Introduction to Health Economics: Winter 2024

Week 1: Introduction to Health Economics: Course Overview and Introduction Dr. Khaled Al-Surimi, PhD, MSc Professor Healthcare Management Department Winter 2024 Learning Outcomes Be the end of this Week, you should be able to … 1. Identify the components that make up the HCMT2004 course, such as des...

Week 1: Introduction to Health Economics: Course Overview and Introduction Dr. Khaled Al-Surimi, PhD, MSc Professor Healthcare Management Department Winter 2024 Learning Outcomes Be the end of this Week, you should be able to … 1. Identify the components that make up the HCMT2004 course, such as description , learning outcomes, content structure and assessments methods 2. Describe the concept of health economics and its important in healthcare 3. Explain the economic concepts , such as scarcity, choice, opportunity cost, efficiency, and equity within the context of healthcare. 4. Understand how these economic concepts and principles influence decision-making processes for individuals, healthcare providers, healthcare managers and policymakers. Health Economics: Introduction The Economics of Healthcare https://www.youtube.com/watch?v=cbBKoyjFLUY What is Health Economics? 1. What is “Economics”? 2. What is “Health”? 3. What is “Health Economics”? Health Economics Health Economics Economics is about … Limited resources Unlimited “wants” Choosing between which ‘wants’ we can ‘afford’ given our resource ‘budget’ Economics is about … Limited resources Resources are scarce Unlimited “wants” Therefore involves “choice” Choosing between which ‘wants’ we can ‘afford’ given our resource ‘budget’ Economics is about choice Good ‘B’ Good ‘A’ Resources Budget Economics in a nutshell is about The study of how scarce resources are allocated to fulfill infinite wants of consumers The study of how society decides what, how and for whom to produce Health Economics What is Health Economics? ▪ Health economics is the study of how (scarce) resources are allocated to and within the health sector. ▪ It is concerned with issues related to efficiency in the production & consumption of health services Health Economics Health Economics What is Health Economics?? It is concerned with issues related to efficiency in the production & consumption of health services. Production of healthcare (doctors, specialists, nurses, hospital care, primary care etc.). Consumption of healthcare ( How do we distribute healthcare services across the population? Based on what we produce and distribute healthcare services (who can pay or who needs it or some combination) How much money should the government spend on health care? What is Health Economics? Health economics is the application of economic theory, models and empirical techniques to the analysis of decision-making by individuals, health care providers and governments with respect to health and health care. Morris, Devlin Parkin and Spencer (2012) Health Economics Health Economics Why Study Health Economics? Health economy is large and growing Health Expenditure (% of GDP) World (2020) 10.89 Source: https://data.worldbank.org/indicator/SH.XPD.CHEX.GD.ZS?contextual=max&end=2020&name_desc=false&start=2000&type=shaded&view=chart Why Study Health Economics? The challenge is how can we improve our performance By spending less and Getting better outcomes Why study health economics? Anyone who has worked in the health sector should be aware of the issue of scarcity of resources. Demand for health services continues exceeding supply due to various reasons, such as: Ageing population in which they potentially require more health services Emerging new health technologies that make untreatable and risky conditions manageable and treatable People expectations increased (changes in consumer demand and attitude). Therefore, economists and economics might contribute to solve these problems. Why study health economics? ▪Health care market is different from other markets ▪Market failure ▪ Role of government in the health care markets ▪As more resources are allocated to healthcare, there are fewer resources available for other goods and services in other sectors (e.g. Education, Transportation, Infrastructure , etc.) How Health Economics Can Help ? Health systems face questions about efficiency of scare resources. However, there are several ways in which health facility (e.g. hospital) should improve the efficiency of their operations including: Length of stay could be reduced; Staff productivity could be increased; Equipment could be fully utilized; Over-prescribing of drugs could be avoided; Drug ordering and storage could be managed properly to avoid wastage and stealing; Nurses could replace doctors when appropriate; Low-cost equipment could replace when appropriate; To encourage the efficient use of resources, hospitals should collect financial data and managers should be trained to carry out cost analyses Health Economics ‘map’ E. Market Analysis H. Micro-Economic Appraisal B. What influences Health? (other than A. What is Health? What is it’s value? health care) C. Demand for D. Supply of Health Care Health Care G. Planning, budgeting, regulation mechanisms F. MacroEconomic Appraisal Key Economics Concepts and Principles Key Economics Concepts SCARCITY OPPORTUNITY COST EFFICIENCY EQUITY MARKET MARGINAL ANALYSIS DEMAND SUPPLY Key Economics Concepts Scarcity Opportunity cost Efficiency Equity Concept 1: Scarcity Concept 1: Scarcity Scarcity refers to there is a finite amount of resources such as time, money, materials, and labor, but an infinite desire for goods and services. This concept is a fundamental principle in economics and drives much of economic theory and policy Problem of scarcity ▪ Scarcity is not a shortage (a shortage is a mismatch between supply and demand) ▪ Resources are finite - we do not have an unlimited supply of resources used in the production of goods and services ▪ Resources are insufficient to produce all the goods and services that people want (desire) ▪ Resources are used in the production of outputs to satisfy our wants (desires ▪ These resources – factors of production – are scarce Scarcity in Healthcare There is a finite amount of medical resources available, including hospital beds, medical staff, medication, equipment, and financial resources. Because resources are limited, decisions and choices must be made regarding which health services to provide and to whom. This involves prioritizing certain treatments, procedures, or patient groups over others. Examples of Scarce Resources in Healthcare Medical Workforce: There might be a shortage of trained healthcare professionals, such as doctors, nurses, or specialists, especially in rural or underserved areas. This can result in longer wait times for patients and a higher patient-to-doctor ratio. Hospital Beds: During a surge in illnesses, such as an epidemic or pandemic, the number of patients may exceed the number of available hospital beds and critical care units. This can lead to difficult decisions about who receives intensive care. Access to Medication: Some medications, especially new or specialized treatments, can be in short supply. This might be due to high costs, limited production capacity, or supply chain issues. In some cases, drugs for rare diseases are scarce due to a small market that doesn't justify mass production. Medical Equipment: Scarcity can also apply to medical equipment like MRI machines, ventilators, or dialysis machines. This equipment is expensive and may not be available in all healthcare facilities. Vaccines and Public Health Resources: During a disease outbreak, vaccines, antivirals, or other preventative resources may not be available to everyone who needs them (e.g. COIVD19- Vaccine) This scarcity forces difficult decisions about how to allocate these resources to save the most lives. Case Study Scarcity in Healthcare Concept 2: Opportunity cost Concept 2: Opportunity cost “The value of forgone benefit which could be obtained from a resource in its next-best alternative use.” For example, if hospital resources are used to expand emergency services, those resources may not be available for elective surgeries. Implications of opportunity cost - Deciding to do A implies deciding not to do B (i.e. value of benefits from A>B). Good ‘B’ Good ‘A’ - Value not necessarily determined by “the market”. Resource Budget An Illustration of Opportunity Cost in Healthcare Possibilities for Health Department Expenditure in a Year Paediatric Care (No Children Treated in ‘000’s) Care of Elderly (No of Elderly Treated in ‘000’s) 0 1 2 3 4 5 30 28 24 18 10 0 Opportunity Cost of Treating Children in Terms of Elderly Patients Forgone 0 2 6 12 20 30 Case Study Opportunity Cost in Healthcare Concept 3: Efficiency Concept 3: Efficiency Efficiency Maximising benefit for scare resources used The allocation of scarce resources that maximizes the achievement of aims (Knapp ,1984) Technical (Productive) Efficiency Meeting a given objective at least cost (resources) ( output/Input) Allocative Efficiency Producing the pattern of output (supply) that matches the pattern of consumer want (demand) – Market efficiency Technical (Productive) Efficiency The concept of technical efficiency is used in analyzing the production of health and health care Technical efficiency emphasizes the relationship between resource inputs and outputs Production is technically efficient if the most output possible is produced from a given set of inputs, or the fewest inputs possible are used to produce a given amount of output For example, the number of patients that can be treated in an out-patient clinic depends on the number of medical and nursing staff that are available and other inputs If the most out-patient care clinic that can be provided by one doctor and two nurses is 20 treatments each day, then it is technically inefficient to provide 19 treatments using that number of staff or to provide 20 treatments using more staff. Technical (Productive) Efficiency in Healthcare Optimizing Staffing: Ensuring that the right number of healthcare professionals is working to meet patient needs without overstaffing or understaffing. Equipment Utilization: Making sure that medical equipment is used to its full capacity and not lying idle or being underused. Process Optimization: Streamlining administrative and clinical processes to reduce waiting times and duplication of services. Cost-Effective Purchasing: Acquiring medical supplies and services at the best possible prices without compromising quality. Allocative Efficiency It’s about allocating resources in a way that maximizes the overall welfare of society. Allocative efficiency is achieved when resources are distributed such that it is not possible to make any one individual better off without making someone else worse off (Pareto efficiency). In healthcare context, it involves ensuring that the right mix of healthcare services is produced to meet the population's needs in the most effective way. Allocative Efficiency in Healthcare Matching Services to Preferences: Ensuring that the mix of health services produced matches the preferences and needs of the population. Budget Allocation: Appropriately distributing the healthcare budget across different services, interventions, and populations in a way that maximizes health outcomes. Health Interventions: Choosing to fund health interventions that provide the greatest benefit in terms of health outcomes for the population. Cost-Effectiveness: Investing in treatments and preventive measures that offer the best value for money in terms of improved health outcomes. Key Differences between Productive Efficiency and Allocative Efficiency Focus: Allocative efficiency is about what to produce (which services, for whom), while productive efficiency is about how to produce (the process of delivering services). Outcome vs. Process: Allocative efficiency is outcome-oriented (maximizing health outcomes), whereas productive efficiency is process-oriented (optimizing the production process). Scope: Allocative efficiency has a broader societal