Jalil Yahaya - AP/ECON 3510 M - Health Economics - 2025 Lecture Notes PDF

AP/ECON 3510 M - Health Economics Lecture #1 - PPT Notes Week 1: Topic 1 | Review of the Canadian Healthcare System Wednesday, December 8th, 2025 Lecture Title: Introduction to Health Economics and the Canadian Health Care System Introduction to Health Economics Definition Health economics e...

AP/ECON 3510 M - Health Economics Lecture #1 - PPT Notes Week 1: Topic 1 | Review of the Canadian Healthcare System Wednesday, December 8th, 2025 Lecture Title: Introduction to Health Economics and the Canadian Health Care System Introduction to Health Economics Definition Health economics examines how resources are allocated both to and within the health economy. It encompasses the production of health care and its distribution across populations. Importance of Health Economics 1. Economic Contribution: ○ The health sector significantly contributes to the overall economy. 2. Policy Concerns: ○ Health is a priority for individuals, leading to policy challenges regarding how best to pursue and maintain it. 3. Economic Elements in Health Issues: ○ Many health-related issues are influenced by economic factors. Gross Domestic Product (GDP) Definition: ○ GDP is the value of final goods and services produced by an economy. Inflation Definition: ○ Inflation is the increase in the prices of goods and services over time, which reduces the purchasing power of money. It happens when demand outpaces supply, production costs rise, or more money circulates in the economy. Healthcare Expenditures Definition: ○ Healthcare expenditures are the total costs associated with healthcare services, including hospitals, medications, and insurance. They can be private (individual spending) or public (government spending). Explanation/Analysis: This graph introduces the concept of GDP and its relevance to health care. GDP measures the value of all final goods and services produced in a country or economy. Health care spending is a significant part of GDP, highlighting its economic weight. For Canada, this indicates how much of the national output is allocated to maintaining health care systems and services, reflecting priorities in public policy and resource allocation​. Explanation/Analysis: This graph compares the share of GDP spent on health care across OECD countries in 2019. Canada’s health care spending, at approximately 11% of GDP, is higher than the OECD average but lower than the United States, which spends over 16%. The graph suggests three reasons for increasing health care spending in Canada: ○ 1.) rising consumption of services (e.g., more tests and treatments), ○ 2.) increased availability and adoption of advanced, costlier treatments, and ○ 3.) health care costs outpacing general inflation​. Health Care’s Share of GDP Proportion of GDP: 1. Approximately $1 out of every $10 spent on final goods and services in the Canadian economy is allocated to the health sector. Calculation Adjustment:  1. The share of GDP allocated to health care is adjusted to exclude the impact of general inflation. This means that the reported figure reflects changes in real spending on health care, rather than changes caused by rising prices across the economy as a whole. Factors Contributing to Increases in Health Care Spending: 1. Increased Utilization: More health services are being consumed (e.g., doctors ordering more tests, higher drug purchases). 2. Higher Quality Services: People are purchasing higher-quality health services, which are more expensive and were previously unavailable. 3. Faster Price Growth: Health care prices have risen at a rate exceeding general inflation. Economic Methods Key Features of Economic Analysis: This course focuses on four distinctive aspects of economic analysis: ○ Scarcity of Societal Resources: Recognizing that resources are limited and must be allocated efficiently. ○ Assumption of Rational Decision-Making: Individuals and groups are assumed to make decisions aimed at maximizing their benefits or utility. ○ Concept of Marginal Analysis: Evaluating decisions based on the additional benefits and costs of a specific action. ○ Use of Economic Models: Employing simplified representations to explain behaviours and outcomes in the economy. Further Details: ○ Each of these features will be explored in-depth in subsequent sections. 1. Scarcity of Resources Core Premise: ○ Economic analysis assumes that individuals must forgo some of one resource to gain more of another. ○ If scarcity were not an issue, people could obtain everything they wanted, and economic problems would not exist. Key Concept: Opportunity Cost ○ Definition: The value of the next best alternative that is given up when making a decision. (Simply put, what must be given up). This applies even to intangible factors such as time. ○ Example: Although healthcare services may be labelled as "free," many individuals still choose not to access them. This is because the time spent travelling to the health care facility and waiting for services could be used for other activities that they consider more valuable, such as working, studying, or spending time with family. ○ Policy Implication: Opportunity costs play a crucial role in public policy decisions. If policymakers fail to consider the value of alternatives that are sacrificed, such as time or resources, there is a greater chance that policies will not be optimal or effective in addressing societal needs. 