to cost and productivity variations. Distribution of Health Care Services Two fundamental theorems ○ Competitive equilibrium is pareto optimal ○ Pareto optimal allocation produces a perfectly competitive economy Implications: ○ Non-market arrangements justified only by market failure. ○ Separation of efficiency and distributional concerns. Is Healthcare Different? Introduction Implications for Resource Allocation: ○ Conditions not met in the healthcare sector that affect market applicability. Alternative Institutions: ○ Potential for non-market institutions to achieve higher Pareto efficiency than the market. Results ○ Market Failure: Healthcare exhibits characteristics that lead to market failure. ○ Government Provision Not Necessary: Market failure does not necessitate government provision of healthcare services. ○ Non-Market Institutions: Non-market institutions may attempt to overcome market inefficiencies but can also introduce their own problems. Characteristics ○ Derived Demand: Demand for healthcare is derived from the demand for health itself. ○ Externalities: Consumption of healthcare goods can affect the utility of others. ○ Increasing Returns to Scale: Production of healthcare may exhibit increasing returns to scale. ○ Informational Asymmetries: Providers have more information than patients. ○ Uncertainty: Uncertainty about the need for and effectiveness of healthcare. ○ Heterogeneity: Healthcare goods vary in their distinctive features. ○ Perspectives on Distinctiveness: "Broads" emphasize the distinctiveness of healthcare. "Narrows" believe healthcare is not so different. Demand Derived Demand: ○ Demand for healthcare is derived from the demand for health: ○ Healthcare is consumed for its indirect effect on health. Simple Consumer Framework ○ Welfare Effects of Healthcare: Depend on the technical relationship between healthcare and health: Knowable by a third party.  ○ Efficiency Concepts - Technical and cost-effective efficiency concepts can be applied to healthcare consumption decisions: Production: supply-side considerations. Use: both supply and demand-side considerations. Choosing health levels: trade-offs between health and other goods. Implications for Normative Analysis ○ Need as a Concept: Need becomes relevant for normative analysis of healthcare utilization. ○ Operationalization of Need: Need is based on technical effectiveness, requiring an effective service to improve health. ○ Need vs. Demand: Need depends on the ability to benefit from healthcare. Demand depends on preferences and ability to pay. Externalities Externalities and Market Failure: ○ Consumption of a good by one individual can directly affect the utility of another: ○ Positive externalities lead to underconsumption in a market economy. Types of Externalities 1. Physical: Consumption of a health good directly improves the health of another Underprovision, free riding External advantages (non-rival in consumption, non excludable) Free provision ≠ pareto optimal always (low proportion of expenditures, variations in exposure, tax payment finance provision is not pareto optimal if not at risk) 2. Psychological: Consumption of healthcare services affects the satisfaction of others Altruism - concern for others’ well being Utility Interdependencies: Others' healthcare consumption affects an individual's utility. Consumption of health care is health status not an object Policy Implications: internalized? Subsidized? Cash or in kind? Transfers in kind: distort relative prices, increase consumption rather than utility Concern over health status ○ Benefit: others receive needed health care services ○ Result: policy interventions outside health care sector ○ Policy response to externalities: ensuring access to healthcare ○ Widespread access and utilization Larger public role in financing, organizing and delivery Regulation of the supply and distribution of providers Optional-Value Externality: option-good property of medical services ○ Option Value Externality: The existence of reserve capacity in healthcare provides utility to individuals, even if they don't currently need it. ○ Market Demand and Option Value: Market demand reflects only the value to current users, ignoring the option value for future potential users. ○ Interventions: Hospitals need incentives to maintain reserve capacity, which may require separate payment. Public subsidies may be warranted. Private insurance can also address this issue. Increasing Returns to Scale Economies of Scale: Some healthcare services exhibit increasing returns to scale: ○ Examples: hospitals, specialists, medical equipment. Implications for Resource Allocation: ○ Economies of scale can affect resource allocation in areas of low density or income: ○ Subsidies may be warranted for appropriate medical care units. Information Informational Asymmetry: Providers have more information than patients, leading to potential exploitation. Types of Information Sought: ○ Diagnostic information: determining the cause of illness. ○ Treatment information: determining the appropriate course of action. Provider Advantage: ○ Providers can manipulate quantity, quality, and price of services. Worsening Asymmetry: ○ Patients have limited time to seek information. ○ Illness can impair rational decision-making. Levels of Capability: ○ Perfect incapability (e.g., coma). ○ Limited capability (life-threatening illness without mental impairment). ○ General capability (non-life-threatening illness). Lack of Opportunity for Sampling: ○ Limited experience with healthcare services, especially for rare or infrequent needs. ○ Difficulty in comparing experiences. Impossibility of Quality Evaluation: ○ Uncertainty about treatment effectiveness makes it difficult to judge quality. ○ Quality may be difficult to evaluate even after utilization. Special Properties of Information ○ Information as a Good: Often, the good demand is information itself (e.g., diagnostic services). ○ Quality Evaluation Challenges: Patients cannot evaluate the quality of information services because they lack the information needed to do so. Responses ○ Supply-Side Interventions: Securing minimum quality levels through licensure and professional norms. ○ Demand-Side Policies: Providing consumers with relevant information. ○ Market vs. Government Organization: Informational asymmetries do not necessarily justify government organization of healthcare. Agency ○ Adaptive mechanism to informational asymmetry ○ Providers are expected to act in the best interests of patients, not their own. ○ Agency relationships are incorporated into models of physician behavior. ○ Strategies to promote: Creating a professional culture that emphasizes agency. Reducing competitive pressures that might induce self-interest. Supply side regulations  ○ Purpose: Prohibit low levels of quality and guard against the possibility of consumers choosing them. ○ Alternative to Information Provision: Supply-side regulations can be an alternative to providing information to consumers. Information asymmetries and Supplies-Induced Demand (SID) ○ SID Debate: Providers can influence patient demand for healthcare services: Providers may recommend services of questionable benefit for financial gain. ○ Violation of Agency: Providers may act in their own self-interest rather than the patient's. ○ Consequences for Welfare Analysis: SID undermines the assumptions of traditional welfare analysis: Vitiates the assumption of individual sovereignty. Uncertainty Types of Uncertainty: ○ Uncertainty in demand for healthcare. ○ Uncertainty regarding treatment effectiveness. Market Efficiency and Risk-Bearing: Market efficiency depends on the existence of risk-bearing markets: ○ Missing risk-bearing markets can lead to market failure. Non-Market Arrangements may improve efficiency in the presence of missing markets. Insurance: ○ Risk-averse individuals can benefit from risk pooling through insurance. ○ Individuals may be better off paying for insurance even with loading charges. ○ Self-insurance for small losses through deductibles can be beneficial. ○ Failures Economies of Scale - advantage of increasing size of business (fixed costs + premium calculations) Adverse Selection - patients have better information on their risks; strategy: risk pools of all risk levels, compulsory insurance Moral Hazard - patients increase likelihood or size of losses (demand more services, providers increase price or quantity); strategy: demand side cost sharing & supply side interventions Equity Distributional Equity: ○ Fair distribution of goods and services: Health is a critical component of well-being. Ill-health and need for healthcare are often beyond individual control. Justice and Need-Based Allocation: ○ Those in ill-health should receive treatment based on need, not other factors. Agreement on Equity, Disagreement on Notions: ○ Importance of equity is widely accepted, but there is less agreement on the specific notion of equity. Focal Variable: The choice of focal variable (what is to be distributed) is critical. Two Aspects of Equity: ○ Horizontal equity: equal treatment of equals. ○ Vertical equity: unequal treatment of unequals. Distributional Equity Principles 1. Allocation according to need ○ Those with greater need receive more resources: ○ Aligns equity and efficiency objectives if those most in need also benefit most. ○ Different definitions of need can lead to different allocations. 2. Allocation to ensure equality in access ○ Defined as the ability or capacity to obtain or use healthcare. ○ Does not imply equal consumption. ○ Can be coupled with need (equal access for equal needs). ○ Horizontal and vertical equity principles are important. 3. Allocation to equalize distribution of health ○ Equitable allocation leads to an equal distribution of health: ○ Good health is essential for individual flourishing. ○ Healthcare alone cannot achieve equal health distribution. ○ Equalizing health does not involve intentionally reducing the health of some individuals. Choosing a Notion of Equity Should a single overarching principle be chosen? Should the chosen principle apply at all levels (population, regional, individual)? Other factors beyond distribution emerge (procedural fairness, duty, obligation, etc.). Definitions of Need Need Equated with Ill Health: ○ Degree of need is determined by severity of illness: ○ May not be effective treatments for all types of ill health. Need Defined with Respect to a Specific Objective: ○ Need exists if a service is effective in achieving a community-endorsed objective: ○ Cost-effectiveness may also be considered. ○ Does not establish the amount of healthcare needed. Expenditure-Based Need: ○ Links need to health outcomes and quantifies it in terms of expenditure: ○ Combines need and resources required to meet that need. ○ Useful for setting priorities at individual or population levels. II. SELECTED HEALTH INDICATORS AND TRENDS Health Outcome and Disease Burden Indicators and Trends Health Status and Measures Traditional Public Health Measures: Mortality rates, Life expectancy, Morbidity rates. Mortality Rates ○ Age and Time-Specific Annual Probability of Death: Probability of an individual dying within a year: Estimated by the ratio of deaths to individuals alive at the beginning of the year. Can be calculated for specific population groups. Expressed as a rate per 100,000 individuals. ○ Cohort n-Year Probability of Death: Probability of an individual dying within n years: Also known as mortality risk.  Generally lower than the period n-year rate if population is expected to experience health improvements. Life Expectancy ○ Expected number of years until death for a given age and date: ○ Inversely related to the probability of death. Morbidity ○ Importance: Mortality rates alone do not capture disability, impairment, and discomfort caused by illness. ○ Prevalence: Number of people with a disease at a given time → Can change due to new infections or cures/deaths. ○ Incidence: Rate of new infections → Measured as the number of cases per unit of time. ○ Prevalence Pattern: Initial growth in prevalence, followed by flattening as new cases are offset by cures/deaths: Duration of the disease affects the time it takes for prevalence to flatten. Measuring Mortality in Practice Period Measures: ○ Infant mortality rate (age 0-1 year). ○ Child mortality rate (age 0-5 years). ○ Adult mortality rate (age 16-59 years). Age-Standardized Measures: ○ Adjusting for demographic composition when comparing mortality rates across countries. Empirical Estimates: Using vital registration data to calculate period mortality rates. Model-Based Estimates: Using mortality information from comparable countries to estimate local mortality rates. Measuring Morbidity in Practice Morbidity: A complex concept encompassing both objective and subjective aspects of health status. Quantification Challenges: Continuous and multidimensional nature complicates measurement. National Morbidity Rates Measurement Categories: ○ Observed or Objective Rates: Based on clinical tests or medical examinations. ○ Self-perceived or Subjective Rates: Based on individuals' reports of their health status. Health Related Quality of Life Definition: Describes a person's health status at a specific point in time. Aspects Included: Impairments, functional states, perceptions, and social opportunities influenced by disease, injury, treatment, or policy. Uses of HRQoL Measures ○ Provides a snapshot of health status. ○ Discrimination: Distinguishes between groups at a specific point in time. ○ Evaluation: Captures changes in health status over time within individuals. Valuing Health States ○ Aggregation Methods: HRQoL measures are used to value health states using monetary or utility units. ○ Examples: Quality Adjusted Life Years (QALYs) → Measure the quality and quantity of life.  ○ Disability Adjusted Life Years (DALYs) → Measure the time lost due to disability and premature mortality. Types of HRQoL Measures ○ Generic Health Measures: Broadly applicable across different populations. ○ Specific Health Measures: Tailored to specific diseases or conditions. ○ Disease-specific Measures: Designed for specific diagnostic groups, conditions, or populations. Generic Measures ○ Concepts of HRQoL: Duration of life, Impairments, Functional states, Perceptions, Social opportunities ○ Operational Definitions: Generic measures summarize concepts by a single index value or a profile of interrelated scores. ○ Combination of Dimensions: Combines duration of life with specific dimensions of impairment, physical, psychological, and social function. ○ Examples: Quality of Well Being Scale (QWB) Torrance classification Rosser Scale EQ 5D Health Utilities Index (HUI) Short-Form 36 Burden of Disease Importance of Measuring Burden of Disease: ○ Setting health service priorities ○ Setting health research priorities ○ Identifying disadvantaged groups and targeting interventions ○ Providing a comparable measure of output for evaluation and planning Disability Adjusted Life Year (DALY) ○ An indicator of the time lived with a disability and time lost due to premature mortality. Incorporated Concepts: ○ Any health outcome representing a loss of welfare is included. ○ Individual characteristics considered are age and sex. ○ Similar health outcomes are treated alike. ○ Time is the unit of measure for burden. Elements of the DALY Measure ○ Components of the DALY Measure: Duration of time lost due to death at each age. Value of time lived at different ages. Non-fatal health outcomes (converting time lived with disability to be comparable with time lost due to premature mortality). Time preference (individuals prefer benefits now rather than in the future). ○ Disability Classes Defined: Class 1: Limited ability to perform at least one activity in recreation, education, procreation, or occupation. Class 2: Limited ability to perform most activities in one of these areas. Class 3: Limited ability to perform activities in two or more of these areas. Class 4: Limited ability to perform most activities in all of these areas.  