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Read the slides because he didn't actually go through them

  • Activity based funding
    • Money given to hospitals based on services provided to and complexity of patients
    • Private hospitals do this and then add on a margin for profit
    • They calculate an average expenditure for the same service in comparable hospitals
      • They don't do this for rural hospitals as they're more complex - block funding
  • Hospital stay on average used to be 8 days. Now it's 4 days.
    • This is partly due to technology and partly due to change in funding system
    • They're rolling this out in accident/emergency. In future this will be in all activity based care.
  • Health care is 9.4% of GDP (=$500/capita)
  • Bulk billing = GPs are paid $33 per patient by the government. If they want more, then they can't bulk bill.
  • 95% of the money is spent on intervention. 5% is on prevention

Health economics

  • Economics applied to healthcare
  • How to use the resources to deliver the best possible outcomes
  • The economic problem is scarcity of resources
    • Resources = land, labour and capital. Each of these has multiple uses. Time is also a limited resource.
  • Scarcity implies choice. The choice is how to allocate resources.
  • Opportunity cost = lost use of something due to choosing one thing over another due to scarcity of resources (i.e. time).
    • E.g. in medicine we're spending a lot of time on this study that we could have spent earning more money somewhere else. This is the opportunity cost of our time
  • Neonatal intensive care is very expensive in rich societies because we can afford to save their life (will spend up to $100k). In poor countries there is no neonatal intensive care because they can't justify spending that much money on one person.
    • In Australia, the cutoff is 24 weeks (this is the cutoff for heroic measures to save lives).
  • Public health is a zero sum game so opportunity cost applies
    • So we use economics to justify life and death choices

Key questions

  • What should be produced?
  • How should it be produced?
    • We are a high-labour cost country, so we use technology to replace labour.
  • Who gets to consume it?

These are all just opportunity cost decisions.

Possible answers

  • The market system (capitalism; price system - based on supply and demand)
    • Based on consumer choice - one dollar one vote
    • There is a risk in putting a new product on the market - people don't want them
    • Profits and losses. Profit = produce more. Losses = go out of business. So we need to produce something at the least cost
  • Government decides
    • E.g. heroin, cocaine, rifles are banned
  • Some combination of the two
  1. Want it an can afford it --> get it
  2. ' can't afford it --> can't get it
  3. Don't want it --> no need to buy it
  • Efficiency of market is the opposite of equity
    • Because having a PoW in a rural area is not efficient
    • The market is voluntary and follows these 3 rules EXCEPT in the case of healthcare and education, which the government says everyone should have

Examples of efficiency

  • Allocative efficiency
    • Correct balance between hospital based and community based health services
    • Often based on politics (e.g. marginal seats) rather than economics
  • Technical efficiency
    • Provision of hospital services to maximise cost efficiency e.g. hospital in the home


  • Should all Australians have equal access to health care?
    • But equal access is VERY expensive -- so there is a cost to equity
  • Do all Australians have equal access to health care?
  • Should healthcare be allocated on the basis of ability to pay?
  • Takes a long time for the govt. to react and to move health services to where the population is (e.g. a lot of public hospitals east of Homebush, most of population is West of population)

Distinctive features of health

  • Risk and uncertainty - high cost of some treatments
    • Uncertain about what someone's health status is - whether we'll be healthy next year is a mystery
    • Most individuals couldn't pay for some treatments - hence we need insurance
    • The more people who insure, the less the average risk - you're pooling risks
    • Insurance makes sense for low frequency high impact events (not for high frequency low impact) e.g. don't insure for GP consultation
    • Everyone pays the same premium irrespective of risk. You're not risk assessed in healthcare - it is community rated (except for special extenuating circumstances)
      • Risk rating is deemed inappropriate in Australia - because the point of insurance is to spread the risk from high risk people to low risk people
  • Externalities
    • People tend to underinvest in that particular product. E.g. vaccination has a benefit to society as well as to the individual.
    • E.g. underinvesting in healthcare - but being healthy is good for your productivity etc
    • Smoking - give an external bad to someone else
    • Because of this people overproduce or underproduce
  • Asymmetry of information between consumers and providers
    • Drs and nurses should know more about the illness than the patient does

Supplier induced demand

  • Doctors are paid a fee for each service they provide and the fee is set greater than a "competitive" level
  • Incentive to provide more services than would be the case if the consumers were fully informed and operating in a truly competitive market
    • E.g. doctors order x-rays etc for reasons that the patient doesn't know
    • The question becomes "is it excessive?" - a conflict of interest
      • Problem is: fee for service + someone else pays
      • E.g. mechanic - because you have to pay for it, you have rational choice not to pay. It is possible that you can get excess servicing.
  • There probably should be more supplier induced demand in medicine in Australia
    • Medicare should be a probing system where people do get recalled for appropriate testing because it will result in better outcomes