scope, considering the overall health needs of the population. Productive efficiency is more focused on the internal workings of healthcare providers. Both allocative and productive efficiency are essential for a well-functioning healthcare system. Allocative efficiency ensures that the right services are being provided to meet the population's health needs, while productive efficiency ensures that these services are delivered in the most cost-effective manner. Efficiency and ‘the market’ Price/ Cost Price/ Cost Supply Equilibrium Price PE Supply E Demand QE Quantity Demand Quantity Concept 4: Equity Concept 4: Equity Equity is always an important criterion for allocation of resources. It is observable that people attach more importance to equity in health and health care than they do to many other goods and services It is important to distinguish equity from equality Equity means fairness; in the health care context this means a fair distribution of health and health care between people and fairness in the burden of financing health care Equality means an equal distribution, but it may not always be fair to be equal. For example, it might be thought to be unfair both healthy and sick people are given equal amounts of health care Equity in Healthcare Equity in health economics is about ensuring that everyone has fair access to healthcare and the opportunity to achieve the best possible health outcomes, considering their individual circumstances and needs. It requires a commitment to social justice and often involves redistributive policies to address inequalities in health and healthcare. Balancing Equity and Efficiency Efficiency Efficiency refers to the allocation of limited economic resources to meet the healthcare needs of a society Equity Equity is the ‘fair’ distribution of benefits across the population CHAPTER 4 Demand for Health and Medical Care Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com. LEARNING OUTCOMES ▪ Define the concept of elasticity of demand ▪ Identify the private, external, and social demand for health services ▪ Explain how time costs influence the demand for health services ▪ Explain the concept of Supplier-induced demand in healthcare Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ Explain the law of demand (model) and factors influencing demand DEMAND & THE LAW OF DEMAND IN HEALTHCARE ▪ Demand is: the quantity of healthcare products or services customers are willing and able to buy at different prices, when all other factors are held constant (ceteris paribus) ▪ The Law of Demand (Model) states that the “higher the price, the lower the quality demanded” and vice versa. ▪ Only ‘price’ changes for the law of demand also known as “quantity demanded.” ▪ The other factors that don’t change include: ▪ income, tastes and preferences, prices of other related goods & services, expectations ▪ If any of the other factors change: ▪ the demand curve will shift to the right if demand increases or ▪ the demand curve will shift to the left if demand decreases Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ ▪ ▪ ▪ Demand Curve for Physician Visits The Law of Demand P1 P0 q1 q0 Price changes lead to movements along D curve Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com Price THE DEMAND RELATIONSHIP Quantity Demanded versus Demand Curves d1 and d 2 show the quantity demanded increasing as the price decreases. Each curve represents a separate level of demand. With reference to curve d1, curve d2 represents an increase in demand, not just an increase in quantity demanded. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com © Jones & Bartlett Learning. Importance of Demand for Health care Demand analysis seeks to identify which factors are most influential in determining how much care people are willing to purchase Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com The major purpose of demand analysis for medical care is to determine those factors which on the average, most affect a persons utilization of medical services Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com Factors Influencing Demand Factors Influencing Demand Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com Change in the price Change in Factors other than price CHANGES IN DEMAND ▪ Change in the price ▪ Exogenous variables cause a shift in the entire demand curve or a change in demand ▪ Chang in Factors other than price ▪ Income ▪ Prices of other related goods and services ▪ Substitutes ( Brand-name drugs versus Generic drugs ) ▪ Complements (Physiotherapy and Pain Relief Medication) ▪ Tastes and Preferences ▪ Expectations Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ Endogenous variable – out-of-pocket price – causes a movement along a given demand curve, or a change in the quantity demanded Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com PRICE ELASTICITY OF DEMAND PRICE ELASTICITY OF DEMAND ▪ Measure of the responsiveness of quantity demanded to a price change at a given point or between two given points on a given demand curve Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ It attempts to measure responsiveness (change) when the only factor undergoing change is the price of the good or service RESPONSIVENESS OF QUANTITY DEMANDED TO PRICE FOR DIFFERENT SLOPED DEMAND CURVES Figure 4-4 Responsiveness of quantity demanded to price for different sloped demand curves. Curve BC shows a greater responsiveness of quantity demanded to price than curve AD. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com © Jones & Bartlett Learning. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com INSURANCE ARRANGEMENTS and DEMAND ALTERNATIVE INSURANCE ARRANGEMENTS ▪ Indemnity contract sets a fixed per-unit amount up to which the insurer will pay in the event of a service being used; the individual is responsible for price above the fixed amount ▪ Deductibles, on the other hand, are amounts that the insured must pay out-ofpocket before the insurance company starts to pay its share Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ Coinsurance is a payment by the patient of a proportion of the charged price; insurance pays the balance DEMAND CURVE WITH NO INSURANCE (DN), WITH 50 PERCENT COINSURANCE (D50), AND WITH A 20 PERCENT COINSURANCE (D20) © Jones & Bartlett Learning. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com When there is a coinsurance rate, Dn also represents the relation between the quantity demanded and the outof-pocket price. IMPLICATIONS OF HEALTH CARE ▪ The less a situation calls for immediate action, and the greater the relevance of substitutes, the less steeply sloped is the demand curve for medical care ▪ A reduction in consumption of medical care can lead to a deterioration in health; therefore, analysis of medical care demand may be best over multiple periods Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ Medical care should be viewed as a spectrum of services and goods, rather than as a good or service only sought and consumed in an emergency DEMAND FOR MEDICAL CARE ▪ There is an inverse relationship between price, especially out-of-pocket price and the quantity demanded of health care services Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ Price of medical care is relevant to the demand for many healthcare services, especially when viewed in terms of the impact of insurance on the utilization of healthcare services TYPES OF DEMAND FOR HEALTH CARE SERVICES ▪ E.g. Regular Check-Ups: visiting a Family physician periodically to monitor your condition. ▪ External demand – the demand by the other members of society for an individual to consume health care services ▪ E.g. Public Health: Vaccinations reduce the spread of infectious diseases, protecting public health and reducing healthcare costs for society as a whole. ▪ Community or social demand is the sum of internal and external demands Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ Private or internal demand – an individual’s demand for his or her own consumption of health care services SOCIAL DEMAND FOR MEDICAL CARE At the price of P1, individual A would purchase Q1 units of medical care. But because society values A's use of medical services, society determines that at price P1 individual A should consume Q2 units of medical care. As a result, subsidies or other actions must be provided to increase A's demand for medical services to society’s level of Q2. Societies demand for aid, therefore, is the distance between Q1 and Q2. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com © Jones & Bartlett Learning. INCREASE IN DEMAND FOR MEDICAL CARE WITH IMPROVED QUALITY OF CARE Demand curve D1 reflects an individual's initial demand for medical care. When the quality of care is viewed as increasing, or improved, then the individual's demand for medical care will shift outwards to demand curve D2, increasing the quantity demanded at each price of medical care. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com © Jones & Bartlett Learning. DEMAND FOR HEALTH CARE ▪E.g. elective cosmetic procedures ▪Health care can be regarded as a means to an end, such as health – an investment good or service ▪E.g. vaccinations, regular check-ups Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪Health care can be regarded as an end in itself – a consumption good or service TOTAL COST OF A HEALTHY DAY + ▪ The amount of time involved in traveling, waiting, and being examined to obtain a unit of healthcare X ▪ The wages or income that would have been earned during the time spent obtaining care or the value to the person of the activity given up to obtain the care C = (A x W) + (B X P), where C = unit cost to produce one healthy day A = amount of time required to produce 1 unit W = opportunity cost of individual’s time B = amount of purchased inputs required P = price of one unit of purchased input Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ The money cost involved in utilizing healthcare ROLE OF PHYSICIAN in The DEMAND for HEALTH CARE ▪ To undertake treatments upon which their patients have decided ▪ The patient’s demand for health care is now also dependent on the interaction with the physician Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ To act in an advisory capacity and inform patients of their level of health and the activities and treatments that might improve their health AGENCY ROLE ▪ Supplier-induced demand—Potential divergence of interest between the principal and the agent, with the agent having the ability to influence demand for personal gain Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ Perfect agent –Prescribe and/or provide a quantity of medical care such that the patient, if fully informed, would have chosen LIMITS TO SUPPLIER-INDUCED DEMAND ▪ Information sharing among patients, among patients and other providers, or on the Internet limits the degree to which a physician can sway the patient with incomplete or misinformation ▪ The assumption that the physician has perfect information about the patient’s health status and the productivity of medical care is not always realistic Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com ▪ With repeated events, the patient eventually gains information to be used to evaluate health and medical productivity Physician Care Market Simulation Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com In class Activity CHAPTER 5 Healthcare Productions and Costs Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com. CHAPTER OBJECTIVES §Define fixed and variable inputs and distinguish between a short-run and a long-run time horizon §Explain the concepts of total cost, average cost, and marginal cost and the relationships among them Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com §Explain the concept of a production function for medical services in terms of inputs and outputs PRODUCTION FUNCTION § A production function expresses how output will vary when inputs are changed in quantity § Marginal product is the additional production yielded by the use of one extra unit of variable input § Diminishing marginal product means at higher levels of output, the marginal productivity of the inputs begins to decline # of Nursing hours (Inputs) Total visits Marginal Productivity 1 5 - 2 12 7 3 16 4 4 19 3 (Outputs) Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § A summary of what goes into the process, the inputs, and what comes out, the output PRODUCTION FUNTION (Input- Output) § Graphically, the horizontal axis reflects the variable input and the vertical axis reflects the output § The production function gets flatter as the number of variable inputs increases, reflecting diminishing marginal product # of Nursing hours (Inputs) Total visits 1 5 - 2 12 7 3 16 4 4 19 3 (Outputs) Marginal Productivity © Jones & Bartlett Learning. The production function illustrates the relationship between the number of nursing hours employed and the amount of total output produced in terms of the number of physician visits provided. The horizontal axis reflects the input L (nursing hours); the vertical axis reflects the output Q (total visits). Because of diminishing marginal product, the production function gets flatter as a number of nursing hours increases. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § Production function illustrates the relationship between the variable input(s) and the amount of total output produced ECONOMIC ANALYSIS OF PRODUCTION § It involves the specification of alternative combinations of inputs that yield varying levels of outputs § Inputs typically consist of limited quantities of: § § § § § § Mental and physical labor Capital equipment Raw materials Intermediate goods and services Knowledge Entrepreneurial abilities Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § Production involves the creation or addition of utility PRODUCTION PROCESS IN HEALTHCARE § Technology is a way of transforming inputs into outputs § Outputs consist of finished or intermediate goods and services Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § Production process has considerable impact on economic variables and can be influenced by economic factors as well TYPES OF INPUTS § Variable inputs—amount can be purchased and used in varying amounts in the production cycle during the time period under consideration § E.g. Medication and Supplies Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § Fixed inputs—use is restricted to current function for the time period under consideration and cannot be varied or changed in the current production period § Salaries, buildings, and equipment RELATIONS BETWEEN COSTS (INPUT) AND OUTPUT Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com *Cost per hour for a nurse is $20 RELATIONSHIP AMONG TOTAL FIXED COSTS, TOTAL VARIABLE COSTS, TOTAL COSTS, AND LEVEL OF OUTPUT § Variable cost – The cost of resources that change with the level of output produced § Total cost – Total resource commitment for any specific level of output and equals fixed plus variable costs. © Jones & Bartlett Learning. At each production level, total costs can be divided between the fixed and variable costs. The fixed costs do not vary with output. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § Fixed cost – The cost of resources incurred irrespective of the level of output produced. TOTAL COST CURVE § Horizontal axis reflects the amount of output and the vertical axis reflects the total cost § Note the total cost curve gets steeper as the quantity of output increases, reflecting the diminishing marginal product of the input § The production function curve and the total cost curve reflect opposite sides of the same coin. © Jones & Bartlett Learning. The total cost curve illustrates the relationship between the quantity of output produced (Q) and the total costs of production. The horizontal axis reflects the number of physician visits produced (Q); the vertical axis reflects the total costs (TC equals TFC+ TVC). As the quantity of output increases, the total cost curve gets steeper, reflecting the diminishing marginal product of the input. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § Total cost curve illustrates the relationship between the quantity of output produced and the total costs of production RELATIONSHIP BETWEEN PRODUCTION FUNCTION AND TOTAL COST CURVE § The two curves reflect opposite sides of the same coin § Also notice that the total cost curve gets steeper as the total output increases § These two changes in the slopes of the curves occur for the same reason— diminishing marginal productivity © Jones & Bartlett Learning. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § Notice that the production function gets flatter as total output increases Working Example on Production Function, Marginal Product (MP) and Productivity Radiograph per Hour Technicians Total Product (TP) Marginal (MP) Product 1 10 10 increasing MP 2 26 16 increasing MP 3 50 24 increasing MP 4 74 24 constant MP 5 94 20 decreasing MP 6 100 6 decreasing MP Productivity Note: Marginal product (MP) is the change in output /change in the input to measure the additional output produced when the quantity of that input is increased by one unit Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com “Sweetgrass Radiology Labs has a fixed amount of radiology equipment. The laboratory can hire any number of radiology technicians per hour to produce radiographs, which are displayed on a screen. The relationship between the number of technicians hired per hour and the number of radiographs produced per hour is shown in the following table” Show the total and marginal products and indicate at each level of production whether the production function exhibits increasing, constant, or diminishing marginal productivity. Working Example on Production Function, Marginal Product (MP) and Productivity Radiograph per Hour Technicians Total Product (TP) Marginal (MP) Product 1 10 10 increasing MP 2 26 16 increasing MP 3 50 24 increasing MP 4 74 24 constant MP 5 94 20 decreasing MP 6 100 6 decreasing MP Productivity Note: Marginal product (MP) is the change in output /change in the input to measure the additional output produced when the quantity of that input is increased by one unit Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com “Sweetgrass Radiology Labs has a fixed amount of radiology equipment. The laboratory can hire any number of radiology technicians per hour to produce radiographs, which are displayed on a screen. The relationship between the number of technicians hired per hour and the number of radiographs produced per hour is shown in the following table”. Show the total and marginal products and indicate at each level of production whether the production function exhibits increasing, constant, or diminishing marginal productivity. TOTAL COST § The level of the TC curve is determined, in part, by the fixed costs § The shape of the TC curve is determined by the production function and the variation of output with variable inputs Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § Total cost (TC) is the vertical sum of the total variable costs (TVC) and the total fixed costs (TFC) Working Example on Total Cost § What were May’s fixed, variable, and total costs for the month? § Fixed costs = $12,000 a month for rent and utilities. § Variable costs are: o o o o Physician = $300/hour X 400 hours = $120,000 Nurse = $90/hour X 400 hours = $36,000 Secretary = $60/hour X 400 hours = $24,000 Supplies = $60/patient X 6,000 patients = $360,000 § Total variable costs = $120,000 + $36,000 + $24,000 + $360,000 = $540,000 v Total costs = $12,000 + $540,000 = $552,000. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com “The May Clinic rents a small office in Columbia. May pays the building owner a rent of $12,000 a month, which includes all utilities. It has signed a three-year lease. May hires a general practice physician at $300 an hour, a nurse at $90 an hour, and a secretary at $60 an hour. May assumes that each patient uses $60 in supplies. In September, the clinic was open for 400 hours, during which all personnel were available at all times to staff the clinic. During that time, 6,000 patients were seen” Working Example § What were May’s fixed, variable, and total costs for the month? § Fixed costs = $12,000 a month for rent and utilities. § Variable costs are: o o o o Physician = $300/hour X 400 hours = $120,000 Nurse = $90/hour X 400 hours = $36,000 Secretary = $60/hour X 400 hours = $24,000 Supplies = $60/patient X 6,000 patients = $360,000 § Total variable costs = $120,000 + $36,000 + $24,000 + $360,000 = $540,000 v Total costs = $12,000 + $540,000 = $552,000. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com “The May Clinic rents a small office in Columbia. May pays the building owner a rent of $12,000 a month, which includes all utilities. It has signed a three-year lease. May hires a general practice physician at $300 an hour, a nurse at $90 an hour, and a secretary at $60 an hour. May assumes that each patient uses $60 in supplies. In September, the clinic was open for 400 hours, during which all personnel were available at all times to staff the clinic. During that time, 6,000 patients were seen” RELATIONSHIP BETWEEN COSTS AND OUTPUT The ATC is separated into AFC and AVC. MC is addition to TC of the next unit produced. When MC is above ATC (or AVC), the average cost is falling; when MC is greater than ATC (or AVC), the average cost is increasing; and when MC equals ATC (or AVC), the average cost is constant; that is, it has reached a minimum point. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com © Jones & Bartlett Learning. RELATIONSHIPS BETWEEN COSTS AND OUTPUT § Marginal cost is initially below the average cost, which brings down the average cost as output increases § Eventually, marginal cost increases as output expands § As long as the marginal cost is below the average total cost, further expansion of output will continue to reduce the average total cost Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com § Average fixed cost (AFC)is lower at successively higher levels of output because the fixed cost is spread out over more units of output Working Examples Copyright © 2020 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com. Background texture © Bunphot/Getty Images. Working Examples Calculate its average and marginal costs. Visits 100 110 Total Cost $2,000 $2,100 Average Cost $20 $19 Marginal Cost $10 Average Cost = Total Cost/Visits. Marginal Cost = Change in Total Cost/Change in Visits. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com A clinic’s cost and visit data are as follows. Working Examples Calculate its average and marginal costs. Visits 100 110 Total Cost $2,000 $2,100 Average Cost $20 $19 Marginal Cost $10 Average Cost = Total Cost/Visits. Marginal Cost = Change in Total Cost/Change in Visits. Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com A clinic’s cost and visit data are as follows. Working Examples A community health center has assembled the following data on cost and volume. Visits 20 25 30 35 40 Total Cost $2,200 $2,250 $2,300 $2,350 $2,400 AC $110 $90 $77 $67 $60 MC $10 $10 $10 $10 Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com Calculate its average and marginal costs for volumes ranging from 25 to 40. Working Examples A community health center has assembled the following data on cost and volume. Visits 20 25 30 35 40 Total Cost $2,200 $2,250 $2,300 $2,350 $2,400 AC $110 $90 $77 $67 $60 MC $10 $10 $10 $10 What patterns do you see? The average cost drops steadily even though the marginal cost is constant. The fixed cost is getting spread over a larger and larger volume Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com Calculate its average and marginal costs for volumes ranging from 25 to 40. Class Activity Copyright © 2020 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com. Background texture © Bunphot/Getty Images. Class Activity – Exercise 1 Residents 80 100 120 140 Costs $10,000 $11,000 $12,000 $13,200 AC MC - Calculate its average and marginal costs for volumes ranging from 80 to 140. What patterns do you see? Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com Sweetwater Nursing Home has 150 beds. Its cost and volume data are below. Class Activity – Exercise 1 What are the average and marginal costs of a blood draw when the volume is 20,000? 10,000? What principle does your calculation illustrate? Volume Total Cost 0 $80,000 20,000 $260,000 10,000 $170,000 AC MC Copyright © 2021 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com It takes a phlebotomist 15 minutes to complete a blood draw. The supplies for each draw cost $4, and the phlebotomist earns $20 per hour. The phlebotomy lab is designed to accommodate 20,000 draws per year. Its rent is $80,000 per year. Will have more Class Activity in the Lab Session Copyright © 2020 by Jones & Bartlett Learning, LLC an Ascend Learning Company. www.jblearning.com. Background texture © Bunphot/Getty Images. HEALTHCARE MARKETS Dr Khaled Al-surimi, PHD Professor Healthcare management Business school Winter 2024 Learning Outcomes By the end of this lecture, you should be able to: 1. Define the fundamental concepts of markets and its power in the healthcare context ; 2. Describe the 9 conditions for competitive markets; 3. Identify the different forms of market structure in the healthcare context. 4. Explain the characteristics of different forms of market structure 5. Describe the concept and reasons for market failure in the healthcare context Lecture outline q q Markets Concepts Ø Concept of the market and its power Ø Ø Fundamental concepts of markets The 9 conditions for competitive markets Ø Applicability of Market Conditions in Healthcare Market Structure Ø Perfectly Competitive Ø Monopoly Ø Monopolistic competition Ø Oligopoly Ø Monopsony q Market Failure MARKETS A market is: the setting in which interaction between buyers and sellers occur a set of arrangements that brings buyers (demanders) and sellers (suppliers) together, and not necessarily at a physical location A market denotes a network of interactions among buyers and sellers of similar goods or services who have business relationships or the potential to have such relationships Central to analysis of functioning of a market is the price that the buyer pays and the seller receives for the good or service Fundamentals of Markets A market is simply the result of the interaction of supply (sellers) and demand (buyers). For any market to function, you need three components: – A good or service to trade. – Two independent players: Buyers, and Sellers – A 'price' of the good or service that conveys information about its value, that is: ü Buyers’ willingness to pay = Demand ü Seller's willingness to produce = Supply MARKET POWER § Market power is the ability of one participant (buyer or a seller) in a market to influence the terms and conditions at which exchanges of goods and services occur in the market § Essential ingredients for market power are § Limited availability of good substitutes for the good or service § Ease with which buyers and sellers can evaluate alternatives available § The existence of market power may enable the possessor to have undue influence over the use of resources to their benefit and to the disadvantage of other bargaining parties in the market Fundamentals of Markets – Examples of Goods and Services The 9 conditions for competitive markets The 9 conditions for competitive markets The Buyers/Clients 1. Able and willing to pay: Consumers must have the financial resources and willingness to purchase the goods or services at the prevailing market price. 2. Informed: Consumers must have full knowledge about the available goods and services, including their prices and quality. 3. Rational: Consumers are assumed to make decisions based on maximizing their utility. 4. Time to shop: Consumers have sufficient time to compare prices and options before making a purchase decision. The 9 conditions for competitive markets The Good or Service 5. Homogeneous: The product or service is standardized and undifferentiated across producers. For example, a commodity like wheat. 6. Price is known in advance: The prices are transparent and known to all market participants before they engage in transactions. The Producers/Suppliers 7. There are many sellers: There are enough producers such that none can control the market price; each is a price taker. 8. There is free entry: New producers can enter the market without any barriers, which ensures long-term competitive prices. 9. There is free exit: Producers can leave the market without incurring significant costs, preventing the risk of sunk costs that might otherwise deter exit. Applicability of the 9 Competitive Markets Conditions in Healthcare FORMS OF MARKET STRUCTURE Types of Markets Forms of Market Structure Perfect Competitive Monopoly Monopolistic competition Oligopoly Monopsony MARKET STRUCTURES AND THEIR CHARACTERISTICS https://www.youtube.com/watch?v=z7g6rFjvvkU Perfect Competition Definition: A market structure where numerous small firms compete against each other, selling identical products, with no single firm having any significant market power. Characteristics: Many buyers and sellers with no control over the market price. Homogeneous products with no differentiation. Free and unobstructed entry and exit in the market. Perfect information available to all participants. Price takers, neither buyers nor sellers can influence the market price. Example: Over-the-counter generic drug market where many companies sell identical products and consumers are fully informed about their choices. Monopoly Definition: A market structure characterized by a single producer that controls the entire supply of a unique product or service. Characteristics: One seller with no close substitutes for the product. Significant barriers to entry. Price maker, with significant control over the market price. Potential for inefficiency and higher prices due to lack of competition. Example: A pharmaceutical company with an exclusive patent for a life-saving medication. A local utility company being the only provider of water or electricity in a region. Monopolistic Competition Definition: A market structure where many firms sell products that are similar but not identical, allowing for competition on factors other than price. It is a mid-way between perfect competition and monopoly. Characteristics: Numerous sellers with differentiated products. Low barriers to entry and exit. Some degree of market power due to product differentiation. Reliance on non-price competition like advertising and service quality. Example: Different brands of health insurance plans offering varied coverage options and network access. Differentiated physical therapy clinics offering specialized rehabilitation services Oligopoly Definition: A market structure in which a few large firms dominate the supply of a product or service, with each firm being aware of the others' actions. Characteristics: Few dominant firms and high barriers to entry. Products may be homogeneous (steel) or differentiated (cars). Decisions by one firm can have significant impacts on others. Potential for collusion, either explicit or tacit, to avoid price wars. Example: A local market where only a few large hospital networks provide specialized medical services. A small number of pharmaceutical companies controlling the market for insulin. Monopsony Definition: A market condition where there is only one buyer for a product or service, giving the buyer substantial control over the market. Characteristics: A single dominant buyer and multiple sellers. The buyer dictates terms and conditions to sellers. Limited choice for sellers on where to sell their products or services. Can result in lower prices for the buyer, potentially at the expense of sellers. Example: A national health service that is the only purchaser of medical supplies, able to negotiate prices with suppliers. The Market Structure Continuum Monopolistic Competition Perfect Competition Monopoly Oligopoly Degree of market power increases in this direction 20 CLASS ACTIVITY Case Study MARKET FAILURES Market Failures Definition: Market failure in the context of healthcare markets refers to situations where the market, on its own, does not allocate resources efficiently and thus fails to produce an optimal level of goods and services (Lack of Market Equilibrium) In healthcare, this can lead to either too much or too little healthcare being provided, or to services being distributed inequitably Market failures thus call for external interventions to achieve a more efficient and equitable allocation of resources. WHAT IS MARKET FAILURE? https://www.youtube.com/watch?v=ErAUneQE3dE Reasons for Market Failure in Healthcare v Information Asymmetry v Externalities v Public Goods v Imperfect Competition v Equity Concerns v Uncertainty and Irregular Demand REASONS FOR MARKET FAILURE IN HEALTHCARE https://www.youtube.com/watch?v=mk3xIRXo2nw&t =22s Reasons for Market Failure in Healthcare Information Asymmetry Concept: Patients typically do not have the same knowledge about medical conditions and treatments that healthcare providers do. This can lead to two types of problems: adverse selection and moral hazard. Adverse selection: When a party enters into an agreement in which they can use their own private information to the disadvantage of another party Moral hazard: A situation in which one of the parties to an agreement has an incentive, after the agreement is made, to act in a manner that brings additional benefits to themselves at the expense of the other. Example: Patients might undergo unnecessary procedures because they trust the expertise of the healthcare provider, who may have financial incentives to perform additional services (supplier-induced demand). Reasons for Market Failure in Healthcare Externalities Concept: The actions of one individual or firm can have positive or negative effects on others that are not reflected in market prices. This can lead to under-consumption of beneficial services or overconsumption of harmful ones. Example: Vaccinations provide a positive externality by reducing the likelihood of disease transmission to others. If individuals do not consider this societal benefit, they might choose not to vaccinate, leading to lower levels of herd immunity. Reasons for Market Failure in Healthcare Public Goods Concept: Public goods are non-excludable and non-rivalrous, meaning one person's consumption does not limit another's, and it's not possible to prevent people from using the good. In healthcare, certain services like epidemic control can be considered public goods. Example: The efforts to control the spread of infectious diseases, such as the COVID-19 pandemic, benefit everyone, even those who do not contribute to the cost of these efforts, leading to potential underinvestment in pandemic preparedness. Reasons for Market Failure in Healthcare Imperfect Competition Concept: Healthcare markets often do not meet the criteria for perfect competition due to high barriers to entry, the presence of monopoly power, and other market distortions. Example: In many regions, a single hospital or healthcare provider may dominate, leading to higher prices and reduced choices for consumers Reasons for Market Failure in Healthcare Equity Concerns Concept: Markets may not provide a socially desirable distribution of healthcare because they allocate services based on ability to pay rather than need. Example: Essential healthcare services may be unaffordable for the poor, while the wealthy may have access to high-end services that do not necessarily provide proportional health benefits. Reasons for Market Failure in Healthcare Uncertainty and Irregular Demand Concept: Demand for healthcare is unpredictable and often urgent, leading to situations where the usual market mechanisms for balancing supply and demand do not work effectively. Example: Emergency services must be available at all times, although they are used irregularly. This can lead to inefficiencies in the allocation of emergency care resources. Reasons for Market Failure in Healthcare Regulatory Influences Concept: Government intervention in healthcare markets, while often necessary, can also lead to market distortions if not designed or implemented properly. Example: Stringent licensing requirements can limit the supply of healthcare providers, contributing to higher costs and limited access to care. HEALTH FINANCING SYSTEMS : HOW IS HEALTHCARE BEING FUNDED? HOW HEALTHCARE SERVICES ARE FUNDED? Dr Khaled Al-Surimi, PhD Professor Healthcare management department College of Business LEARNING OUTCOMES By the end of this session, you should be able to……. 