Class 5: Needs assistance with instrumental activities of daily living (meal preparation, shopping, housework). Class 6: Needs assistance with activities of daily living (eating, personal hygiene, toilet use). General Formula for DALY: Health Status Trends: Global Global Life Expectancy Trends: Increased significantly over the past 50 years. Reflected In: Average life expectancy at birth and estimates from the Global Burden of Disease (GBD). Life Expectancy Global Increase: Average life expectancy at birth has increased globally by almost 20 years from 1950-1955 to 2002. Life Expectancy Gap: Narrowed between developed and developing countries, but a large gap remains between high-mortality developing countries and others. Exceptions: Africa and countries of Eastern Europe. Historical Increases: Primarily due to declines in infant and maternal mortality in the first half of the 20th century. Classification of Deaths: ○ Communicable and reproductive diseases: Diarrhea, tuberculosis, malaria, venereal diseases, respiratory infections. ○ Noncommunicable diseases: Neoplasms, endocrine, cardiovascular, respiratory, digestive, senile, and ill-defined. ○ Injuries: Unintentional (e.g., motor vehicle transport), intentional (suicide, homicide), undetermined. Life Expectancy Updates: ○ Global Increase: Life expectancy increased from 65.3 to 71.5 years from 1990-2013. ○ Progress Variability: Varied by age and sex, with reductions in deaths due to cardiovascular diseases and cancers in high-income regions and reductions in child deaths due to diarrhea, lower respiratory illnesses, and neonatal deaths in low-income regions. ○ HIV/AIDS Impact: Reduced life expectancy in Southern sub-Saharan Africa. ○ Communicable Diseases: Number of deaths and age-standardized death rates fell. ○ Noncommunicable Diseases: Number of deaths increased due to demographic shifts, but death rates fell. ○ Injuries: Number of deaths increased, but age-standardized rates declined by 21%. ○ Increasing Age-standardized Death Rates: For seven causes → HIV/AIDS, pancreatic cancer, atrial fibrillation and flutter, drug use disorders, diabetes, chronic kidney diseases, and sickle cell anemias. Mortality Trends ○ Changes in Cause of Death Structure: Resulted in changes in the composition of deaths by age. ○ Children Affected: Disproportionately affected by communicable diseases, while mortality rates of adults have grown relative to those of children as these diseases have been controlled. Gender and Socioeconomic Differences ○ Child Mortality Rates: Higher in males than females, except in China, India, Nepal, and Pakistan. ○ Income Group Variability: Significant variability in child mortality across different income groups, with children from poor households having a significantly higher risk of dying before the age of five years.  Morbidity Rates ○ Leading Causes of Morbidity: Communicable diseases remain leading causes, although some are vaccine-preventable. ○ Emerging Contributors: Chronic conditions are emerging as significant contributors to morbidity. ○ Control Gains: Gains have been made in controlling TB and malaria, but they remain among the leading causes. Health Financing Indicators And Trends The National Health Accounts NHA Description: Describes the sources and uses of total expenditures on health services consumed in a given year. Columns: Show how funds are channeled through sources like government budgets, national health insurance, and out-of-pocket spending. Rows: Originally described how funds are spent on various types of health care services. In revised NHA, rows now represent different dimensions of spending: ○ Financing dimensions (sources) ○ Provider dimensions (uses) ○ Consumption dimensions (who benefits) Highlights in the Philippine National Health Accounts (PNHA) Development PNHA Development: Work began in 1992 at the Health Policy and Development Program (HPDP) of the University of the Philippines School of Economics (UPSE), with support from the Department of Health (DOH) and the United States Agency for International Development (USAID). Institutionalization: Estimation of the PNHA was institutionalized at the National Statistics Office (NSCB) and later at the Philippine Statistics Authority (PSA), completing the 1991-2013 series. Task Group Demonstration: A working task group sponsored by DOH and WHO led by Prof. Racelis in 2013 demonstrated how the PNHA can be estimated using the framework provided by the WHO, OECD, and Eurostat's A System of National Health Accounts 2011 (SHA 2011). Adoption of Framework: The PSA adopted the SHA 2011 as the framework for estimating the PNHA from 2014 to the present. Healthcare Financing Dimensions: ○ Financing Schemes: Components of the health financial system that channel revenues and use them to pay for health care goods and services. ○ Financing Sources (FS): Revenues of the health financing schemes received or collected through specific contribution mechanisms. ○ Financing Agents (FA): Institutional units that manage health financing schemes. ○ Institutional Units of Financing Sources (FSRI): Institutional units that provide revenues to health financing schemes. PNHA Financing Dimensions Highlight: ○ Public vs. private roles in health care provision. ○ Entities/organizations managing financing schemes and determining expenditure levels. ○ Types of financing for health services (taxes, contributions to insurance funds). ○ Modes of compensating health care providers (fee-for-service, fixed budgets, cost-reimbursement). Financing Schemes: Government Schemes: Central government schemes (domestic revenue-based, foreign assistance-based), state/regional/local government schemes. Compulsory Contributory Health Insurance Schemes: Social health insurance schemes.  Voluntary Health Care Payment Schemes: Voluntary health insurance schemes (government-based, complementary/supplementary, life and non-life insurance, managed health care schemes). ○ Enterprise Financing Schemes. ○ Household Out-of-Pocket Payment. Financing Sources: ○ Transfers from government domestic revenue (allocated to health purposes). ○ Transfers distributed by government from foreign origin. ○ Social insurance contributions (from employees, employers, self-employed, others). ○ Voluntary prepayment. ○ Other domestic revenues (from households, corporations). Financing Agents: ○ General government (central government, Department of Health, other ministries, state/regional/local government). ○ Social security agency (Philippine Health Insurance Corporation (PHIC), other social security agencies). ○ Insurance corporations (commercial insurance companies). ○ Corporations (other than insurance corporations, health management and provider corporations, other providers of health services). ○ Households. FSRI: ○ Government. ○ Corporations. ○ Households. ○ Rest of the world (bilateral donors, multilateral donors, unspecified institutional units providing revenues to financing schemes). Provision Dimensions ○ Providers: Entities receiving money in exchange for producing health care goods and services. ○ Factors of Provision: Types of inputs used in producing health care goods and services. ○ Health Capital Formation: Assets acquired by health providers for repeated or continuous use in producing health services. ○ Health Providers: Hospitals (public general, public mental health and substance abuse, public specialty, private hospitals). Nursing and residential care facilities. Providers