Table Of ContentPrinciples in Health
Economics and Policy
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Principles in Health
Economics and
Policy
Jan Abel Olsen
11
1
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Preface
This book is based on the view that there are four principal questions facing
health policy makers in all countries. These four questions are universal in that
they are equally relevant no matter how much money a country spends on its
health services, and no matter the political system. The questions are recurrent
in that they tend to pop up constantly when health policy reforms are being
discussed. The structure of this book reflects the following logical order of
these questions:
1) How should society intervene in the determinants
that affect health?
Needs for health care depend on how our health is being affected by the phys-
ical and social environment as well as by our health related lifestyle. There are
various ways in which the health affecting circumstances that surround us can
be improved and healthy choices can be encouraged. To which extent should
society intervene?
2) How should health care be financed?
The more needs for health care, the more money is required to finance it.
Revenues can be raised through: i) patient payments (‘out of pocket’ at the
point of delivery), ii) taxation (and social insurance), and iii) private health
insurance. Rarely would we find that a country has chosen only one of the
three sources, most often we find a combination of at least two. For which
reasons would we prefer one source of financing over the other?
3) How should health care providers be paid?
Once revenues have been collected, there are various ways in which to pay
providers of care. The key issue is whether it should be activity based or not.
Hospitals may receive fixed annual budgets, or they can be reimbursed depend-
ing on how many patients have been admitted and what types of care have
been provided. Primary doctors can be salaried, or remunerated depending on
their number of patients and what services they provide. Why, and to what
extent, should payments be activity based?
vi PREFACE
4) How should alternative health care programmes be
evaluated when setting priorities?
Once revenues are raised and providers are paid, resources are allocated to
competing health care programmes. If you believe that health care should be
distributed on the same principle as ordinary market goods, resources would
simply be allocated to those services that patients are willing and able to pay
far. However, if you believe that health care should be distributed depending
on people’s needs, you must evaluate the competing alternatives in order to
find where they improve the most health. Which methodologies are appropri-
ate for assessing the degree to which new treatment programmes are efficient
and equitable?
A closer look at these questions makes it quite evident that the answer you
give to 4) would influence your answer to 2), in that if you think health care
should be distributed according to health needs, then you cannot hold that all
health care should be financed in a way that is dependent on ability to pay such
as patient payment or private insurance.
Clearly, there are no universally correct answers to these questions. The
answers depend on the objectives of the health service, and these objectives are
normative in that they reflect value judgements. Interestingly though, most
health policy objectives can be understood as being concerned with efficiency
and/or equity. Therefore, you need to understand these crucial concepts and
how they relate to health policy. So, before diving into the four principal ques-
tions, the first part of the book explores the concepts of efficiency and equity.
First of all, though, a scene setting context of health care and health will be
outlined.
Acknowledgements
First and foremost I want to acknowledge Paul Dolan for letting me draw
heavily from our joint book Distributing health care, OUP, 2002. Without that
book as a basis, I would not have started writing this one. Many thanks Paul,
and thanks for supporting me to get on with it.
This book was written while spending a sabbatical year at The London School
of Hygiene and Tropical Medicine. I am grateful to its Department of Public
Health and Policy for providing me with work space, and to my colleagues
there for many stimulating discussions.
I would like to thank Tony Culyer, Tor Iversen, Ivar Sønbø Kristiansen and
Jon Magnussen for their comments on particular chapters, and Birgit Abelsen
for providing Figures 1.3–6. The usual disclaimer applies.
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Contents
Part 1 The context of health and health care
1 Health and health care 3
1.1 What is health? 3
1.2 What is health care? 6
1.3 What do health care and health do for people? 8
1.4 Health and health care across the world 11
1.5 Conclusion 14
2 Economics and efficiency 17
2.1 More in means more out—but at a diminishing rate 19
2.2 Substitution: ‘more than one way to skin a cat’ 24
2.3 Scarcity: a dismal reality for the dismal science 32
2.4 Supply and demand—and the magic equilibrium 38
2.5 Conclusion 44
3 What makes the market for health care different? 47
3.1 The perfect market model and the imperfect
market for health care 47
3.2 Asymmetric information and the agency relationship 52
3.3 Externalities: selfishly motivated 55
3.4 Conclusion 59
4 Equality and fairness 61
4.1 Externalities: unselfishly motivated 61
4.2 Transfers in cash or in kind 64
4.3 Three theories of distributive justice 67
4.4 The health frontier and trade-offs 72
4.5 Conclusion and some conceptual clarifications 77
Part 2 Intervening in the determinants of health
5 The health environment 85
5.1 The physical environment 85
5.2 The social environment 89
5.3 Conclusion 92
