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Transcript of Health Economics - Prelims
7/28/2019 Health Economics - Prelims
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Prepared by:
Lucky P. Roaquin, RN, MAN
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After an hour, the students will be able:
(COGNITIVE DOMAIN)
To define the meaning of economics in termsof health and nursing profession
To differentiate the concepts of economicsappertains to health care industry
To describe the benefits of understatingeconomics in the nursing profession
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After an hour, the students will be able:
(AFFECTIVE DOMAIN)
To established a well-rounded ideas andconcepts about the relationship of economicsand health care
To hasten knowledge on the different issues
governing economics status and health careindustry
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After an hour, the students will be able:
(PSYCHOMOTOR DOMAIN)
To illustrate the existing nursing professionin terms of economic level
To provide a critically research on theeconomics of health care and nursing
profession in different scope settings orpractices
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Preliminary Period
A. The Role of Economics in the Health Care
Industry
- The Organization of an Economic System
- The Health Care System
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What is HEALTH?
According to WHO,Health is a state of complete physical, mental and social well- being and not merely the absence
of disease or infirmity.
According to Nightingale,Health as being well and using every power (resource) to the
fullest extent in living life.
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Physical Health
The overall condition of an individual inside
and outside the physical body. A person issaid to be physically fit if his body
functions according to the way it has beendesigned. Our body can compensate for
defects through regular exercise, properdiet and nutrition, and proper rest.
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Mental Health
Pertains to an individual’s emotional andpsychological wellbeing. One way to thinkabout mental health is by looking at how
effectively and successfully a person
functions.
Signs of mental health include feelingcapable and competent, being able to
handle normal levels of stress, maintainingsatisfying relationships, leading an
independent life, and “bouncing back” or
recovering rom different situatons.
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Social Health
Concerned with human beings and their
relation to one another. The concept of social health is given less importance
compared to physical and mental healthbecause social health may encompass the
characteristics of a society and not just thatof an individual.
According to Russell (1973), a society ishealthy when there is equal opportunity for
all and access by all to the goods andservices essential to full functioning as a
citizen.
There are evidences showing that thosewho are well integrated into their
communities tend to live longer andrecover faster from disease. Conversely,
social isolation has been shown to be a risk
factor for illness.
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Determinants of health aid in thecreation of health programs and publicpolicies that explicitly address the rootcauses of ill health, health inequalitiesand the need of those who are affected
by poverty and social disadvantages.
According to Wilkinson & Marmot
(2003), it is concerned with the healthimplications of economic and social
policies, as well as with the benefits thatinvesting in health policies can bring.
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Biology & Genetic Endowment
Biological form and function arepassed on to the next generation bygenes, which is the primary units of inheritance. Individual genetic traits
have different susceptible todiseases.
Not only because of biologicalinheritance that people experiencehealth problems later in life but dueto a vicious cycle of bad habits that
are being passed on from generationto generation.
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Culture
Membership in ethnic or culturalgroups influences the health of individuals and populations. Beliefsand values are two components of
culture that may have great effect onpeople’s health.
Beliefs are the results of the
experiences about the physical,biological, and social world in which aperson lives. Values are any aspectsof object, a thought, or an act that
are inherently desirable orundesirable.
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Education
Health education increases with anindividual’s level of education, or what
we call health literacy. As the level of education increases, the ability of theperson to read, understand, and use
health care information to make
informed choices, reduce health risks,and increase quality of life increase as
well.
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Employment & Working Conditions
People who have better control overtheir work have better health. Safe
workplaces also contribute to betterhealth. Workplace social support,
measured by the number and quality of interactions with co-workers, is
associated with better health. In general,having a job is better for health than
having no job.
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Gender
Many of such differences are sociallyconstructed. They arise from differencesin traits, attitudes, values, behaviors and
roles that society ascribes to men and
women.
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Health Services
Health services, particularly those designedto maintain and promote health and preventdisease, contribute to health. Services that
educate people about health risks andhealthy choices support healthy living.Those that encourage and assist in the
adoption of healthy living practices andsupport independent living also make a
contribution to health
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Income & Social Status
Poverty denies people access to decenthousing, education, transport and other
factors vital to full participation in life.Because of poverty, health is compromised
indirectly by living in neighborhoodsblighted by concentrations of deprivation,
high unemployment, low educationalattainment, poor quality housing, limited
access to services and a poor qualityenvironment.
