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Basic Health
Economics

Book list
1
...
Essentials of Health Economics
By Diane M
...
Handbook of Health Economics
By Elsevier Publication
4
...
Santerre
5
...
Basic Concepts of Economics
Economics: According to Robbins, ‘Economics is a science which studies human behavior as a relationship
between ends and scarce means which have alternative uses
...

Alternative uses of scarce resources
...

Need for optimization
...
Traditional approach:
• Economic is a social science
...

• It is considered as a science of wealth in relation to human welfare
...

• Wealth was considered as a means to an end – the end being human welfare
...
Modern approach:
• An individual, either as a consumer or as a producer, can optimize his goal is an economic
decision
...

• Social problems can thus be explained by abstract theoretical tools or by empirical methods
...

• It seeks to explain what the problem is and how it tends to be solved
...

• Economics of today deal economic issues not merely as they are but also as they should be
...

Subject matter of economics or branches of economics: The subject matter of economics is presently divided into
two major branches; Micro Economics and Macro Economics
...

The study of economic behavior of the households, films and industries form the subject matter of micro
economics
...
For example, micro economics is
concerned with how the individual consumer distributes his income among various products and services
so as to maximize utility
...


Macro Economics:
•

•

Macro Economics deals with the functioning of the economy as a whole
...

It deals with the broad economic issues, such as full employment or unemployment, capacity or under
capacity production, a low or high rate of growth, inflation or deflation
...


2

Positive economics: Positive economics is an approach that seeks to understand the behavior and the operation of
system without making judgement e
...
what determines the wage rate of unskilled workers? What will be the effect
of higher cigarette taxes on the number of smokers?
It analyses and explains the casual relationship between variables
...
Positive economics is alternatively known as pure economics or descriptive economics
...
Statements based on positive economics considers what is actually occurring in the economy
...
In this way,
they accept or reject the statements
...
g
...
It is also known as policy economics, as it takes
into account individual opinions and preferences
...

Differences between positive economics and normative economics:
Basis of comparison
1
...

3
...

5
...


Needed
because

7
...


Based on
Examples

Positive economics
It concentrates on what already are –
the facts, the verifiable
...

Nature is factual and descriptive
...

Normative economics talks about opinions
and judgements
...


The type of argument behind positive
economics is objective
...


Statements under positive economics
can be tested and the right or wrong can
be found
...

Facts, reality
...


economics

Normative economics passes opinions on the
facts presented in positive economics
...

• Should the government subsidize or
regulate higher education?
• Should medical benefits to the elderly
e available only those with income
below some threshold?

Components of economics: Economics is about making choices
...

2
...


What and how much to produce?
How to produce it?
For whom to produce it?

Definition of health: Health is a state of physical, mental and social well-being in which disease and infirmity are
absent
...

Determinants of health: Key factors that have been found to influence whether people are healthy or unhealthy
include the following:

1
...

3
...

5
...

7
...

9
...

11
...


Social support networks
Education and literacy
Employment/working conditions
Social environments
Physical environments
Personal health practices and coping skills
Healthy child development
Biology and genetics
Health care services
Gender
Culture

Health economics: Health economics is the study of the value of health and how it can be produced most efficiently
and distributed to maximize social welfare
...
This includes both resource allocation within health economy to the health
sector and within healthcare system to different activities and individuals
...

2
...

4
...

To estimate the true cost of delivering healthcare or to estimate all real costs like patient’s time, loss of
output elsewhere in the system
...

To estimate effects of certain economic variables such as user charges, time and distance cost of accessibility
etc
...


Health outcomes:
1
...

3
...

5
...

7
...

Classification of cost:
A
...
Fixed cost: It is the cost of fixed inputs used in production
...
g
...

2
...
These costs vary with the change in
volume of production e
...
cost of raw materials, elasticity cost
...
Semi variable cost: It refers to costs which are partly fixed and partly variable
...
g
...

4
...

Total cost = Fixed cost + Variable cost
...
Marginal cost: It refers to the additional cost of producing one extra unit of a product
...
On the basis of expense:
1
...

2
...

3
...

C
...
Controllable cost: It refers to costs which can be influenced or controlled by the actions of the
organization members
...
Uncontrollable cost: It refers to costs which cannot be controlled by the actions of the organization
members
...
According to functions or operations of a business:
1
...
g
...

2
...

3
...

4
...

