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HEALTH ECONOMICS
Presented by:
Dr Amith E S
Postgraduate Student

Department of Community Medicine

Gadag Institute of Medical Sciences
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 OVERVIEW

1. Introduction
2. Basic Concepts
3. Terms in Economics
4. Demand, Supply
5. Economic Evaluation
6. Types of Economic Evaluation
7. References

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 INTRODUCTION

• Economics (in Greek) = Oikos (household) + Nomos (Management)

• Father of Economics: Adam Smith – 18th century Scottish economist

• Economics is the science of scarcity

• Economics: The study of how to make choices that affect the allocation and
distribution of scarce resources

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 INTRODUCTION

Unlimited wants

Limited resources

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 HEALTH ECONOMICS

• Health economics is a branch of economics concerned with issues related to

efficiency, effectiveness, value and behavior in the production and
consumption of health and healthcare

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 HEALTH ECONOMICS

Health Services

Health Concept

Medical Education,
Training and Research
Concept of Health
Economics
Cost
Capital and Recurring
Expenditure
Economic Concept

Depreciation
Health is an investment

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 ECONOMICS OF HEALTH AND HEALTH CARE

1. Ability to provide treatment for an wide range of diseases has increased

2. Demand for care has increased

3. Attention has shifted from the passive funding and administration of systems to
active concern about the cost of care and the health outcomes achieved

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08/13/2025 10
BASIC CONCEPTS

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 MICROECONOMICS

• Deals with the behavior of individual prices and quantities (issues at individual
level).

• Our knowledge of economics helps us to manage our personal lives, to understand

society and to design better economic policies.

Examples:

• Interaction between one doctor and one patient

• Interaction between all doctors and all patients on one procedure

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 MACROECONOMICS

• The study of the behavior of the entire economy and concerned with the behavior of
the economy as a whole or with the broad aggregate of economic life such as national
output, income, the overall price level, unemployment, and foreign trade

Examples:

• Interaction between all doctors and all patients

• Interaction between all doctors and all patients with reference to all procedures and
services

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 POSITIVE & NORMATIVE ECONOMICS

Positive Economics: describes the facts and behavior in the economy.

Eg: What will be the effect of higher cigarette taxes on the number of smokers?

Normative economics: involves ethics and value judgments.

Eg: Should the government give money to poor people?

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 SIZE & SCOPE OF THE HEALTH ECONOMY

• Size & Scope of the Health Economy

• Share = Total health expenditures/Total GDP

• Value ranges from 0 – 1

• GDP vs GNP

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 GDP vs GNP

BASIS FOR
GDP GNP
COMPARISON
Meaning The worth of goods and The worth of goods and services produced
services produced within the by the country's citizens irrespective of the
geographical limits of the geographical location is known as Gross
country is known as Gross National Product (GNP).
Domestic Product (GDP).
What is it? Production of products within Production of products by the enterprises
the country's boundary. owned by the residents of the country.

Basis Location Citizenship

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 GDP vs GNP

Calculation GDP = Consumption + GNP = GDP + NFIA

Investment + Government
Spending + Net Export
On which scale On a local scale On international scale
productivity is
measured?
Focus on Domestic production Production by nationals

Outlines The strength of the country's How the residents are contributing towards
domestic economy. the country's economy.

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 GDP & HEALTH EXPENDITURE

• WHO recommends that countries should spend at least 5% of their GDP on

health expenditure to achieve universal health coverage and access to quality
essential healthcare services.

• The 5% figure is considered a minimum threshold

• The advanced healthcare systems typically spend more (~ 8-12% of GDP)

• Established to guide developing and middle-income countries in particular

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 INDIA'S GDP & PUBLIC HEALTH EXPENDITURE

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 INDIA'S GDP & PUBLIC HEALTH EXPENDITURE

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 INDIA'S GDP & PUBLIC HEALTH EXPENDITURE

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 INDIA'S GDP & PUBLIC HEALTH EXPENDITURE

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TERMS IN ECONOMICS

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 1. COST

• The value of resources used to produce something; including a specific health

services or set of services

• Cost is not just the price paid for that resource but also includes the benefit
foregone by not choosing the alternative