1. Define healthcare financing 2. Explain the main functions (Pillars) of healthcare financing Resource collection, Risk pooing, and Resource allocation 3. Describe the main goals of healthcare financing 4. Identify the main sources of financing for the health sector. 5. Compare and contrast these different financing sources. DEFINING HEALTHCARE FINANCING The WHO defines health financing as “ a function of health system concerned with the mobilization, accumulation, and allocation of money to cover the health needs of the people, individually and collectively ”. Healthcare financing provides a mechanism for paying healthcare costs - Liaropoulos, L., Goranitis, I. Health care financing and the sustainability of health systems. Int J Equity Health 14, 80 (2015). https://doi.org/10.1186/s12939-015-0208-5 - https://www.who.int/health-topics/health-financing#tab=tab_1 DEFINING HEALTHCARE FINANCING Health financing is a core function of health systems that can enable progress toward universal health coverage (UHC) by improving effective service coverage and financial protection https://extranet.who.int/nhptool/BuildingBlock.aspx HEALTH FINANCING CORE FUNCTIONS § Resource mobilization § How do we get the money? § Resource Pooling § How do we spread the risk? § Resource allocation (Purchasing) § How do we pay providers for healthcare services? https://www.who.int/westernpacific/health-topics/health-financing#tab=tab_1 https://www.fpfinancingroadmap.org/learning/health-financing-concepts/health-financing-basics HEALTH FINANCING AND RISK POOLING HEALTH FINANCING FUNCTIONS FRAMEWORK Source: Schieber and Maeda 1997, The World Bank HEALTH CARE FINANCING GOALS Putting in place proper health financing mechanisms can ensure that different population groups, especially the most vulnerable and highrisk groups, can access care and be protected from catastrophic expenditures and impoverishment due to health payments. The goal of health financing policy is to move towards universal health coverage (UHC) by ensuring adequate spending on health at national and local levels and effective allocation of financial resources to different types of public and personal health services. https://www.who.int/westernpacific/health-topics/health-financing#tab=tab_1 MAIN SOURCES OF HEALTH FINANCING: 1. General Revenue Or Taxation. 2. Insurance Schemes. 3. Community Financing. 4. Direct Out Of Pocket Payments. 5. External Source of Financing. 1. GENERAL REVENUE OR TAXATION. v Definition: This refers to the funding of healthcare services through taxes or revenue collected by the government from individuals and businesses. These taxes can be specific (levied on particular goods such as tobacco or alcohol), general (such as value-added taxes), or through income and corporate taxes. GENERAL REVENUE OR TAXATION. Strengths: Provides a steady and predictable source of financing. Allows for universal coverage and access to health services. Reduces financial barriers to care, as it is not directly linked to the ability to pay at the point of use. Weaknesses: Can be politically challenging to increase tax rates. The wealthy may end up subsidizing the poor, which some might view as unfair. May not be responsive to consumer preferences if the government does not allocate resources efficiently. Example: The National Health Service (NHS) in the United Kingdom is primarily funded through general taxation 2. INSURANCE SCHEMES v Definition: Health insurance schemes involve pooling risks and resources so that the financial burden of health care costs is spread across many individuals, with payments made regularly through premiums or payroll taxes. Types: Social Insurance Private Insurance 2. INSURANCE SCHEMES Strengths: Spreads financial risk across a larger pool of individuals. Can provide comprehensive coverage. May offer a choice of providers and services. Weaknesses: Can be expensive for individuals and employers. May have issues with adverse selection and moral hazard. Can be complex to administer and require significant oversight. Example: The Medicare and Medicaid programs program in the United States is federal health insurance. 3. COMMUNITY HEALTH FINANCING v Definition: Community financing refers to health financing schemes that are organized at the community level, often targeting populations that are not covered by formal insurance schemes. These can include community health funds, microinsurance, or other indigenous forms of mutual health organizations. 3. COMMUNITY HEALTH FINANCING Strengths: Promotes community ownership and solidarity. Can be tailored to the specific needs of a community. Often has low administrative costs. Weaknesses: May only provide limited financial protection due to small risk-pooling pools. Often covers only basic services. Can be financially unstable and unsustainable without external support. Example: The Dhaka Community Hospital in Bangladesh operates a community-based health insurance scheme for informal sector workers. 4. OUT-OF-POCKET PAYMENTS v Definition: § This is the payment made by individuals at the point of receiving healthcare services without any prepayment or risk pooling mechanism in place. 4. OUT-OF-POCKET PAYMENTS Strengths: Simple to understand and administer. Users may have a greater sense of ownership over the services they use. This can lead to a more direct relationship between provider and patient. Weaknesses: This can lead to catastrophic health expenditures and impoverishment. Discourages people from seeking care, which can exacerbate health issues. Not equitable as it depends on the ability to pay. Illness might remain untreated because of a lack of funds Example: In many low-income countries, a significant portion of healthcare financing comes from out-of-pocket payments due to the lack of extensive insurance coverage. 5. EXTERNAL SOURCE OF FINANCING vDefinition: External financing refers to the funds that come from international donor agencies, foreign governments, international NGOs, and other entities outside of the country to support health services, usually in low- and middleincome countries 5. EXTERNAL SOURCE OF FINANCING Strengths: Can provide significant resources for health systems that are underfunded. Often targets specific health challenges like infectious diseases or maternal health. Can support innovations and infrastructure development. Weaknesses: Can create dependency and may not be sustainable in the long term. May not always align with the country’s own health priorities. Risk of fluctuations due to changes in donor policies or global economic conditions. Example: The Global Fund to Fight AIDS, Tuberculosis, and Malaria provides external financing to countries to combat these diseases, often supplementing their own domestic health budgets. OVERALL SUMMARY DIFFERENT FINANCING METHODS AVAILABLE AND ORGANIZATION OF THE FINANCING SYSTEMS Health Financing Systems Methods of public financing External financing “Aid” Methods of private financing Internal financing Social insurance systems (illness) Public systems of health services Unified System Fragmented System User payments For-profit or Non-profit private insurance Medical savings voluntary or compulsory Social contributions employers employees FINANCIAL INCENTIVES IN HEALTH: DEMAND-SIDE AND SUPPLY-SIDE FINANCING https://www.fpfinancingroadmap.org/learning/health-financing-concepts/health-financing-basics HOW MUCH WE SPEND ON HEALTH AND HEALTHCARE HTTPS://DATA.WORLDBANK. ORG/INDICATOR/SH.XPD.CH EX.GD.ZS?VIEW=MAP HEALTH PROVIDER PAYMENTS How do Healthcare Providers get paid? Dr Khaled Al-Surimi, PhD Professor Healthcare Management Department College of Business Learning Outcomes By the end of this session, you should be able to……. 1. Identify the different major healthcare service providers 2. Describe different types of healthcare provider payment methods 3. Compare and contrast each type of healthcare provider payment methods 4. Explain the relationship between provider behavior and insurer MAIN AGENDA… HEALTHCARE PROVIDERS TYPES PHYSICIAN PAYMENT METHODS HOSPITAL PAYMENT METHODS MANAGEMENT OF PROVIDER BEHAVIOR BY INSURERS Recap: Defining HealthCare Financing The WHO defines health financing as “ a function of health system concerned with the mobilization, accumulation, and allocation of money to cover the health needs of the people, individually and collectively ” Healthcare financing provides a mechanism for paying healthcare costs - Liaropoulos, L., Goranitis, I. Health care financing and the sustainability of health systems. Int J Equity Health 14, 80 (2015). https://doi.org/10.1186/s12939-015-0208-5 - https://www.who.int/health-topics/health-financing#tab=tab_1 Recap: Health Financing Core Functions ▪ Resource Mobilization ▪ How do we get the money? ▪ Resource Pooling ▪ How do we spread the risk? ▪ Resource Allocation (Purchasing) ▪ How do we pay providers for healthcare services? https://www.who.int/westernpacific/health-topics/health-financing#tab=tab_1 https://www.fpfinancingroadmap.org/learning/health-financing-concepts/health-financingbasics MAJOR HEALTHCARE SERVICE PROVIDERS Hospital Long-term care facility (LTC) Physician Pharmaceutical Home Care Hospice (Palliative care) HEALTH PROVIDER PAYMENT METHODS Physician Payments Fee-for-service Capitation Per case or episode Salary Hospital Pavement Global budget Per case Capitated Per diem Fee-for-service Retrospective costs PHYSICIAN PAYMENT METHODS PHYSICIAN PAYMENT METHODS Fee-forservice (FFS) Capitation Per case or episode (Bundel) Salary Fee-for-Service (FFS) Definition: A payment model where physicians are paid for each service, test, or procedure performed. Payment is dependent on the quantity rather than the quality of care. ▪ Advantages: ▪ It can incentivize providers to offer more comprehensive diagnostic and treatment options. ▪ Ensures that providers are compensated for every service they deliver. ▪ Disadvantages: ▪ This may encourage overutilization of healthcare services, increasing overall healthcare costs. ▪ Does not incentivize preventive care or care coordination. ▪ Example: A physician bills for each visit, test, and procedure. For instance, if a patient needs an X-ray, blood test, and consultation, the provider bills for each separately. Capitation Definition: A payment arrangement where physicians receive a set amount for each enrolled patient assigned to them, per period of time, whether or not that patient seeks care. ▪ Advantages: ▪ Encourages efficiency in healthcare delivery and may reduce unnecessary healthcare services. ▪ Simplifies billing and payment processes. ▪ Disadvantages: ▪ This may lead to under-provision of care, as physicians might be incentivized to minimize services to reduce costs. ▪ Physicians bear the financial risk if the costs of services exceed the capitation payment. ▪ Example: A primary care physician is paid a fixed monthly rate for each patient in their care, regardless of how many times the patient is seen. Bundled Payments (Per case or episode) Definition: A single, comprehensive payment for all services related to a specific treatment or condition over a period of time or episode of care. ▪ Advantages: ▪ Encourages coordination among all providers involved in a patient's care. ▪ Can reduce unnecessary services and promote cost-effective treatment plans. ▪ Disadvantages: ▪ Complexity in determining the bundle price and dividing payments among multiple providers. ▪ Physicians may avoid high-risk patients whose costs may exceed the bundled payment. ▪ Example: A single payment covers all of the care for a patient’s knee replacement surgery, including the pre-operative visit, the