E
...
Direct cost: It refers to costs which involve a direct expense and are easily traceable
...
Indirect cost: It refers to costs which are indirect and not easily traceable
...
Explicit or accounting cost: It refers to the payments made in monetary terms by a firm, to the owners
of factor services required for production
...
Implicit or economic cost: It refers to the estimated value of all the inputs onward and put to use for
production by a firm
...
On the basis of relevance of decision making:
1
...

2
...
It can be
understood as an irrevocable cost of the past business activity which has to be incurred now and is
irrelevant to the current business scenario
...
Replacement cost: It is the cost of replacing an asset, plant, machinery, equipment etc
...
Imputed cost: These are hypothetical costs which are considered just for the purpose of decision
making and do not involve any actual cash overflow
...
Real cost: It refers to the cost of all efforts and sacrifices made by the owners of factors of production
in production of a commodity
...
Social cost: It refers to the cost of hardships and sacrifices that a society has to bear due to operation
of business activities
...
Conversion cost: It refers to the cost involved in transforming raw materials into finished products
...
It includes the cost of direct and
indirect labour, overheads and expanses
...
Other types of cost:
1
...

2
...

It is an irregular cost which would not exist in ideal conditions
...
Differential cost: It is the change in cost due to change in level of production
...
Incremental cost: It is the additional cost in relation to a change in the level or nature of business
activity
...
The reason why the price of diamonds is higher than that of water, for example, owes to the
greater additional satisfaction of the diamonds over the water
...

Total utility: Total utility is the total psychological satisfaction which a consumer derives from the consumption of
a commodity
...

Efficiency: Efficiency is the maximizing benefits at the least possible cost
...
It is a graphical representation of the opportunity cost concept
...
On such a graph, one of the
commodities is shown on the X axis, while the other is shown on the Y axis
...

The following graph shows the production possibilites frontier for a particular country’s economy
...
In this example, the two commodities that
the country produces are food (F) and cloth (C)
...
e
...
Likewise, if they want to produce more clothes, they must produce less food
...
The graph above demonstrates this
trade off
...
And if the country wants to increase the production of clothes from
100 to 150 units, they must sacrifice the production of 25 units of food
...
Furthermore, an inward shift is also
possible
...

Production function: A function represents a relationship between two variables
...

The relationship between X and Y can be shown with the help of a formula, which is shown as follows:
Y = f(X)
In the aforementioned formula, the value of Y can be determined with the help of the given value of X
...

In other words, production function represents the maximum output that an organization can attain with
the given combinations of factors of production (land, labor, capital, and enterprise) in a particular time
period with the
...
It acts as a collection of different production possibilities of an
organization
...
It is related with a given state of technological change”
Samuelson
...
As long as the natural
laws of technology remain unchanged, the production function remains unchanged
...
L
...
Klein]
...
land, labor, capital and
organization
...

A two variable production function can be expressed as follows:
Q = f (L, K)
Other factors are excluded from the production function due to various reasons
...
However, in case of individual
production function, they are included in capital factor
...

For example, steel, tires, steering, and engines used for manufacturing cars explains a constant relationship
with the number of cars
...

The algebraic or equation form of production function is most commonly used to analyze production
...
Suppose a diamond
mining organization has used two inputs – capital and labor in the production of diamonds
...
This production function
says that a firm can produce one unit of output for every unit of capital or labour it employs
...

Marginal product: Marginal product is the additional output that can be produced by adding one more unit of
input, holding all other inputs constant
...

Cost function: Cost function is the function that gives the cost of producing a given level of output
...
In the short run, some are fixed and some are variable costs
...
The cost function equation is expressed as:
C(x) = FC + V(x)
Where,
C = Total production cost
FC = Total fixed costs
V = Variable costs
x = Number of units

MR = Marginal revenue
MC = Marginal cost
Forms of Market
Market: A market can be defined as any set of arrangements that allows buyers and sellers to communicate and
thus arrange exchange of goods, services or resources
...
Information is a vital ingredient for any market
...

Types of market structure:
A
...
Imperfect competition
a
...
Monopolistic competition
c
...

A
...
Large number of buyers and sellers: Under perfect competition, there exists a large number
of sellers and the share of an individual seller is too small in the total market output
...
Similarly, there are a large number of buyers and an
individual buyer buys only a small portion of the total output available
...
Homogenous goods: Under perfect competition, all firms sell homogenous goods which are
identical in quantity, shape, size, color, packaging etc
...