2. Rational Decision Making Definition of Rationality: ○ Rationality is defined as making choices that best achieve one’s goals, given the resources available. Key Assumption:  ○ Individuals make consistent decisions that aim to maximize their utility (happiness or satisfaction) while considering their budget constraints. Understanding Seemingly Irrational Behavior: ○ Actions that appear irrational can often be explained by examining the incentives and preferences influencing the decision-maker. ○ Example: A sick person choosing not to visit a doctor may seem irrational. However, this decision can be rational if they lack public or private health care/insurance and have no income or wealth to afford medical services. 3. Marginal Analysis Core Concept of Marginal Analysis: ○ Economic analyses often focus on reasoning at the margin, meaning that decision-makers assess the next unit or decision rather than considering the entire set. Key Consideration: ○ To make an informed choice, decision-makers need to understand both the costs and benefits associated with the next (marginal) unit or decision. Mental Experiment of Trade-Offs: ○ Decision-making at the margin involves weighing the incremental cost against the incremental benefit. ○ Rule of Thumb: If the marginal benefit is greater than the marginal cost, the action should be taken. Example: ○ Many people face the choice of whether to buy brand-name or generic pharmaceutical drugs. ○ If the cost of each generic pill is lower than each brand-name pill and the person believes both are equally effective, the rational decision is to purchase the generic drug.  ○ However, if the person believes the brand-name drug is more effective, they may choose to purchase the brand-name pill despite the higher cost. 4. Use of Models Purpose of Economic Models: ○ Economics often uses models to represent and analyze its subject matter. Forms of Models: ○ These models can be presented in various ways, including: Descriptive words Graphs Mathematical equations Limitations of Models: ○ Economic models are not designed to perfectly replicate or predict real-world situations. ○ Instead, their goal is to capture as much of reality as possible while maintaining simplicity to ensure their practical use in predicting behaviour and outcomes. Example: ○ One example is the “Grossman” model of demand for health capital, which will be explored later in the course. Incentives and Analytic Example Importance of Incentives in Economics: ○ At the core of economic analysis, the “incentives” faced by agents (such as buyers, sellers, consumers, individuals, firms, patients, physicians, hospitals, etc.) are crucial. ○ These incentives drive behaviour and decision-making in economic contexts. Connection to the Four Key Economic Features:  ○ Scarcity of Societal Resources: Incentives influence how individuals and firms allocate limited resources to maximize their utility, often necessitating trade-offs. ○ Rational Decision Making: The presence of incentives encourages individuals to make choices that align with their personal goals, given their resources and constraints. Rational decision-making assumes that individuals aim to maximize their utility (satisfaction or happiness) through their choices. ○ Marginal Analysis: Incentives play a key role in determining how individuals weigh the marginal costs and marginal benefits of decisions, helping to guide optimal choices. ○ Use of Economic Models: Incentives are integral to economic models, as they help explain and predict behaviour and outcomes in various markets and systems. Barriers to Incentives: ○ While incentives are important, there can sometimes be barriers that prevent them from functioning as intended. Health vs. Health Care Careful Terminology Usage: ○ It is important to distinguish between "health" and "health care" in an economic context. Health: ○ Health is best understood in terms of “health status,” which reflects an individual's physical and mental well-being. ○ Health status is commonly categorized in surveys as: Excellent Very Good Good Fair Poor  ○ Role in Utility: Health is a key factor in individuals’ utility functions. It contributes to their happiness and quality of life, allowing people to experience life more fully and for a longer period. Health Care: ○ Health care refers to the goods, services, and commodities provided to individuals to maintain or improve their health. ○ The primary impact of health care on utility comes through its effect on an individual’s health status. Health Care Financing Definition: ○ Health care financing refers to the process of raising revenues through various sources such as taxes, insurance premiums, social insurance contributions, etc., to cover the costs of healthcare services. Key Determinations by Financing Arrangements: ○ Access to