The Economic Side to Other Health Issues
Production, costs, and insurance are naturally issues that involve economics, but many other health issues have economic components, even though they may seem to be purely medical concerns. A few examples illustrate this point. The choice of a health care treatment seems purely medical to many people, but physicians and other providers increasingly believe in evaluating and comparing alternative treatments on economic grounds. It is necessary to examine the costs of alternative techniques. Physicians are also increasingly sensitive to the economic side of the patient-physician relationship. The patient’s preferences are considered valid in determining the appropriateness of a given treatment. We also must explore the economic reasons behind people’s health choices. People take care of themselves well at some times and poorly at other times. People’s desired health status can be understood as a meaningful economic choice. Even addiction to a relatively benign substance such as caffeine or a harmful substance such as methamphetamine can be understood better when analyzed as a possibly rational economic choice. Other health issues clearly have an economic aspect: What role should the government play in health? What health care investments should a developing country make? Should cigarette advertising be banned? Questions like these are not solely economic; but they have an economic side.
ECONOMIC METHODS AND EXAMPLES OF ANALYSIS
We have already provided a formal definition of health economics as “the study of the allocation of resources to and within the health economy.” From another perspective, however, health economics is what economists actually do and how they apply economics to health. Economists in practice use certain characteristic approaches to their analyses of the world.
Features of Economic Analysis
Many distinctive features of economics might be exhaustively identified, but we emphasize four: 1. Scarcity of societal resources 2. Assumption of rational decision making 3. Concept of marginal analysis 4. Use of economic models
SCARCITY OF RESOURCES
Economic analysis is based on the premise that individuals must give up some of one resource in order to get some of another. At the national level, this means that increasing shares of GDP going to health care ultimately imply decreasing shares available for other uses. The “opportunity cost” of (what we give up to get) health care may be substantial. While most people will recognize the money costs of goods and services, economists view time as the ultimate scarce resource. Individuals sell their time for wages, and many individuals will refuse overtime work even if offered more than their normal wage rate—because “it’s not worth it.” Similarly, many will pass up “free” health care because the travel and waiting time costs are too high.
RATIONAL DECISION MAKING
Economists typically approach problems of human economic behavior by assuming that the decision maker is a rational being. Rationality is effectively defined as “making choices that best further one’s own ends given one’s resource constraints.” Some behaviors may appear irrational. However, when disputes over rationality arise, economists often attempt to point out, perhaps with some delight, that so-called irrational behavior often makes sense when the incentives facing the decision maker are properly understood.
MARGINAL ANALYSIS
Mainstream economic analyses feature reasoning at the margin. To make an appropriate choice, decision makers must understand the cost as well as the benefit of the next, or marginal, unit. Marginal analysis often entails the mental experiment of trading off the incremental costs against the incremental benefits at the margin. A prime example involves the purchase of brand-name drugs. Patients’ decisions to buy brandname drugs, particularly for elective treatments, may depend critically on whether they must pay $2 or $3 per pill, or, instead, a fraction of those amounts if prescription drug insurance is available.
USE OF MODELS Finally,
economics characteristically develops models to depict its subject matter. The models may be described in words, graphs, or mathematics. This text features words and graphs. These models may be understood as metaphors for reality. We say, “This is the market for physician care,” meaning “This is like the market for physician care.” Any model can be pushed too far and must be tested against a sense of reality and ultimately against the facts. Nonetheless, they can be apt, and we can learn from them. In economic analysis, the models are often abstract. Abstract models help to make sense of the world, in economics as in everyday life. A young child asking what the solar system is like will undoubtedly be shown the familiar drawing of the Sun and planets in their orbits—an abstract model. The drawing is quickly grasped, yet no one supposes that the sky really looks like this.