3
...
The
condition of free entry and free exit ensures that, all the firms under perfect competition will
earn normal profits in the long run
...
This will reduce
the market price and the supernormal profit will not sustain
...

As a result, price will again rise and the loss will be wiped out
...
Profit maximization: The goal of all firms is maximization of profit
...
No Government regulation: There is no government intervention in the market
...
Perfect mobility of factors: Resources can move freely from one firm to another without any
restriction
...

7
...
Each firm knows the price prevailing in the market and would
not sell the commodity which is higher or lower than the market price
...

The firm also has a perfect knowledge about the techniques of productions
...

B
...
All firms in an imperfectly competitive market have one
thing in common: They exercise market power; the ability to raise price without losing the demand for their
product
...

a
...

Features:
1
...
Though there are large numbers of buyers, no
single user can influence the monopoly price by his action
...
No close substitute: Under monopoly, there is no close substitute for the product sold by the
monopolist
...
Boulding, a pure monopolist is therefore a firm producing a
product which has no substitute among the products of any other firms
...
Restriction on the entry of new firms: Under monopoly, new firms cannot enter the industry
...
Price maker: A monopoly firm has full control over the supply of its products and hence it
has full control over its price also
...
g
...

5
...
Under such circumstances, a monopolist can incur supernormal loss then firms would
leave the industry, thus reducing the supply
...

b
...
g
...
These are closely related goods with a little difference in color, size and shape
...
The concept of monopolistic competition was developed by an American economist
Chamberline
...

Features:
1
...
Here the action of an
individual firm regarding change in price has no effect on the market price
...


9

2
...


Product differentiation: Most of the firms under monopolistic competition, sale products
which are not homogenous in nature but are closely substitutes
...

• Artificial differentiation: It is made by the sellers in the minds of the buyers of those
products through advertisements, attractive packing etc
...
Non price competition: In this case, different firms may compete with each other by spending
a huge sum of money on advertisements keeping the product prices unchanged
...
Selling cost: Expenditure incurred on advertisements and sales promotion by a firm to
promote the sale of its product is called selling cost
...
Some advertisements have become so popular that
people use a brand name to describe the product, e
...
, brand name is used to describe all types
of washing powder
...
Free entry and free exit: There are no restrictions on the entry of new firms and the firms can
decide to leave the industry
...

6
...
In this case, the price elasticity of demand would be relatively elastic because of the
existence of many substitutes
...
The number of firms is so small that every seller is affected by the
activities of the others
...
Few sellers: There are few sellers in oligopoly market
...

2
...
The number of sellers is so less in the market that each of these firms contribute to
a significant portion of the total output
...
Hence
every firm decides its policy after taking into consideration the possible reaction of the rival
firm
...

3
...
For example, cooking gas supplied by Titas Gas
company and Basundhara group etc
...
g
...

4
...
Several factors such as unlimited size of the market, requirement of
huge initial investment etc
...


Demand: Demand in economics means both the willingness as well as the ability to purchase a commodity by
paying a price and also its actual purchase
...

It is not demand in the economic sense
...
Generally, demand for a commodity depends
upon the price of the commodity and the relation between price and demand is inverse
...
But in exceptional cases, the two variables may move in the
same direction
...
One such factor is
the income of the consumer
...
Generally, demand for a commodity depends upon the taste and preference of the consumers, the
price of substitute goods etc
...
g
...

But in healthcare good or service,
Patient seeks consultation with MD or another health professional → MD decides which goods and
services the patient needs e
...
drug hospitalization or laboratory procedure → Patient consumes and pays
for goods and services to improve health
...

2
...

4
...


Price of commodity or healthcare commodity, price of other commodities; complement or substitute
...

Quality of care, accessibility, information, technology
...

Severity of illness, age and education of a person
...
When we plot individual
demand schedule on a graph, we get individual demand curve and when we plot market schedule, we get market
curve
...


The demand curve is downward slopping because of the following reasons:
1
...


Some buyers may not be able to afford the high price
...
This is called the
principle of diminishing Marginal Utility
...

2
...

4
...

6
...


Demand for healthcare is a derived demand
...

Presence and extent of uncertainty: No treatment of intervention can confirm 100% certainty
...

Asymmetry of information: Patients of no or poor knowledge regarding healthcare is a very technical issue
...

Healthcare professional require formal license
...

