Section 2: Introduction to Health Economics Principles and Theories Pertinent to Decision-Making in Long-Term Care

Section Overview

In this section, you will be introduced to health economics principles and theories to better understand the decision-making context in LTC homes.

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Theoretical Foundations: Economics of Health Care

Welfare economics refers to resource and finance allocation to maximize social welfare of community members in the society at large (Sen et al., 2020). In health care, welfare economics relates to the allocative efficiency – the ability to choose between two or more alternatives based on the evidence of cost relative to health gain (Paulden et al., 2014). For example, the number of lives saved from a health education program to prevent motor vehicle accidents costs $10,000 per life saved. If another maternal and newborn health promotion program is less expensive and saves more lives (e.g., $5000 per life saved), this may be considered a better investment option based on the principle of allocative efficiency. In contrast, technical efficiency refers to maximizing the reach and scale-up of health interventions while lowering costs (Akazili et al., 2008). For example, the decision-makers would explore various strategies to increase the vaccine coverage from 70% to 95% in a given population while controlling (or preventing) additional program expenses. It is imperative to understand the fundamentals of welfare economics and how these factors affect the health care decision-making process.

Firstly, welfare economics is interwoven with utility, which aims to study the perceived value of health care services or interventions. In the free market, individuals can maximize their utility by virtue of purchasing goods or consuming services based on their affordability. However, unlike commercial economics, in which buyers and sellers make informed choices, patients or general members of the public sometimes lack sufficient knowledge about medical conditions and illness and the nature of treatment modalities, including the provision of health services, drugs, and technologies (Major, 2019). For example, an elderly person diagnosed with dementia may not be in a position to decide the best course of treatment or efficacy of other alternatives. In this case, patients and their family members (who are often a substitute decision maker) often rely on the knowledge and expertise of health care providers to recommend the best possible treatment.

Secondly, welfare economics is rooted in the laws of supply and demand of goods and services. According to this theory, buyers will demand fewer goods and services at a higher price. In contrast, almost all health care services are considered essential, and patients want to get the highest possible standard of care. In situations when drugs, supplies, and technologies are not covered by public health (universal) and/or health insurance (selected services), patients and their family members are expected to pay out-of-pocket for these services (Markit, 2017). In the worst-case scenario (in the absence of universal health care or health insurance), people may be denied essential health services if they cannot afford to pay for these services. This often leads to issues related to access, availability, and affordability depending on what is (or is not) covered and who is (or is not) eligible to receive these services.

The Role of Macro and Micro-Economics in Health Care

Macroeconomics is a branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity (Eichenbaum et al., 2021). For example, macroeconomics is used to determine that as the world’s population increasingly ages and the elderly population becomes exceedingly larger, there is a need for more LTC facilities on a national level.

In comparison, microeconomics is a branch of economics used to study the behaviour of individuals and interactions between buyers and sellers regarding choices made for consumption and/or allocation of scarce resources (Moore & Coddington, 2018). For example, in LTC, the decision to hire more recreation staff and invest in social technologies is often based on price, quantity, and quality of care.

The differentiation between macro and micro-economics is important because the latter puts a significantly larger financial stress (opportunity cost) for institutions at the grassroots level. For example, the pandemic required LTC homes to make additional budgetary allocations to mitigate potential risks and to improve health outcomes among residents, such as increasing staffing levels and ongoing purchasing of much higher amounts of PPE. But how can you put a dollar figure on such important improvements that positively affect the quality of life for residents living in LTC? The reality is that increased staffing and PPE was a necessity that had to be implemented, whether the funds to cover these additional costs were available or not. Finding ways to maintain or possibly increase the staffing levels that were implemented during the COVID-19 pandemic due to the improvements that were experienced would be an important consideration for future discussions.

Financial Perspectives

At the micro-level, financial spending can be understood through four perspectives in the context of the Canadian health care system, in that there are four major perspectives of health economic evidence relating to the health care context in Canada: (1) Public payer perspective; (2) Patient/family perspective; (3) Third-party payer (insurance provider) perspective; and (4) Societal perspective (Glied, 2008). These perspectives must be taken into account when calculating the costs and outcomes of health care interventions.

Summary

Allocating resources based on equity or fairness are deeply rooted in welfare economics. For example, deciding who (different types of patients with varying levels of disease severity) gets what (the type and amount of funding) and when (now or later) depends on factors associated with the supply and demand, utility, and efficiency principles. At the macro-level, budget and policies are geared towards maximizing the public good at a societal level. In constrast, financial decisions and policies at the micro-level primarily affect how individuals receive care in acute and/or chronic health facilities. The public payer perspective is often preferred in universal health care in which the single public-payer pays a vast majority of costs. However, in settings where a big chunk of health service delivery happens in the private sector, the patient payer perspective is needed. Overall, it is important to understand how decision-making affects everyone using fundamental health economics principles and theories covered in the section above.

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Complete the following activity to assess how much you learned about the content that was covered in this section.