L6 Public Health Introduction to health economics

Overview

An introduction to why health care must be rationed and how economics helps do it explicitly. The lecture sets the scene with the pressures on New Zealand health funding (ageing, chronic disease, technology, fiscal constraint), defines economics and health economics around scarcity and efficiency, introduces opportunity cost as the concept underlying every allocation decision at macro, meso and micro level, then presents economic evaluation (its four types, incremental analysis, the ICER and the QALY) as a systematic framework for comparing costs and consequences. It closes on equity, arguing that economics informs but cannot make the choice.

Setting the scene: pressures on health funding

• In New Zealand most health spending has been publicly funded since 1938, but there is increasing pressure on health care funding.
• Ageing population. NZ population projections (Stats NZ, 1953 to 2078) show the 0 to 14 age group’s share of the population declining steadily while the 65+ share rises steadily, crossing over the 15 to 39 group around 2028. Data to 2028 are estimated; from 2028 onward is the projected 50th percentile.
• Implication of ageing (Ministry of Health briefing, Dec 2023): ageing is associated with higher rates of disability and long-term chronic conditions requiring daily or regular support, so increasing numbers of people will live longer with more complex conditions and comorbidities needing more specialised, costly care. Older-age population shares differ by ethnicity, with Europeans making up the largest share of the 65+ population and Māori, Pacific and Asian groups comparatively smaller shares.
• Noncommunicable diseases (GBD 2021): NCDs killed at least 43 million people in 2021, equal to 75% of non-pandemic-related deaths globally. 18 million of these deaths occurred before age 70, and 82% of those premature deaths were in low- and middle-income countries. Cardiovascular disease accounts for most NCD deaths, followed by cancers, chronic respiratory diseases and diabetes (including diabetic kidney disease deaths). Risk factors named: tobacco use, physical inactivity, harmful alcohol use, unhealthy diets, air pollution.
• Chronic condition prevalence, NZ adults 15+ (2024-25 NZ Health Survey): chronic pain 27.5%, arthritis 19.8%, medicated high blood pressure 16.9%, high or very high psychological distress 14.3%, medicated high cholesterol 11.4%, diabetes 6.1%, ischaemic heart disease 4.5%.
• Overweight or obesity, adults 15+ (BMI 25.0 or greater): prevalence rises from about 45% at 15 to 24 years to a peak around 78% at 55 to 64 years, then falls slightly (about 67% at 75+). Adjusted prevalence ratios (asterisk = statistically significant): men vs women 1.10*, Māori vs non-Māori 1.22*, Pacific vs non-Pacific 1.37*, Asian vs non-Asian 0.74*, disabled vs non-disabled 1.16*, most vs least deprived 1.15*.
• Overweight or obesity, children 2 to 14 years (BMI equivalent to adult 25.0 or greater): about 28% at 2 to 4 years, 27% at 5 to 9 years, 37% at 10 to 14 years. Adjusted prevalence ratios: boys vs girls 0.96, Māori vs non-Māori 1.45*, Pacific vs non-Pacific 2.10*, Asian vs non-Asian 0.62*, disabled vs non-disabled children (5 to 14) 1.45*, most vs least deprived 1.46*.
• Caregiver perception of child weight (Butler et al. 2022, Auckland suburb of high socioeconomic deprivation, n = 106 five-year-olds): over half had overweight or obesity, compared with one in three nationally, but few were perceived as overweight by caregivers. Of children with obesity, 66.7% were perceived as normal weight and only 25.6% as overweight; no child with overweight was perceived as overweight (90.9% perceived normal weight).
• Downstream consequences of obesity listed: cancers, heart disease, stroke, diabetes, musculoskeletal disease, osteoarthritis, low back pain, chronic kidney disease, producing earlier onset of disease, comorbidities and complexity of care (for example, higher obesity rates causing New Zealanders to need knee surgery younger).
• Technological advances (examples: bio-printing of organ structures, responsive neurostimulation implants for epilepsy, adjustable hospital beds, wearable ultrasound patches for continuous blood pressure monitoring). Increasing access to technology through globalisation increases demand for drugs, procedures and surgery, but it can be very expensive, and diagnostic tests and screening carry their own resource implications.
• Other current NZ pressures shown in news coverage: cost of living (“the cost to survive”), doctors and health workers leaving because of a lack of modern medicines, treatment access lagging international standards (blood cancer), one in five GP referrals declined with rising wait times, and a significant amount of unmet need.