Price (P)

P1
DD
P2

Quantity (Q)
Q1

Q2

Suppose,
P = Physician’s fees
Q = No
...

Shift of demand curve (change in level of demand): A list of demand shifters includes the following:
1
...

3
...


Income
Price of other commodities
Insurance
Tastes

Inward shift of demand curve: Demand curve will shift inward as a result of a fall in income, fall in price of
substitutes and fall of preferences
...


Price elasticity of demand (PED): It is defined as the degree of responsiveness of quantity demanded of a
commodity due to change in its price when other factor remaining constant
...

PED =

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

Formula for calculating PED is:

12

| Ep | =

𝑃
𝑄

𝑄 −   𝑄

   ×    𝑃2     −   𝑃1
2

1

If
•
•
•
•
•

| Ep | > 1, we call it relatively elastic demand
...

| Ep | < 1, we call it relatively inelastic demand
...

| Ep | = 0, we call it perfectly inelastic demand
...


2
...


4
...
Only if the product is inelastic in nature, then raising of price will be
beneficial
...
Therefore, the prices of different commodities are determined on the basis of
relative elasticity
...
Price discrimination is a process in
which a single seller sells the same commodity in two different markets at two different prices at the same
time
...

Determination of factor price: The concept of elasticity of demand also helps in determining the price of
various factors of production
...

Route of intermediate trade: If demand for exports of a country is inelastic, that country will enjoy a
favourable terms of trade while if the exports are more elastic than imports, then the country will lose in
the terms of trade
...

OR Supply is the amount of resource that firms, producers, labourers, providers of financial assets, or
other economic agents are willing and able to provide to the marketplace or directly to another agent in the
marketplace
...

Determinants of supply of healthcare:
1
...

3
...

5
...


Prices of the healthcare
...

Health facilities and equipment
...

Environment of the market
...


Movement along supply curve: The change in quantity supplied brought about by a change in price
...
Elasticity of supply is expressed as:
PE =

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

Formula:
PES =

𝑃
𝑄

×

𝑄2 − 𝑄1
𝑃2    −   𝑃1

Market equilibrium: Market equilibrium is the condition that exists when quantity supplied and quantity demanded
are equal
...


Consumer surplus: Consumer surplus is the difference between the maximum amount a person is willing to pay
for a good and its current market price
...


Math:
Problem 1: If the price Ceevit increases from Tk
...
00 to Tk
...
50 and the amount you demand fall from 10 to 7
pieces, how your elasticity of demand would be calculated?
Solution:
Given
Initial price, P1 = 2
...
50 Tk
Initial quantity, Q1 = 10 pieces
Changed quantity, Q2 = 7 pieces
Total price, P = P1 + P2
= (2
...
50) Tk
= 4
...
50
17

×

𝑄2 − 𝑄1
𝑃2 − 𝑃1
7 − 10

× 2
...
00

= 1
...
59 > 1, so it is elastic demand; quantity demanded for ceevit is more responsive to the price change
...
5
...
5
...

Solution
Given
Initial price, P1 = 5
...
80 Tk
Initial quantity, Q1 = 10
Changed quantity, Q2 = 13
Total price, P = P1 + P2
= 5
...
80
= 10
...
80
23

𝑄2 − 𝑄1
𝑃2 − 𝑃1
13 − 10

×

5
...
00

= 1
...
76 > 1, so supply is elastic
...


16

2
...
Health economics is concerned with issues related to the allocation of
scarce resources to improve health
...

Importance of health economics:
1
...

3
...


To formulate health services
...

To evaluate the relative costs and benefits of particular policy options
...
on the utilization of health services
...
Economic Analysis
Determinants of cost:
1
...

3
...

5
...

7
...

Misuse of hospital capital
...

Overstaffing at different area
...

Low productivity due to various causes like low morale of the employee, lack of training, lack of proper
working area
...


Importance of cost analysis:
1
...

3
...

5
...


It will create cost-consciousness to the employee
...

Future planning will be easy
...

To find out cost benefit analysis
...


Capital cost analysis:
Objectives:
1
...

3
...


To identify all capital goods used in that year
...

To estimate the working life
...


