Health economics concepts have a direct impact on health care, and in order to improve the quality and affordability of health care medical professionals and policymakers have to consider the economic approach towards analyzing current health care issues and their underlying causes.
Economics is a broad term which is typically recognized the study of concepts and processes related to human choice and resource scarcity (Backhouse & Medema, 2016). The sub-discipline of economics which is concerned with the utilization of scarce resources in the context of health care is called health economics (Fuchs, 2000). Health economics exist due to the fact that resources, such as capital, human resources, equipment, etc., are scarce, or limited to the extent it is important to consider their proper allocation and management.
The concept of resource scarcity has a direct impact on health care economics. Ordinary people, health care professionals, and policy-makers have to prioritize resource allocation in both production and consumption. This fact requires careful consideration in order to allocate the right amount of resources to meet a particular level of demand. Resource scarcity requires proper operations management organization. All the processes between the production of a good or service and its delivery to the consumer should be optimized to maximize the use of available resources. Resource scarcity also necessitates the creation of policies and regulations that affect the allocation of resources in the most efficient way.
The concept of opportunity cost is connected with resource scarcity. Since resources are limited, consumers of health care services choose those services which have greater value and skips on other, less valuable, services. The opportunity cost is, therefore, “the value of the benefit of the next best alternative” (Wiseman, 2011, p. 8). In other words, the concept of opportunity cost describes the value of something that is given up when a choice to pursue something else is made. Opportunity cost has important implications for the health care economy: if scarce resources are to be allocated efficiently, then “the value of using these resources in alternative ways needs to be made explicit” (Palmer & Raftery, 1999, p. 1552).
Resource allocation is affected by supply and demand, the concept which describes the relationship between consumers and producers. Scarce resources are allocated for the production of goods or services which are in the highest demand. Health can be considered a good which is vital for people’s well-being, and health care delivery as a service. The lack of supply for health care services increases demand, and vice-versa. In addition supply and demand impact the prices of health care services. The excess supply of physicians, for example, will make their services cheaper due to lower demand. A short supply of physicians, however, will make their services more expensive.
Two other health economics concepts related to the demand are price elasticity and income elasticity. Price elasticity is a term that describes the effect price or supply change has on-demand (Shafrin, 2009, par. 1). The demand for the health care sector, in general, is low and is estimated at -0.17 (Ringel, Hosek, Vollard, & Mahnovsky, 2002, p. 8). In other words, health care sector demand is considered inelastic, “1 percent increase in the price of health care will lead to a 0.17 percent reduction in health care expenditures” (Ringel, Hosek, Vollard, & Mahnovsky, 2002, p. 8). Some classes of health care services are, however, more elastic than others.
These services include preventive care and pharmacy benefits (Ringel, Hosek, Vollard, & Mahnovsky, 2002, p. 8). It can be argued that these services are considered inessential, not typically covered by insurance, and can be substituted in the case of a price increase due to the existence of a variety of alternatives. Other health care services are vital, cannot be as easily substituted and, therefore, are less elastic. If a consumer is in pain or suffers from a condition that requires immediate medical attention, the role of price diminishes. Income elasticity is a concept that denotes the relationship between income changes and demand changes. Medical services are considered to be mostly income inelastic, but the exact elasticity estimates vary from one study to another due to due to the inclusion of “the effects of changes in medical technology in studies that use long time-series data” (Ringel, Hosek, Vollard, & Mahnovsky, 2002, p. 8).
There is no denying that it is essential for healthcare professionals and policymakers to have knowledge of the discipline of health economics. The complex nature of health care requires involved parties’ understanding of heath economics. Health care sector includes public and private health services, policies and regulations which define and monitor the process of health care delivery, and various health-related organizations.
Health economics resolves the uncertainty arising from the complexity of health care by explaining the work of the components of health care sector and the factors that drive behavior in production and consumption of health care services. The knowledge of health care economics allows the involved parties to calculate the required amount of and adequately allocate necessary resources such as capital, equipment, human resources in order to allow the health care system to function in the most efficient manner.
The knowledge of health care economics is valuable to both health care professionals and policy makers. In the recent years, several major laws affecting the practice of public health were enacted, aimed to minimize health disparities by lowering costs and improving the accessibility of health care. The creation of such laws as the Affordable Care Act (ACA) is impossible without a thorough understanding of health economics. Healthcare personnel are on the frontline of health care, and their knowledge and experience are invaluable to power players in the legislative arena. Therefore, they should also consider economic principles when making proposals focus on reducing economic losses associated with low-quality care.
Health care economics is different from other areas of the economy due to the existence of government intervention, which is aimed at improving the general well-being of the population. The primary potential benefits of learning about health economics principles related to government involvement in health care economics are improved cost control and higher quality care through resource allocation. In the light of economic uncertainty, the knowledge of health care economics can be applied to improve resource allocation.
Several developed countries, including the United States, introduced service rationing to the health care sector (World Health Report 2000, n.d., p. 59). This includes calculating and placing limits in order to ensure that hospitals operate below the allocated budget threshold. Such measures improve the efficiency of health services delivery through better use of existing resources. Another benefit is the expansion of federal health care programs such as Medicaid and Medicare, aimed at reducing health disparities which exist due to the income inequality. The knowledge of the principles of cost and price elasticity is vital for the understanding of those factors which necessitate the expansion of these programs and the benefit it will provide both to the public and private health care.
The United States health system heavily relies on private insurance, and the majority of hospitals in the United States are privately owned. The knowledge of health economics related to the private sector government involvement leads to the improvement of health care performance through better regulation of the health care delivery by the policy makers.
Delivery reforms introduced by the government lead to better patient outcomes. For example, recently there have been discussions on establishing minimum nurse-to-patient ratios in privately owned hospitals (Aiken et al., 2010, p. 2). After the regulations which mandated minimum nurse-to-patient ratios in some hospitals had been enacted, it had a direct effect on patient outcomes in these areas (Aiken et al., 2010, p. 15). The simple calculation of the required nurse-to-patient ratios is impossible without the understanding of such health economics concepts as supply and demand and resource scarcity.
The main causes of health disparities are the lack of sufficient funding and the improper management of available resources. Health economists use economic concepts to analyze and predict factors which affect the efficiency of health care. Recent health care reforms reminded us of the need to never stop improving the systems we currently have in place, and these improvements should take into consideration different types of financial information and health economics concepts.
Aiken, L., Sloane, D., Cimiotti, J., Clarke, S., Flynn, L., Seago, J.,…Smith, H. (2010). Implications of the California Nurse Staffing Mandate for Other States. Health Services Research Retrieved from, 45(4), 904-21. doi:10.1111/j.1475-6773.2010.01114.x
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Ringel, J., Hosek, S., Vollard, B., & Mahnovski, S. (2002). The Elasticity of Demand for Health Care: A Review of the Literature and Its Application to the Military Health System. Santa Monica: RAND Corporation.
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World Health Report 2000 (n.d.)