Health Economics
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Direct answer
Opportunity cost is the first word of health economics: every rupee spent on health is a rupee unavailable for anything else, and the discipline exists to choose wisely under that scarcity. Its examinable core has two halves. The first is economic evaluation: cost-minimisation analysis when outcomes are identical, cost-effectiveness analysis in natural units (cost per case detected or cured), cost-utility analysis in QALYs or DALYs averted, and cost-benefit analysis converting everything to money for a benefit-cost ratio. The second is India's financing arithmetic: government health expenditure is still under 2 per cent of GDP (about 1.9 per cent per the National Health Accounts 2021-22), out-of-pocket spending has fallen from 64.2 per cent of total health expenditure in 2013-14 to 39.4 per cent in 2021-22, and the National Health Policy 2017 targets public spending of 2.5 per cent of GDP with out-of-pocket spending halved by 2025 — because catastrophic health expenditure above 10 per cent of household consumption remains the leading route into poverty.
What you must remember
- Evaluation quartet: cost-minimisation (equal outcomes, compare costs), cost-effectiveness (natural units), cost-utility (QALY/DALY), cost-benefit (monetised outcomes, benefit-cost ratio) — a guaranteed matching question.
- ICER: the incremental cost-effectiveness ratio divides the extra cost by the extra effect of one strategy over another — the number that decides whether a new vaccine "is worth it".
- Cost taxonomy: direct medical (drugs, bed days), direct non-medical (transport), indirect (lost wages) and intangible (pain) — studies differ by whose costs they count.
- Market failures: healthcare is riddled with information asymmetry (the doctor is the patient's agent, risking supplier-induced demand), moral hazard (insurance encourages overuse), externalities (vaccination protects neighbours) and public-good characteristics (vector control).
- Indian numbers: OOPE 39.4 per cent of total health expenditure in 2021-22 (down from 64.2 per cent in 2013-14); government share of total health spending has risen to roughly half; public expenditure about 1.9 per cent of GDP against the 2.5 per cent target by 2025.
- Catastrophic spending: SDG indicator 3.8.2 defines it as health spending above 10 per cent (severe: 25 per cent) of household income or consumption.
- Financing models: Beveridge (tax-funded national health service, United Kingdom), Bismarck (social health insurance, Germany — the model behind India's ESIC), national insurance (Canada), private insurance dominant (United States), out-of-pocket dominant (poor countries).
- Indian protection stack: PM-JAY hospitalisation cover, free drugs and diagnostics at public facilities, Jan Aushadhi (PMBJP) generic stores, and NPPA price caps on stents and knee implants; Health Technology Assessment in India (under the Department of Health Research) supplies the evidence layer.
Costing one decision like a health economist
A state must choose between screening every adult for diabetes biennially or opportunistically at clinic contact. Cost-minimisation is irrelevant — outcomes differ. Cost-effectiveness computes rupees per case detected; opportunistic screening wins on that table. But cases differ in value: early detection in a 45-year-old obese man averts more DALYs than in a 70-year-old, so cost-utility analysis using DALYs averted re-ranks the options. If the finance department insists on comparing with road projects, only cost-benefit analysis serves, monetising health gains — crude but commensurable. Finally, discounting future benefits (commonly 3-5 per cent a year) and sensitivity analysis on assumptions keep the honest answer honest. This ladder — CEA to CUA to CBA — is exactly how Ayushman Bharat package rates and national screening decisions are argued.
Where students slip
The classic swap is cost-effectiveness versus cost-utility: the moment a question mentions QALYs or DALYs, the answer is cost-utility analysis, not cost-effectiveness. Second, out-of-pocket numbers must be attributed correctly — 39.4 per cent is the 2021-22 share of total health expenditure, a fall from 64.2 per cent in 2013-14; quote both to date-stamp the answer. Third, moral hazard and adverse selection get interchanged: moral hazard is behavioural change after insurance (overuse), adverse selection is the sick buying more cover — both, plus supplier-induced demand, are standard single-best-answer fare. Fourth, the 2.5 per cent GDP figure belongs to the National Health Policy 2017 with a 2025 deadline; writing it as an achieved figure is the planted error.
Frequently asked questions
Which economic evaluation uses QALYs as the outcome?
Cost-utility analysis, comparing interventions by cost per quality-adjusted life year (or DALY averted) gained.
What is catastrophic health expenditure?
Out-of-pocket health spending exceeding 10 per cent of household income or consumption (25 per cent for the severe threshold) — SDG indicator 3.8.2.
What is supplier-induced demand?
Over-provision of services driven by the provider's superior information and financial interest, exploiting the doctor's role as the patient's agent.
How has out-of-pocket expenditure in India trended?
It fell from 64.2 per cent of total health expenditure in 2013-14 to 39.4 per cent in 2021-22, credited to rising public spending and PM-JAY.
What financing model does ESIC represent?
Bismarck-style social health insurance — payroll contributions from employers and employees funding care for enrolled workers and dependants.