Health Economics

Health Economics

Frank A. Sloan
Chee-Ruey Hsieh
Copyright Date: 2012
Published by: MIT Press
Pages: 816
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  • Book Info
    Health Economics
    Book Description:

    This book introduces students to the growing research field of health economics. Rather than offer details about health systems around the world without providing a theoretical context, Health Economics combines economic concepts with empirical evidence to enhance readers' economic understanding of how health care institutions and markets function. It views the subject in both microeconomic and macroeconomic terms, moving from the individual and firm level to the market level to a macroeconomic view of the role of health and health care within the economy as a whole. The book includes discussion of recent empirical evidence on the U.S. health system and can be used for an undergraduate course on U.S. health economics. It also contains sufficient material for an undergraduate or masters course on global health economics, or for a course on health economics aimed at health professionals. It includes a chapter on nurses as well as a chapter on the economics of hospitals and pharmaceuticals, which can be used in master's courses for students in these fields. It supplements its analysis with readings (both classic and current), extensive references, links to Web sites on policy developments and public programs, review and discussion questions, and exercises. Downloadable supplementary material for instructors, including solutions to the exercise sets, sample syllabuses, and more than 600 slides that can be used for class presentations, is available at A student solutions manual with answers to the odd-numbered exercises is also available.

    eISBN: 978-0-262-30112-1
    Subjects: Management & Organizational Behavior, Health Sciences

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-xxvi)
  3. Preface
    (pp. xxvii-xxxii)
  4. Acknowledgments
    (pp. xxxiii-xxxiv)
    Frank A. Sloan and Chee-Ruey Hsieh
  5. Chapter 1 Introduction and Overview
    (pp. 1-36)

    Health economics is a growing field within the discipline of economics. Health economics deals with issues related to the financing and delivery of health services and the role of such services and other personal decisions in contributing to personal health.

    Unlike the opening of department stores and car dealerships, there is no grand opening for a new field in a discipline such as economics. As an academic field of inquiry, there was virtually no health economics research before 1945, and relatively little after that date until the 1960s (Phelps 1995; Fuchs 1996). During the early 1960s, two Nobel laureates published...

  6. Part I Demand for Health, Health Care, and Insurance
    • Chapter 2 Health and Health Behaviors
      (pp. 39-82)

      Being in good health is a necessary but not a sufficient condition for living a productive and long life. Productivity applies to both work and nonwork activities. Although much of health economics is about supply and demand for personal health care services, the use of health services is derived from the fundamental objective of health promotion. Health services and health behaviors are conceptualized as inputs in the production function, with health being the output.

      Even though health is undoubtedly important to people, we all care about more than just being in good health. We value other possessions, such as our...

    • Chapter 3 Demand for Health Care Services
      (pp. 83-126)

      This chapter focuses on demand for health care services, including preventive, diagnostic, and therapeutic services. Examples of preventive services are vaccinations, counseling about proper diet and physical exercise, and routine dental examinations, including teeth cleaning. A drug that lowers blood pressure or cholesterol may prevent a heart attack or a stroke. The use of glucose monitoring equipment may prevent the onset of complications of diabetes. Diagnostic tests, such as mammography and colonoscopy (tests to detect cancerous or precancerous tumors of the breast and colon, respectively), are in a sense preventive as well in that these tests may detect polyps and...

    • Chapter 4 Demand for Private Health Insurance
      (pp. 127-168)

      While most countries, especially high- and middle-income countries, offer some public health insurance coverage, private health insurance is also marketed in most of these countries. The same underlying concepts apply to both public and private health insurance in that both protect covered persons against the risk of incurring out-of-pocket expenditures for personal health services (“expenditure risk”). In this chapter, we focus on the demand side of private insurance market, leaving the topics of supply of private health insurance to chapters 10 and 11 and public health insurance to chapter 12.

      The fundamental reason people demand insurance is that they are...

  7. Part II Supply of Health Care Services and Insurance
    • Chapter 5 The Market for Physicians’ Services
      (pp. 171-218)

      Physicians are the captains of the health care team. Physicians provide three distinct types of services. First, they provide advice to their patients about disease prevention, diagnosis, and treatment, including referrals to other sources of personal health care services and prescriptions for drugs that could not be purchased by the patient without a physician’s recommendation. Second, physicians themselves perform preventive, diagnostic, and therapeutic services. Third, physicians certify the presence of illness and disability to other parties. Certification of a disability is typically required before a person can receive compensation for a disability or coverage for particular services under a health...

    • Chapter 6 Hospitals
      (pp. 219-274)

      Worldwide, hospitals incorporate the latest in medical technology in a country and tend to care for the most acutely ill persons. Patients seek hospital care either because they have an acute illness, such as pneumonia, or because they are experiencing particularly serious adverse consequences of a chronic illness, such as a heart attack among persons with heart disease.

      This was not always so. In the nineteenth century, in such countries as the United States and the United Kingdom, hospitals tended to be almshouses, caring for the poor, while more affluent persons received care at home. Given very inadequate infectious disease...

    • Chapter 7 Quality of Care and Medical Malpractice
      (pp. 275-318)

      At first glance, it must seem unusual that a health economics textbook would devote considerable attention to quality of care. A popular but inaccurate view of economics is that the discipline deals only with cost and money. Accordingly, it would be legitimate to think that health economics deals with health care cost containment and the cost-effectiveness of specific health care technologies. After all, as explained in chapter 14, cost-effectiveness is a ratio of cost to some health outcome resulting from the use of the health care technology. Yet as we have seen in previous chapters, health care quality issues keep...