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 TYPES OF COST – INPUTS

1. Direct Cost

• Related to the use of resources as a result of the treatment and healthcare process

• Eg: Lab tests and facilities for treatment, transportation, caregiver expenses,
hospital stays, medicines

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 TYPES OF COST – INPUTS

2. Indirect Cost

• Related to the ‘losses’ to the society incurred as a result of the impact of a

disease, treatment

• Eg: loss of wages due to absenteeism to work, early retirement

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 TYPES OF COST – INPUTS

3. Intangibles

• Related to the distress, suffering, anxiety and impact on quality of life resulting
from illness and poor health

• Eg: emotional anxiety, fear, pain and stigmatization

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 TYPES OF BENEFITS – OUTPUTS

1. Direct Benefit (immediate)

• These are usually clinically defined units appropriate to the area of study

• Eg: lives saved, reduction in tumor size, change in blood pressure, etc

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 TYPES OF BENEFITS – OUTPUTS

2. Indirect Benefit

• Benefits valued in monetary terms.

• Eg: Patients have more working hours and in turn can earn more wages

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 TYPES OF BENEFITS – OUTPUTS

3. Intangible Benefit

• Nonmaterial benefits

• Eg: general well-being/happiness/satisfaction, these are more generally labeled as

utilities

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 COSTS OF HEALTHCARE

Capital Cost

• Costs to purchase the major capital assets required by the programme

• Represent investments at a single point in time

• Not listed in the budget or account of the organisation

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 COSTS OF HEALTHCARE

Recurrent Cost

• Running costs or operating costs, which are incurred each year

• Salaries, drugs, maintenance of vehicles, fuel and electricity

• Resources that are purchased often

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 COSTS OF HEALTHCARE

Total Cost

• Cost of producing a particular quantity of output

• Total cost of a program or an intervention is derived by adding all the costs

incurred in producing a given level of output

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 COSTS OF HEALTHCARE

Average Cost

• Cost per unit of output

• Computed by dividing the total cost by the number of participants or other

relevant intervention units

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 COSTS OF HEALTHCARE

Overhead Cost (Shared Cost)

• The ongoing expense of operating a business

• Resources that serve many different departments and programs

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 COSTS OF HEALTHCARE

Marginal Cost

• The change in the total cost that arises when the quantity produced is
incremented by one unit

• Extra cost of producing one more unit of a good

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 COSTS OF HEALTHCARE

Incremental Cost

• The total additional cost associated with the decision to expand output

• Difference in cost or effect between two interventions or programs being

compared in the evaluation

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 COSTS OF HEALTHCARE

Opportunity Cost

• The loss of potential gain from other alternatives when one is chosen.

• Concept – Rupee spent on “A” is Rupee denied to “B”

• Opportunity costs are not restricted to monetary or financial costs

• Plays a crucial part in ensuring that scarce resources are used efficiently

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 COSTS OF HEALTHCARE

Fixed Cost

• Costs which do not vary with the quantity of output in the short run (one year)

Variable Cost:

• Costs which vary with the level of output

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 TERMS IN HEALTH ECONOMICS

Depreciation

• The reduction in value of an asset - occurs overtime as it gets older or wear out

• Investments such as equipment and buildings wear out with time or they
depreciate unlike land whose value is mostly non depreciable

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 TERMS IN HEALTH ECONOMICS

Example of Depreciation Cost

• A manufacturing company purchases a X-Ray machine for Rs 100,000. The

machine has an estimated useful life of 10 years and a salvage value of Rs 10,000.