Care: Financing arrangements help determine who has access to health care services and under what conditions. ○ Burden of Payment: They influence who bears the financial responsibility for paying for health care. ○ Integration of New Treatments: They affect how and when new treatments are incorporated into the health care system. ○ Control of Health Care Expenditures: Financing arrangements play a crucial role in how well a country can manage and control its healthcare spending. ○ Trade-offs at the Margin: Financing arrangements determine the trade-offs made when deciding whether to increase or decrease health care expenditures. Example in Canada: ○ In Canada, public financing (mainly through taxation) accounts for approximately 70% of total health care spending. ○ The remaining 30% comes from private spending, which typically complements public health services rather than duplicating them. Explanation/Analysis: This figure presents the proportion of healthcare financing from public and private sources across different countries. Canada’s system, with 70% public financing and 30% private spending, demonstrates its commitment to universal health care while allowing private contributions to supplement services such as dental care and prescription drugs. The data shows that countries with higher public funding tend to have more equitable access to essential health services​. Explanation/Analysis: This table chart shows the percentage of healthcare spending financed by public sources across OECD countries. Canada ranks high, with 70% of expenditures publicly funded. ○ This ensures widespread access but requires careful management to sustain funding levels. Countries with lower public shares rely more heavily on private insurance and out-of-pocket payments, which can exacerbate disparities in access​. Explanation/Analysis: This table presents data comparing the percentage of adults in Canada and other OECD countries who faced cost-related difficulties accessing care in 2007. Examples include delaying or forgoing treatment due to financial constraints. The table underscores the variability in insurance coverage and cost-sharing across countries, which significantly affect citizens’ ability to access care. Health Care "Funding" Definition: Health care funding involves providing financial resources to healthcare organizations to enable them to perform specified health-related activities. ○ This occurs after the necessary revenues have been raised (via taxation, premiums, or other sources). Impact on System Performance: The method of funding plays a significant role in determining system performance by influencing:  ○ Service Providers: Who delivers the services. ○ Service Types: What kinds of services are offered. ○ Service Quality: The standards of care and treatment. ○ Service Locations: Where services are provided (e.g., urban vs. rural). ○ Service Recipients: Who receives the care (e.g., demographics, socio-economic groups). Importance in Health Economics and Policy: Designing funding schemes that promote efficiency in both the production and distribution of health care services is a primary focus in health economics and policy. Example: Payment methods for physicians influence their medical practices and decision-making: Fee-for-Service (FFS) and Capitation: Fee-for-Service (FFS): ○ In this model, health care providers (e.g., doctors, hospitals) are paid for each service they deliver (e.g., consultations, tests, procedures). ○ The more services provided, the more revenue the provider earns. ○ Implication: This model incentivizes providers to deliver a higher volume of services, as payment is tied to the number of services performed. This could lead to over-utilization, where providers may recommend more tests or treatments than necessary. Capitation: ○ In this model, providers are paid a set amount per patient, regardless of how many services the patient receives; or simply put “capped”. This amount is typically based on the number of patients under the provider's care. ○ Implication: Capitation incentivizes providers to focus on efficiency and cost control because they are paid a fixed amount per patient. Providers may prioritize preventative care and cost-effective treatments to avoid unnecessary costs, as they will not earn more by providing additional services. Health Care Delivery Definition:  Health care delivery refers to the provision of services and goods within the health care sector, specifically on the supply side. It includes the individuals and organizations responsible for providing health care services or producing health care goods (such as drugs and medical devices). Key Providers in Health Care Delivery: ○ Physicians: Physicians are the most influential group within health care delivery, playing a central role in diagnosing, treating, and managing patient care. ○ Hospitals: Hospitals are the dominant institutions for delivering health care services, typically providing acute care, surgeries, emergency services, and specialized treatment. ○ Drugs: Pharmaceuticals constitute the most common type of health care good, frequently used to treat individuals and manage various health conditions. Is Healthcare Different? Health care has many distinctive features that set it apart from most other goods. While none of these features are unique to health care alone, the specific combination of these features—along with their prominence—makes health care distinct from most other goods. 