Describe the principles of health economics and the methods of health financing.

Concepts and Economic Evaluation

• Opportunity cost means that the real cost of anything is the best alternative forgone, not the money spent
• Its force in health is uncomfortable and should be stated plainly — money spent on an expensive treatment for a few is money not spent on a cheap intervention for many, and refusing to consider cost does not avoid that choice but merely makes it unconsciously
• Why health care IS not AN ordinary market, which is the key theoretical point:
• Information asymmetry — the provider knows far more than the patient, and also advises on what should be bought
• This produces supplier-induced demand, in which the seller determines the quantity purchased, which no ordinary market permits
• Uncertainty — illness is unpredictable in timing and cost, which is the reason insurance exists
• Externalities — immunising a child benefits others through herd immunity, so the private benefit is less than the social benefit and the market under-provides it
• Public goods — vector control, sanitation and clean air are non-excludable and non-rivalrous, so no private firm can sell them and they must be publicly provided
• The MERIT good argument, and inability to defer purchase — a patient having a heart attack cannot shop around or postpone
• The conclusion from these features is the central policy claim of health economics — health care left to a free market will be under-provided, inequitably distributed and inefficient, which justifies public financing and regulation
• The four types of economic evaluation differ precisely, since this is the commonest examination question:
• Cost-minimisation analysis — compares costs only, and is valid only where the outcomes are known to be equivalent
• Cost-effectiveness analysis (CEA) — costs in money, outcomes in natural units such as life-years gained, cases prevented or deaths averted
• Its limitation is that it can only compare programmes with the same outcome; cost per case of malaria prevented cannot be compared with cost per cataract operated
• Cost-utility analysis (CUA) — outcomes measured in QALYs (quality-adjusted life years) or DALYs averted
• It solves the comparability problem by combining length and quality of life into one measure, so that entirely different programmes can be compared on a single scale
• A QALY is a year of life weighted by its quality, from 1 for perfect health to 0 for death; a DALY is a year of healthy life lost, so QALYs are gained and DALYs are averted
• Cost-benefit analysis (CBA) — both costs and outcomes valued in money
• Its advantage is that it can compare health with non-health investments such as roads or schools, and can state whether a programme is worth doing at all rather than only which is better
• Its difficulty is that it requires putting a monetary value on a human life and on health itself, which is methodologically contentious and ethically uncomfortable
• The costs to be counted — direct medical (drugs, staff, tests, hospital); direct non-medical (transport, food, accommodation for the family); indirect (lost productivity of the patient and of the carer); and intangible (pain, suffering and anxiety), which are real but very hard to value
• The perspective of the analysis determines which costs count — a health service perspective counts only its own spending; a societal perspective counts everything including the patient’s lost wages and the carer’s time
• The societal perspective is the more complete and generally the more appropriate, and a narrow perspective can make a programme look attractive by shifting costs onto patients rather than removing them
• Discounting — future costs and benefits are valued less than present ones, which systematically disadvantages prevention, whose costs are immediate and whose benefits are distant

Health Financing and the Indian Position

• The sources of health financing:
• General taxation — the most equitable and administratively simple, since payment is by ability to pay and use is by need; it depends on the tax base and competes with other public spending
• Social health insurance — compulsory, contribution-based, as with ESI; it works well for formal sector employees and poorly where most employment is informal, which is India’s difficulty
• Private voluntary insurance — subject to adverse selection, in which those who expect to claim are likeliest to buy; cream-skimming, in which insurers avoid high-risk people; and moral hazard
• These features mean private insurance cannot achieve universal coverage unaided, since the people who most need cover are those insurers most wish to exclude
• Community-based health insurance; external aid; and out-OF-pocket payment
• Out-OF-pocket payment is the worst method of financing health care, and the reasons should be given — it is regressive, taking a larger share from the poor; it collects at the moment of illness, when income is lowest; it provides NO risk pooling; it causes catastrophic expenditure and impoverishment; and it deters necessary care while doing nothing to deter unnecessary care
• The principle of risk pooling is what makes every other method work — prepayment by many, spending on the few who fall ill, so that the unpredictable individual cost becomes a predictable collective one
• The larger and more diverse the pool, the better it works, which is the argument for national rather than fragmented schemes
• Provider payment methods and the incentives each creates:
• Fee-for-service — rewards doing more, and therefore encourages over-provision
• Capitation — a fixed sum per person enrolled, which encourages prevention and efficiency but also under-provision and avoidance of sick patients
• Salary — neutral but may encourage under-activity
• Case-based payment (DRG or package rates) — encourages efficiency within a case but also unnecessary admissions and up-coding
• Global budget — controls total cost but may cause waiting lists
• The general lesson is that every payment method creates some perverse incentive, so the practical answer is a blend, with monitoring directed at whichever distortion the chosen method produces
• The INDIAN financing position — public health expenditure is low as a share of GDP, well below the 2.5% target of the National Health Policy 2017; out-OF-pocket spending is very high as a share of the total; and medicines and diagnostics in outpatient care are the largest components
• The measures being taken — PM-JAY for hospitalisation; ESI and CGHS for defined groups; state schemes; free drugs and diagnostics initiatives, which address the largest out-of-pocket component directly; JAN aushadhi generic stores; price capping of essential medicines, stents and implants under the DPCO; and promotion of generic prescribing
• The argument for higher public spending, which is the conclusion the evidence supports — out-of-pocket spending falls only when public provision rises, since people pay privately because the public alternative is unavailable or unreliable, not because they prefer to pay
• Refusing to consider cost makes the choice unconsciously, since opportunity cost is unavoidable rather than optional
• Cost-effectiveness compares like with like only, while cost-utility using QALYs or DALYs can compare anything
• Out-of-pocket payment collects when income is lowest, which is why it is the worst method of financing care
• It deters necessary care and not unnecessary care, which inverts the rationing it is supposed to achieve
• Risk pooling makes every other method work, converting an unpredictable individual cost into a predictable collective one
• Larger and more diverse pools work better, which is the argument for national rather than fragmented schemes
• Information asymmetry produces supplier-induced demand, which no ordinary market permits and which distorts everything
• Immunisation has positive externalities, so private benefit is less than social benefit and markets under-provide it
• Vector control is a public good, non-excludable and non-rivalrous, so no private firm can sell it
• Cost-minimisation is valid only for equivalent outcomes, which is a restriction routinely ignored in practice
• QALYs are gained and DALYs are averted, which is the direction of each and an easy thing to reverse in an exam
• Cost-benefit can compare health with roads, and can say whether a programme is worth doing at all
• It requires valuing a life in money, which is its methodological and ethical difficulty rather than a technical detail
• A societal perspective counts lost wages and carer time, which a health-service perspective ignores entirely
• A narrow perspective can shift costs onto patients and call it a saving, which is why perspective must be stated
• Discounting disadvantages prevention systematically, since its costs are immediate and its benefits distant
• Adverse selection defeats voluntary insurance, since those expecting to claim are likeliest to buy cover
• Insurers wish to exclude those who most need cover, which is why private insurance cannot achieve universality unaided
• Fee-for-service rewards doing more, capitation rewards doing less, and every method has its own distortion
• Blend payment methods and monitor the distortion that the chosen one predictably produces
• Social insurance suits formal employment and fits India poorly, where most work is informal
• Out-of-pocket spending falls when public provision rises, since people pay privately from necessity rather than preference