Health economics

Health economics studies how issues related to health care and health services affect a population. This field applies existing economic theories and models to the health care industry to determine how to provide the best application of potential care resources. It seeks to understand what drives the financial behaviors of individuals, health care providers, and governments when making health care decisions. By doing so, health economists determine which health care resources provide the best financial value. However, such determinations must take into account both the cost-effectiveness of the resulting health care and the needs of both individuals and corporations. Health economists are driven to understand the economic impact derived by the actions of consumers and producers, and how social choice drives health care decisions.

Health economics has come under increased scrutiny in the twenty-first century. In the United States, there has been greater focus on providing government-mandated health services. However, there is great disagreement over what services government should provide, who should pay for them, and what sort of oversight should be used to maintain any resulting health care program. US health care costs accounted for 17.8 percent of the country's gross domestic product (GDP) in 2015. In 2016, such costs reached $3.35 trillion, or $10,345 per person. This represented a 40 percent rate of growth between 2009 and 2016—a rise that can be linked to the establishment of the Patient Protection and Affordable Care Act (ACA) of 2010. The ACA, commonly referred to as Obamacare, is a federal health care initiative that was established by former president Barack Obama. Health care's share of the GDP reached a record high in 2020, at 19.5 percent, but health care spending soon slowed in the US. By 2022, US health care costs accounted for 17.3 percent of the GDP, or approximately $4.5 trillion. Health economics can serve an important role in determining the most effective and cost-efficient strategies for implementing an equitable nationwide health care system that enjoys broad support.

Background

Health economics is intended to examine issues underlying the health care system and the economic factors that drive this industry. Among these, they evaluate how economic factors influence the production of health care, how market forces drive health care costs, what costs result from human behaviors, and what strategies may reduce health care expenses. Ultimately, the growing demands for access to affordable health care are among the most important forces driving health economics.

Economists, in general, examine how raw materials and labor are transformed into a final set of goods or services. By studying available data, they seek to determine what materials need to be produced, the most efficient methods for production, and to whom the final goods or services should be sold. The health care industry, on the other hand, is primarily concerned with providing improvements in health. Therefore, combining these principles, health economics assesses the systems needed to promote better health in a studied population so that all individuals may be provided with the best possible quality of life.

To do this, health economists examine the available resources, which may include health care professionals, hospitals and clinics, medications, and companies that provide services. These resources are then divided into labor and capital. The human resources, such as doctors and nurses, are regarded as labor, while the buildings, medicines, and medical devices are classified as capital. The final goods and services created by this labor and capital may include any assigned treatments or the insurance used to pay for treatment.

Health economics was defined as a distinct field of economics based on papers published by Kenneth Arrow in 1963 and Mark V. Pauly in 1968 in the American Economic Review. Arrow in particular noted that health economics relied on market forces that were different from those found in other industries. For instance, people only use health care when they are sick; for most people, it is not a product that constitutes a daily part of their lives. Second, many medical procedures are too expensive to be paid for out of pocket. This requires people to rely on other financial avenues (such as insurance) to pay for many types of medical coverage. Third, people are largely unable to use comparison shopping to purchase their medical care. In most other industries, such as when buying a car, buyers can compare costs and buy a product they believe offers the best value. While the ACA has sought to make comparison shopping a vital driving force in the health care industry, the percentage of people able to price shop remains comparatively small. Instead, most people still rely on insurance that is offered to them through their workplace, relatives, or other sources. As a result, they have fewer options when it comes to making choices about their medical care. The insurer makes many of the decisions for them. Finally, the medical care paid for by insurance is regarded as a net loss by insurers. Insurance companies make no profit from providing extra services; rather, these are regarded as expenses. As a result, it is in the best financial interests of insurers to deny expensive medical claims or to refuse coverage to people who are very sick, although there are potential negative social repercussions to making decisions based solely on financial considerations.

The result is health care wherein the needs of the industry and those of the people it services are not necessarily in alignment. In most other industries, the customer and the service provider are in union; if a person hires a plumber, it is in the best interests of the customer and the plumber to have the repairs made correctly. The customer wants things fixed properly, while the plumber wants to have the customer use his services again or to recommend his company to others. In the health care industry, customers oftentimes remain dependent on their health care providers regardless of the level of service they offer. Many customers are unable to switch insurance providers and must therefore rely on the insurer to provide coverage even though there is only limited financial incentive for the insurer to do so. That said, there is some incentive for insurers to be proactive toward individual customers who are part of larger corporate insurance plans. If enough people complain, if the insurer receives bad publicity, or if companies find cheaper insurance providers, a company that offers insurance to its employers can switch providers. However, there is still less market flexibility in the health care industry than in most other industries, particularly for individual consumers.