1. Presence and Extent of Uncertainty ○ Health care involves a lot of uncertainty on both the demand and supply sides. ○ Demand-side uncertainty: Patients may not know when or what type of care they will need. ○ Supply-side uncertainty: Providers face uncertainty regarding treatment outcomes and patient responses. 2. Problems of Information ○ Health care is marked by information asymmetry between providers and patients. ○ Demand-side information: Patients often lack the technical knowledge to make fully informed decisions about their care. ○ Supply-side information: Providers typically possess more knowledge than patients, but this can create issues. For example, providers may recommend  treatments that benefit them financially, which may not always align with the patient's best interest or the most cost-effective option. 3. Prominence of Insurance ○ Health insurance is a key feature of health care, intended to reduce the financial burden on individuals. ○ Price effects: Insurance can mitigate the impact of prices on health care consumption by shifting costs from patients to insurers. 4. Large Role of Nonprofit Firms ○ A significant portion of health care services is provided by nonprofit organizations. ○ Nonprofit behavior: Unlike for-profit firms, nonprofits do not seek to maximize profit. Instead, the goal is often to maximize social welfare or meet community needs. 5. Restrictions on Competition ○ Health care is characterized by limitations on competition in various forms. ○ Costs and benefits: These restrictions can affect pricing, service quality, and access to care. ○ The debate centers around whether restrictions protect patients or stifle innovation and efficiency. 6. Role of Equity and Need ○ Health care is often viewed through the lens of equity, with an emphasis on ensuring access based on need rather than ability to pay. ○ Costs and benefits: This focus can lead to improved access for vulnerable populations but may also create challenges in terms of resource allocation and sustainability. 7. Government Subsidies and Public Provision ○ Government involvement in health care through subsidies or public provision is common. ○ Costs and benefits: Public financing can ensure broader access but raises questions about the efficiency of government-run systems and the role of taxpayer funding. Example: Does Price Matter in Health Care? Question: Does price matter in health care, similar to other goods? Do people demand/purchase more when the price decreases? Answer: Yes, the price of healthcare does influence consumer demand, similar to other goods. This is confirmed by findings from the Rand Health Experiment (Keeler et al., 1988), which studied the effect of varying coinsurance rates on health care utilization. In this study, individuals who faced lower coinsurance rates (i.e., had to pay less out of pocket for health care services) were more likely to seek medical treatment. The experiment showed that when people are required to pay a smaller portion of the health care costs, they tend to use more services. Conversely, when the coinsurance rate increases, individuals generally reduce their demand for non-essential care, as the cost to them becomes higher. Coinsurance Explained: Coinsurance refers to the percentage of the total health care cost that the insured individual is required to pay after the insurance company has covered its portion. For example, if a person has a 20% coinsurance rate, they would pay 20% of each health care service they use, and the insurance company would cover the remaining 80%. Example: Suppose a doctor’s visit costs $100. With a 20% coinsurance rate, the individual would pay $20 (20% of $100), while the insurance company would cover the remaining $80. If the coinsurance rate were to increase to 40%, the individual would then pay $40 for the same service, leading to a higher out-of-pocket cost. In this case, individuals might be less likely to seek care if they perceive the additional cost as burdensome, thereby reducing their demand for health services. Topics Covered in This Course This course will cover various key aspects of health economics through the following structure: Part 1: Introduction and Economics Background Overview of the Canadian Health Care System Efficiency and Equity in Health Care The Economics of Markets Economic Evaluation in Health Care Part 2: Demand for Health and Health Care  Determinants of Health Demand for Health Health Care as an Economic Commodity Part 3: The Health Care System Health Care Insurance Health Care Financing and Funding Part 4: Supply of Health Care (if time allows) Supply of Physician Services Supply of Hospital Services Supply of Pharmaceuticals The objective of this course is not to provide detailed descriptions of existing health care systems. Instead, the