Economics is a discipline that deals with scarcity of resources.

Health economics is application of micro-economic tools to health.

Efficiency is the ratio of input to output. It is also defined as cost per unit produced. High efficiency is achieved when a service is rendered with use of minimum resources. Inefficiency is a waste of resources.

Effectiveness is ability to accomplish a defined task. It is the degree to which organizational goals and objectives are achieved.

Utility is economic jargon for satisfaction. A good is desired because it generates utility. If goods are of the same price the consumer will prefer those that provide higher utility. Utility can be positive or negative. Positive utility increases satisfaction whereas negative utility decreases satisfaction.

Need is defined based on objective criteria.

Want is subjective. It is an individual’s own assessment of health ‘wants’.

Demand is the result of an individual seeking healthcare and converting a health want into a health demand.

Supply is the response to the demand by supplying the goods or services demanded.

Utilization is amount of capacity actually used.

Equity is a measure of justice or fairness but does not always translate into equality. Equality argues that everybody should be treated in the same way.

Health as a commodity

Conventional economic analysis considers health as a commodity. Health is a complicated entity, little understood, and impossible to measure accurately. It is therefore difficult to use health as a commodity in health economics. Health is measured by morbidity, mortality, and disability.

Consumer sovereignty

Economists assume a sovereign, rational consumer who makes decisions on demand in his/her best interests. Need for health is a very strong drive different from demand for goods and services in the usual markets. Ordinary consumers can choose what to buy and what not buy according to their taste and resources. The sick on the other hand do not have such a choice in cases of serious disease. They are forced to buy health care at any price. Thus patients do not have consumer sovereignty in reality.

Supplier-induced demand

The conventional analysis of demand in free competitive markets can not be transferred directly to health because in health the health care provider makes decisions or recommendations about demand and then wears another that to become a supplier. The term supplier-induced demand is used to refer to the situation in which the physician controls both demand and supply.

Role of price in health

The demand for health is such a strong human drive related to survival that it cannot be modulated fully by price as are commodities in open competitive markets.

2.0 ECONOMIC ANALYSIS

Introduction

The purpose of economic analysis is to evaluate projects. There are 4 basic types of economic evaluation in public health: cost minimization, cost benefit analysis, cost effectiveness analysis, and cost utility. Cost minimization is the easiest of the economic evaluations because it uses monetary units directly to make a decision. It is choice of the least costly of 2 or more interventions that have the same effectiveness or outcome. Cost benefit analysis is economic appraisal that addresses allocative efficiency. It compares marginal benefit to marginal cost. Cost effectiveness analysis addresses meeting given objectives at least cost. CEA minimizes costs and is the first stage of CBA. Interpretation must take into account general background data such as population, total employment, and gross domestic product.

Cost benefit analysis (CBA)

CBA compares monetary costs with monetary gains. It measures the costs of an intervention and the benefits of the intervention in the same monetary units.

Cost effectiveness analysis (CEA)

Cost effectiveness analysis measures technical efficiency of an intervention. Costs are computed monetary terms and benefits are expressed in their natural units.

Cost utility analysis (CUA)

Cost utility analysis values benefits of health services in terms of utility. The most commonly used measure of utility is the number of years of life gained due to the health intervention. Cost utility analysis enables making a decision which of 2 or more interventions is better per cost unit when the outcome measure reflects the values and preferences of society. Since CUA is based on consumer preferences, it is of limited application due to its many value-laden assumptions. Cost utility analysis uses years of health as a measure of outcome. The most popular are: Years of Potential Life Lost (YPLL), and Healthy Years Equivalent (HYE). Quality of life is measured as  years of healthy life (YHL), quality adjusted life years (QALY), and Disability adjusted life years (DALY).