• Annual Depreciation Expense:

• 𝐶𝑜𝑠𝑡−𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒/𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒=100,000−10,000/10= Rs 9,000

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 TERMS IN HEALTH ECONOMICS

Efficacy

• The extent to which a specific intervention, procedure, regimen or service

produces a beneficial result under ideal conditions

Effectiveness

• It measures the extent to which a specific intervention, procedure, regimen or

service when implemented in the field in routine circumstances, does what it is
intended to do for a specified population
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 TERMS IN HEALTH ECONOMICS

Relevance

• The appropriateness of the program or service whether it is needed at all

Efficiency

• Measures how well resources are used in order to achieve a desired outcome

• It is the ratio of the output to the inputs of any system

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 TERMS IN HEALTH ECONOMICS

1. Allocative Efficiency

• How different resource inputs are combined to produce a mix of different

outputs

2. Technical Efficiency

• Concerned with achieving maximum outputs with the least cost

3. Overall efficiency – measures the combined effect of allocative and technical

efficiency

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 TERMS IN HEALTH ECONOMICS

Adequacy

• Refers to the sufficiency of something, often resources or income, to meet

specific needs or standards

• E.g. staff allocated to a certain program may be described as inadequate if

sufficient attention was not paid to the amount of work load and targets

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 TERMS IN HEALTH ECONOMICS

Accessibility

• The ability of individuals to access and utilize economic resources, goods, and
services

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 TERMS IN HEALTH ECONOMICS

Acceptability

• The service provided may be accessible but not acceptable to all

Impact

• Expression of the overall effect of a program, service or institution on health

status and socio-economic development

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 TERMS IN HEALTH ECONOMICS

Out of Pocket Expenditure

• The money people pay directly from their own pockets for medical services It is
a part of private health expenditure.

Catastrophic Health Expenditure

• Out-of-pocket spending for health care that exceeds 40% of a household's

income with the consequence that households suffer the burden of disease

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 TERMS IN HEALTH ECONOMICS

Willingness to Pay

• The maximum amount a person is willing to pay for a product or service

• Willingness to Accept

• The minimum amount a seller is willing to accept for a product or service.

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 TERMS IN HEALTH ECONOMICS

Fiscal Deficit

• A fiscal deficit occurs when a government's total expenditures exceed the

revenue that it generates

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DEMAND, SUPPLY

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 DEMAND VS SUPPLY

Need Availability
Felt Need Access
Utilization
Affordability Equity
Resources OOP
Willingness Price

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 DEMAND FOR HEALTHCARE

1. Medical care
2. Occupation
3. Consumption pattern
4. Education
5. Income
6. Costs
7. Sex, marital status
8. Culture etc
9. Monetary v/s Non-monetary costs

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 SUPPLY OF HEALTHCARE

1. Cost of delivery
2. Possibility of substitution
3. Market for inputs (doctors, nurses, drugs, equipment etc.)
4. Remuneration
5. How different remunerations affect behavior of suppliers of health care

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 NEED VS DEMAND

Need Demand
Someone's subjective idea (may beObjectively observable as behaviour in the
based on a formula applied objectively,market.
but the choice to use the formula was
someone's subjective idea).
Money is not a factor Money is a key factor.

"Demand" is also called "effective

demand,“ because it's expressed only by
spending money.

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ECONOMIC EVALUATION

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 ECONOMIC EVALUATION

Comparative analysis of alternative courses of action in terms of both their costs

and consequences in order to assist policy decisions. - Drummond et al (1997)

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 ECONOMIC EVALUATION

• Process of systematic identification, measurement and valuation of the inputs

and outcomes of two alternative activities, and the subsequent comparative
analysis of these

• The existence of alternatives is at the heart of an economic evaluation because

making choices is central to economics

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 HISTORY OF ECONOMIC EVALUATION

• In the 1800s, mortality statistics were the primary outcomes reported by the
healthcare institutions, with no regard for the results of the operations and
interventions that were performed within their institutions

• Apart from small experiments in collecting outcome data and relating it to

healthcare interventions, very few advances were made in the first half of the
19th century

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 HISTORY OF ECONOMIC EVALUATION

• Donabedian was the first to assess the healthcare interventions using the
concepts of structure, process and outcomes

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 HISTORY OF ECONOMIC EVALUATION

• Because of a lack of uniformity in approach , these early economic analyses

were of limited use in aiding decisions about which treatments to fund

• Article by Kenneth Arrow (1963) is credited with giving rise to health economics
as a discipline - “Uncertainty and the welfare economics of medical care”

