Health Economics

BPH/MPH
HEALTH ECONOMICS
Prabesh Ghimire
HEALTH ECONOMICS BPH/MPH
Table of Contents
UNIT 1 HEALTH ECONOMICS AND HEALTH CARE FINANCE ................................................................ 3

Introduction to Economics and Health Economics ................................................................................... 3
Role of Health Economics and Health Financing in Health Planning and Management .......................... 3
Introduction to Micro and Macro Economic Theory .................................................................................. 4
Introduction to Social Market and Health Care Market ............................................................................. 5
UNIT 2 DEMAND AND SUPPLY THEORY .................................................................................................. 6
Law of Demand and Supply ...................................................................................................................... 6
Market Equilibrium .................................................................................................................................... 8
Elasticity of Demand and Supply .............................................................................................................. 9
UNIT 3 HEALTH CARE FINANCING .......................................................................................................... 11
Existing Alternative Financing Schemes in Nepal .................................................................................. 11
Social Health Insurance .......................................................................................................................... 12
National Health Insurance Mechanism in Nepal ..................................................................................... 13
Equity and Universal Health Coverage ................................................................................................... 14
UNIT 4 ECONOMIC EVALUATION ............................................................................................................ 16
Concept of Economic Evaluation ............................................................................................................ 16
Cost Effectiveness Analysis .................................................................................................................... 17
Cost Utility Analysis (CUA) ...................................................................................................................... 20
QALY and DALY ..................................................................................................................................... 21
Cost-Benefit Analysis .............................................................................................................................. 22
Equity ...................................................................................................................................................... 25
Efficiency in Health Care ......................................................................................................................... 26
UNIT 5 NATIONAL HEALTH BUDGET ...................................................................................................... 28
Health Sector Revenue, expenditure and national budget ..................................................................... 28
Sources of Revenue and Expenditure in Nepal ...................................................................................... 28
Health Sector Budgeting ......................................................................................................................... 29
Accounting Process ................................................................................................................................ 30
National Health Accounts ........................................................................................................................ 31
©Prabesh Ghimire Page | 2

UNIT 1 HEALTH ECONOMICS AND HEALTH CARE FINANCE
Introduction to Economics and Health Economics
Economics
Economics is a broad term referring to the scientific study of human action, particularly as it relates to
human choice and the utilization of scarce resources. It deals with the production, distribution, and
consumption of goods and services, or the material welfare of humankind.
Health Economics
Health economics can be defined broadly as the application of the theories, concepts and techniques of
economics to the health sector. It is thus concerned with such matters as:
 the allocation of resources between various health-promoting activities
 the quantity of resources used in health delivery
 the organization and funding of health institutions
 the efficiency with which resources are allocated and used for health purposes
 the effects of preventive, curative and rehabilitative health services on individuals and society
Role of Health Economics and Health Financing in Health Planning and Management
Health planning is basically about choice: choice between one future and another; choice between
various ways of achieving that future. Health economics is also interested in choice, so there is an
obvious affinity between health economics and health planning.
Economic considerations play a key role in all aspects of life including health. In addition, the nature and
level of a country's economic development is a major determinant of the health status of its inhabitants
and is associated with the level of health service and health-related activities a country can support.
Health policy and its implementation are thus strongly influenced by macro-economic considerations.
The table below attempts to elaborate the connection between economics and health planning in the
following manner:
Issues relevant to planners Key Questions of health planning and Role of health economics
and manager management that is addressed by health
economics
Organizational behavior 1. Who makes the resource allocation - Notions of efficiency and
e.g. How can managers and decisions to and within the health sector, and the role inducements
health workers be what are their objectives? (rewards and penalties)
encouraged to increase their 2. What types of cost controls or incentives
efficiency? (monetary or otherwise) can be introduced to
encourage efficient behavior?
Project Evaluation 1. Does the service do any good or have any - Micro-economic
e.g. Which health programs discernible effect on health? evaluation: cost benefit
or services should receive 2. What are the relative efficiencies (merits and cost-effectiveness
analyses.
highest priority when and demerits) of alternative health activities?
allocating new funds? 3. What are the distributional (who incurs the
cost, who receives the benefits?)