of ambulatory health care (public integrated care centers, other ambulatory health care providers). Retail sale and other providers of medical goods. Provision and administration of public health programs. General health administration and insurance. All other industries (providers of occupational health, secondary producers of health). Institutions providing health-related services (research institutions, education and training institutions). Consumption Dimensions ○ Functions: Types of goods and services provided and activities performed within the health accounts boundary. ○ Beneficiary Characteristics: Attributes of those receiving health care goods and services or benefiting from health activities. ○ Health Care Functions:  Curative care. Rehabilitative care. Medical goods. Preventive and public health services (maternal and child health, school health services, prevention of communicable and noncommunicable diseases, occupational health, other public health services, food, hygiene, and drinking water control). Governance, health system, and financing administration. Ancillary services. ○ Beneficiary Characteristics: Disease (infectious and parasitic diseases, reproductive health, nutritional deficiencies, noncommunicable diseases, injuries, non-disease specific, other unspecified). Age (0-4, 5-9, 10-14, 15-19, 20-39, 40-49, 50-64, 65 and older). Income. Region. Catastrophic and Impoverishing Spending Catastrophic Spending: Refers to health care payments exceeding a certain threshold, typically a proportion of prepayment income. Impoverishing Spending: Refers to health care payments pushing households below the poverty line. Health Care Payments Distribution ○ Nature of Health Care Payments: Involuntary, undeliberate, and non-discretionary, resulting from unforeseen health shocks. ○ Difference from Other Consumption Items: Do not add to welfare but restore it. Catastrophic Spending ○ Ethical Position: No one should spend more than a given fraction of their income on health care. ○ Threshold Level: Can be based on prepayment income, ability to pay, or consumption. ○ Catastrophic Payment Gap: Captures the amount by which payments exceed the threshold. ○ Measurement Methods: Mean positive gap and overall mean are used to measure the intensity or severity of catastrophic payments. Impoverishing Spending ○ Limitations of Catastrophic Spending: Does not fully indicate the hardship caused by health care expenses. ○ Impoverishment Consideration: Considers the impact of health care payments on a household's ability to purchase other essential goods and services. ○ Impoverishing Spending Measures: Compare poverty levels with and without considering out-of-pocket (OOP) payments. ○ Effects Examined: Poverty headcount (fraction of households in poverty). Poverty gap (total or average shortfall from the poverty line across all poor households). Limitations and Assumptions ○ Health spending is assumed to be funded entirely from current non-medical consumption. ○ Methods focus on medical care costs, not income losses associated with illness. ○ High OOP costs may deter people from seeking care, leading to underestimation of health service utilization.  III. ECONOMICS OF HEALTH Demand for Health Grossman Model and Modifications Health as human capital : earnings and well-being Demand for medical care and other health inputs → derived from basic demand of health Overview ○ Views health as an output of household production, directly affecting utility and earnings. Factors: role of prices and insurance → health care demand Key Features: ○ Health is demanded and produced by consumers ○ Health is demanded for consumption and investment purposes ○ Quantity of health is negatively related to its shadow price ○ Health capital is one component of human capital ○ Production function → consumer efficiency or productivity Basic Model Assumptions 1. Intertemporal Utility Function ○ U(total consumption of health services, stock of health, consumption of another commodity) ○ Length of the life as of planning date is exogenous 2. Net investment in stock of health = gross investment - depreciation ○ Rates of depreciation is exogenous ○ Has a vector “M” = goods purchased in markets that contribute to household production 3. Household production functions ○ Basis for the production of gross investment and other commodities 4. Gross Investment in Health 5. Goods budget constraints ○ Equates PV of outlays on goods = PV of earnings income + initial assets 6. Total amount of time available must be exhausted in all possible uses 7. Sick time = total amount of time available - flow of healthy time ○ Inversely related to stock of health ○ Time lost due to illness 8. Single full wealth = plug 6 to 5 Equilibrium of Stock of Health (H) & Gross Investments (Z) ○ Max (1) → U(total consumption of health services, stock of health, consumption of another commodity) ○ Subject to the following constraints (2) Net investment on stock of health (3) Household production function (4) Gross investment in health (8) Single full wealth → goods budget constraint + total amount of time available Equilibrium Conditions First order optimality conditions for gross investment in Period t-1: ○ PV of marginal costs of gross investment in health = PV of marginal benefits Philippine National Health Accounts Overview: Provides a comprehensive framework for analyzing health expenditures in the Philippines. Four Main Inclusion Criteria ○ Primary intent is to improve, maintain, or prevent deterioration of health status. ○ Qualified specialized knowledge and skills are required. ○ Consumption is for final use of people residing in the country. ○ There is a transaction of health care services or goods. Special Areas of Concern ○ Medical tourism (imports included, exports excluded). ○ Informal payments (included). ○ Multisectoral issues (generally excluded). ○ Well-being services (generally excluded). ○ Social care (generally excluded). PNHA Tables: Financing, Production, Consumption Data Sources: Household, National Gov’t, Local Gov’t, Social Security Agencies, Private Insurance Framework for Analyzing Health Determinants 1984 Mosley and Chen model for child mortality ○ Socio economic determinants → proximate determinants → disease risk and outcomes Categories of Proximate Determinants ○ Maternal Factors: Age, parity, birth interval, other aspects of fertility. ○ Environmental Contamination: Transmission of infectious agents through air, food/water/fingers, skin/soil, inanimate objects, insect vectors. ○ Nutrient Deficiency: Intake of calories, protein, and micronutrients. ○ Injury: Physical injury, burns, poisoning, accidental or intentional. ○ Personal Illness Control: Preventive measures, medical treatment. Dynamics ○ First 4 → health to sick individuals ○ Personal illness → rate of illness (prevention) and rate of recovery (treatment) Socioeconomic Determinants ○ Individual: productivity, traditions/norms ○ Household: income/wealth ○ Community: ecological setting, politico-economic, HC provision, HC financing Time allocation → health status → economic decisions ○ Influence on individual and household well-being Health Production Household Production Model Economic analogue → proximate determinant of health → Mosley and Chen Economic framework parallels the model of proximate determinants of health. Individuals make choices regarding proximate determinants of health, influencing their health status. ○ Shaped by socioeconomic factors Features of an economic model of the health transition process ○ Demand for medical care and health-influencing behaviors derived from demand for good health. ○ Separation of Biological and Behavioral Relationships ○ Biological relationship viewed as a technological process. ○ Behavioral Nature of Health Care Utilization  Behavioral Model ○ Individuals value good health