In countries where health care is publicly funded, health economics again functions differently than in other markets. In such countries, health services are provided irrespective of either a person's interest in health care or his or her financial ability to pay. As a result, publicly run health care systems are less impacted by many traditional economic forces than other capitalist-driven industries. In this sense, they share some similarities with public utilities.

Overview

Health economics applies traditional economic theories of competition, disparities, efficiency, production, and regulation to health care and health services. It has applications in both private and public health care systems. For instance, economics is split into macroeconomics and microeconomics. Macroeconomics is concerned with issues on broader scales, such as the employment, inflation, trade policies, and growth of national economies. Microeconomics deals with smaller units, like single companies or individual people. Due to this smaller unit of study, issues related to scarcity of resources become more important. Scarcity of resources refers to the fact that the financial resources of a company are limited, so it must make financial determinations about how to make best use of its money within a set budget. On a microeconomic scale, this means that health economists search for health care solutions that provide the best service given the limited financial resources available. The goal is to provide a cost-effective solution that best meets the needs of both the company's bottom line and its employees. Macroeconomic health economics is often tied to public sectors, while microeconomic health economics is most concerned with private industry.

Health economists are responsible for evaluating the financial mechanisms that underlie health care systems. This includes studying health care proposals on federal, corporate, and individualized levels. Health economists may also be asked to review new technologies to assess their cost-effectiveness and value to the community, to make determinations about pricing, to review health care investment strategies, and to prevent antitrust policies that interfere with fair competition between health care operators and vendors.

Beyond their study of the financial composition of health care structures, health economists are often tasked with reviewing how these systems can affect the general population. In this capacity, they review the implications resulting from such issues as market failures, the uneven distribution of health resources, and the financial costs to a population resulting from having to pay for the care of the uninsured. Similarly, they work with researchers to examine how risky behaviors influence health care costs. For instance, health economists are often responsible for calculating the financial cost to society resulting from such damaging behaviors as smoking or drug abuse. Using data from clinical trials, they can determine the effectiveness of offering financial incentives that can help reduce unhealthy behaviors.

Health economists' duties may vary depending on whether they are in the private or public sector. In the public sector, they may be tasked with finding cost-effective methods of providing vaccinations to broad segments of the population. They may also be asked to determine whether curative or preventive approaches to health care initiatives cost less. In addition, they help make financial decisions about how much money should be spent on publicly funded medical research proposals. Health economists in the public arena also typically work with policymakers to create budgets that guide public health care decisions.

The goal of health economists in the private sector is to maximize the profits of companies by promoting heightened financial efficiency. To this end, they may work with researchers to establish strategic plans that capitalize on the financial potential of new technologies or drugs. They may also assess how existing resources may be best used, or to provide financial data that allows insurers to make pricing decisions about group insurance plans.

Health economists may also be asked to review the cost-effectiveness of providing access to drugs or other procedures that can potentially treat life-threatening conditions. These analyses use a system that compares the average total cost of certain drugs or treatments versus the average number and quality of life years gained because of their use. Such reviews can be controversial, as health care providers may deny access to certain expensive drugs based upon considerations of actual cost, medical effectiveness, and whether they provide the most cost-effective solution.

For instance, medical drugs are required to undergo rigorous clinical trials that can last for several years. During these trials, doctors review how effective they are in treating certain conditions. Patients will ask that they be provided with any drug that may offer hope for improving their quality of life or extending their life span, regardless of their clinical effectiveness. However, from the point of view of insurers, some drugs may be deemed too expensive to include as part of their insurance plan. For example, if such drugs have only demonstrated a limited level of effectiveness or if they result in a treatment regimen that is more expensive than another medical course of action that has demonstrated comparatively similar levels of effectiveness, health economists may recommend that these drugs be denied to clients. Such considerations that take financial cost into greater consideration than the health of the patient can be very divisive. However, from the perspective of the insurer, it cannot operate as a functional financial institution and continue to assist all of its insured clients if it approves every medical procedure—especially those that only offer limited success rates. Health economics is often tasked with determining the financial benchmarks used by insurers or publicly funded health care programs that allow them to make these often difficult and unpleasant decisions.

Health care spending continued to grow faster than the general economy into the 2020s. Out-of-pocket expenses for the consumer were also estimated to continue to grow. This latter outcome is the result of more people getting their medical coverage from plans with high deductibles. Such health care plans require the patient to pay for a certain set amount (either as a percentage or flat fee) for certain types of care and medications. While such plans are typically less expensive to buy, they may also provide less coverage. Health economics is responsible for both setting the prices of such plans and studying the financial impact that plans may have on the broader population as a whole. With health care remaining a source of continuing public controversy, health economics has assumed a greater place in the discussion of how to best implement and maintain health care programs.

Bibliography

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