What is Health Care Economics?

The US health care industry consists of a variety of nonprofit organizations, for-profit businesses, government agencies, and independent regulators that all come together to impact individuals’ health and wellbeing.

But just because a business operates within the health care sector doesn’t mean it’s freed from the economic concerns that drive all businesses: how to lower costs, increase revenues, drive profit, and offer value to the end customer. Or, in this case, patients.

This is where health care economics comes into play. Below is an overview of what health care economics means, as well as a discussion about why understanding it is so crucial for those in the industry.

What Is Health Care Economics and Why Is It important?

Health care economics is a term used to describe the various factors that converge to influence the health care industry’s costs and spending. As a field of study, health care economics seeks to understand the role that individuals, health care providers, insurers, government agencies, and public and private organizations play in driving these costs.

Health care economics can be approached from several perspectives depending on the specific challenge you’re facing. For example, in the Harvard Online course Health Care Economics, Harvard Medical School faculty organize the discussion around six key areas:

  1. Spending growth
  2. The role of the patient
  3. The role of the provider
  4. The impacts of risk and insurance
  5. Benefits design
  6. Payment reform
components of health care economics

Understanding how each of these factors influences each other makes it’s possible to develop a firm understanding of health care economics as a whole.

Spending Growth

Health care expenses have been rising in the US in both absolute and relative terms. Understanding the drivers of this health care spending, how spending varies across different regions, and the role technology can play is crucial for anyone working in the industry.

The Role of the Patient

The patient plays a critical role in driving health care spending, for both themselves and others. By choosing one prescription or treatment over another, opting for elective surgery, or using too much or too little care, individual patients can significantly impact supply, demand, and pricing for the entire system.

The Role of the Provider and Health Care Production

While the patient serves as the demand side of the equation, health care providers serve as the supply side. What services and treatments providers choose to offer and how much they charge for them are typically directly related to the patient’s demands. Yet, several other factors may influence this decision as well.

Risk & Insurance

Health insurance is a means for individuals, employers, and society at large to manage costs related to health care. Ensuring stable insurance markets requires a thorough understanding of risk and risk pools.

Benefit Design

The design of employee benefits packages can be an effective means of controlling health care costs by forcing individuals to make more efficient decisions about their care. For example, an insurance plan which features high deductibles can serve to prevent frivolous spending while still ensuring protection in the face of medical emergencies.

Payment Reform

Similarly, health care providers can be compensated for their time and services in many different ways. Fee-for-service, episode-based payment, and population-based payment models can all be leveraged to promote effective decision-making among providers.

Why Study Health Care Economics?

The economics that drive the US healthcare industry are complex and require professionals to regularly balance seemingly conflicting goals. On the one hand is a mission to provide value to the patient by helping them live healthier, more meaningful lives; on the other, a responsibility to effectively manage revenues and costs.

While it’s obvious that for-profit hospitals, insurance companies, and other businesses have a responsibility to their shareholders to turn a profit, even nonprofit organizations operating within the space must effectively fund their operations or risk closing down.

With this in mind, it’s critical that professionals across the entire health care sector understand the economics that power it. Medical providers, administrators, health care policymakers, and even business leaders working outside the industry can benefit from understanding the economics.

  • Medical providers: To remain effective, medical providers must regularly evaluate new treatments, services, and technologies and consider what role they may play in helping them create value-based care for their patients. Understanding the economics behind such developments can allow these professionals to make more informed decisions.
  • Administrators: Those who work in an administrative role within the health care industry will often be more concerned with financial metrics than providers. For these individuals, an understanding of the economics that underlie their industry is invaluable.
  • Health care policymakers: Whether at the local, state, federal, or international level, health care policymakers must walk a fine line balancing the public interest against various economic considerations.
  • Business leaders: The majority of Americans receive health insurance through their employers. This fact makes health care a major expense for most organizations. Business leaders, managers, and executives must understand health care economics to do right by their employees and shareholders.

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