and make choices influencing their health status. ○ Direct impact on health outcomes ○ Shaped by personal, social, cultural, and policy influences. ○ Individuals strive to maximize utility, including the value of health. Grossman Model Health as both an investment and a consumption good Consumption value: disutility from being sick Investment value: time available for market and non market activities Stock of health depreciates over time, increasing after a certain life cycle stage. Investment in health: Behaviors that increase health stock. Value of Health ○ Engagement in health-promoting behaviors depends on health value relative to other objectives. ○ Health as a Complementary Good Can be substituted for other goods based on preferences. ○ Psychological Costs of Modern Medicine: influences health-seeking behaviors ○ Trade-offs between current consumption and future health investments. Derived Demand ○ Value of a behavior influencing health depends on its impact and individual valuation of that health. Household as decision making unit ○ May not be individuals whose health is directly affected. ○ Health of one member can influence others. ○ Different models (e.g., unitarian, collective utility, altruism, dictatorship) lead to varied health-related behaviors. Health Production Function Inputs ○ Behavioral Choices as Inputs: Inputs to health production. ○ Transformation governed by biological processes. ○ Health inputs can be substitutes or complements. ○ Importance of time and expertise in utilizing health inputs. ○ Inputs are investments producing increments to health stock over time. ○ Time Lag in Transformation: Inputs not instantaneously transformed into health outcomes. Efficiency ○ Productivity of health inputs varies across individuals, households, and countries. ○ Initial units of health input have greater impact than subsequent units. ○ Marginal product depends on input quality. ○ Marginal product depends on quantities of other inputs used. ○ Influence ability to combine health inputs effectively. Prices, Income and Constraints on Behaviors Household Budget Constraint: ○ Prices of health inputs ○ Prices of other goods and services ○ Available time ○ Other resources  Ability to afford costs depends on: Income, Wealth, Access to credit, Alternative demands on time Role of Non-Money Prices ○ Producing good health involves: Money, Time and Psychic costs ○ Opportunity cost of time → significant ○ Price changes of one health input affect demand for others. ○ No market price for health → depends on households ○ Shadow price: Cost of producing health reflects the value of resources devoted to health improvement. Values, Perception and Information ○ Choice of health inputs depends on perceived costs and benefits. ○ Understanding health effects depends on: Information availability Ability to process information True technological relationship between behaviors and health. ○ Acquiring health information can be costly, varying across individuals. Decision Making Process ○ Households choose health-influencing behaviors to maximize utility subject to resource constraints. ○ Utility or value of a behavior derived from health it produces. ○ Constraints: Prices of goods and services, time availability and other goals Role of Policy Government Policy Influence: ○ Availability ○ Accessibility ○ Public awareness ○ Prices of health-promoting programs and private market goods and services. Empirical Implications and Requirements Data requirements & analytical approaches → economic factors, health behaviors and health outcomes Unit of observation: household → all Health Outcomes ○ Morbidity ○ Mortality ○ Chronic conditions ○ Nutritional status ○ Days lost from work ○ Accidents ○ Pregnancy outcomes ○ Fertility ○ Recent deaths ○ Likely causes of death. Inputs in production of health: comprehensive, substitutability and complementarity Influences ○ Data on perceived costs and benefits of each health input: money, time, psychic costs ○ Information on alternative healthcare service suppliers. ○ Reliability and effectiveness ○ Income, wealth and alternative demands on time  ○ Sources and control of household sources Illustrative Data ○ Access to credit and other external resources ○ Wage rates in formal sector ○ Composition and characteristics of household ○ availability, prices, types, and quality of healthcare services in public and private sectors Community level ○ Policies and programs → decision making Implications for Data Analysis Influences on health are empirically important and their relative effects Address endogeneity of health inputs, recognizing choices influenced by unobserved factors affecting health status. Equations for Estimation ○ Health Production Function: behaviors → health outcomes ○ Input Demand Function: price, availability, HH characteristics, health status → behaviors Reduced: social and economic influences → health behaviors ○ Hybrid: previous health status and behaviors → health outcomes Research not accounting for the endogenous nature of health behaviors can lead to biased estimates. Employing variables correlated with health inputs but independent of unobserved factors. Instrumental variables: community level Role of Medical Resources Draws on studies investigating marginal productivity of medical care relative to other factors. Aggregate data: medical resources and health outcomes Individual data: medical resources on health Findings: ○ Suggest individual behaviors and choices have greater impact on health than additional medical resources. ○ Highlight the importance of individual actions in promoting health. ○ Many studies utilize these techniques to address endogeneity issues. Auster, Leveson, and Sarachek Utilized age and sex-standardized mortality rates as a health measure Economic factors, medical factors and medical organizational factors Cobb-Douglas: these factors and mortality rates Variables ○ Economic: income, years of schooling, population, employmeny ○ Consumption: alcohol, cigarette ○ Medical: drug outlay, physician density, capital stock of hospital, medical auxiliary ○ Medical Organizational: group practices, medical school Objections: time inconsistency, direction of causality Regression: reverse causality Results: ○ Income and School: detrimental income & school → not statistically significant ○ Environmental Variables: not significant ○ Alcohol and Cigarette: not significantly explain mortality rates ○ Medical Infrastructure: expected signs, except physician density  Conclusion: marginal productivity of medical infrastructure in the US may be lower than that of additional schooling Thornton (2002) using 1990 data Estimated aggregate health production function using 1990 data; Age-adjusted mortality rates, Medical care, Education and income, Lifestyle factors, Environmental factors, Race and gender Variables ○ Medical care ○ Education and Income ○ Lifestyle Factors: cigarette, alcohol, married ○ Environmental: residing in metro, workers in manufacturing, violent crimes per 100,000 people ○ Race and Gender Results ○ Medical Expenditure: negative elasticity, not significant → diminishing marginal returns to medical care ○ Income: negative effect on mortality → consistent in international ○ Education: policy variable → significant ○ Cigarette: negative effect, small elasticity ○ Marital: large impact on death rates, married → lower mortality ○ Crime: recognizable but small Evidence from Developing Region Sub-Saharan Africa: lower than high income countries Life expectancy and economic, medical, lifestyle, social & environmental Variables ○ GDP per capita: significant, positive ○ Per capita health expenditure: negative effect → inefficient service ○ Adult literacy: negative ○ Lifestyle: expected signs, not significant Two-Way Random Effects Model: panel structure of data Studies Based on Individual Data Rely on