Health Care Economics in Economics, Cost-Benefit Analysis

Health Care Economics

In economics, cost-benefit analysis assists in evaluating the costs of an approach in terms of resources spent while cost-effective analysis evaluates the costs as achieving some sort of benefit which is not evaluated in monetary terms. Moreover, cost-benefit study examines several aspects including net-present value, present value of benefit, and present value of costs; in line with this, if a project indicates that the monetary outcome is greater than initial costs, the project will be initiated (Amartya, 2000). On the other hand, cost-effective analysis requires a value judgment; since an individual is required to determine how much value is provided by the spent capital.

The other difference is that cost-benefit analysis assigns monetary value to any benefit; the analysis evaluates the benefits in terms of how effective that benefit is; however, it is difficult to quantify the monetary amount. As an example, the health sector uses cost-effective analysis to evaluate how a particular action can lengthen life; on the contrary, cost-benefit analysis measures the particular health initiative in terms of cost.

The other major difference between these two analyses is the factors that make up the study. As an example, during purchase of a car, cost-benefit analysis assists in assessing all costs associated with a car, including selling price, maintenance and the amount of miles per gallon the car gets; the outcome of a cost-benefit study thus shows a car which cost less to own over a period of time. On the other and, cost-effective evaluates not only car's price, but also other value added features like the comfort of the seats, the look of the car, whether it has a GPS installed and any other luxury features.

Question 2

Cost effective and cost utility analyses when used in health settings, they often result in different results. In this regard, the cost effective analysis looks at economic decision making to weigh up the costs and effects of a particular economic action (Black, 1990). For example, a physician may look at various ways of treating a particular disease but is likely to compare the costs and see how much of the disease can be treated with the given money. Therefore, cost effectiveness analysis is used in choosing the treatment method to use often leading to unprecedented outcomes.

On the other hand, cost utility analysis involves looking at whether an action should be undertaken by comparing the cost of the action to increase in utility (Neumann & Weinstein, 2010). For example, in health economics, cost utility analysis is used to decide whether someone should be treated. On the same note, the cost of treating someone with a rare cancer may be £400,000; and if this brings about an increased life expectancy of 1 year, then it is assumed the cost utility of the treatment is £400,000 per year. As a concern, there exists a strong overlap between cost effectiveness and cost utility analysis, cost utility analysis is usually referred to as a specific case relating to health care and life expectancy.

Question 3

Given the opportunity to organize a perfect healthcare system, I would use Charge-based payments as the major financing method. In this method, the hospitals would be required to set defined prices for each hospital service. The hospital-established charge is then to be paid either directly by the patient or the patient's health insurance company.

The best reimbursement method I will use is prospective payments since it is widely used by most health care institutions. The hospitals are free to select the procedures they view as medically necessary for each patient and how much will be paid. In line with this, the insurance and government payers' lays out what is necessary for each patient and informs the provider as to which costs will be paid for and which will not (Phelps, 1992).

For the proposed perfect health care system, it is required that health care organizations evolve from a traditional medical mode to a learning mode of production characterized by continuous innovation, teamwork and shared values. To achieve this ideal, strategic leaders need to overcome resistance to change, which is particularly strong among physicians, who often regard their values as conflicting with those of their institutions. To promote organizational change within health care institutions, leaders are needed who understand the human values at work within organizations and who can communicate a vision of health care that aligns individual provider values with those of the institution.

Physician referral process for the model health care setup should be upheld according to the required standards to minimize conflicts between patients and physicians as well as the implications of referral for quality of care and cost to the patient (Shortell & Anderson, 1971). In this regard, the exchange theory will be used to allow for conceptualization and analysis of the various aspects of the referral interaction. According to this, if a referral is necessary, the physicians should decide to whom the referral is made, for how long, and for what services.

Question 4

The concept of direct exchange between the buyer and the seller is not present in the health care market. A basic characteristic of health care systems in all developed countries is that the majority of payments for medical services flow through third parties. A third party is an entity, usually an insurance company or government agency, which pays for medical services but does not receive or provide health care services. In general, third-party financing is due to two major reasons, the first being that individuals want insurance against the large and uncertain cost of illness, and governments want to assure access to health care for its citizens. In addition, if the concept of direct relationship between the doctors and patients existed, then individuals would pay providers directly for health services at prices set by those providers.

Healthcare is funded by either taxes or premium; individuals pay for the premiums to insurance companies and the taxes to the federal government which in turn pay for health care services. Aid in the employers often pay for a large share of insurance premiums and taxes, the amounts paid by employers are passed on to individuals and households through lower wages for the employees, higher prices to consumers for the employers' goods or services, or lower returns to investors on capital (Getzen, 1997). Besides, people with the highest incomes pay proportionately more than people with the lowest incomes, regardless of their use of medical services. On the other hand, insurance funded mainly by premiums is the most regressive because people with lowest incomes pay a higher proportion of their total income than people with high incomes.