Health Economic Tools and Concepts

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Economic Tools and Concepts
Carol Wieden
HCS/552
February 13, 2012
Jayme Carrico

Economic Tools and Concepts
Introduction
Controversy surrounds health care. Daily, news reports on television, in newspapers, and the Internet discuss the rising cost of healthcare in the United States. The delivery and utilization of healthcare is a complex process. James and Stokes (2006) indicate “the process of healthcare includes diagnosis, treatment, prevention, rehabilitation and palliative care” (p. 1). Multiple entities help deliver healthcare - physicians, nurses, therapists, hospitals, insurance providers, government agencies, and commercial companies such as pharmaceutical and medical equipment suppliers. The aging population is placing increased demands on the healthcare system. The increase in co-morbidities associated with obesity is also testing the ability of health care systems to control costs. Overuse of antibiotics leading to drug resistance and the decrease in research and development of these drugs by pharmaceuticals is causing concern among epidemiologists. Resources are scarce and with newer technology and treatments the health care system must evaluate constantly and determine how to allocate effectively these resources.

The Economics of Health Care
Health economics is a discipline that “measures the costs and benefits associated with healthcare” and “seeks to achieve efficiency in terms of competing healthcare options” (James & Stokes, 2006, p. 2). The efficiency of resource allocation has three focus areas: “Getting the greatest output from production inputs (a problem for suppliers). Product choice – determining what goods and services should be produced (meeting consumer demands). Product distribution (who gets the products produced)” (Scott, Solomon, McGowan, 2001, p. 282). Resource allocation is complicated because the health care market is different from the competitive market. In health care the patient can experience a range of outcomes, health insurance covers direct medical expenses, and there is no set market price that indicates the value of resources used (Scott, Solomon, McGowan, 2001).

The interests of the Pharmaceutical manufacturers is the cost of research and development as well as the effectiveness, safety, acceptability, and cost effectiveness of new drugs (Walley, p. 68). This paper will focus on the economic tools and concepts of marginal cost, demand curve, and elasticity as it relates to pharmaceuticals.

Marginal Cost
Marginal cost is the increase in total costs triggered by the manufacture of one more unit of output. Pricing medication is dependent on which pharmaceutical company manufactured the drug. A patent gives a drug company monopoly power, and they can set the price above marginal cost (P>MC). The price is higher so the company can reap the profits. Although there is no chemical difference between the generic equivalent of a name brand drug, consumers may continue to purchase the name brand drug because they are familiar with the name. Once other drug companies start manufacturing, the price of the drug will drop.

When the consumer has to pay higher out-of-pocket costs for prescription drugs they use less. In standard economics the reduced use of prescription medication because of the higher out-of-pocket costs would be seen as efficiency (Chernew & Fendrick, 2008). The less medication consumed used would mean less cost for the consumer, thus cost sharing would indicate an efficient health care system.

Unfortunately, standard economic reasoning does not always apply to health care. According to Chernew & Fendrick (2008), “The price of prescription drugs generally exceeds marginal costs” and “when faced with cost sharing consumers reduce consumption of...
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