Economics in the Healthcare Sector

Pharmac Annual Review 2000, p.24

Keywords: Health;

It is increasingly common for an economist has been approached by some group lobbying for the introduction of a new therapy, or perhaps by the government who wants some guidance. The therapy is expensive, and so the question of whether it can be used involves issues of costs and benefits. Answering that question or, more precisely, making an economic contribution to answering that question is rarely easy, and yet the welfare of patients depends on it. Not only the welfare of those who may be treated but, given the overall budget constraint, diverting resources to the treatment of one disease will leave others without treatment or on a waiting list.

While in practice there has to be some restraint on the amount a nation spends on health, a further complication arises when someone other than the sick or their families pay for the care. The ‘other’ may be the public purse or a private medical insurance, but in either case there is a separation between the consumer of the treatment and the funder. Medical insurance may pass the additional costs onto the pool of insured, driving up insurance premiums. The government may pass the additional costs on as higher taxation. Eventually there is resistance to the higher premiums or taxes.

It is possible to ameliorate this impasse by ensuring the treatment is effective relative to its cost. This is easier said than done. In principle there is surprisingly little information on the detailed effects of many new therapies (and, indeed, many well established ones). This is partly a consequence of the difficulties of accumulating good scientific evidence, but it also reflects a willingness to market a therapy as early as possible. Delaying until a full understanding is obtained might mean some sufferers will miss out, and the profit to the supplier is reduced. Identifying all the consequences of a therapy, good and bad, may literally take generations.

Even where there is sufficient information there is still the problem of measuring the benefits and costs. The best available method involves evaluating the quality adjusted life years (QALYs) gained per dollar outlaid. However QALYs are difficult to measure and it is not obvious which costs should be included (those to the health budgets, to the entire government budget, to the nation as a whole, including or excluding the costs to the individual and family?).

The New Zealand public health system, including Pharmac, has been exploring the use of the technique. In practice this means that a medication is likely to be approved if its dollar cost per QALY gained is below some set threshold, but in practice the decision is supplemented by common sense. Currently, the main effect of the measure is to discard some very inefficient therapies. As a result there is more to spend on successful ones. Eventually the measure may give guidance on the right size of the Pharmac budget. I shant be surprised if it is larger than the current one, but we do not have the information yet to guide the political decision.

There is an ethical issue here. It would be unacceptable if economists, say, were to determine medical treatment. That is the clinicians’ job. We have a model to help resolve the tension. Hospitals have ‘preferred drugs lists’ which restrict the use of pharmaceuticals unless they are on the list, or unless senior colleagues approve. Pharmac has, in effect, done the same at the national level by deciding which are government funded and which are not. Their decisions should not merely be the expert judgements of Pharmac’s staff, consultants and board. The clinicians using the therapies have to be involved too, and committed to a strategy of ensuring that the therapies they use are not only clinically effective but are also cost effective. Otherwise economists and accountants will make the decisions for them, because the cost dimension cannot be ignored.

That is one reason why there must be a public discussion of the resource issues in medical care, and the need to allocate intelligently, humanely and ethically the available funds to get a maximum return for patients and the nation as a whole.