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Personal Health Practices
Healthy personal practices and lifestyles arekey influences on health. Regular exercises
has been shown to reduce the risk of cardiovascular diseases, diabetes, obesity,back ailments, and cancer. Smoking is the
leading cause of cancer and a major riskfactor for cardiovascular diseases.
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Physical Environment
Where we live affects our health andchances of living flourishing lives. The daily
conditions in which people live have astrong influence on health equity. Access to
quality housing and clean water andsanitation are human rights
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Social Environment & Support
The social environment and its values andnorms influence the health of individualsand populations. Support from families,
friends, and communities is associated withbetter health. Family status affects health
primarily because it affects income andemployment.
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1. What do you mean by social health? Cite asituation where social health is manifested.
2. Speaking of social support, in what wayscan we contribute to a person’s health andhelp improve his wellbeing?
3. In what ways can education and trainingcontribute to people’s health?
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What is Economics?
Economics is a systematic way of thinking aboutthe use of resources. According to Samuelson
(1992), economics as “the study of how people andsociety end up choosing, with or without the use of money, to employ scarce productive resources that
could have alternative uses, to produce variouscommodities and distribute them for consumption,now or in the future, among various persons and
groups in society. It analyses the costs and benefitsof improving patterns of resource allocation.”
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Scarce resources that are available for producing goods andservices are classified into four categories:
Land, which refers to all natural resources such as landfarm, rivers, lakes, waterfalls, trees, oil, minerals,
Labor, which refers to manpower resources and expertise
Capital, which refers to man-made materials that can beutilized for further production of other goods and services
Entrepreneurship, which refers to human skills and talentsthat are used to administer and manage the business
enterprise
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How about in Health Economics?
Same scarce resources are used in theproduction of health care goods and
services. Because business and healtheconomics are both concerned with the
utilization of scarce resources for
production, it is necessary for society todevelop an economic system that willrespond to the needs of its members.
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What is an Economic System?
Economic system is an organizedeconomic institution that determinesthe manner in which scarce resources
are utilized to satisfy human wants.
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HOUSEHOLD BUSINESS
Goods &Services
ConsumptionExpenditure
Rent, Wage,Interest, etc
Land, Labor,
Capital
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4 Fundamental Functions
What to produce
How to produce
How much toproduce
For whom toproduce
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Types of Economic System
A distinction between differenttypes of economic system is
based on who owns the factors of production and the methods used
to coordinate and directeconomic activity.
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Types of Economic System
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Market System or Capitalism
• The factors and conducts of production are
carried out by privately owned enterprises.
Individuals are free to buy, sell, or lease
property
Private Property
Ownership
• The use of markets and prices to
coordinate and direct economic activity to
maximize profit and coordinates economic
activity where buyers and sellers come
Existence of
Pricing Process
• The presence of competition makes
individuals and businesses enhance their
economic welfare
Presence of
Competition
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Market System or Capitalism
•Conditions of Perfect Competition:
• A large number of buyers and sellers
• No barriers to entry
• No product differentiation or brand names
• Assumption of self-interest
• No externalities or spillover effects in
production or consumption
• No risk or uncertainty
• No monopolizing of producers
Presence of
Competition
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Market System or Capitalism
•The desire of sellers to attain economic
advantage through sale of their goods and
services. The desire to maximize profit also
intensifies competition, which will encourage
people to develop and introduce new methods
of production
Profit
Motive
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Command System or Socialism
The government owns most of propertyresources and major factors of production.
The government directly conducts,regulates and controls the economicactivity through its central economicplanning authority. The government
advocates abandonment of profit motive asan incentive to production and substitutes
it with production for use.
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1. What type of economic system do you think isfitting and appropriate to us considering ourculture, traditions and practices?
2. What steps do you consider effective in determining
the products or services society should practice?
3. What do you think is the appropriate and fairmethod of distribution that can satisfy humanwants?
4. What advantages do you enjoy in capitalism thatyou may not be able to enjoy under socialism?
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Contentment and Human Manners
Economics perceptions or main beliefssuppose that the performance of people is
normal. This means that when people takeachievement, they do so because they areenhanced off or more fulfilled after
captivating that deed – or at least anticipateto be. On the contrary, to deliberately do a
little that decreases contentment isunreasonable.