Capital cost (K) = 𝑬

[𝟏−

𝟏
𝒏

(𝟏+𝒓) 𝒓

]

Where,

K = Capital cost
E = Equivalent cost
r = Discount rate
𝑛
= Duration of use or longevity
𝑟

Problem: A 45 years male patient incurred Tk 1500 travel cost, Tk 2500 consultation fee, Tk 4600 drug cost, Tk
5500 family cost, Tk 12500 surgeon cost, Tk 2500 OT charge, Tk 1600 attendant cost, Tk 600 tips, Tk 2200 income
loss as costs for cholecystectomy
...

Solution:
Total cost

= (1500 + 2500 + 4600 + 5500 + 12500 + 2500 + 1600 + 600 + 2200) Tk
= 33500 Tk

Direct cost

= (1500 + 2500 + 4600 + 12500 + 2500 + 1600) Tk
= 25200 Tk

Indirect cost

= (5500 + 600 + 2200) Tk
= 8300 Tk

18

Average cost

=
=

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡𝑠 𝑜𝑟 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠
33500
9

= 3722
...
It evaluates public investment costs, including those that have no markets to guide them
...
Cost benefit analysis (CBA) also addresses
public choices involving either benefit or costs that are external to the market they came from
...

Within health economics, controversies over the wisdom of immunization programs, patient screening or heart
transplant, for example, invoke many problems and criticisms that cost benefit thinking must address
...
These benefits and costs must include not only those directly attributed to the project but
also indirect benefits or costs through externalities or other third-party effects
...
We can also rank projects
according to the benefit to cost

𝐵

𝐵

𝐶

𝐶

( ) ratio; thus, a higher ( ) ratio generally indicates a project that will deliver

greater social benefits for a given dollar of costs
...
The most common difference
between public and private project evaluation is that public projects often have opportunity costs that have no
market to serve as a guide for pricing
...
On the other hand, the dam can enhance
the fertility of otherwise barren land, provide recreational opportunities, attract waterfowl and provide campsites
and swimming areas for recreation
...
Many of the analytical problems stem from the imprecise task of placing dollar values on these
difficult to evaluate costs and benefits
...
For
example, we can measure the benefits of a newly created lake view by observing how much the market values of
nearby homes increase
...


19

4
...
Pollution emitted by a factory that spoils the surrounding environment and affects the health
of nearby residents is an example of a negative externality
...

Positive externality: Positive externalities refer to the benefits enjoyed by people outside the market place due to a
firm’s actions but for which they do not pay any amount
...

2
...

4
...


Vaccination has an associated positive benefit for others because it reduces the risk of contraction
...

Private health increases national wealth
...

Communicable disease surveillance and infectious disease control
...

Examples:
1
...

3
...

The noise and vibration caused by trains to people who live nearby mass transit systems
...


Externalities are a type of market failure
...
The company pays for land it buys and incurs all the costs related
to construction, but there is no way to compensate the residents who live nearby for the noise and discomfort they
face due to construction activities
...
However, once the mass transit line is
operational, those who live nearby benefit the most not only from the decrease in travel time but through
appreciation in the market of their properties
...
They result from diversion
between private benefits and social benefits and between private costs and social costs of different economic
activities
...

2
...

4
...


Pigovian taxes or subsidies intended to redress economic injustice or imbalances
...

Government provision of services with positive externalities
...

Mediation or negotiation between those affected by externalities and those causing them
...
Communicable diseases
• HIV/AIDS – global (geographic and demographic)
• Tuberculosis – global (geographic and demographic)
• Malaria – regional (geographic)
• Acute respiratory infection, diarrhea – local (geographic and demographic)
2
...
Adverse side effects are those costs which are
not included as a part of the product's market price
...
Economic Burden of Health Problem
Economic evaluation: Economic evaluation may be defined as the comparative analysis of alternative courses of
action in terms of both their costs and consequences
...
Economic evaluation does aim
to determine how resources can give the greatest benefit
...
Because two parameters are measured, the results of an economic evaluation will not
necessarily tell us which treatment option is better in the same way that a clinical trial might
...

2
...


First, it deals with both the inputs and outputs, sometimes called cost and consequences of activities
...
Resource scarcity and our consequent disability to
produce desired outputs, necessities must and will be made in all areas of human activity
...


What economic evaluation does?
1
...

3
...

Always measure the benefits produced by all alternatives compared
...


Therefore, the basic tasks of any economic evaluation are to:
1
...

3
...


Identify
Measure
Value
Compare cost and consequences of the alternatives being compared
...