surveys Ambiguity regarding whether health status reflects state before or after medical care Health: explanatory for healthcare utilization and outcome of production ○ Measurement: health and sickness Self-reported vs objective Weak relationship of clinical measure with underlying concept Subjective measure of willingness to pay for medical care → high → healthcare utilization Margined Productivity of Medical Infrastructure at The Individual Level (Newhouse and Friedlander) US Health Examination Survey Psychological health, medical resources, socioeconomic, biological Dependent Variables ○ Physiological health indicators: hypertension, blood pressure, etc. Independent ○ Biological: Age, Age Squared, Sex  ○ Medical Resources: primary care physicans, other practicing physicians, short term general hospital beds ○ Dentists ○ Socio Economic: education, family income, race, urbanization, occupation, industry, marital, family size Results ○ Medical Infrastructure and Socioeconomic Factors: not significant ○ Schooling: more schooling → better health → education = produce health ○ Urbanization: significant on current x-rays ○ Race: significant Conclusion: individual behaviors and choices are more important for health than quantity of medical resources in a given area ○ Acknowledges potential measurement error in medical resource variables, which could bias results. Filmer and Pritchett 1999 Health and public spending across countries Key findings ○ infant vs child mortality rates → development factors ○ Potential of public spending vs actual performance Explanation of ineffective public spending ○ Translation differences ○ Dependence on health service on individual demand and market supply ○ Public funds to expensive but ineffective curative services Methodology: two multivariate regressions ○ Income, female education, income distribution, public spending Model 1 Results ○ Income: GDP per capita significant negative ○ Female education: significant positive ○ Income inequality and ethno-linguistic fractionalization: associated with higher mortality ○ Religion: muslim countries higher Model 2 Results ○ Public spending: negative, imprecise ○ Econometric issues: robustness, measurement error and reverse causation Instrumental variables → average public sector health spending & defend spending of neighborhood countries → no causality Robust Tests: alternative outcome measures and median regression Cost of death: Acknowledges potential measurement error in medical resource variables, which could bias results. ○ Effect of public spending: health production function, net public sector impact, public sector efficacy ○ Composition of public spending across types of medical services and levels of medical facilities can influence efficacy. ○ Public sector cost-effectiveness (PSCE) and medical intervention cost-effectiveness (MICE) are important considerations. Evidence from Philippines Cebu Study Team ○ Longitudinal study → health input demands & health outcome production function  ○ Data: child health → growth, diarrheal diseases, respiratory infections, details information on exogenous and endogenous variables ○ Theoretical Model: Health production function, utility function, budget constraint ○ Estimation Problem: Lagged endogenous variables in equations correlated with error terms. Continuously substituted out for lagged endogenous variables to arrive at reduced form equations. ○ Variables: exogenous, feeding, health care, hygiene & water quality ○ Results: health inputs, health outcomes and socioeconomic factors Birth and Birth Information Survey ○ Anthropometric and gestational age longitudinal surveys; bimonthly ○ Data: community price, facility ○ Effects of Morbidity on Growth: Altering nutrient intake Decreasing nutrient availability Influencing appetite and feeding behaviors ○ Diarrhea Result Breastfeeding Effects: reduce diarrhea in both urban and rural areas; exclusive breastfeeding reduces the probability of diarrhea Preventive Healthcare Variable: Shows no discernible impact Child Age Effect: significant → increase in early month, decrease wih age Diarrhea likelihood increases in early months, peaks, then decreases with age Significant Exposure Variables: Water supply contamination Exposure to feces More pathogenic diet Increased community density Rural Areas: Large rainfall accumulations ○ Febrile Respiratory Infection Result Health Index: not significant Preventive Healthcare: negative Feeding practice: not significant here Household density: higher density → increased exposure Exposure variables: smoke Age & Sex: male suffer more Increase in early age, decrease with age ○ Weight Results Determinants: weight previous time → significant for current weight Infants of taller mothers & male infants → greater genetic potential Age: nonlinear age squared term → explain better Growth velocity: decreases with age Mode of feeding significantly affects weight Growth: adversely affected by diarrhea Disease Impacts Direct cost: treatment Extended impacts: disease impacts extend beyond direct costs Conscious choices & Behaviors Framework for Analyzing: Popkin 1982 Issues: behavioral, linkage of disease & behavior, selection biases, concepts that need to be measured Behavioral Inputs: flexibility in socioeconomic and ecological contexts, behavioral dynamics in all levels, indivisibility of economic functions Arguments for broader definition of behavioral consequences: ○ Home production and leisure activities ○ Market production unaffected by health status → substitutions → varies with seasons Qualitative dimension: disease process affects this but may not be measured Long run: social activities ○ Consider effects on short vs long Impacts: community structures Poor health, inadequate food intake → Decreased health status → Lowered work performance → Reduced income → Decline of total net output ○ Understanding how tropical diseases change individual and household social and economic outcomes ○ Relationships between disease, health status, and functional capacity Selection Biases ○ Unequal health status ○ Health programs → active participation → different utilization Direction of causality → estimates will be biased ○ Dimension B: Functional effects related to Dimension A ○ Dimension D: Clinical measurement of disease and its social effects ○ Dimension E: Actual monetary costs incurred for perceived health needs New Home Economics Features ○ Focus on non-marketed goods without prices ○ Integration of asset ownership and skills affecting household production ○ Integration of the value of time Implications ○ Studies should examine how diseases affect total time allocation of all household members ○ Impact of disease on total household production estimated from market and home production time ○ Effects of disease on fertility, child health, and development require precise household production function estimates Over (et al.): Consequences of Adult Ill Health Substantial, larger than previously supposed, and larger than consequences of illness in non-adults Source of consequence: Immediate suffering of the ill person and grief of family and friend Coping process: Minimize impact of illnesses or compensate for sick workers; significant, underestimated impact of not considered Types of Impacts ○ Effects on production and earnings ○ Effects on investment and consumption ○ Effects on household health and composition ○ Psychic costs Differentiation of Effects ○ During illness (medical care cost is one)  ○ Effects at the time of death ○ Long-term effects felt months or years later Household Impacts ○ Costs to avoid illness ○ Costs of helping ill relatives or community members Economic Effects ○ Direct effects (italicized) vs. coping process manifestations (regular type) Effects on health and composition of households ○ Health: harm other members, communicable disease → increase ill health in poor households, labor allocation shifts way from health maintaining activities ○ Composition: increased desired family to cope, fertility, foster & marriage, less birth control and increased fertility, death of a mother can disintegrate the family Medical Costs ○ Direct Medical Costs: adults suffering more from non-communicable diseases, demographic & epidemiological, hospital expenses expected to rise Production, Consumption, Investment and Income ○ Intervening: Probability of infection → infection → disease → health status → functional capacity ○ Physical impairment: different health status ○ Establish Linkages: sustained nutrition & functional, poor nutrition → lower functional capacity and productivity ○ Reallocation: illness increases value of members’ time in home production & market work → reallocation of labor, substitute workers, in expense of other important activities ○ Change in investment/consumption pattern: catastrophic adult illness, disinvestment, saving, borrowing finance, reduce educational opportunities, affect food consumption ○ Income distribution: weather → protected, higher living standards → absorb negative impact, increased income variance → poverty degree ○ Household recovery: sacrificing health of other members → irreversible poverty Cost of avoiding effects of adult ill health ○ Insurance mechanisms → why direct effects of adult ill health are found to be small ○ Forms: Informal: job, inheritance, extended family, social networks, community Formal: administrative costs, efficiency losses; adverse selection, administrative costs, moral hazard ○ Organization of economic activity: insurance mechanism in workforce Investment and Savings ○ Insure against illness and household risks ○ Choice of residential location → health risks ○ Saving in developing countries → consumption smoothing ○ Precautionary measures: liquidity > return → reduce investment scope & productivity ○ Foregone earnings = private and social costs Concluding Notes ○ Consequences of Adult Ill Health: Extend beyond increased medical care consumption Range from impacts on health of other members to efficiency impacts on healthy workers ○ Coping Mechanisms: Successful social mechanisms lead to high coping costs Future generations may sacrifice education to maintain household production and consumption Macro Level Impact Health and GDP per capita: healthy workers → productive = raises per capita income Savings and expenditure over life cycle: incentive to save for retirements from longevity of disease → boost national savings temporarily Foreign Direct Investment: avoid heavy disease burdens → restrict access to lands and resources Education: healthier children → more attendance → cognitive development → longer lifespan Lower infant mortality: fewer children → baby boom cohort Health and economic productive potential: higher steady state output Evidences ○ Initial health population → economic growth ○ Health matters in low income countries and good economic policies Empirical Evidence: Micro-Level Studies Health and Agricultural Productivity: better wage rates, childhood health investments → long-term payoffs Health and Schooling Productivity: malnutrition → academic skills acquisition Results ○ Direct effect on achievement: learning productivity ○ Indirect effect of nutrition: height increases → earlier enrollment, malnutrition → repeat 1st grade Malnutrition and Human Capital Poor school attainment → poor health → low nutritional status early life ○ Parental education and socioeconomic predictors for stunting Early childhood stunting → impaired cognitive development Health and Schooling ○ Affect productivity of schooling investments ○ Greater returns when children is health and well nourished, wasted otherwise Income, Medical Spending and Consumption ○ Two issues Household income and medical spending Household consumption protection against shock ○ Hypotheses: Earned income ≠ unearned income Depend on age and labor force status Urban ≠ rural ○ Earned Income: labor supply adjustments; rural household → less vulnerable ○ Unearned Income: social security schemes, informal solidarity relationships, size of informal payments ○ Medical Spending: insurance coverage limits and ceilings ○ Consumption: saving & borrowing, households struggle to insure against income shock Informal easier for health Formal harder due to risk ○ Model: contemporaneous values of determinants, health shocks from preceding period, and village-level fixed effects ○ Measurements: death of working age, hospitalization, dummy variable for head of household drop in BMI ○ Results Income changes: affects different between earned & unearned, urban & rural  Death of working age: negative Adverse health shocks: negative for rural and urban Many effects on health shocks as statistically significant Unearned income: health shocks = increase unearned income Medical spending: deaths no effect, hospitalization increases, urban areas → large effect of non workers, rural otherwise Health shock and consumption: households can smooth consumption when health shock is challenged Non-food consumption: deaths & large BMI → reduce, health shocks = high electricity and housing, increased expenditure = better living conditions for sick Empirical Evidence: Macro-Level Studies Bloom, Canning and Sevilla ○ Micro evidence → macro evidence on health’s effect on economic growth ○ Health → aggregate production function to test labor productivity effects ○ Controls for bias with high experience level ○ Externalities affecting productivity Contrary Evidence: Acemoglu and Johnson (2006, 2007) ○ Better population health = lower economic pace ○ Health improvements increase human capital but lower mortality may increase population size, reducing per capita factor inputs ○ Higher life expectancy in 1940 correlated with slower health gains from 1940-2000 ○ Reductions in infant mortality linked to improvements in child health and adult height ○ Long lag between health improvements and productivity gains leads to inconsistent estimates Aggregate Income Losses Galasso and Wagstaff (2018) ○ Economic costs of stunting, benefits of nutrition intervention ○ Results GDP 8.7% lower due to stunting → would’ve been 4,000 USD instead of 2,623 USD Middle income country status Rate of return to nutritional interventions = 17.2% Stunted person: 12,000 a month instead of 13,000 ○ Implications Stunting remains high, disproportionately affects the poor Reduces number of years schooling → cognitive development → adult health outcomes GDP per income penalty of those working that were stunted in childhood Investments in nutrition (first 1000 days) is expected to have high rates of return Value of Health Why Value Health? Gov’t decisions: preservation & lengthening of life → scare resources Rational decisions: comprehensive & precise valuation of future advantages → interventions → PV of stream of costs Costs & benefits: must have same unit of measurement → money units Key inputs ○ Evidence on alternatives ○ Economic & clinical → complements  ○ Economic valuation: framework to make best use of clinical evidence → organized consideration of effects on health care costs and other valuable things Organized consideration ○ Difficult to clearly identify alternatives without systematic analysis ○ Perspective/viewpoint is important ○ Informal assessment → misleading on magnitude of orders ○ Systematic approaches → explicitness and accountability Features of Economic Valuation Inputs (costs) & outputs (consequences) → alternative course of action ○ Cost → what must be given up ○ Consequences → overall benefits to be received Choices → many criteria (explicit often implicit) → decisions are made by our own behalf using own resources “The comparative analysis of alternative courses of action in terms of their costs and benefits” Task