Materialistic Goal – be obliged to be formedall the way through the employ of assets.This comprises both merchandises, which
have substantial essence, and services, whichare indefinable or contain no bodily essence.To be absolutely accurate, an acquisitive goal
is the contentment one anticipates to take
delivery of when making exercise of a goodor service, not the high-quality or serviceitself.
Non-Materialistic Goals – contain the feelingof affection for of others, acquaintance, and
devout comfort.
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Microeconomics
This deals with the profitable performance of entity components in economy. Such elementsconsists of customers, companies, laborers,
savers, shareholders, and the like.Microeconomic impressions cover such issues as
(1) what involve the value of an entity good or
service; (2) what resolves the production stage of a company; and (3) how the levy price have an
effect on the distinctive shareholder in reserves.
Economics deals for the nearly all division withthe money-oriented aims of goods and services.They are created with the possessions of effort,
assets, ordinary possessions, and freeenterprise. Yearnings for goods and services are
unrestricted, at the same time as assets areinadequate.
Populace takes full advantage of their cost-effective comfort by apportioning or by means of resources competently. This is accomplished byusing cost-benefit investigation, guaranteeingthat reserve users have more to achieve than
they have to mislay or give up.
Miscalculations in resolutions making take placebecause of (1) unacceptable calculate of charges
and assistances; (2) breakdown to regard aslong-run consequences; (3) negative response to
regard as the effects on others; and (4)
somebody as well bearing much of the costs of apronouncement.
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Money & Banking
It is considered that survival cost-cutting
measure can function devoid of capital; acontemporary financial system is to accept as
true that cannot situate exclusive of cash.Acquisition of knowledge about money is andhow it is of assistance is important in order toadvance the economic predicament caused by
insufficiency.
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The Theory of Money
Money plays a vital function in specialty andsource of revenue standards. Every individual
concentrates in generating a quantity of good orservice in arrange to amplify the competence of reserve use. Interest, in turn, endorses elevatedsource of revenue standards. But this guide to
human being authority fabricating immeasurably
extra of a manufactured gods than each require– but not having not anything else is desirable.
Accordingly, specialization energy switches overtheir manufactured goods.
Two methods of dealing: (1) Barter – refers to ascheme in which one individual gives a high-
quality service, or reserve to another in replacefor a number of other good, service, or reserve;(2) double coincidence wants – denote that every
individual has what the supplementary self-needs and desires what the other individual has.
In an exchange market, populace accumulatespurchasing authority in the things they
formulate. But in a modern economy, peoplehoard purchasing supremacy in the funds theyreceive by generating things. Currency, is the
illustration of purchasing control – the authoritypeople receive by producing things.
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Purposes of Money
Accumulate of worth – as soon as you clasp onto capital you compromise the authority to
acquire goods and services at whatever timesyou desire
Average of swap over – money re-establishesone of the goods desirable for replace
Standard of rate – permit people to beacquainted with how much supplementary one
thing is significant than another thing.
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Banking Structure
As soon as the economies were of the most part
restricted and diminutive, and individual whodesired to make use of money normally did so in
a straight line from an important person whohad saved noteworthy quantities of it in advance.
The mortgage amounted to a replace of purchasing money connecting an investor and a
borrower.
The involvedness' of our economy and theenlargement in the amount of credits to funding
outsized manufacturing and other venturesnecessitates the pooling of the savings of thousands of citizens. This pounding and
succeeding conceding of loans is accepted outby banks.
Banks fell into two categories: Commercial bank – is defined by ruling as a firm
that provides read-through financial credits and
makes profitable loans. Thrifts bank – includes savings bank (mutualsavings bank which is managed as cooperatives
that signify that the shareholders are the holders),savings and loans (intended to make available
credit to home buyers); and credit unification (acooperative created by constituents who labor in
the similar company or government bureau or fit into the similar combination.
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How banks make money
Banks formulate capital. Not immediatelyearnings, but authentic, honest-to-goodness
money. In reality, banks prepared the majority of the money that survives nowadays. Such money
is promising for the reason that the bankingorganization, particularly for the reason of the
banks’ capability to make loans. Frequentlybanks formulate smaller amount of loans thanthey are permissible to put together with their
depositors’ money.
