Essentials of Health Economics - CHAPTER 2 The Role of...

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CHAPTER 2 The Role of Economics L EARNING O BJECTIVES : In this chapter, you will learn about: 1. the role of economics in health care. 2. the use of economic models to explain phenomena. 3. the concept of the market and equilibrium. ECONOMICS AND POLICY Understanding what economics can and cannot do is the first and possibly most important step in using economics as a tool of health policy. Economics can offer a framework to study the implications of individual decision making and help define the alternative mechanisms available to improve resource allocation. It cannot be used to solve all problems of healthcare access and delivery. Sound policy making is based on sound economic principles applied in a sensitive and uniform manner. Lessons can be learned from basic economics —lessons about human behavior and the way individuals make decisions, respond to incentives, interact with each other—and about the efficient allocation of scarce resources. Economists do not have the final say about the management of the healthcare systems, but they can make important contributions to the conversation about health policy and how it relates to the healthcare system. Even if you have had an exposure to economics, it is still important to read through this chapter. This chapter can be used to refresh your memory of the important concepts that will come into play when analyzing the medical markets and policies in these markets. This material will be useful in setting the tone for the rest of the book. The primary function of this chapter is to examine the basic principles of the market. WHAT IS HEALTH ECONOMICS? Health economists examine a wide range of issues from the nature and production of health to the market for health and medical care to the micro- evaluation of interventions. Grossman ( 1972 ) developed an economic framework for the study of medical care demand where medical care is
simply one of many factors used to produce health. The production of health looks at the determinants of health including income, wealth, biology, public health infrastructure and interventions, and lifestyle choices. Many factors confound the ability of medical care to contribute to good health. The principle activity of economists outside of the United States is the evaluation of medical interventions. Decision makers with limited resources find it necessary to conduct studies comparing the costs and consequences of diagnostic and treatment options to make informed decisions about efficient allocations of scarce resources. Cost-effectiveness analysis, the evaluation method of choice in medical decision making is further discussed in Chapter 14 . The primary focus of United States health economists is the market for health care. The demand for health care is seen as not only the desire to feel well (i.e., consumption aspects of health), but as a way to invest in human capital. Factors affecting the demand for medical care include: socioeconomic factors of the population, patient demographics, access

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