Identify, measure & value, compare Approaches Nature of consequences → measurement, valuation and comparison to costs Measurement Units: ○ Cost Effectiveness Analysis (CEA) → natural unit → one dimension scale ○ Cost Utility Analysis (CUA) → cardinal utility → multi dimensional concept of health in scalar ○ Cost Benefit Analysis (CBA) → units of money Types of Economic Valuation Cost Minimization → Monetary Unit → cost per case Cost Benefit → monetary unit → net benefit Cost Effectiveness → monetary → clinical values → incremental cost effectiveness ratio Cost Utility → monetary → quality/disability adjusted life year → incremental cost effectiveness ratio Benefits in CEA: Natural Units Natural: clinical parameters → length of life in years Applicability: alternatives differ in one specific effect Independent intervention: unaffected costs and benefits 𝐶𝑜𝑠𝑡𝑠 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 Average Cost-Effectiveness Ratio: 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑖𝑛 𝑙𝑖𝑓𝑒 𝑦𝑒𝑎𝑟𝑠 𝑔𝑎𝑖𝑛𝑒𝑑 Incremental Cost-Effectiveness Ratio ○ Mutually exclusive interventions ○ Compares incremental costs and benefits 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐶𝑜𝑠𝑡𝑠 ○ 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠 Ranking interventions ○ Based on ICERS → interventions → doing nothing Defined combinations of interventions as the unit of comparison. Limitations ○ Does not account for distribution of life years ○ Not suitable for multiple effect comparison  ○ Does not determine if the highest-ranked measure should be performed Benefits in CUA: Cardinal Utility Multidimensionality → effects of an intervention Utility → preference of health outcomes Common measure: quality adjusted life years ○ Health state evaluation ○ Indifference: Surviving one year in health state with utility index x vs. fraction x of a year in perfect health. Indices of Comparison 𝑐𝑜𝑠𝑡 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 ○ 𝐴𝐶𝑈𝑅 = 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑖𝑛 𝑢𝑡𝑖𝑙𝑖𝑡𝑦 → independent interventions 𝑎𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 ○ 𝐼𝐶𝑈𝑅 = 𝑎𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑖𝑛 𝑢𝑡𝑖𝑙𝑖𝑡𝑦 → mutually exclusive interventions Applicable both to medical and non medical interventions Limitations ○ Whose utility function for health states? ○ Rank measure → does not help up to which cost-utility ratio intervention should be performed ○ Alternative: threshold value for cost-utility ratio ○ No guarantee budget will be used to maximize health benefits ○ Should measure marginal opportunity cost of resources of budget → current & potential interventions are taken into account ○ Should be recalculated when budgets change & new interventions are adopted Disability Adjusted Life Years ○ Low of life in years of full health → standardized life expectancy of 80 for men, 82.5 for women ○ Utility of intervention is measured by the number of DALYs prevented Quality Adjusted Life Years ○ Morbidity weights → people concerned by intervention ○ QALY of person = multiply expected duration of health state with its morbidity index ○ Makes changes in quality of life and changes in length of life comparable Health Years Equivalent ○ Health profiles ○ Likely sequence of health states caused by intervention ○ How many years in perfect health they would find equally attractive Benefits of CBA: Units of Money Extension of human life & changes in quality of life → monetary equivalent ○ Suitable to evaluate each intervention separately 𝑐𝑜𝑠𝑡𝑠 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 Worthwhile if 𝐴𝐶𝐵𝑅 = 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 0 Benefits overtime is converted to present value by using an appropriate discount rate ○ Highest net benefit should be adopted Calculate incremental cost-benefit ratios & apply threshold value of one additional unit of ABCR Method 1: Human Capital Approach Individual’s value depends on the contribution to welfare of fellow citizens Two Postulates ○ Net value of implicitly → consumption of person i no value ○ Appropriate measure of society’s welfare GNP Operational very easily  Ethical underpinnings → prisoners, ignores pleasure of living Method 2: Willingness to Pay Approach Subjective utility: disposable income and length & quality of life WTP: maximum amount of money which pension would be prepared in order to obtain the interview Decision making rule: worthwhile if total WTP > exogenous cost of intervention WTP > cost ○ Subjective WTP Welfarist approach ○ Distribution of benefits among individual is irrelevant CBA individuals have the same weight Cannot conclude that all affected individuals will have positive net benefit CBA ≠ pareto criterion CUA vs CBA Similarity ○ Neither considers how net benefits from an intervention are distributed Differences ○ CUA fails to recommend if a project should be carried out unless there is a predetermined health care budget ○ How benefits accrue to affected persons CUA: extra welfarist CBA: conventional utility of welfare economics ○ CUA: health; CBA: utility Costs Direct, indirect, intangible Government perspective: direct costs only Inderived costs: indirect costs and intangible costs Model Development → Transition Probabilities ○ Purpose: Inform patient movement between health states in decision trees or state transition models. ○ Data Preference: Local data is preferred; if unavailable, prioritize Asian studies over international ones, with validation from local experts. ○ Justification: Ensure data applicability to minimize uncertainty in models. Benefits of CEA: Natural Units Uncertainty Analysis: Deterministic Sensitivity Analysis ○ Examines % change in ICER by adjusting one parameter at a time. ○ Uses 95% confidence intervals and best/worst-case scenarios. ○ Presents top 10 parameters affecting ICER in a tornado diagram. Probabilistic Sensitivity Analysis: ○ Uses scatter plots to show ICERs from simulations. ○ Generates acceptability curves to indicate cost-effectiveness probability at varying thresholds. ○ 50,000 simulations often show ICERs concentrated in the upper-right quadrant, suggesting a positive correlation between incremental costs and outcomes. Threshold ○ Context: Guides government decisions on healthcare technology inclusion in public programs.  ○ Decision Rule: Fund interventions below the cost-effectiveness threshold; exclude those above. ○ Analogy: Illustrated as a bookshelf model (Culyer, 2016). ○ Determinants Demographics, disease burden, local values & budget size Inefficient allocation → disinvestment in productive technologies Key Assumptions ○ Access: Insured individuals access technologies at no charge. ○ Objective: Aim to enhance population health; effectiveness is based on health impacts. ○ Threshold Dynamics: Interventions may be effective but not qualify for insurance coverage. Budget considerations impact which interventions are funded. Issues ○ Equity & Fairness: Consider the implications of funding less effective treatments, especially for marginalized populations. ○ Decision-Making Goals: Aim to maximize population health within budget constraints. ○ Threshold Setting: Setting too high a threshold can exhaust budgets and crowd out more effective treatments. Lack of a threshold can result in inefficient health interventions. Estimation Strategies ○ Aspirational Thresholds: Often based on GDP fractions; may be unrealistically high. ○ Two Perspectives: Supply Side: Focus on opportunity costs from disinvestment. Demand Side: Emphasizes societal valuation of health gains. ○ Threshold Identification: Investigate cost-effectiveness of interventions on the brink of insurance coverage. Pragmatic evaluation of cost-effective programs with ongoing assessments. ○ Empirical Approaches: Utilize historical funding decisions and marginal cost estimations for QALYs.