Excess reserves refers to this distinction amongwhat banks can let somebody borrow and what
they have loaned. Deposit multiplier refers to thequantity of times the currency deliver possibly
will develop if all surplus funds were provided.
Money is an end result of interest. As soon as weconcentrate on the employ of our possessions toamplify output, we require switching over goods
ad services with each other. Producing goodsand services give professionals the authority to
get hold of other goods and services all the waythrough swap over.
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1. Explain further the concepts about bartersystem? Compare exchange of commoditiesusing the old (barter) system from new(currency) system.
2. State the significance of currency system inthe health care industry.
3. If barter system is applicable in our presenttime, will it be effective in the current healthcare industry?
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What is Health Care?
Health care are activities that are undertaken
with the objective of restoring, preserving, orenhancing the physical and mental well-being of
people. These activities may be aimed at therelief of pain, the removal of disabilities, the
restoration of functions, the prevention of illnessand accidents or the postponement of death.
(Heshmat, 2001)
What is Health Care System?
A set of interrelated and independent parts thatform a complex whole and each of those partscan be viewed as a subsystem, hence, a health
care system can be described as the interrelatedways in which a given society organizes available
resources for the maintenance and improvementof the health of its people.
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Economic Functions of Health Care System
Health care system has similar attributes withthat of economic system. Both are involved in theuse of scarce resources, the production of goods
and services, and its distribution among the
members of society.
The organization of health system simply meansthat health status of a nation is the result of the
interaction of three-factors:• Health sector
• The population• The health-related sectors
The term health sector is used to indicate thegroups of services or institutions in the
community and country that are concerned withthe health protection of the population.
The identification of the health sector in thecountry requires:
Recognition of the accepted role of the healthinstitutions and services based on legal,
political and or technical criteria A familiarity with the health sector
composition in terms of agencies dischargingresponsibilities for the health protection of the
population.
Given a society’s resources, the combination of quantity and quality of health care services mustbe chosen and produced. In health care system,the consumer and the physician determine this.
Often times, there is a trade-off between thetwo. This also happens because society choosesto provide higher quality of health care services,
which only a handful can benefit as it entailshigher cost. On the other hand, quality may becompromised at times so as to cater to more
people.
Functions of the Health Sector: Direct provision of health services covering the
aspects of promotion, prevention, diagnosisand treatment and medical rehabilitation. Development and provision of health
manpower, drugs and medical supplies, andfinancing support/schemes
Research and development Coordinating, controlling and directing
organizations and activities with otherfunctions
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Marginal Benefit vs. Marginal Cost
The addition on theextra satisfaction that
you derive fromconsuming goods and
availing the services.
A measure of thechange in costs
associated withincreasing or
decreasing output byone, and is derived by
calculating the changein total costs for that
one unit.
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Health Care Services Production & BestMethods to Use
Techniques in production are being decided
because even within a particular health deliverysystem, the combination of health care personnel
and equipment vary. In place of marginalbenefits on the consumer side, marginal
productivity of inputs will be used by providersto determine the cheapest method in providing a
service.
The health care provider will have to determinethe best combination of capital (machines, healthequipment and devices) and manpower
(personnel) at the lowest cost possible. Economicefficiency then is achieved if health care
providers will be able to minimize the cost of their services.
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Economic Efficiency Concepts
Economic recession has been the cause of
evaluating the level of real resources available tohealth services. Two questions are being askedin determining resource utilization efficiency:• “Are limited resources used in the best ways
possible?” • “Is value for money achieved in their use?”
The concept of economic efficiency refers to theratio of output with use of a given input. The
economic efficiency of a particular productiveprocess is the ratio of the value of its productoutput to the value of the input resources. Thechoice of techniques depends upon the relative
prices or costs and the quantity of products toproduced. The aim of the firm is to produce ascheaply and efficiently as possible.
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Health Care Distribution
In a market or capitalistic system, the decisions onhow to distribute the supply of commodities dependlargely on the price and income of the consumer. In
this system, nobody dictates how incomes andoutputs are to be distributed. The law of supply anddemand centers on the price of commodities and isintegral in determining the quantity supplied and
demanded by consumers. But unlike the capitalisticsystem, health care system primarily relies on the
quality of the commodity, not prices, in determiningthe quantity to be produced
In mixed-capitalist economic system like the US,many health care goods and services are
distributed by both the government and the
private market. When the private markets cannotprovide the health care needs of the people, the
government intervenes to fill it up. When aperson who is in dire need of medical treatment,
but does not have health insurance, he seekmedical care in any government-ownedhospitals. Hospitals run by the government get
their funds from people’s taxes.