2
...
It is of 4 types:
a
...
Cost of illness study
c
...
Cost description
Full economic evaluation: It includes the followings:
a
...
Cost effectiveness analysis (CEA)
c
...
Cost utility analysis (CUA)

They are discussed below:
a
...
Demonstration of
equivalence of outcome may entail presentation of primary data from the study itself, or presentation of
secondary data, such as the results of a meta-analysis
...
No other side effects or any
other costs are associated with the drugs
...
Both reduces cholesterol
level by the same amount
...


22

•
•

Program 1: Day surgery: Operations successfully completed
...


We would find that it could be achieved to the same degree in either program, though presumably at
different costs
...

b
...


Cost effectiveness analysis: For a cost effectiveness analysis, the outcomes of the alternative strategies are
not equivalent and are measured in unidirectional natural units, such as lives saved, change in pain score,
or change in peak flow rate
...
They tell
us which strategy maximizes a given objective, such as improving pain score, with the lowest cost
...
A cheaper thrombolytic agent were also
the most effective, interpretation of the results would be easy and out choice of thrombolytic therapy is
clear; the cheaper, more effective agent would be dominant
...
The study can help our decision making by presenting results as a
cost of effectiveness ratio – in this case, the cost per life saved at 30 days
...

Cost utility analysis: Utility refers to the value or worth of a particular health state or an improvement in
that health state
...
Cost utility analysis should be the method of choice when quality of life is an important
outcome
...

Utility based measures are usually expressed in terms of quality adjusted life years (QALYs) gained
...
Cost utility analysis may be seen as an improvement on cost effectiveness analysis
as it attempts to combine more than one outcome measure
...

• When the program affects both morbidity and mortality and we wish to have a common unit of
outcome that combines both effects
...

Advantages:
1
...

3
...

Consideration of length and quality of life
...


Disadvantages:
1
...

2
...
This is because costs and benefits are measured
in different terms
...
Cost benefit analysis: Cost benefit analysis refers to economic analyses in which the outcomes are valued
in monetary units
...

This is clearly very useful for assisting decision making
...
While cost benefit analyses have many theoretical attractions for health
economists, they are unlikely to be frequently encountered in the medical literature
...
QALY is measured on a scale of 0 to 1 where 0 means death and 1 means perfect health
...
QALYs are therefore expressed in terms of years lived in perfect health
...

2
...


If a person lives in perfect health for 1 year, then that person will have 1 QALY
...
5 QALYs
...
5 years
of life × 1 utility value = 0
...
5 utility (half of perfect health), then that person
will also have 0
...
5 utility value = 0
...
Part A is the amount of
QALYs gained due to quality improvements
...

In cost effectiveness studies (health economic evaluations), the QALY is used to quantify the effectiveness of, for
instance, a new medicine versus the current one
...

Example:
1
...


3
...
7, then that person will have 2
...
7 utility value = 2
...
9, then that
person will now have 2
...
Therefore, the benefit of new medicine will be counted as 0
...
2 additional utility level = 0
...

Similarly, if a new medicine (say Med B) prolongs the patient’s life by 2 years at a utility level of 0
...
4 additional QALYs (2 years of additional life × 0
...
4 QALYs)

24

The beauty of the QALY therefore is that it allows us to compare the health effect of a new cancer therapy with the
health effect of a new anti-depressant (or with any other medical intervention)
...
In the DALY philosophy, every person is born with a certain number of life years potentially
lived in optimal health
...
These losses in healthy life years are exactly what is measured by the DALY
metric
...

DALY = YLL + YLD

Here, YLL = Years of life lost due to premature death
YLD = Years of life lived with disability
YLL = w (a ⸺ b)

Where, w = age weight
a = Life expectancy at birth
b = Age at the time of death
YLD = wd

Where, w = Disability weight for the disease
d = Duration of the disability or disease
The disability weights (DWs) are a crucial component of the DALY calculation, as they translate morbidity into
healthy life years lost, thus enabling comparison of morbidity and mortality
...
Living 10 years with a DW of 0
...
20, thus both correspond to losing 1 full
healthy life year
...
This condition has a DW of 0
...
The number of YLDs for this patient is therefore, calculated as:
YLD

= 1 (60 ⸺ 40) × 0
...
5
...

Continuing the aforementioned example, the life expectancy of the 60-year old female is 22
...
Dying at the age of 60 will thus cause a loss of 22
...
5
So, DALY

= YLD + YLL
= 11 + 22
...
5

Uses of DALY:
1
...


