Health Economics Unit 12

2 Definition of Economics  Demand − relationship between quantities and prices that addresses how much bought at each price  Supply – relationship between quantities and prices that addresses how much sold at each price

3 Definition of Economics (cont.)  As price increases, demand decreases but supply increases in free market  Market reaches equilibrium when supply and demand are equal at a given price  Economics is about choices made about production and consumption of goods and services

4 Economic Decision Making Scarcity – choice of which services to provide with scarce resources Preferences – refers to personal preferences or choices about a resource Opportunity costs − choices in saving money by providing alternative opportunities Uncertainty – choices made when outcomes are uncertain

5 Basic Economic Reasoning Economic reasoning based on concept of making decisions at the margin Marginal benefit − spending one more dollar or trying to bring about one more positive health outcome Utility – achievement of life satisfaction or usefulness without additional societal expenditures Profit – net revenue of an action or product

6 Economic Evaluation Cost-benefit Analysis Compares costs of intervention with the dollar value of the benefits Limitations − difficult to put a dollar value on health Cost-effectiveness Analysis Compares costs of intervention with benefits

7 Economics of the Labor Market Labor supply – describes how wages relate to the number of hours of work that can be obtained. Expected to indicate that an increasing number of hours of labor will be supplied as the wage increases. Does not indicate magnitude of response to increasing wages.

8 Example of Labor Supply and Demand of Nurses Decision to become nurse based on lifetime earnings and individual preferences (utility maximizing decision). As wage increases (price), number of nurses increases (supply), resulting in more hours of nursing time (demand) leading to lower wage (price) because prices decrease when supply increases.

9 Demand for Health Care  Health insurance insulates individuals from cost of health care, leading to increase in demand for health care (moral hazard).  Moral hazard leads to increase in demand for health care and increase in health care expenditures.  Managed care attempts to decrease moral hazard.  Main dilemma in US health care: How to reach equilibrium in the supply and demand of health care, given health insurance and uninsured.

10 Supply of Health Care  Suppliers of health care − health care providers and institutions of care.  Provider-induced demand – offering services not needed to compensate for reduced payment.  Managed care attempts to decrease supplier tendencies to increase provider-induced demand.  Minimal difference in cost containment between managed care and traditional insurance practices.