In socialist and communist systems, thegovernment directly conducts, regulates
and controls not only the economicactivity but also the manner of providingthe health care needs of its people. Their
productive resources are allocatedaccording to the availability and need of people.
In the Philippines, only few individualshave health insurance coverage, majority
of the population has access to healthcare services on the basis of willingness
and ability to pay.
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Significant Economic Health Care System IssuesThe usual role of price and income in the demand for
services does not apply to health services
The demand for curative services for non-life
threatening illness including alleviation of minorpains that is influenced strongly by the patient’s
income and price of the service. The demand for preventive health services appears
not to be influenced by the income and price. The
demands usually are low. On the other hand,health managers see these services as importantneed and hence engage in promotional activities
and prevention programs through communityeffort.
The consumer of health services does not determine
the amount, kind, and quality of what he purchases.In hospital, the patient does not determine if he is
willing to undergo a series of laboratoryexaminations or intervention, including operation. Itis the attending physician or any health personnel
who makes this decision and in a way, the ability of the patient to pay.
The economies of scale, which work inmanufacturing, do not work in hospital setting.
Large hospitals have more patients and higher dailyaverage cost per patient as opposed to smallhospitals with less patients. As the size of the
hospital increases, so does its range,comprehensiveness, and sophistication of services
Competition does not result in lowering the charges
for health services
Hospitals do not compete on a cost basis but in aservice and convenience basis. Physicians do not
decide where to send their patients on the basis of lower cost, but rather on the basis of the quality
and range of services available for diagnosing andtreating patients.
Marketing goal to maximize demands for services
apply only to preventive and advanced health
programs
To keep people healthy so that they will not needto be hospitalized. There is a high degree of selectivity in the admission of patients too
hospitals, and physicians are expected to limitsuch use to the minimum amount necessary to
assure satisfactory physiological result even if thepatient may be bothered.
Not all cost centers in a hospital make profit
Some hospitals never produce a net surplus of funds but continue to offer year after year services
needed in the community
Non-profit motive
In a hospital is true when the measurement of
success is not clear-cut and trustees may findthemselves in different position. Many trustees
regard the hospital as quasi-public institution andbelieve that when interests of the community come
into conflict with those of the hospital, thecommunity interests are primary and the hospitals,
do not strive for annual surplus in order to paydividends to stockholders.
External benefits
In health expenditures carry with them what canbe called external benefits, that is, the benefits of
expenditures accumulated not only to theindividual who makes them and community as awhole. Economists some cases, states that the
private marginal benefit from expenditure is lessthan the social insignificant advantage.
Health needs, wants, and effective demand
Generally taken as the basis of his right to receiveit, regardless of his ability to pay. While the
medical profession has always acknowledged anobligation to meet this needs that is an essential
part of it.
Complimentary nature of medical services, training,
and research
States that many developed countries, medicalservices are often offered jointly with medicaleducation and sometimes also with medicalresearch. Most authorities believe that byconducting a good educational program, a
hospital enhances the quality of care rendered.
Health as an item of consumption and investment
Resources devoted to health care represent insome part an investment in health. An investment
in health must measure its return in terms of indexes of health. The problem of determining the
return of the investment is complicated by
multiple causation which makes it impossible toattribute improvement in health to effect of the
health services.
Substitutability between labor and capital in the
health field
The ability of capital or more specifically machinesto replace very limited personnel services in health
field.
Differing requirement for labor and capital by
different health programs
In developing countries, the major causes of deathare parasitic and infectious in nature. Most of
these are vulnerable to existing preventivetechnology requiring less-skilled workers andordinary traditional diagnostic equipment. In
developed countries, the major health problemsare the chronic degenerative diseases, which
require more skilled manpower and moresophisticated diagnostic and curative equipment.
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1. How does competition works in health care? Areprice and consumer income consideredimportant determinants in the purchase of health care services?
2. How do we arrive to a decision as to whathealth care good or service must be producedin the society?
3. As far as input factors are used in production,why are hospitals more labor intensive thancapital intensive?
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4. How is distribution of health care servicesdone in health care system?
5. What is economic efficiency? How can
economic efficiency be attained?