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TYPES – ECONOMIC EVALUATION

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 COSTS AND BENEFITS IN ECONOMIC EVALUATION

RESOURCES HEALTHCARE HEALTH

CONSUMED PROGRAMME IMPROVEMENT

COSTS (C) EFFECTS (E) UTILITIES (U) BENEFITS (B)

C1 – Direct costs B1 – Direct benefits

Health
C2 – Indirect costs Health effects B2 – Indirect benefits
effects in
C3 – Intangible in natural units B3 – Intangible
QALYs
costs benefits
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 Are both costs and outcomes of alternatives assessed?
NO
Is the comparison of two or more

EXAMINES ONLY EXAMINES ONLY COST YES

NO OUTCOME
PARTIAL EVALUATION PARTIAL EVALUATION PARTIAL EVALUATION
alternatives?

• OUTCOME DESCRIPTION • COST DESCRIPTION • COST-OUTCOME DESCRIPTION

FULL ECONOMIC EVALUATION

• COST MINIMISATION ANALYSIS
PARTIAL EVALUATION • COST-EFFECTIVENESS ANALYSIS
PARTIAL EVALUATION
YES • EFFICACY (OUTCOME) • COST UTILITY ANALYSIS
• COST ANALYSIS
ANALYSIS • COST BENEFIT ANALYSIS

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 PARTIAL EVALUATION

1. Outcome description e.g. No. of lives saved

2. Cost description e.g. Burden or cost of illness

3. Cost outcome description e.g. Data on cost of coronary care unit, estimate of no.
of lives saved

4. Efficacy or effectiveness evaluation eg. RCT

5. Cost analysis e.g. cost compared between home and hospital based treatment of
tuberculosis

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 COST OF ILLNESS STUDY

• To quantify the burden a particular disease places on society

• Outcome of treatment not considered

• Provide basic data for an economic evaluation that investigates the outcome when
something in that situation changes

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 COST OF ILLNESS STUDY

• Estimates total costs of a disease or condition

Medical and non-medical costs

Productivity losses

• Reported as cost
Annual total cost

Average patient lifetime cost

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 COST ANALYSIS

• A resource tool for financial management in hospital or department

• It is an economic evaluation technique that involves the systematic collection,

categorization, and analysis of program or intervention costs, and cost of illness

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 Cost Minimization Analysis

Cost Benefit Analysis

TYPES OF
FULL EVALUATIONS
Cost Utility Analysis

Cost Effectiveness Analysis

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 Interventions Yes Cost Minimization
Equally effective Analysis
No
Outcomes measured in Yes
monetary terms Cost Benefit Analysis

No
Outcomes measured in Yes
QALYs Cost Utility Analysis

No
Cost Effectiveness
Other units
Analysis
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 COST-MINIMIZATION ANALYSIS

Used when an intervention or service

Aims to identify the least
and its alternative achieve outcomes
costly option
that are the same

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 COST-MINIMIZATION ANALYSIS
Cost-minimization Analysis of Laparoscopic and Open
Example
Appendicectomy (Kald A et al. 1999)

Conclusion: Laparoscopic appendicectomy has higher direct costs than

open operation
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 COST-EFFECTIVENESS ANALYSIS

Compares the costs of

alternative procedures, Expressed in terms of one
services or interventions main outcome measured in
with a treatment’s common natural units
therapeutic goal

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 COST EFFECTIVENESS ANALYSIS

1. To identify most cost-effective intervention from group of alternatives

2. To identify and exclude programs wasting resources

3. To provide general information on relative costs and health benefits of

different alternatives

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 MEASUREMENTS OF COST-EFFECTIVENESS
Cost spent for each unit
of health gained

Average Marginal Incremental

Cost Effectiveness Cost Effectiveness Cost Effectiveness
Ratio (ACER) Ratio (MCER) Ratio (ICER)

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 COST-EFFECTIVENESS PLANE
Increasing cost

Poor
More cost, Less value More cost, More
effective effective
Good
d value
Decreasing ol Increasing
re sh
effectiveness Th effectiveness
ER
Poor IC
value
Less cost, LessGood Less cost, More
effective value effective
Decreasing cost
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 COST-UTILITY ANALYSIS

