Economists Weigh All the Costs of Health Care

By Hokayem, Charles | Regional Economist, July 2002 | Go to article overview

Economists Weigh All the Costs of Health Care

Hokayem, Charles, Regional Economist

Should a nursing home adopt a flu immunization program? How effective are wellness center programs that are designed to reduce high blood pressure in adults? How often should a child be screened for lead poisoning? Many people might be surprised to learn that economics helps answer these questions. It may be hard to imagine economists studying health and medicine, but it turns out that they help public-health officials and health-care providers by determining the efficient allocation of scarce health-care resources.

Implementing a new health program or maintaining the current one eventually leads to several questions: Is the program worth it? Do the time and effort of the program provide a benefit to the recipients? Is there a more efficient way to carry out the program? Health economists apply economic evaluations to assist in answering these questions. The basic idea behind any economic evaluation is to compare the costs and benefits related to some decision.

Which Costs to Consider?

In looking for a program's cost to society, some people might examine only the program's budget. Salaries for nurses and doctors, expenses for educational brochures and other financial or accounting costs will appear in the budget. But such an examination of the budget ignores the program's economic costs or opportunity costs to society, which are what economists look for.

Opportunity costs can be thought of in terms of trade-offs. Every time you do something, you forgo doing something else. Choosing between going to a baseball game and a hockey game means you give up one to see the other. So, when economists look for a program's opportunity costs, they consider the trade-off of devoting resources to establishing and carrying out that program instead of using them for something else.

Economic costs paint a better picture of a program's true costs and provide a common yardstick to compare different programs. Consider, for example, the difference between economic and financial costs of a volunteer. Suppose a flu vaccination program relies on volunteer help for some of its daily activities. Although the use of volunteers does not impose a financial cost on the program, it does impose a cost to society because the volunteers'time could be used elsewhere, including helping out in another program.

With this idea in mind, the resources used by a program can be divided into four categories: (1) resources used directly from within the health industry, (2) resources used by the program's participants, (3) resources used to treat side effects and (4) resources from other programs.1

Most of a program's direct costs come from resources used within the health industry, mostly wages paid to personnel who provide the service or activity but also the value of volunteer time given to the program. Other direct program costs can include donated goods, materials and supplies, laboratory equipment and any space used by the program, whether an existing or new facility.

The participants' costs vary, depending on what they must give up to participate in the program. Resources used by program participants can be special items purchased for use in that program, as well as transportation to and from the program

site. Another cost to a participant is what economists label productivity loss, which simply refers to the foregone wages because of time taken away from work.2 This time consists of travel time, waiting time and the actual time spent in the program.

Economists also consider indirect costs, such as adverse side effects resulting from the program. For example, every individual has a small chance of developing a reaction to a flu shot. A reaction to the flu shot given through a flu vaccination program requires additional care; so, the extra costs for this treatment should also be included in the cost of the program.

Another indirect cost comes in the form of resources taken away from other programs. …

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Economists Weigh All the Costs of Health Care


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