Health care economics can be understood in terms of a number of different economic concepts. One of the most basic economic concepts is supply and demand. Essentially, supply is how much of something available that there is in a market, and demand is how much that people want. The concept reflects the idea that where there are no constraints, supply and demand will be roughly the same. In the real world, of course, there are always constraints. Demand has a number of drivers, and health care providers need to be aware of these drivers. Older people require more health care, so demand increases as the population ages. Sick people require more health care as well. Thus, when rates of disease or illness increase, that increase demand. As people reach end of life, especially at an advanced age, they become prolific consumers of health care. Thus, while the aging baby boomers will result in increased demand for health care in the near-term, the biggest impact will be as more of this generation enters its 80s and starts consuming health care at a much more rapid rate. In health care, something like the ACA increases demand because more people have health insurance, and therefore are able to pay for health care services.
For health care providers, increased demand needs to be met with increased supply. I tis not necessarily easy to increase supply -- you need to train doctors and nurses and build infrastructure in order to increase supply. Thus, when there is a shortage of supply, prices increase as those who demand health care compete to attract the attention of suppliers. For those in the health care industry, it is important to understand the different drivers of health care and then see how the supply in the industry is going to match up to that.
Scarcity is a related concept to supply and demand. Scarcity is a situation where the supply is less than the demand. Normally, scarcity reflects in a higher price, as those who demand the good bid up the price in order to acquire it at the expense of others who also want the good. The price is therefore determined by the relative supply and demand of a good. When the price rises, scarcity dissipates as demand exits the market.
This is also a way of understanding the difference between need and demand. Demand is basically the aggregate of need and want; as the price of a scarce good rises, the want will typically exit the market, leaving only the need. When speaking in general terms about health care, elective surgery can be seen as part of demand, but not of need; cancer treatment is a need and part of demand. However, when understanding the economics...
In other words, if there is excess demand in the
health care system, that cannot be resolved simply by cutting out all supply that caters to wants. A surgeon specializing in cosmetic rhinoplasty cannot simply start treating dementia in the elderly -- health care may often be viewed in aggregate terms but is actually a set of similar, but distinctly different individual markets, each with its own supply and demand conditions.
There are other economic concepts that can be used to help understand health care economics. One such term is marginal analysis. This is used by health care providers to make decisions about the provision of supply. Essentially, marginal analysis seeks to understand the addition benefits of a decision relative to the additional costs. Usually, an action will be undertaken when the marginal benefit is greater than the marginal cost. This is related to the concept of
opportunity cost. Opportunity cost is the cost of doing something, as reflected in the inability to do something else. A simple example would be a
hospital that has $20 million for a new wing. It can spend $20 million on a children's
medicine wing, but if it does that, it cannot spend $20 on a new cancer wing. So the opportunity cost of pursing children's medicine is that the hospital cannot pursue cancer. Normally in
economic terms, the hospital would then look at the marginal value of each choice and select the choice that delivers the greater marginal value.
Other concepts, which apply in particular to
public administration of health care, are efficiency and equity. In economics, efficiency relates to the degree to which economic effort translates into economic output. An economically efficient outcome is typically one where the supply and demand align perfectly. Thus, a perfect market, which by
definition is free from any distortions. There are many different types of economic distortions, including things like regulation and taxes on the
government side, or disproportionate bargaining power (such as derived from information asymmetry) on the market side. The difference between the actual efficiency of a market and the theoretically optimal efficiency in a market is known as deadweight loss. Profit margins are one form of deadweight loss. In a perfectly competitive market, there is no opportunity for profit. But in other…