6. How can be economic efficiency effective in
the present health care industry?
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Scarce resources must be used as
efficiently as possible. To achieve thisgoal, an efficient information system isrequired to bring together the values of products with their production costs and
varying consumers and producers’decision.
The price system, as it indirectly ordirectly influences many health care and
health programs, is integral in thiseconomic analysis. Therefore, it is
important to consider the price systemmechanisms by examining the application
of supply and demand in health caresystem.
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Demand as Applied to Health Care
Demand refers to various quantities of commodities buyers are willing to able to
buy at different alternative prices
In most markets, if the price of acommodity increases, the quantity
demanded of it will decrease. Conversely,if the price of a commodity decreases, the
quantity demanded of it will increase.
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Demand for Medical Services
Demand refers to various quantities of commodities buyers are willing to able to
buy at different alternative prices
An inverse relationship exists between
the price and quantity demanded forphysician services. The individual demand
curve for physician services is slopingdownward; illustrating that quantity
demanded rises as the price of physicianservices drops.
In the demand curve, price represents perunit out-of-pocket expenses the consumer
incurs when purchasing medical servicesfrom the physician. It equals to the amountthe consumer must pay after the impact of third party payment has been taken into
account. If the visit to the physician is notcovered by a third party, the actual price of
the visit equals to the out-of-pocketexpense.
Another way to illustrate the inverserelationship between price and quantity
demanded for physician services is that of the substitution and income effects of a pricechange. According to the substitution effect,a decrease in the price of physician services
causes the consumer to substitute away fromthe relatively higher-priced medical goods,hence, the quantity demanded for physician
services increases as price decreases.
Based on income effect, a lower price alsoincreases the real consumer purchasing power.
The quantity demanded of physician servicesincreases when purchasing power increases.There is an inverse relationship between priceand quantity demanded because as price falls,the real income and quantity demanded rises.
Taken together, the substitution and incomeeffects indicate that the demanded for physician
services decreases as price increases.
1. Demand ShifterThe increase in real income causes the demand
for physician services to rise. The consumer iswilling to pay a higher price, thereby causing
the demand curve to shift to the right.
2. Complementary Medical ServicesRefers to two or more goods which are jointlyused for consumption purposes. Becausethese goods are consumed together, an
increase in the price of one good inversely
influences the demand for the other.
3. Substitute GoodsIt refers to two or more goods that are used tosatisfy the same wants and provide the samecharacteristics. The demand for one good is
directly to a change in the price of its
substitute good.
4. Time Cost Influence the Quantity Demandedfor Medical Services
Time cost includes the monetary cost such asbus fare or gasoline, plus opportunity cost of
time.
5. Health Insurance and Demand for Medical
ServicesUncertainty is a fact of life and the need forhealth care is difficult to predict. People facerisks every time they drive along the streetsor invest their money. One way to minimize
risks is to let firms shoulder the coststhrough insurance policies.
5. Health Insurance and Demand for Medical
Services
When people buy insurance, they voluntarilypurchase a certain minimal loss – theinsurance premium – to avoid future risk of a
larger loss. The expenses associated withmedical care is designed to provide
protection. The demand for health andmedical care is interrelated feature of health
insurance.
6. Moral Hazard
This can be defined as any change in behavior asa result of becoming insured. Usually, thechanges in the behavior that matter most arethose that increase the pure premium of the
insurance. Increasing premiums is the
workings of the private insurance systems toat least cover their cost.
7. Events of Various Types
A disaster may increase the quantity demanded
for intravenous fluid and tubing and bloodproducts. Factors shifting the demand curveoutward would increase consumers’ incomeor insurance coverage, reduced opportunity
cost, increases in the price of substitutes,decreases in the price of implements orevents that increase quantity demanded.
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Supply as Applied to Health Care
Supply represents the quantity of a
product that producers are able to andwilling to sell at a specific price and timeperiod. The effect of price on the quantitysupplied is opposite to the effect of price
in the quantity demanded.
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Supply Shifters
Cost
Represents the resources or inputs
required to produce a good or service.Cost is a very important supply-shifterbecause the cost of a particular level of output is the result of the quantities of
resources used to create it multiplied bytheir price.
a. Total cost (TC)
Is the overall costs entailed to produce agiven level of output. Total cost is
expected to increase as output increases.
b. Average cost (AC)
Represents the total costs of productionassociated with each unit of outputdivided by the quantity produced over the
same period of time.