25

2
...

4
...

6
...


Identifying disadvantaged groups and targeting health interventions
...

Rational allocation of scarce resources
...

Provide comparable measure of output for interventions, program and sector evaluation
...


Maths regarding DALY and QALY
Problem 1: A businessman made an accident at the age of 35 and died after suffering from disability for 10 years
...

Assuming life expectancy at birth = 66
...
6
Solution:
Given,
Duration of disability, d = 10 years
Life expectancy at birth, a = 66
...
6
Age at the time of death, b = (35 + 10) years
= 45 years
We know,
DALY = YLL + YLD
= w (a⸺b) + w × d
= (66
...
6 × 10)
= 27
...
The person died at the age
of 60
...

Assuming life expectancy = 67
...
2 and 0
...
6
...
7 years
Age weight, w = 0
...
2
Duration of the disease, d1 = (60⸺37) years
= 23 years
So, YLD = w1 × d1
= 0
...
6
For nephropathy,
Disability weight, w2
= 0
...
6 × 12

26

= 7
...
6 (67
...
62
So, DALY loss = YLL + YLD for NIDDM + YLD for nephropathy
= 4
...
6 + 7
...
42
Problem 3: Sketch the QALY diagram and determine how many QALYs are gained if a person achieves a threemonth life extension on hospital dialysis, where duration: 3 moths; health state: hospital dialysis; weight 0
...

a
...


Assuming no discounting
Assuming discounting at 5% per annum

Solution:
Discount rate: The differential timing of costs and benefits must also be considered in an evaluation
...
For example, if two options for
dealing with heart disease were: (a) expanding funding for coronary artery bypass grafting and (b) a health
education campaign to influence diet and life style; we might except option (a) to deliver benefits earlier
...
The positive rate
of time preference can be incorporated into economic evaluation by the notion of discounting further costs
and benefits to their present value
...


𝐹𝑛
(1+𝑟)𝑛

P = Present value
Fn = Future cost at year n
r = Discount rate

1

Assuming no discounting, QALY gain = (0
...
16 QALY
b
...
62 × )
4

= 0
...
65
...

b
...


Assuming no discounting QALY gain = 0
...
2 QALY

b
...
65 [1 +
1
(1
...
+

1
(1
...
05

+

1
(1
...
05)3

+

]

= 0
...
41

Problem 5: Sketch the QALY diagram and determine how many QALYs are gained by preventing a case of
tuberculosis which have been treated at home for 3 months; where duration: 3 months; Health state: home
confinement of TB; weight 0
...

a
...


Assuming no discounting
Assuming discounting at 5% per annum

Solution:

a
...
68) ×

b
...
08
Assuming discounting at 5% per annum QALY gained

1
4

= (1⸺0
...
08

1
4

Problem 6: A patient was suffering from chronic bronchial asthma for 20 years
...
2 to 0
...
Calculate QALY gained by
the patient
...
2
Improved level of quality of life = 0
...
5⸺0
...
3
= 6 years

29

6
...
According to human
capital theory, individuals invest in themselves through education, training and health to increase their earnings
...

2
...

4
...
People want health; they demand
medical care inputs to produce it
...
Instead, they produce health,
combining time devoted to health-improving efforts with purchased medical inputs
...
It does not depreciate instantly and it can be analyzed like a capital
good
...
As
a consumption good, health is desired because it makes people feel better
...


The process of economic analysis
Economic analysis is an iterative (iterative means doing something again and again usually to improve it) process
that normally begins with a ‘without the project’ situation, which is the baseline against which all alternatives are
compared
...
Health Economics and Environment
Change; Health Economics and Nutrition
Nutrition economics: Nutrition economics is a discipline dedicated to researching and characterizing health and
economic outcomes in nutrition for the benefit of society
...

Role of nutrition economics: The three main roles of economics in relation to nutrition are:
1
...

3
...
e
...

Economic evaluation, i
...
to define which services to expand by comparing the performance across different
nutrition interventions and between nutrition and other modalities for improving health
...


31

Solved Questions
Q
...
Define health economics
...

Q
...
What are the components of economics? Differentiate between positive and normative
economics with example
...

Q
...
Distinguish between public and private goods
...

Differences between public and private goods:
Basis
1
...
Provider
3
...
Availability
5
...
Decision
7
...
Traded in free
market
9
...
Free
riders
problem
11
...
Excludability
13
...
Examples

Public goods
Public goods are the ones which are
provided by the nature or the
government for free use by the
public
...


