Health economics is an interdisciplinary field that connects economics and health, but also includes areas such as statistics, sociology, psychology and epidemiology. Why is health economics important? How is it defined? How does healthcare differ from other goods and services? Is health considered an economic good? How and why does the healthcare market look the way it does, what challenges exist? Does ethics and equity play a role in economic evaluations of interventions, and how can the distribution of health be measured and analysed? These are some of the questions Ulf-Göran Gerdtham of the Department of Economics and Department of Clinical Sciences at Lund University addressed in his seminar.
“Many may think health and economics are a strange combo and ask how they fit together?” he said. “Both doctors and economists care about people but from different perspectives. Doctors focus on the clinical aspects of well-being, while economists focus on the resource-allocation aspects of well-being. Health economics provides the interdisciplinary bridge.”
Our interest in the economics of health goes back a long way. During the Great Plague in London in 1665 the English economist, physician, scientist and philosopher William Petty (1623 – 87) tried to estimate the value of a human life by looking at earnings over the lifecycle. He advocated that people be removed from London to avoid the plague, but this was probably not implemented.
“The value of a human life remains a key question,” said Gerdtham.
However, as a recognised discipline health economics does not have a very long history. Gerdtham explained that the official start is usually attributed to a seminal article in The American Economic Review in 1963 by American economist, mathematician, writer and political theorist Kenneth J. Arrow who, along with John Hicks, won the Nobel Memorial Prize in Economic Sciences in 1972. The article pointed out that the private market economy doesn’t work that well for health which needs public-sector involvement.
“In Sweden my PhD supervisor Professor Bengt Jönsson was the first to obtain a PhD in the field in 1975. By the time I initiated my PhD studies 12 years later the field was reasonable established with a big increase in publications. By 2010 there were over 30 000 publications in the economic literature on this discipline.”
A big, somewhat peculiar, business
Gerdtham pointed out that health is a big business but one that throws up some peculiarities for economists.
He highlighted that healthcare spend as a percentage of GDP varies greatly. In 2020 it was about 11 to 12% in most upper-income countries, but 8.5% in South Africa and 18,5 % in the US. “Healthcare spend has doubled since the 1970s. There’s no clear upper limit.”
Wealthier countries spend more on health. “There’s a linear relationship between health spending per capita and GDP per capita – 87% of the variance across countries can be explained by GDP,” he said. “Health spending increases as GDP increases. There is also increased public expectation as the economy expands and more is spent on public-health programmes especially for vulnerable people in richer countries – 60 to 80% may be publicly financed.”
Health is peculiar in economics. The health market is a regulated market, both in the financing of healthcare and in the production of healthcare. On top of this, health involves complex ethical choices and is also associated with strong emotions compared to other goods.
These peculiarities pose challenges to economic principles, making it potentially beneficial that some economists specialise in health economics.
“Every definition of economics stresses ‘scarcity of resources,” said Gerdtham, “implying that choices must be made about how resources should be used in the best way. Choices imply trade-offs and trade-offs creates ‘opportunity costs’- an important concept in economics. Opportunity costs is about the sacrifices we make when choosing one thing over another. Health economics aims to guide decision makers to the best approach to achieve their goals.”
“Health is peculiar because healthcare is a derived demand for health. Health is the fundamental goal. And demand for healthcare is actually demand for health.”
Health is also peculiar as a commodity since it cannot be traded, bought or sold like other commodities. Health economics therefore focuses on health production, since people may produce health by combining their own time and market goods like healthcare services, but also diet, fitness equipment, as well as ‘bad’ goods like tobacco and alcohol. Thus people make positive and negative investments in their health. As such, health has consumption and investment aspects. It’s often a trade-off between immediate and future wellbeing.
“As individuals we all recognise that health is important yet at the same time still engage in behaviours that are in conflict with our health,” said Gerdtham. “Health economics aims to understand health behaviour and the influence of our behaviours on health.”
And while we can do something about our own behaviours, we may not be able to control the behaviours of other impacting on our health – like being exposed to passive smoking or the impact of vaccination.
“The market for healthcare is also peculiar – most decisions involve uncertainty. Illness strikes randomly and can result in catastrophic losses because often healthcare is costly and the effects of healthcare are uncertain. This makes decision-making in health very challenging.”
There is also a power imbalance in the relationship with healthcare providers – doctors typically possess more information about illnesses, treatments, costs and their effects than healthcare consumers. This asymmetry of information may lead to situations where consumers may not receive unbiased information from providers, which may impact their ability to make informed decisions.
“Beyond these issues related to efficiency of healthcare, equity in distribution seems more important in health than for other goods, and therefore, even if healthcare would be efficiently utilised so we cannot get any more from our resources, the outcome might still be undesirable if it is unfair.”
“In most countries the healthcare system is conceptualised as three parts – the patient, the provider and the third-party payer (insurer),” explained Gerdtham. “The patient and provider may lack incentives to consider costs if the third party pays. The costs may also be higher with the third party than without (moral hazard). To address this, healthcare systems often try to create incentives to improve efficiency in the model through co-payments of patients, value-based pricing for new treatments, pay-for-performance of providers, as well as gathering information about the cost-effectiveness of interventions.”.
Health economics tries to understand all these complexities. Health economists do positive economics – looking at, for example, the relationship between smoking and smoking cessation; normative economics which aims to guide decision makers on the cost-effectiveness of recommended interventions; and, analysing the complex area of health-equity challenges.
Gerdtham pointed to examples of his group’s work including a study looking at the health effects of education which showed that increased schooling equals increased health. “There are many methods to identify cause and effect of education on health but economists are not clear on how big the effect is. If you look at public-health interventions uptakes are very different in different education groups. Investment in education vs. investment in health remains a big political question.”
He also highlighted a recent experimental study looking at the effects of ‘hard’ and ’soft’ penalties in context of commitment contracts to curb fitness procrastination which showed that hard penalties make people more likely to reach their fitness goals compared to soft penalties and a control group without contracts. “These types of experiments could also be used in smoking cessation and weight-loss programmes,” he explained.
Promoting health equity in policy evaluations
Gerdtham pointed out that one of the most challenging areas is around cost-effective decision making that includes equity. “Cost-effectiveness considers equity but rarely. How much equity would we sacrifice for cost-effectiveness? This is not clear-cut and there is lots of ongoing work in this area.”
He is planning a programme aimed at developing, designing and implementing an enhanced decision-making process for preventive and health-promoting policies in decision-making institutions, systematically considering health equity. The questions he will address include: How can the effect of prevention and health-promotion interventions on health inequalities be measured and analysed? How can inequalities in health be incorporated into cost-effectiveness analyses? And how can policy-making institutions be supported to utilise all of this in decision-making?”
His STIAS work, in collaboration with Stellenbosch University, involves providing evidence to guide health policies and social programmes to provide better support to individuals with mental-health conditions. The work includes considering ecological and individual-level linkages between exposure to trauma, vulnerability, social exclusion and mental-health symptoms over time.
Michelle Galloway: Part-time media officer at STIAS
Photograph: Ignus Dreyer