Economics, health economics and the economic problem

• Economics is a social science focused on the production, distribution and consumption of goods and services, analysing the choices individuals, businesses, governments and nations make to allocate resources (Hayes 2022).
• Two key principles:
  • Scarcity: there are insufficient resources to meet all wants and needs, so we face trade-offs, and choosing one thing means giving up another.
  • Efficiency: what is the most efficient way to use scarce resources, and how do we maximise outputs or return from inputs?
• Fundamental economic problem: how to most efficiently satisfy (increasing) demand within limited resources.
• Health economics addresses problems of health and health care by identifying the factors that contribute to the health of individuals and populations, and identifies the most productive ways of using resources for improving health (Birch and Gafni 2013). The overarching objective is to improve health, but health care is the focus.
• Health vs health care:
  • Health: complete physical, mental and social wellbeing and not merely the absence of disease or infirmity (WHO); or the ability to adapt and self manage in the face of social, physical and emotional challenges (Huber et al. 2011).
  • Health care: the provision and consumption of services aimed at improving or maintaining health-related quality of life.
• What counts as health care is itself contested. Candidate items brainstormed: drugs, diagnostic tests and follow-up treatment, primary care, counselling, palliative care, surgery, immunisations, devices and equipment, education. This feeds the questions: is access to publicly funded health care a universal right, and if so what should be publicly funded, how much, and for whom?
• Health care is only one contributor to health. Health is a function of lifestyle, human biology, environment, income, education, age, smoking, exercise, drinking alcohol, safe water, clean air, housing, work places, social support, gender, ethnicity, diet, genes and health care of many types.
• Life expectancy vs health expenditure across OECD countries (Health at a Glance 2025) is a scatter read as four quadrants: lower spend/higher life expectancy, higher spend/higher life expectancy, lower spend/lower life expectancy, higher spend/lower life expectancy. The USA is a red outlier with very high spending (index about 2.5) but comparatively lower life expectancy (about 0.95); New Zealand sits near the centre (about 1.0 on both).
• The ‘economic’ problem: an economic system in general, or a health system in particular, is a mechanism for answering what (to buy), how, for whom, and who decides.
• Questions a health economist might ask: how much of a society’s resources should go to health care; what priority should be given to the elderly vs the young; how much should be spent on cancer treatments; what happens to demand when prices increase (for example through a tax); which programme should be implemented, A or B.
• Two strands follow from this. Thinking about resources and how best to use them for efficiency and equity gives rationing and priority setting. Asking whether resources produce benefits that justify their costs gives economic evaluation.

Warning

The transcript flags one slide (the “What is health care?” brainstorm) as text-only with its layout not visually confirmed. The same list of items is confirmed on a later slide, so the content stands but the arrangement is unverified.

Rationing, opportunity cost and the levels of allocation

• Health care resources are finite, so not all health technologies (drugs, devices, procedures and so on) can be provided within available resources, and prioritisation or allocation decisions must be made.
• Opportunity cost underlies these decisions: with limited resources, making a choice means giving up other alternatives, and opportunity cost is the lost value or benefit of choosing one alternative over another. Applied examples posed: the opportunity cost of attending the lecture, and of obtaining a medical degree.
• Allocating health care funding at every level of the health system involves opportunity cost. Three levels:
  • Macro (government): decisions about how much money goes to welfare, environment, education, health and so on. Forecast core Crown expenses 2026/27: Health $34.2b(thesinglelargestexpensecategory),socialsecurityandwelfareexcludingNZSuper$27.0b, NZ Superannuation $26.5b,Education$22.4b, Other $15.1b,financecosts$10.2b, law and order $7.6b,coregovernmentservices$6.6b, transport and communications $5.1b.Revenue:individualstax$67.9b, GST $33.1b,corporatetax$20.3b, other $12.6b,otherindirecttaxes$8.1b, other direct taxes $3.6b.
  • Increasing expenditure to meet growing demand is not financially sustainable. Net core Crown debt fell from about 24% of GDP in 2012 to about 19% around 2019, rose sharply to about 42% by 2024-25, and is forecast to peak near 46% around 2028 before easing to about 44% by 2030.
  • Meso (Ministry of Health, Health New Zealand/Te Whatu Ora): working within the resources provided and the priorities set at macro level, decisions about what mix of health services to fund, for example immunisation, elective surgery, palliative care.
  • Micro (individual): working within guidelines and available resources, health professionals decide which people receive services, for example using the Oxford Hip Score (a patient-reported form covering the past 4 weeks: usual hip pain rated none to severe, trouble washing and drying all over, trouble getting in and out of a car or using public transport, each rated no trouble at all through to impossible to do).
• Worked opportunity cost at meso level: $1 million will purchase either 58 hip replacements, or leukaemia treatment for 2 patients for 10 years, or a 5-year course of methadone treatment for 40 people addicted to opiates, or a postnatal depression service for 400 women for 1 year. These are alternative uses of the same budget, so funding one forgoes the others, against a background of thousands of drugs, devices, operations and procedures that people want publicly funded.
• Why clinicians should care: the need to ration and prioritise affects how doctors and other health professionals work, for example too many patients and not enough beds, unavailable treatments, restricted medication. Understanding health care economics helps inform or interpret those decisions and is useful for clinical researchers.