Private goods
Private goods are the ones which are
manufactured and sold by the private
companies to satisfy the customer
needs and wants
...
e
...


Readily available to all
...

Social choice
Overall growth and development
No

Reduces with each consumption
...

Consumer’s decision
Profit earning
Yes

No
Yes

Yes
No

Non-rival
Rival
Non-excludable
Excludable
Horizontal
Vertical
Police service, fire brigade, Clothes, cosmetics, footwear, cars,
national defense, public transport, electronic products and food
...


Characteristics of healthcare as a special commodity:
8
...

10
...

12
...

Individual demand medical care when suffer from pain, injury and illness etc
...

Concern with externality (both positive and negative)
...

13
...

14
...


32

Q
...
Define externality with example related to health
...

Ans: From note
...
It can arise from actions by doctors linked to self-interest or attempts to promote well-being of
their patients
...

Example:
1
...

2
...


Q
...
What do you mean by supply? Write down the determinants of supply for healthcare
...

Q
...
Define direct cost and indirect cost with examples from healthcare perspective
...

Q
...
Define economic evaluation with example
...

Q
...
What do you mean by incremental cost effectiveness ration (ICER)? What is the concept of
QALY?
Incremental cost effectiveness ratio: An incremental cost-effectiveness ratio is a summary measure
representing the economic value of an intervention, compared with an alternative (comparator)
...

Formula:
ICER =

𝐶1 − 𝐶2
𝐸1 − 𝐸2

Where, C1 = Cost of one intervention
C2 = Cost of other intervention
E1 = Effect of one intervention
E2 = Effect of other intervention
Example: Suppose that the standard treatment for a particular high-grade B cell lymphoma costs 100,000
taka and on average, leads to 10 additional QALYs for those receiving treatment
...
So, the incremental cost effectiveness ratio for the alternative treatment relative to the
standard treatment is:
ICER =

𝐶𝐵 − 𝐶𝐴
𝐸𝐵 − 𝐸𝐴

33

=

200,000 − 100,000
12 − 10

= 50,000Tk/QALY
Concept of QALY: From note
...
9
...
Why monopoly is a source of market failure?
Conditions for competitive market or Conditions for perfect competition:
8
...
As a result, a
single firm cannot influence the market price so that a firm under perfect competition is a price
taker and not a price maker
...

9
...
So the products are perfect substitutes of
each other
...
Free entry and free exit: Any firm can enter or leave the industry whenever it wishes
...
If the existing firms are earning supernormal profits, new firms
would be attracted to enter the industry and increases the total supply
...
On the other hand, if existing firms incur
supernormal loss, then firms would leave the industry, thus reducing the supply
...

11
...

12
...

13
...
The labors are not unionized and they can move between jobs and skills
...
Perfect knowledge: Individual buyer and seller have perfect knowledge about market and
information is given free of cost
...
Similarly, each buyer
knows the prevailing market price and he/she is not allowed to pay higher price than that
...
Each firm is able to make
use of the best techniques of production
...
Market failure
in a monopoly can occur because not enough of the good is made available and/or the price of the good
is too high
...

Q
...
Discuss about investment in health along with the effect of age and income on investment
...
11
...
Environmental health is focused on the natural
and built environments for the benefit of human health
...
They are:
1
...
Toxicology
3
...
Environmental engineering
5
...

2
...

4
...

6
...

8
...


Assign environmental costs to resources under use
...

Allocation of environmental resources based on true costs and real benefits
...

Material substitution e
...
copper sheet can be substituted by aluminum etc
...

Pollution taxes
Waste reduction through technological efficiency
...
12
...

Nutrition economics: Nutrition economics is a discipline dedicated to researching and characterizing
health and economic outcomes in nutrition for the benefit of society
...

Scopes of nutrition economics:
1
...

2
...

3
...

4
...

5
...

6
...

7
...

Q
...
Write short note on: Burden of disease
...
It is often
quantified in terms of quality-adjusted life years (QALYs) or disability-adjusted life years (DALYs), both
of which quantify the number of years lost due to disease (YLDs)
...
Prioritising actions in health and the environment
2
...

4
...

6
...


Assessing performance of healthcare systems
Comparing action and health gain
Identifying high-risk populations
Planning for future needs
Setting priorities in health research

36



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