    • Chapter 8 Nurses in Hospital and Long-Term Care Service
      (pp. 319-366)

      Health care is a major source of employment of labor at virtually all skill levels, with the skill mix differing substantially among countries. Some health care workers have relatively minimal amounts of training specific to health care. Others acquire skills on the job. Still others acquire formal education in health care, which is later supplemented with on-the-job training and experience. Dominant among the latter are professional nurses, both in numbers and in responsibility for provision of health care on an ongoing basis. This chapter focuses on professional nurses.

      Nurses are the largest group of health care professionals. Nurses assume important...

    • Chapter 9 Pharmaceutical Manufacturers
      (pp. 367-416)

      Pharmaceutical manufacturers, profit-maximizing firms with long time horizons, decide on investments in new products. Among these new products, prescription drugs are of particular interest since they are major inputs in the production of good health. In addition, new prescription drugs are a major source of advances in health care technologies, which in turn often result in extending the capability of medicine to prevent and treat diseases and improve the quality of life. Once products are developed, there are issues of pricing and product promotion in countries in which the products become available. Some manufacturers concentrate on producing generics, which are...

    • Chapter 10 The Supply of Private Health Insurance
      (pp. 417-466)

      Having discussed the demand for private health insurance in chapter 4, we now turn to the supply of such insurance. Many countries have a private health insurance sector. However, the importance of this sector varies greatly among countries.

      This chapter deals with these important issues related to supply. How do insurers reduce individuals’ out-of-pocket health care expenditure risk? How do investments affect insurers’ risk of insolvency and the premiums they charge? Why do underwriting cycles—cycles in premiums and in the availability of insurance coverage—arise in markets for insurance? Compared to other lines of insurance, how important are underwriting...

  8. Part III Market Structure in the Health Care Sector
    • Chapter 11 Private Financing of Health Care Services
      (pp. 469-502)

      Up to now, this book has discussed decision making at the individual and firm levels, either individuals as patients or individuals—physicians and nurses—as suppliers of health services, and hospitals, pharmaceutical manufacturers, and health insurers as firms. Part I (chapters 2–4) focused on the demand side of the health care market, while Part II (chapters 5–10) focused on the supply side of this market. In Part III, comprising chapters 11 through 13, we analyze resource allocation at the level of the market and consider interactions among various parties in the health care market, including patients as the...

    • Chapter 12 Government Financing and Private Supply
      (pp. 503-562)

      Many countries have single-payer government financing or private financing under strict government oversight, combined with the private provision of personal health care services. Health insurance in such situations is often provided as social insurance. This means that insurance coverage is universal and provided without regard to a person’s ability to pay. Benefits are provided uniformly to the entire covered population. If differences are allowed—for example, if supplementation with a private insurance plan is allowed—these differences are above a high minimum level of benefits. Taxation or premiums may be progressive or, more frequently, may be proportional to individuals’ earnings,...

    • Chapter 13 Public Supply and Financing
      (pp. 563-614)

      Many countries have neither private financing nor social insurance. Rather, there is direct provision of health care services through public clinics and hospitals. This system is found in some high-income countries, including the United Kingdom, Denmark, Norway, Australia, and New Zealand, and it predominates (or has predominated) in some developing countries, such as China in the period immediately following the communist revolution (see chapter 11).

      An overriding question concerns the rationale for such systems. Since our subject is health economics, our particular focus is on the economic rationale for such systems. Further, we want to know how direct provision and...

  9. Part IV Performance of the Health Care Sector:: Positive and Normative Aspects
    • Chapter 14 Cost and Cost-Effectiveness Analysis
      (pp. 617-656)

      Up to now, this book has largely dealt with positive economics—explaining why behaviors are observed, including the role of incentives in the decisions made in a health care context. In the next two chapters we focus on normative economic questions. Answers to normative questions involve recommendations about policies that should be adopted. There are many normative questions in the health care sphere. Here we deal with recommendations about the allocation of health care resources. Which personal health care services should be provided, and under what circumstances? If resources were unlimited, it would be unnecessary to have methods for determining...

    • Chapter 15 Measuring Benefits and Cost-Benefit Analysis
      (pp. 657-692)

      Until now, we have discussed benefits in terms of units of health outcomes. Cost-benefit analysis (CBA) measures benefits and costs in monetary terms, which allows benefits from health care programs to be compared not only with each other but also with those of programs in other areas. Cost-effectiveness analysis (CEA) is much more widely used in health policy applications.

      CBA is more widely used in other areas, such as in appraising the value of environment programs, than it is in health. It is difficult to explain this difference. Environmental hazards cause damage to personal health and loss of longevity, too....

    • Chapter 16 The Contribution of Personal Health Services to Longevity, Population Health, and Economic Growth
      (pp. 693-736)

      In many countries, population health and longevity have increased substantially over the previous century. By contrast, in others, trends in health indicators are far less favorable (Becker, Philipson, and Soares 2005). Improved health may have important benefits in improving market and nonmarket (e.g., in such activities as parenting) productivity, as well as having value in its own right. This raises an important concern about the extent to which the improvement in population health can be attributed to the use of personal health care services and to the technological change in these services realized over the past century.

      This chapter addresses...

    • Chapter 17 Frontiers of Health Economics
      (pp. 737-752)

      This book concludes with a discussion of five ongoing controversies in health economics and in some cases in economics more generally. (1) Are people and institutions really rational and forward-looking in decision making, as economists generally assume? (2) How do people and institutions obtain information relevant to their decisions? To what extent does asymmetric information really affect the performance of health care markets, including markets for private health insurance? (3) How do the way health care providers are paid and how they compete affect the performance of providers and social welfare more generally? (4) How does the regulatory process affect...

  10. Index
    (pp. 753-780)