surgery itself, and all post-operative care and rehabilitation. Salary-Based Payment Definition: Physicians are employed and paid a fixed salary by the hospital, clinic, or health system they work for, regardless of the number of services they provide. ▪ Advantages: ▪ Provides financial stability for physicians. ▪ Can promote teamwork and discourage competition among physicians within the same organization. ▪ Disadvantages: ▪ May reduce the individual incentive for high productivity or efficiency. ▪ Might not adequately reward those who provide higher levels of care or take on more complex cases. ▪ Example: A physician working for a public or private hospital earns a yearly salary independent of the number of patients seen or procedures performed PHYSICIAN PAYMENT METHOD INCENTIVES Fee-for-service method The provider has an incentive to generate more services, especially if the fee exceeds the marginal cost of production Insurer has an incentive to monitor for excessive use of services provided Capitation The provider has an incentive to reduce the volume of visits and intensity of service provided because of the financial risk incurred Insurer has an incentive to monitor for low quality and underutilization of care PROFIT-MAXIMIZING MODEL OF FEEFOR-SERVICE PAYMENT Useful for analyzing the effects of the level of rates in a fee-for-service payment system Because the physician is paid a fixed rate per unit of service provided, the number of units produced will depend on the payment rate and marginal costs for the specific service Another important factor is the relative profits of fees paid for different services The incentive is created to increase the volume of care provided The fee schedule can influence both the type of services performed and the location of performance of the service HOSPITAL PAYMENT METHODS HOSPITAL PAYMENT METHODS Retrospective cost basis Prospective feefor-service system Per diem fees Per case or per admission payment Per case payment with adjustment for outliers Diagnosis related groups Capitation Global budget Retrospective Cost Basis Definition: This is a payment method where hospitals are reimbursed after services are delivered, based on actual costs incurred. ▪ Advantages: ▪ Ensures hospitals can recover the costs of services provided. ▪ Hospitals are less likely to under-provide care since reimbursement is based on cost. ▪ Disadvantages: ▪ This can lead to higher healthcare costs due to a lack of incentives to control spending. ▪ May encourage overutilization of services. ▪ Example: A hospital submits detailed costs for a patient's stay after discharge, and the payer reimburses these costs. Prospective Fee-for-Service System Definition: Hospitals are paid a predetermined fee for each service provided, established in advance. ▪ Advantages: ▪ Simple and transparent payment structure. ▪ Providers know in advance how much they will be paid for each service. ▪ Disadvantages: ▪ Can encourage volume over value, leading to potential overuse of services. ▪ Does not incentivize cost control or efficiency. ▪ Example: A hospital charges a set fee for an MRI scan, regardless of the actual cost or outcome for the patient. Per Diem Fees Definition: A fixed payment is made per day for a patient's care, regardless of the number or type of services provided during that day. ▪ Advantages: ▪ Simplifies billing and can make costs more predictable for payers. ▪ Encourages efficient delivery of services within a day. ▪ Disadvantages: ▪ May not account for the variability in costs of services needed from day to day. ▪ Hospitals may have an incentive to extend the length of stay to increase reimbursement. ▪ Example: A patient's daily hospital stay is billed at a flat rate, including all the routine services provided on that day. Per Case or Per Admission Payment Definition: A single payment is made for all the care provided during a single hospital admission. Advantages: Encourages hospitals to provide care efficiently for each case. Simplifies the billing process for both providers and payers. Disadvantages: This may lead to early discharge to minimize costs. Hospitals may be disincentivized to admit sicker patients who may require more resources. Example: A hospital receives a lump sum payment for the entirety of a patient's stay for a specific surgical procedure. Per Case Payment with Adjustment for Outliers Definition: Similar to per-case payments, but with adjustments made for cases that require unusually high costs ("outliers"). ▪ Advantages: ▪ Provides a safety net for hospitals treating patients with unexpectedly high costs. ▪ Aligns incentives for cost control while acknowledging the need for flexibility. ▪ Disadvantages: ▪ Complexity in determining what qualifies as an outlier and how adjustments are calculated. ▪ Potential for disputes between hospitals and payers regarding outlier status. ▪ Example: A hospital receives additional payment for a patient who had complications during surgery requiring extended ICU care beyond what is typical for the procedure. Diagnosis Related Groups (DRGs) Definition: A system where hospital payments are determined by the patient's diagnosis, with each diagnosis grouped into a category with a fixed payment rate. ▪ Advantages: ▪ Encourages efficiency and cost control by standardizing payments. ▪ Reduces the incentive to provide unnecessary services. ▪ Disadvantages: ▪ This may lead to under-provision of care if the DRG payment is lower than the cost of services needed. ▪ Complexity in coding and classification can lead to administrative burdens. ▪ Example: A hospital is paid a fixed amount for treating a patient with acute appendicitis, covering all related services. Capitation Definition: A payment model where a hospital is paid a set amount for each enrolled person assigned to them, per period of time, whether or not that person seeks care. ▪ Advantages: ▪ Encourages preventive care and efficient use of healthcare resources. ▪ Provides predictable revenue for providers. ▪ Disadvantages: ▪ Risk of under-service if the capitation payment is too low. ▪ May not adequately cover the costs of patients with chronic or severe conditions. ▪ Example: A healthcare system is paid a monthly fee for each member of a health plan, regardless of whether the member uses services. Global Budget Definition: A fixed total budget given to a hospital or health system for a defined period, covering all healthcare services. ▪ Advantages: ▪ Promotes strategic planning and prioritization of services. ▪ Can stabilize healthcare spending and encourage system-wide efficiency. ▪ Disadvantages: ▪ May limit funds available for unexpected expenses or new treatments. ▪ Risk of reduced service quality if the budget is inadequate. ▪ Example: A regional health authority allocates a set annual budget to a hospital, within which the hospital must manage all operational costs and patient care services. OTHER PAYMENT METHODS: Value-Based Purchasing (VBP) Definition: A payment model that rewards hospitals for the quality of care they provide, with incentives tied to performance on specific measures of quality and efficiency. ▪ Advantages: ▪ Aligns hospital payments with patient outcomes and satisfaction. ▪ Can improve the quality of care and patient experience. ▪ Disadvantages: ▪ May be challenging for hospitals to meet performance benchmarks, especially those serving high-risk populations. ▪ Requires robust data collection and reporting systems to monitor and manage performance measures. ▪ Example: A hospital receives higher reimbursement rates from payers for demonstrating low rates of hospital-acquired infections and high patient satisfaction scores. OTHER PAYMENT METHODS: Pay-for-Performance (P4P) Definition: A payment model that offers financial incentives to physicians and hospitals who meet certain performance measures for quality and efficiency. ▪ Advantages: ▪ Promotes higher quality care by incentivizing best practices and guideline adherence. ▪ Aligns financial incentives with health outcomes and patient satisfaction. ▪ Disadvantages: ▪ This may lead to a focus on easily measured aspects of care rather than complex patient needs. ▪ Risk adjustment is complex and imperfect, potentially disadvantaging providers serving high-risk populations. ▪ Example: Physicians or hospitals receive bonuses for meeting targets such as high rates of vaccinations or controlled blood sugar levels in diabetic patients. Overall Summary on the Common Healthcare Provider payment methods Payment Method Fee-for-Service (FFS) Capitation Bundled Payments Definition Payment for each service rendered. Characteristics Incentivizes high volume of services. Encourages Advantages Disadvantages Simple, ensures payment for Can lead to unnecessary every service, offers patient testing/treatments, doesn't focus choice. on outcomes. Examples Traditional doctor visits, diagnostic tests. Set amount per Predictable costs, Primary care physician Risk of under-service, patient per period, efficiency, focus on preventive incentivizes keeping patients payments in some managed may not cover all patient needs. regardless of services. healthy. care organizations. care. Single payment for all Simplifies Complexity in services related to a Encourages billing, focuses on entire defining bundles, potential for Joint replacement surgery, treatment or condition. coordinated care, efficiency. care episode. care skimping. maternity care bundles. Value-Based Payments (VBP) Payments adjusted based on care quality, outcomes, and efficiency. Focus Directly Potential Pay for Performance (P4P) Financial incentives for meeting specific performance measures. on quality improvements, efficiency. ties payments to performance metrics. for gaming the system, data collection burdens. Providers share in savings from reducing Shared Savings Programs healthcare spending. Incentivizes cost reduction while maintaining quality. Potential for additional revenue, promotes efficient care. Complex arrangements, risk of reduced care quality. Accountable Care Organizations (ACOs). Financial risk for providers, complex to administer. Some state Medicaid programs, alternative payment models. Global Payment Rewards Aligns Requires high-quality, cost-effective care. incentives with patient health outcomes. robust measurement and data analysis. Fixed annual payment Encourages overall health for all care for a management, long-term care patient or population. focus. Flat fee for direct access to primary care Simplifies billing, emphasizes Direct Primary Care (DPC) services. patient-provider relationship. Predictable spending, rewards preventive care. Enhanced access for patients, reduced administrative burden. Hospital Value-Based Purchasing (VBP) Program. Quality incentive programs in Medicare. Out-of-pocket costs for patients, Membership-based primary may not cover specialist care. care practices. MANAGEMENT OF PROVIDER BEHAVIOR BY INSURERS MANAGEMENT OF PROVIDER BEHAVIOR BY INSURERS Overall case management Preadmission management – Second opinions – Preadmission testing Concurrent management – Concurrent review – Discharge planning Post-hospital review – Retrospective review – Claims denials Provider behavior can be regulated before, during, or after hospital admission, or a combination of these three time periods. Before hospitalization, insurers can require providers to seek permission (pre-authorization); during hospitalization, insurers can monitor the length of stay or use of procedures (concurrent review); and following hospitalization, insurers can conduct reviews and deny claims (retrospective review). PRINCIPAL-AGENT RELATIONSHIPS Exist when one entity or individual (the agent) acts on behalf of another individual or entity (the principal) The arrangement works well when the agent is an expert at making necessary decisions that are in the best interest of the principal If there is a conflict of interest between the agent and principal in carrying out the conditions of the arrangement, then the arrangement will usually not work well The provider, acting as an agent, typically faces at least two principals: the patients being served and the insurers RELATIONSHIPS BETWEEN INSURER AND PROVIDER Insurers must pay providers a given amount when the provider renders services to members of the insurance plan Payment to the provider includes – The average costs incurred by providers for that service – Profits that are reasonable – Risks incurred under the payment type Insurer incurs transaction costs associated with – Searching for product or service availability – Characteristics of the products offered by providers – Prices – Costs of negotiating and preparing contracts – Costs of monitoring providers’ performance – Costs of enforcing terms of contracts HEALTH INSURANCE Dr Khaled Al-Surimi, PhD Professor Healthcare management department College of Business LEARNING OUTCOMES By the end of this session, you should be able to……. 