Bases for allocation and why they are insufficient

• Candidate bases a funder such as Health New Zealand/Te Whatu Ora might use to decide what to purchase and provide: medical need (treat the sickest first), random allocation or lottery (equal chance for everyone), first-in-first-served or longest on the waiting list, proximity to the hospital, personal merit and social esteem, diseases that evoke most empathy, age (youngest or oldest first), needs assessment / burden of disease / cost of illness.
• These methods are insufficient by themselves. What is needed is the capacity to benefit from the resources spent, not just the amount of need or the cost.
• The economics approach instead allocates resources so that benefits are maximised for the cost (efficiency), because every choice carries an opportunity cost.

Economic evaluation

• An economic evaluation compares the costs and consequences of at least two alternatives. There is always a comparator, even if it is the status quo.
• General approach, in order: identify costs and consequences; measure them; value and compare them. Structurally, a choice branches into Programme A and Programme B, each with its own costs and consequences, and all four are compared.
• Typical questions: which is more (cost-)effective, drug A or drug B; diet or diet plus exercise; surgery or physiotherapy.
• Four main types, distinguished by how consequences are measured (costs are always in $):

Type	Consequences	Costs
Cost-minimisation analysis (CMA)	not applicable	$
Cost-effectiveness analysis (CEA)	natural units, for example lives saved or life years saved	$
Cost-utility analysis (CUA)	quality-adjusted life years (QALYs); disability-adjusted life years (DALYs) also exist	$
Cost-benefit analysis (CBA)	$	$

Cost-effectiveness analysis

• CEA compares treatments or programmes with the same type of consequences but different magnitudes and different costs. Consequences are measured in natural units, for example life years gained, cases of meningococcal disease prevented, reduction in hypertension, prostate cancer cases detected.
• Worked example (Gordon et al. 2020, RCT of tailored exercise prescription for women with breast cancer, 8-year follow-up):
  • Option 1, usual care: exercise information received from health professionals during the course of health care. Outcome 24.82 life years saved, cost A$274,035.
  • Option 2, intervention: 16 sessions with an exercise physiologist over 8 months supporting women to exercise at least 4 days per week for 45 minutes. Outcome 25.64 life years saved, cost A$281,445.

Marginal (incremental) analysis and the ICER

• Interest lies in the difference between the costs and consequences of the alternatives: what is the additional (marginal) cost and what is the additional (marginal) benefit?
• Using the example above: additional cost $281,445-$274,035 = $7,410; additional life years saved 25.64 - 24.82 = 0.82.
• $\text{ICER}=\frac{\text{additional cost}}{\text{additional benefit}}=\frac{7410}{0.82}=A\$9,037\text{ per life year}$
• Interpretation: compared with usual care, the intervention costs A$9,037 per life year gained.