focus is on understanding the economic principles that have shaped the development of health care systems in the past and how these principles can guide future reforms. Canadian Health Care System Definition of Canada’s Health Care System: ○ Often referred to as “Medicare,” Canada’s health care system provides universal coverage for medically necessary health care services. ○ These services are provided based on need rather than the ability to pay, ensuring equitable access to care. Public Financing, Private Delivery: ○ Canada operates a predominantly publicly financed health care system. This means that funding for the system largely comes from tax revenues (government taxes at federal, provincial, and territorial levels). ○ However, the health care services themselves are primarily delivered by private entities (such as private hospitals and physician offices), even though these entities are publicly funded. Positioning Among Other Systems:  ○ Canada's system lies between two other global models: 1. U.S. System: A predominantly privately financed and delivered health care system. In the U.S., health care services are mainly paid for through private insurance or out-of-pocket payments, and most health care services are provided by private organizations. 2. U.K. System: A predominantly publicly financed and delivered system. In the U.K., health care services are largely provided and financed by the government. The Canada Health Act The Canada Health Act outlines the conditions under which provinces and territories must operate their health insurance plans in order to receive full federal funding for health care. The Act mandates five key criteria that all provincial and territorial health insurance plans must meet: 1. Comprehensiveness ○ Provincial plans must cover all medically necessary health services. ○ This ensures that all essential health care needs are met, including hospital and physician services. 2. Universality ○ All provincial residents must be offered health insurance coverage on uniform terms and conditions. ○ This ensures equal access to health care for all residents of the province. 3. Portability ○ Provincial health insurance plans must provide coverage for residents even when they are outside their home province. ○ This guarantees that residents maintain access to health care services regardless of where they are within Canada. 4. Accessibility ○ Provincial health plans must provide insured individuals with reasonable access to medically necessary hospital and physician services. ○ This provision ensures that financial or other barriers do not prevent people from accessing needed services.  5. Public Administration ○ The provincial health insurance plan must be publicly administered. ○ This can be done either directly by the provincial government or through a provincial non-profit agency, ensuring that the system remains not-for-profit and transparent. Explanation/Analysis: The graph highlights life expectancy (at birth) and (infant mortality rate) from 1960 - 2004. Explanation/Analysis: This chart measures premature mortality as the potential years of life lost. Canada’s lower rates (4.2k), compared to global averages (i.e the U.S. at 6.6k), reflect its strong health care system, but regional and demographic differences persist. Health Variations in Canada Health outcomes in Canada, as in many other countries, are influenced by demographic and socio-economic factors. Key Health Variations: 1. Gender Differences: ○ Women tend to live longer than men. ○ Life expectancy: Women: 83.0 years Men: 78.4 years 2. Income and Life Expectancy: ○ People with higher income levels tend to have longer life expectancies. Top third of income distribution: 78.4 years Bottom third of income distribution: 75.2 years  3. Overall Health Improvements: ○ Overall Life expectancy has increased significantly over time: In 1960: 71.3 years Currently: 80.7 years ○ Infant mortality has decreased by more than 80% since 1960. 4. Determinants of Health: ○ Surprisingly, the most significant determinants of health are factors outside of the healthcare system. This includes factors like lifestyle, environment, education, and social support systems. Explanation/Analysis: This graph shows the number of physicians per 1,000 people across OECD countries. Canada is shown at 2.8 per 1000, and the U.S is at 2.6 per 1000. Explanation/Analysis: The chart compares hospital bed availability among different countries. Canada has fewer beds per 1000 (2.5) compared to many OECD nations. Explanation/Analysis:  This pie chart details Canadian health care expenditures by category for the year 2019, with hospitals consuming the largest share, followed by physician services and pharmaceuticals. Explanation/Analysis: This diagram maps the flow of resources in the health care system, showing interactions between governments, insurers, providers, and patients. It highlights the exchange of funds and services, emphasizing the need for efficiency and alignment of incentives to improve system performance. Understanding these flows is crucial for identifying inefficiencies and implementing reforms​.