• Extension of cost-effectiveness analysis

• Health benefits measured in preference-based non-monetary units

• Health utility scores typically range between 0 and 1

• Weighs costs and quality adjusted health outcomes of each intervention

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 COST-UTILITY ANALYSIS

• Ideal method when

Interventions affect both morbidity and mortality

Treatments have a wide range of different outcomes

A common unit is required

• Measures: DALY, QALY

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 DISABILITY ADJUSTED LIFE YEARS

1 DALY = 1 year of healthy life lost

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 QUALITY ADJUSTED LIFE YEARS

• Measure both quality & quantity of life lived, based on no. of life added by
intervention

• QALY = Length of life X Quality of life

• 1 QALY = 1 year of life lived in perfect health

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 QALY’s GAINED FROM AN INTERVENTION

0.9 Without treatment

Life length=40yrs
QOL=0.9
QALY=40x0.9=36
With treatment
Life extended=13yrs
QOL= 0.9
QALY=53x0.9=47.7
QALY gained
=(47.7-36) = 11.7

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 LIMITATIONS OF CUA

• Equity issues (young gain more QALYs)

• Doesn't capture non-health effects

• QALY approach may be too narrow to capture the full range of benefits

• Doesn't incorporate a patient's willingness to pay when deciding to finance new

treatments

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 COST-BENEFIT ANALYSIS

Places monetary values on both costs and

outcomes

Aims to answer the question “is the

benefit worth the cost?”

Benefits valued using the human capital

approach & contingent valuation method

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 COST-BENEFIT ANALYSIS

Human capital Willingness to pay Willingness to accept

approach
Places monetary How much they How much they
value on person’s would be prepared to would accept to be
life; based on loss or pay to obtain benefits paid to abandon a
gain of income or avoid the costs of good or put up with
illness something negative

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 COST-BENEFIT ANALYSIS

Net social benefit (NSB) = B – C (Benefit minus Cost)

• If, B>C (B-C>0), take intervention, accept the programme

• If, B<C (B-C<0), rejected intervention/programme
• If, B=C (B-C=0), indifferent

Cost-benefit ratio: divide net benefit by net cost

• If B/C ratio > 1, implement

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 COST-BENEFIT ANALYSIS

Outcome
Total cost
Intervention (No of case
(C)
averted)
A (Vaccine) 10000 200
B (Vaccine & handwashing) 15000 650
C (Vaccine, hand washing &
18000 900
Water treatment)

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 COST-BENEFIT ANALYSIS

Outcome
Total cost Total
Intervention (No of case
(C) Benefit (B)
averted)
A (Vaccine) 10000 200 8,000
B (Vaccine & handwashing) 15000 650 26,000
C (Vaccine, hand washing &
18000 900 36,000
Water treatment)

 If we consider intervention A, B – C < 0 (NSB<0), Reject A

 In intervention B, here, B – C > 0 (NSB>0), Accept B
 In intervention C, here, B – C > 0 (NSB>0), Accept C

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 COST-BENEFIT ANALYSIS

Outcome
Total cost Total Net Social Benefit
Intervention (No of case
(C) Benefit (B) (NSB = B-C)
averted)
A (Vaccine) 10000 200 8,000 -2,000
B (Vaccine & handwashing) 15000 650 26,000 11000
C (Vaccine, hand washing &
18000 900 36,000 18000
Water treatment)

 If we consider intervention A, B – C < 0 (NSB<0), Reject A

 In intervention B, here, B – C > 0 (NSB>0), Accept B
 In intervention C, here, B – C > 0 (NSB>0), Accept C

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 COST-BENEFIT ANALYSIS

Priority

Estimate of the potential value

Decision making by policy maker

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 REFERENCES

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Delhi: World Health Organization, Regional Office for South-East Asia; 2022.
3. Asgari-Jirhandeh N, Zapata T & Jhalani M (2021). Strengthening primary health care as a means to
achieve universal health coverage: experience from India. J Health Manage. 23(1):20–30.
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Welfare 2022. 17:474p
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Shooshan Danagoulian. Description: 9th edition. | New York, NY : Routledge, 2024.

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THANK YOU

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