Cost-utility analysis and QALYs

• CEA assumes life years gained are identical in quality. That assumption is questionable: for people with end-stage kidney disease, life years gained from a kidney transplant may not be of the same quality as those gained from haemodialysis.
• CUA adjusts life years gained for quality, using quality-adjusted life years (QALYs). A QALY incorporates both mortality and morbidity into a single unit measure, and one QALY is assumed equivalent to living one year in full (perfect) health.
• Health-related quality of life weights run from 0.0 (dead) to 1.0 (perfect health), and there are various methods for estimating them (covered in another lecture).
• Graphically, plotting HRQoL weight against duration gives an area under the curve equal to QALYs. Comparing “without programme” (area A, ending at death 1) with “with programme” (area B, ending at death 2) shows the programme extending survival, in this illustration at a lower quality-of-life plateau. The QALY gain is the difference in areas.
• Calculation example: if 1 year on haemodialysis equals 0.64 years in full health, then 5 years on haemodialysis = 5 x 0.64 = 3.2 QALYs.
• Worked CUA on the same trial: usual care A$274,035and10.63QALYs;interventionA$281,445 and 10.97 QALYs. Additional cost $7,410;additionalQALYs10.97-10.63=0.34;ICER=7410/0.34=A$21,794 per QALY. Compared with usual care, the intervention costs A$21,794 per quality-adjusted life year.
• Whether to purchase the intervention still depends on the total cost and the budget. Economic reasoning suggests choosing the interventions that bring the most utility, that is the lowest cost per QALY, but that leaves equity unaddressed.

Equity, ethics and the limits of economics

• Ethical questions of equity, fairness and justice that cost-effectiveness alone cannot settle (Hope, Reynolds and Griffiths 2002):
  • Should treatments for the young have greater priority than treatments for the old?
  • Should identifiable patients be favoured over non-identifiable patients (the rule of rescue)?
  • Should palliative care be given higher priority than the QALY calculation would give it?
  • Should higher priority go to those who are particularly badly off with regard to their health?
  • Should higher priority be given if there is no alternative treatment?
  • How should double jeopardy (co-morbidities) be dealt with?
• Making decisions: there are no magic formulae. Economic evaluation is simply a systematic framework for explicit analysis. Equity, fairness and distributional criteria also matter, value judgements are still required (especially for aspects the analysis does not cover), and decisions sometimes need to be revisited.
• Victor Fuchs: economics is “the science of means, not of ends”; it can tell us the consequences of various alternatives but cannot make the choice for us, and these limitations will always be with us because economics can never replace morals or ethics.

Important

Summary position of the lecture: resources are limited so difficult decisions about what is funded and who receives care are unavoidable; opportunity cost is the starting point for thinking about allocation; economic evaluation gives a systematic framework for weighing costs and consequences of alternatives; and it still requires value judgements that must be understood and justified.

Self-test

1. Define opportunity cost and state why it underlies every health care allocation decision.
2. Distinguish scarcity from efficiency as principles of economics.
3. State the fundamental economic problem in resourcing health care.
4. Distinguish “health” from “health care” using the definitions given.
5. List the three levels at which health care funding is allocated, with the decision made at each.
6. List four bases a funder might use to decide what to provide, and explain why such methods are insufficient by themselves.
7. Define an economic evaluation, and say what must always be present in one.
8. List the four main types of economic evaluation and how consequences are measured in each.
9. Describe the steps of the general economics approach to comparing two programmes.
10. What is marginal or incremental analysis, and what ratio does it produce?
11. A programme costs A$281,445andyields25.64lifeyearssaved;usualcarecostsA$274,035 and yields 24.82 life years saved. Calculate the ICER and state what it means.
12. Explain why cost-effectiveness analysis may be inadequate for comparing kidney transplant with haemodialysis, and what analysis is used instead.
13. Define a QALY. If 1 year on haemodialysis equals 0.64 years in full health, how many QALYs result from 5 years on haemodialysis?
14. Predict what happens to the ICER of the breast cancer exercise intervention when the outcome is switched from life years to QALYs, and explain why.
15. List four ethical or equity questions that a cost per QALY calculation cannot answer.
16. Explain what Victor Fuchs meant by economics being “the science of means, not of ends”.
17. Integrative: explain how an ageing population, rising obesity prevalence and expensive new technology together create the problem that economic evaluation is designed to address, and state what economic evaluation can and cannot resolve.