1. Explain basic terms and concepts in health insurance 2. Describe the history development of health insurance 3. Identify the main types and models of health insurance 4. Explain why health insurance is important 5. Explain the concept of moral hazard and adverse selection and their implications 6. Explain factors influencing demand for insurance RECAP: HEALTH FINANCING CORE FUNCTIONS ▪ Resource mobilization ▪ How do we get the money? ▪ Resource Pooling ▪ How do we spread the risk? ▪ Resource allocation (Purchasing) ▪ How do we pay providers for healthcare services? https://www.who.int/westernpacific/health-topics/health-financing#tab=tab_1 https://www.fpfinancingroadmap.org/learning/health-financing-concepts/healthfinancing-basics RECAP. :HEALTH INSURANCE AND RISK POOLING RECAP. DEFINITION AND INSURANCE SCHEMES ❖ Definition: ▪ Health insurance schemes involve pooling risks and resources so that the financial burden of health care costs is spread across many individuals, with payments made regularly through premiums or payroll taxes. ▪ Types: ▪ Social Insurance ▪ Private Insurance RECAP: HEALTH INSURANCE AND HEALTHCARE FINANCING SYSTEMS KEY CONCEPTS AND TERMS IN HEALTH INSURANCE KEY CONCEPTS AND TERMS IN HEALTH INSURANCE Deductible Copayment Coinsurance Premiums Benefits Health Savings Account (HAS Urgent Care Out-of-pocket maximum KEY CONCEPTS AND TERMS DEDUCTIBLE ▪ The amount you pay out-of-pocket for healthcare expenses before an insurance provider will pay any expenses. ▪ After you pay your deductible, you usually pay only a copayment or coinsurance for covered services, and your insurance company pays the rest ▪ Higher deductibles generally lead to lower premium costs but mean higher initial expenses for the insured when seeking care For example: If your health plans deductible is $1,500, you’ll pay 100% of eligible healthcare expenses until the bills total $1,500. After you pay the deductible, you then share the cost with your health plan by paying either copayments or coinsurance. KEY CONCEPTS AND TERMS COPAYMENT A copayment (or “copay”) is a fee you pay at the time of service when you receive a specific medical service or supply. For example, your health insurance plan may require a $15 copayment for an office visit or brand-name prescription drug. KEY CONCEPTS AND TERMS COINSURANCE Coinsurance is a percentage fee that you pay for medical services or supplies once your deductible has been paid. For example: Your plan might cover 80% of your medical bill. You will have to pay the other 20%. The 20% is the coinsurance. KEY CONCEPTS AND TERMS PREMIUMS These are regular payments made by or on behalf of the insured individuals to the insurance company to maintain coverage Premium amounts can vary based on several factors, including the level of coverage, the insured's age, lifestyle, and in some cases, medical history. KEY CONCEPTS AND TERMS BENEFITS/COVERAGE Benefits are what’s covered under a health insurance plan. Covered benefits and services that are not included are defined in the health insurance plan's coverage documents. The term Coverage refers to the range of medical services and treatments that the health insurance policy agrees to fund. Coverage can include doctor visits, hospital stays, surgeries, prescriptions, and sometimes preventive care and mental health services, varying significantly between different policies and providers. KEY CONCEPTS AND TERMS HEALTH SAVINGS ACCOUNT (HSA) An account that lets you save for future medical costs. Money put in the account is not subject to federal income tax when deposited. Funds can build up and be used year to year to pay for deductibles, copayments, coinsurance, and other medical expenses. They are not required to be spent in a single year. KEY CONCEPTS AND TERMS URGENT CARE An urgent care center is a convenient option when illness strikes outside of your doctor’s regular office hours. Urgent care is an alternative when an illness, injury or condition is serious enough that you need care right away but not so severe that it requires hospital emergency room care. KEY CONCEPTS AND TERMS OUT-OF-POCKET MAXIMUM ▪The out-of-pocket maximum is your portion of the bill after insurance has covered their part. BRIEF HISTORY OF HEALTH INSURANCE BRIEF HISTORY OF HEALTH INSURANCE 19th Century Early 20th Century Early 21st Century Pre Early 20th Century Late 20th to Early 21st Century Late 19th Century Mid 21st Century Late 19th Century 20th Century 21st Century BRIEF HISTORY OF HEALTH INSURANCE ▪ Early Forms and Mutual Aid Pre-19th Century: Early forms of health insurance can be traced back to ancient times when guilds or benevolent societies offered mutual aid to their members. However, these were not health insurance in the modern sense but rather community-based support systems. ▪ Industrialization and Social Insurance Late 19th Century: The Industrial Revolution brought about significant social and economic changes, leading to the emergence of modern health insurance systems. Germany, under Chancellor Otto von Bismarck, introduced the first system of social health insurance in the 1880s as part of broader social welfare reforms. This model inspired similar systems in other European countries 19th Century Early 20th Century Early 21st Century Pre Early 20th Century Late 20th to Early 21st Century Late 19th Century Mid 21st Century Late 19th Century 20th Century 21st Century BRIEF HISTORY OF HEALTH INSURANCE ▪ Expansion of Health Insurance Models Early 20th Century: Various models of health insurance began to emerge across the world. The United Kingdom introduced the National Insurance Act in 1911, providing health insurance coverage to workers. Other countries developed their own systems, often influenced by the Bismarck or Beveridge models, the latter named after William Beveridge, which aimed at universal health coverage (UHC) funded by general taxation. 19th Century Early 20th Century Early 21st Century Pre Early 20th Century Late 20th to Early 21st Century Late 19th Century Mid 21st Century Late 19th Century 20th Century 21st Century BRIEF HISTORY OF HEALTH INSURANCE ▪ Post-World War II Developments Mid-20th Century: The aftermath of World War II saw a significant expansion of health insurance and welfare states in many countries. The National Health Service (NHS) was established in the UK in 1948, providing healthcare free at the point of use, funded by taxation. Many other countries, especially in Western Europe and Scandinavia, expanded or introduced public health insurance systems during this period. 19th Century Early 20th Century Early 21st Century Pre Early 20th Century Late 20th to Early 21st Century Late 19th Century Mid 21st Century Late 19th Century 20th Century 21st Century BRIEF HISTORY OF HEALTH INSURANCE ▪ Global Trends and Challenges Late 20th to Early 21st Century: As healthcare costs escalated, countries around the world faced challenges in maintaining and reforming their health insurance systems. The United States, with its unique employer-based insurance system, introduced significant reforms through the Affordable Care Act in 2010 to expand coverage and control costs. Other countries have pursued reforms to address issues of accessibility, affordability, and sustainability. 19th Century Early 20th Century Early 21st Century Pre Early 20th Century Late 20th to Early 21st Century Late 19th Century Mid 21st Century Late 19th Century 20th Century 21st Century BRIEF HISTORY OF HEALTH INSURANCE ▪ Universal Health Coverage (UHC) 21st Century: There has been a growing international movement towards Universal Health Coverage (UHC), driven by the World Health Organization (WHO) and other global health organizations. UHC aims to ensure that all people have access to the healthcare services they need without financial hardship. Many countries are working towards this goal, each adapting the concept of UHC to their specific context and healthcare system. 19th Century Early 20th Century Early 21st Century Pre Early 20th Century Late 20th to Early 21st Century Late 19th Century Mid 21st Century Late 19th Century 20th Century 21st Century TYPES OF HEALTH INSURANCE MODELS TYPES OF HEALTH INSURANCE MODELS Bismarck Model Out-of-Pocket Model Beveridge Model National Health Insurance Model Mixed Models Managed Care and Health Maintenance Organizations (HMOs) TYPES OF HEALTH INSURANCE MODELS Bismarck Model - Social Health Insurance Model Characteristics: Named after Otto von Bismarck, who implemented the first health insurance system in Germany in the 1880s, this model uses an insurance system typically funded jointly by employers and employees through payroll deduction. Coverage: It aims to cover all citizens and is characterized by private health insurance plans that have to accept everyone, with no profit on basic care. Countries: Germany, France, Belgium, Japan, and Switzerland use variations of this model. TYPES OF HEALTH INSURANCE MODELS Beveridge Model - Universal healthcare system Characteristics: Named after social reformer William Beveridge, this model involves health care being provided and financed by the government through tax payments, just as the police and public library services are. Coverage: There are no medical bills; healthcare is a public service, aiming for universal coverage. Healthcare providers can be government employees in some cases. Countries: The United Kingdom, Italy, Spain, and most Scandinavian countries are examples where the Beveridge Model is in place. TYPES OF HEALTH INSURANCE MODELS National Health Insurance Model Characteristics: This model combines elements of both Bismarck and Beveridge models. It uses public insurance to pay for healthcare services delivered by private providers. Coverage: Everyone in the country is covered, and the system is funded through taxes. The government has significant leverage to negotiate lower prices for pharmaceuticals and services. Countries: Canada, South Korea, and Taiwan are examples of countries using the National Health Insurance model. TYPES OF HEALTH INSURANCE MODELS Out-of-Pocket Model Characteristics: In countries with no systematic healthcare system, patients pay for all healthcare services out of their own pockets. The quality and access to healthcare are directly related to the individual's ability to pay. Coverage: This model is prevalent in many low-income countries where a significant portion of healthcare expenses is out-of-pocket, leading to disparities in access and quality. Countries: Many developing countries in Africa, Asia, and Latin America primarily use this model, though many are working towards more structured healthcare systems. TYPES OF HEALTH INSURANCE MODELS Mixed Models Characteristics: Many countries employ a mixture of the previous models or variations of them to meet their healthcare needs. For example, some may have a Beveridge model for the broader population but allow for private insurance and care for those who prefer it or can afford it. Countries: Australia and India are examples where mixed models are in operation, combining public and private insurance elements and healthcare provision. TYPES OF HEALTH INSURANCE MODELS Managed Care and Health Maintenance Organizations (HMOs) Characteristics: Particularly in the United States, managed care