Uncertainty, pandemics, and vaccines: how can health economics and T-REX help to solve resource allocation issues in the current COVID-19 crisis?

Professor Brenda Gannon, School of Economics and Centre for the Business and Economics of Health. April 14, 2020.  

Health Economics, was branded by famous health economist Alan Williams, as ‘the cheerful face of a dismal science’1.

The peculiar nature of the market for health care, asymmetry of information – that doctors have a major influence on both supply and demand – has attracted attention, as has the study of the options available for financing such services. Intervention is often needed, in the guise of public health insurance, or private health insurance. Issues such as moral hazard and adverse selection may occur.

Health economics is application of economic theory to analysis of decision making by individuals, health care providers and government and opportunity cost is central. The first paper ever to address this uncertainty, was by Arrow (1963)2. Due to uncertainty, and unknown date of a health shock and varying degrees as to the way it can affect people, normal market mechanisms do not work. Departing from standard microeconomics theory, in the choice of health care consumed, one size does not indeed fit all.

So the demand for health care, needed a new theoretical framework, based on the human capital model and introduced by Grossman (1972)3.  On the supply side, the criteria to distribute resources is modelled on the concepts of efficiency and equity. Taking efficiency first, the cartoon of how many minions does it take to fit a light bulb, comes to mind (Look it up!).

Are they efficient? It appears so, as they use varying types and sizes of minions to help fit the light bulb. However, even though they may appear technically efficient, minimising inputs for one output, the light bulb then drops and breaks. This all comes at a price. In the health care world, this could be translated into what cost-effective mix of health care workers and technology we need in a hospital per person, to ensure good health outcomes. But this does not solve the full problem, quality of care, is of utmost importance and has to be measured. Fortunately, health economics theory and measurement provide solutions to this issue. Secondly, looking at equity, are those health care resources distributed evenly across all individuals? If there is not equitable access for all people, e.g. richer and poorer do not get the same resources based on their health care needs, then it is not equitable (bearing in mind equal access is not necessarily equitable access). Think of this now, in the current COVID-19 pandemic – is it equitable to refuse anyone health care based on anything other than need? No, it is not. Yet, the older people in some countries had to get less care compared to younger, simply because there were not enough resources and stark (and possibly incorrect) choices were made. This demonstrates to us that other factors such as effectiveness of treatment, equity based on need, and ethics of medical care need to be incorporated into resource allocation models. Health Economics concentrates on effectiveness, efficiency, equity, while the interdisciplinary focus brings in ethics and scientific suitability of treatments. Prevention, rather than cure, is now given much thought, alongside personalised medicine.

Do you want to know more? Sign up for the Masters in Health Economics, ECON7460 or the ECON2460 Health Economics module for semester 2, 2020. This course discusses the economics of Life, healthy living, longevity, ageing, death. It will provide descriptive and theoretical aspects and help you to look at health and health care issues through the distinctive lens of an economist, changing forever the way you think about these concepts. The central concern is the behaviour of economic agents (that includes you!) when confronted with scarcity. Choice and opportunity cost are central. This course will focus on demand for and supply of healthcare, health insurance, equity and need, health and labour market, lifestyle behaviours, measurement of health outcomes, health economics of ageing and longevity, welfarist and non-welfarist foundations of economic evaluation. An additional topic in 2020, will be Pandemics! Does an influenza pandemic lead to more emergency department visits and longer waiting times?4 Does an intervention to mitigate any non-urgent health care demand work to alleviate crowding? If not, would this hold in a more serious pandemic such as COVID-19? Do hospital admissions increase overall, and do costs increase?5 Is there a willingness to pay threshold and is investment in anti-viral warranted?6 What trials are ongoing for cost-effective interventions in respiratory failure?7

The main requirements for this course include Microeconomic theory, second year level at least. The course brings together many facets of economics, including standard demand and supply, market failures, indifference curves, productivity analysis, insurance mechanisms, among others.

This year, the assessments will again be essay based, giving you much opportunity to hone your writing skills – something every employer wants! Please check the final 2020 ECP to view a new assessment process, based on the needs of students in 2020.

In the first lecture, T-REX will make a strong entrance, and will help demonstrate the finite health care resources we have, and the race in the demand for these resources.

1. Williams, A. (1987), “Health economics: the cheerful face of a dismal science”, in Williams, A. (ed.), Health and Economics, London: Macmillan

2. Arrow, KJ (1963) Uncertainty and the Welfare Economics of Medical Care The American Economic Review, Vol. 53, No. 5. (Dec., 1963), pp. 941-973.

3. Grossman, M. (1972).  On the concept of health capital and the demand for health.  Journal of Political Economy, 80, pp. 223-255.

4. Sivey, P.,McAllister, R.,Vally, H.,Burgess, A.,Kelly, A. (2019). Anatomy of a demand shock: Quantitative analysis of crowding in hospital emergency departments in Victoria, Australia during the 2009 influenza pandemic. PloS one, 14, 1 – 11

5. Lau, K., Hauck, K., Miraldo, M. (2018) Excess influenza hospital admissions and costs due to the 2009 H1N1 pandemic in England. Health Economicshttps://doi.org/10.1002/hec.3834

6. Gyrd-Hansen, D., Halvorsen, P.A., Kristiansen, I., (2007) Willingness‐to‐pay for a statistical life in the times of a pandemic Health Economics, 17(1).

7. Attema, A., Lugner, A., Feenstra, T. (2009) Investment in antiviral drugs: a real options approach, Health Economics, 19(10).

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