Answers

Reveal answers

1. Opportunity cost is the lost value or benefit of choosing one alternative over another. With limited resources, every choice means giving up other alternatives, so allocating funding at any level of the health system carries an opportunity cost.
2. Scarcity is that there are insufficient resources to meet all wants and needs, which forces trade-offs. Efficiency asks what the most efficient way to use those scarce resources is, that is how to maximise outputs or return from inputs.
3. How to most efficiently satisfy (increasing) demand within limited resources.
4. Health is complete physical, mental and social wellbeing and not merely the absence of disease or infirmity (WHO), or the ability to adapt and self manage in the face of social, physical and emotional challenges (Huber et al. 2011). Health care is the provision and consumption of services aimed at improving or maintaining health-related quality of life.
5. Macro: government decides how much money goes to welfare, environment, education, health and so on. Meso: the Ministry of Health and Health New Zealand/Te Whatu Ora decide, within macro-level resources and priorities, what mix of health services is funded (immunisation, elective surgery, palliative care). Micro: health professionals, within guidelines and available resources, decide which individuals receive services.
6. Any four of: medical need (sickest first), lottery or random allocation, first-in-first-served or longest waiting, proximity to hospital, personal merit and social esteem, diseases that evoke most empathy, age, needs assessment / burden of disease / cost of illness. They are insufficient because what is needed is the capacity to benefit from the resources spent, not just the amount of need or the cost.
7. An economic evaluation compares the costs and consequences of at least two alternatives. There must always be a comparator, even if that comparator is the status quo.
8. Cost-minimisation analysis (consequences not applicable), cost-effectiveness analysis (consequences in natural units such as lives or life years saved), cost-utility analysis (consequences in QALYs, with DALYs as an alternative), cost-benefit analysis (consequences valued in dollars). Costs are in dollars in all four.
9. Identify the costs and consequences of each alternative, measure them, then value and compare them: the choice branches into programme A and programme B, each with costs and consequences, and all four are compared.
10. Marginal or incremental analysis looks at the difference between the costs and consequences of the alternatives, that is the additional cost and the additional benefit. Dividing additional cost by additional benefit gives the incremental cost effectiveness ratio (ICER).
11. Additional cost = $281,445-$274,035 = $7,410.Additionallifeyears=25.64-24.82=\mathrm{0.82.}ICER=7410/0.82=A$9,037 per life year. Compared with usual care, the intervention costs A$9,037 per life year gained.
12. Cost-effectiveness analysis assumes life years gained are identical in quality, which is unreasonable here because the quality of life years gained from a transplant is unlikely to equal that of years gained on haemodialysis. Cost-utility analysis, which adjusts life years for quality using QALYs, is used instead.
13. A QALY is a single unit measure incorporating both mortality and morbidity, where one QALY equals one year lived in full (perfect) health. 5 x 0.64 = 3.2 QALYs.
14. The ICER rises, from A$9,037perlifeyeartoA$21,794 per QALY. The additional cost is unchanged at $7,410, but quality adjustment shrinks the incremental benefit from 0.82 life years to 0.34 QALYs, so the same cost is divided by a smaller gain.
15. Any four of: should treatments for the young take priority over the old; should identifiable patients be favoured over non-identifiable ones (rule of rescue); should palliative care be given higher priority than the QALY calculation implies; should higher priority go to those particularly badly off in health; should higher priority be given when there is no alternative treatment; how should double jeopardy (co-morbidities) be handled.
16. Economics can tell us the consequences of various alternatives but cannot make the choice for us; those limitations are permanent because economics can never replace morals or ethics. Economic evaluation is a systematic framework for explicit analysis, not a magic formula, and value judgements remain necessary.
17. Ageing raises the numbers living longer with complex conditions and comorbidities needing specialised care; rising obesity prevalence (up to about 78% of adults aged 55 to 64 overweight or obese, and 37% of children aged 10 to 14) brings earlier onset of cancers, heart disease, stroke, diabetes and musculoskeletal disease, adding comorbidity and complexity; and new technology increases demand for drugs, procedures and surgery at high cost. Demand therefore grows while resources stay limited (increasing expenditure is not financially sustainable given rising net core Crown debt), so rationing is unavoidable. Economic evaluation can make the costs and consequences of alternatives explicit and identify what maximises benefit for the cost, but it cannot settle equity, fairness and distributional questions or supply the value judgements the final decision requires.