and HMOs represent a network or organization that provides or arranges managed care for health insurance, self-funded health care benefit plans, individuals, and other entities, acting as a liaison with healthcare providers on a prepaid basis. Coverage: The focus is on agreements with healthcare providers and services to provide care at reduced costs, and it includes mechanisms to encourage the use of care providers within the network. TYPES OF HEALTH INSURANCE TYPES OF HEALTH INSURANCE Private Health Insurance: Offered through private companies, this can be employer-sponsored or purchased by individuals. Policies and coverage details can vary widely. Public/Government Health Insurance Programs funded and managed by government entities are designed to provide coverage to specific groups such as the elderly, disabled, or low-income families. Examples include Medicare and Medicaid in the United States. Universal Health Coverage (UHC) Aimed at providing all citizens within a country access to necessary healthcare services without financial hardship, funded through taxation, social insurance, or a combination of methods. HEALTH INSURANCE: PURPOSE AND BENEFITS Financial Protection Health insurance protects individuals and families from the potentially high costs of medical care, reducing the risk of financial hardship due to illness or accidents Access to Care Insured individuals have better access to healthcare services, including preventive care, which can lead to earlier diagnosis and treatment of health conditions. Health Improvement By facilitating access to healthcare services, health insurance contributes to the overall health and wellbeing of the population, potentially reducing the incidence of severe health conditions and improving life expectancy. HEALTH INSURANCE: CHALLENGES AND CRITICISMS Cost and Affordability The rising cost of healthcare and insurance premiums is a significant concern, making it difficult for some individuals and families to afford coverage Coverage Gaps Not all health insurance policies cover every type of medical service, leading to gaps in coverage that can result in significant out-of-pocket expenses for some services or treatments. Complexity The complexity of health insurance policies and the healthcare system can make it challenging for individuals to understand their coverage and rights fully. WHY DOES HEALTH INSURANCE MATTER? Why is Health insurance important? WHY DOES HEALTH INSURANCE MATTER? Financial Protection Public Health Improvement Access to Care Economic Stability Equity and Accessibility Mental Health Support WHY DOES HEALTH INSURANCE MATTER? Financial Protection Prevents Bankruptcy: Medical care can be prohibitively expensive, especially in emergencies or for chronic conditions. Health insurance helps protect individuals and families from the financial ruin that can result from unexpected medical expenses. Cost Sharing: Through mechanisms like premiums, deductibles, and copayments, health insurance spreads the financial risk of healthcare costs across many individuals, making it more manageable for everyone. WHY DOES HEALTH INSURANCE MATTER? Access to Care ▪ Timely Medical Attention: Individuals with health insurance are more likely to seek medical attention when needed, without delay due to concerns about costs. ▪ Preventive Services: Many health insurance plans cover preventive services and screenings, which can detect health issues early when they are more treatable and less costly. ▪ Better Health Outcomes: Regular access to healthcare services leads to better disease management, reduced complications, and improved overall health outcomes. WHY DOES HEALTH INSURANCE MATTER? Economic Stability Reduces Absenteeism: By promoting health and well-being, health insurance can reduce absenteeism and increase productivity in the workforce. Supports Healthcare Providers: Insurance payments to healthcare providers support hospitals, clinics, and private practices, contributing to the stability and availability of healthcare services. WHY DOES HEALTH INSURANCE MATTER? Public Health Improvement ▪ Disease Control: Health insurance enables more individuals to participate in vaccination programs and infectious disease screenings, contributing to the control and reduction of communicable diseases. ▪ Health Data Collection: Insurance claims and health data help in monitoring public health trends, facilitating research, and informing public health policy and strategies. WHY DOES HEALTH INSURANCE MATTER? Equity and Accessibility ▪ Reduces Inequality: By providing a mechanism for more equitable access to healthcare, health insurance can help to reduce health disparities across different socioeconomic groups. ▪ Universal Coverage Goals: In countries with universal health coverage (UHC), health insurance is a key component in ensuring that all citizens have access to necessary healthcare services without financial hardship. WHY DOES HEALTH INSURANCE MATTER?? Mental Health Support ▪ Comprehensive Care: Many insurance plans now include coverage for mental health services, recognizing the importance of mental well-being as part of overall health. ▪ This support is crucial for individuals dealing with mental health issues who might otherwise be unable to afford treatment. MORAL HAZARD AND ADVERSE SELECTION Moral hazard Moral hazard occurs when the behavior of an insured individual changes in a way that increases the likelihood or magnitude of a claim after obtaining insurance coverage This change in behavior happens because the individual is less concerned about the risk due to the financial protection provided by insurance It might lead to less incentive for individuals to maintain a healthy lifestyle or take preventive health measures. Implications: Insurance companies often implement strategies like co-payments, deductibles, and co-insurance to share costs with policyholders and discourage unnecessary use of medical services. These mechanisms aim to make insured individuals more conscious of the costs associated with their healthcare decisions MORAL HAZARD AND ADVERSE SELECTION Adverse Selection Adverse selection refers to a situation where there is an imbalance in information between the insurer and the insured, leading to individuals who are more likely to use insurance being more inclined to purchase it. For example, in health insurance, individuals who know they have health issues or are at higher risk of needing medical care are more likely to seek insurance coverage than those who consider themselves healthy Implications: To combat adverse selection, insurers may use underwriting practices to assess the risk of applicants, including health screenings or questionnaires. Some health insurance systems, especially those aiming for universal coverage, use mechanisms such as mandatory insurance for all citizens to ensure that the risk pool is as broad and diverse as possible, thereby mitigating the effects of adverse selection MORAL HAZARD AND ADVERSE SELECTION Addressing moral hazard and adverse selection Both moral hazard and adverse selection present challenges to the sustainability and efficiency of insurance systems. Policymakers and insurers employ various strategies to address these issues, including the design of insurance products, regulatory measures to ensure broad participation and incentives for healthy behaviors. Understanding and mitigating the effects of moral hazard and adverse selection are crucial for maintaining a balanced and fair insurance market that can provide financial protection and access to care for the widest possible population. FACTORS IMPACTING DEMAND FOR HEALTH INSURANCE Consumer tastes and preferences Level of wealth Medical expenses in the event of illness Likelihood of illness Price of insurance Behavioral assumption HEALTH FINANCING AND INSURANCE DEPARTMENT AT MOPH, QATAR https://www.moph.gov.qa/english/derpartments/policyaffairs/hfid/Pages/default.aspx Health Labor Market Dr Khaled Al-Surimi, PhD Professor Healthcare Management Department College of Business Learning Outcomes By the end of this session, you should be able to……. 1. 2. 3. 4. Explain the key terms and concepts in the health labor market Describe the demand for and supply of health labor Explain how the labor market can explain wage and employment Explain how market power can affect labor market outcomes Health Workforce 2030 https://www.youtube.com/watch?v=QXpp4kmUCLU&t=2s The global health workforce stock and distribution in 2020 and 2030: a threat to equity and ‘universal’ health coverage? | BMJ Global Health Key Concepts and Terms Health LABOR MARKET The health labor market is a specialized segment of the labor market focused on the demand for, supply of, and distribution of health workers. This market plays a crucial role in determining the accessibility, quality, and effectiveness of healthcare services. Understanding its dynamics is essential for policymakers, healthcare organizations, and educational institutions aiming to address the health needs of populations. Health labor market framework and labor market dynamics World Health Organization. (2021). Health labor market analysis guidebook. Health Labor (Health workforce ) Health workforce refers to all individuals engaged in actions primarily intended to enhance health, including doctors, nurses, midwives, allied health professionals, technicians, administrators, and support staff within the healthcare sector. World Health Organization. (2021). Health labor market analysis guidebook. NUMBER OF WORKERS IN HEALTHCARE Depends on the number of individuals who choose to enter a health-related profession or career Depends on the number of hours the healthcare worker is willing to work and the geographic area of work World Health Organization. (2021). Health labor market analysis guidebook. Demand for Health Labor (Health Workforce ) Demand for Health Labor (Health Workforce) Demand curve for labor is the graphical representation of the relationship between quantity of labor inputs and the price of that input, ceteris paribus Demand is the quantity of labor a firm demands at a specific price at a specific period of time If the price of a unit of labor changes, so will the quantity demanded Demand curve will shift downward and to the left if labor becomes more productive or output prices increase Demand for Health Labor Considerations Production Function Marginal Productivity (MP) Marginal Value Product (MVP) Marginal costs (MC) and Marginal Revenue (MR) Demand for Health labor- Illustration PRODUCTION FUNCTION: Reflects the relationship between inputs and outputs as shown in (1) and (2) Relationship first exhibits increasing marginal productivity, followed by decreasing marginal productivity ( 3) Marginal productivity (MP) is the additional output achieved with the employment of one additional unit of input to the fixed factors of production © Jones & Bartlett Learning. Demand for Health labor- Illustration MARGINAL VALUE PRODUCT (MVP) Marginal value product (MVP) is the additional revenue obtained from hiring one more unit of the variable input (4) and (5) MVP initially increases but then decreases due to: Inefficiencies that occur from employing less effective units Difficulties that arise in coordinating activities among a larger workforce Note the price of the test is assumed to be $20 © Jones & Bartlett Learning. Demand for Health labor- Illustration The firm ( clinic, hospital, etc.) will increase inputs until marginal costs (MC) are equal to marginal revenue (MR) Note the price of the test is assumed to be $20 © Jones & Bartlett Learning. Class Activity Q& A: Checking understating Health Economic Evaluation: An overview Dr Khaled Al-Surimi, PhD Professor Healthcare Management Department College of Business Learning Outcomes By the end of this session, you should be able to……. 1. 2. 3. 4. Define economic evaluation and its importance Describe the types of Economic Evaluation. Explain the main stages in economic evaluation. Describe the check-list for health economic evaluation Outline Definition of Economic Evaluation Types of Economic Evalua