AC = TC/Q Php333=Php5,000,000/15,000
c. Marginal Cost
Represents the change in costs associatedwith increasing or decreasing output by
one.
Studying costs is important because it canassist in decision-making by identifyingthose areas where we can exercise the
power of choice. In practice, someresources are already dedicated to
particular activities by past decisions, andsimilarly, present decisions will haveresource implications in the future.
Decisions are distinguished betweenshort-run and long-run periods.
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Economies of Scale Concept
Economies of scale is a concept when thelong-run average cost declines and
output increases enabling the producer tomaximize profits or optimize its output. Itdepends primarily on the behavior of
costs and the volume of production. The
relationship between average cost andquantity of output will determine the
economies of scale or its scale of plant.
Short-run period refers to the time intervalwhen some factors are not adjustable in
amount. For instance, capital equipment,heavy machineries and buildings cannot beeasily replaced, bought or built overnight
without incurring losses. in short-run period,
fixed factors are given and the firm adjustsits operation by changing the variable
resources such as labor and raw materials.
In the long-run period, however, the firm canadjust all factors, hence, all costs are
variable.
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Why Diseconomies Scale Occurs?
It happens when the firm becomes
inefficient in controlling and coordinatingoperations especially upon venturing inlarge-scale production. In a small size
plant, the management can easily identifyproblems and make efficient decisions.
In contrast to small-sized plants, big-sizedplants are harder to manage. As operation
become more complex, problems and decision-
making considerations become multifarious too.On a large scale production, the management
will find difficulty in collecting andunderstanding information for timely decision.
Problems such as communication andcoordination will also occur resulting toinefficiency and eventually, rising of average
cost.
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Economies of Scale in Health Care
Economies of scale is a situation whichthe long-run average cost declines as
output increases output increases. Itrefers to the idea that the average costfalls as a medical firm gets physicallylarger due to specialization of health
professionals and increases in labor andcapital equipment or diagnostic
machines.
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Economies of Scope in Health Care
“Economies of Scope” is a situation in
which a producer can jointly produce twoor more products to lessen the cost of
production than doing them separately.The product thus maximizes profit by
minimizing total cost.
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Changes in Technology
Changes in technology may shift theamount of quantity supplied.
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Demand & Supply Shifters in Competitive MarketsDemand Shifters
1. As income increases, the quantity demandedincreases.
2. As income increases, the amount of insurance coverage available increases.
3. As opportunity cost increases, the quantitydemanded increases.
4. As the price of substitute decreases, thequantity demanded for certain gooddecreases.
5. Events may increase or decrease the quantitydemanded.
Supply Shifters1. As population cost increases, the quantity
supplied for certain good decreases.2. As economies of scale or scope increases,
the quantity supplied increases.3. As technology improves, the quantity
supplied increases.4. Events may increase or decrease quantity
supplied.
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Equilibrium of Demand and Supply
EquilibriumDefined as a state when there in no tendency for
further change. In the market, it is achievedwhen the supply equals the demand. Price andquantity o products will adjust until the point is
reached where producers and consumers greedto exchange a given quantity at a given price.
DisequilibriumOccurs when supply is not equal with demand. A
surplus represents market disequilibrium.
Surplus takes place when there is an excess inthe quantity supplied or a sudden drop in thequantity demanded. Surpluses occur when the
market price is higher than the equilibrium price
so that producers generate a quantity suppliedthat exceeds the quantity demanded. As a result,producers reduce the price of the product andincrease the quantity demanded to bring the
market into equilibrium.
ShortageRepresents market distribution when there is anexcess in the quantity demanded or a suddendrop in the quantity supplied. Shortage occurs
when the market price is lower than theequilibrium price, so that the quantity demanded
exceeds the quantity supplied. As a result, the
consumers are willing to pay a higher price forthe product. As its price increases, the quantity
supplied also increases, which brings the marketequilibrium.
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1. What are the factors that determine thedemand for health care services? Discusseach factor.
2. What are the factors that determine thesupply for health care services?
3. What are the most important inputs inhealth care?
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4. Give examples of substitute health caregoods and services and show how theyaffect demand.
5. What are the complementary goods andservices? What happens if the price of onewill rise?
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