Health policy, equity and 1. How best can the resources be matched - Develop optimum
social justice to the population's needs, mortality and welfare criteria and the
e.g. Does the operation of morbidity patterns, demands and utilization? concept of the social
welfare function
the health sector reflect the 2. What impact do different health care
- - Identify effect of
government's objectives e.g. systems have upon access, take-up and socioeconomic
for equity benefits received by target groups in the variables and physical
population? access on utilization
3. What are the financial barriers, if any, to patterns
the provision of an equitable (fair) health
service
Introduction to Micro and Macro Economic Theory
Health Economics can be better understood by examining the two basic theories underlying the science
of economics: microeconomics and macroeconomics.
i. Micro-economic theory
- Microeconomic theory is concerned with supply and demand. This theory is utilized to understand the
intricate relationship between health inputs and health outputs.
- It is useful for understanding price determination, resource allocation, consumer income, and
spending distribution at the level of individuals and organizations.
- Micro-economic theory covers economic concepts that look at issues on a smaller scale such as
health care market and allocation of resources within it.
- Micro-economic theory comes into play when health care competition increases, because the
success of supply and demand concept depends upon a competitive market.
- Issues such as cost containment, competition between providers, accessibility of services, quality and
st
need for accountability continue as target of major concern in the 21 century.
ii. Macro-economic theory

- Macro-economic theory is concerned with the broad variables that affect the status of economy as a
whole.
- Broad economic aggregates such as general price inflation, unemployment of resources in the
economy, growth of national output and their relation to health sector are studied.
- In macro-economic approach, economists investigate public and private expenditures in health. One
of the particular interests is on health planning under which allocation of resources to health services
is studied.
- Macro-economic theory has been useful in providing a large-scale perspective on health care
financing, ultimately resulting in various proposals for national health plans, health care rationing,
competition, and managed care.

Introduction to Social Market and Health Care Market
General Market
The term market refers to a situation where buyers (consumers) and sellers (producers) interact directly
or through intermediaries to trade goods and services. It is a situation where forces of demand and supply
interact to determine prices of goods and services being exchanged.
- The structure of the market in which the firm is operating has a significant effect on efficiency.
- A general market structure is defined by the following characteristics
 Number and size of the firms in the market
 The ease with which firms may enter and exit the market
 The degree to which firms’ products and services are differentiated
 The degree of information available to both buyers and sellers regarding prices and product
characteristics
- The characteristics of market structure determine the nature of competition which ranges from perfect
competition to a pure monopoly. Between these extremes there are many structures such as
monopolistic competition and oligopoly.
Characteristics of General Market

The ideal economic structure of a general market is perfect competition which has following
characteristics
- Many sellers and many buyers: There are plenty of choices and producers have no power to
influence prices.
- Homogenous products: such that consumers are unable to differentiate between products sold by
different sellers/firms.
- Firms can enter and exit the market freely without any restrictions
- Consumers have perfect knowledge/information about prices, and technology so that consumers and
firms can access such information at zero cost
- No externalities: The costs and benefits are fully reflected by the market price of goods and services.
- No intervention from outside is needed.
Health Care Market

The structure of markets in health care is not competitive. Many conditions of perfect competition in
general market are contravened in health care market. Because of this, a condition of ‘market failure’ is
obvious in health care market. (Market failure is a condition in which the essential conditions of
perfect/free markets are not met).
Characteristics of health care market/ causes of general market failure

i. Oligopoly/monopoly: Health care market generally has few providers due to factors such as entry
restriction and licensing. The providers can have the power to influence price.
ii. Barriers to entry and exit: There may be barriers to entry and exit.
iii. Returns to scale: In health care market, there are increasing returns to scale.
iv. Information symmetry: There are several information asymmetries in health care market. E.g.
between doctor and the patient, and between the consumer and the health insurance company.
v. Externalities: Both positive and negative externalities may be seen in health care market. Examples:
Immunization program provides herd immunity and have positive externality, smoking affects non-
smokers and have a negative externality.
vi. Intervention: Governments can intervene in markets to correct market failure. E.g. taxes, subsidies,
regulations, providing services directly, etc.

Differences between health care market and general market

Basis of General (Perfect) Market Health Care/ Social Market
difference
Entry and Exit There are no barriers to entry and There may usually be barriers to entry and exit
exit (due to entry restriction, professional licensing,
long and expensive training and expensive
investment)
Nature of A general market is characterized There might be a few hospitals in a location
competition perfect competition with many (oligopoly) or only one hospital in a rural location
buyers and sellers (monopoly)
E.g. Drug company with patent is a monopoly
with the power to set price
Product Products and services are usually The services of one health care provider may
homogeneity homogenous not be identical to those of another
Information Consumers have perfect There are information asymmetries in health
symmetry knowledge/information about prices, care market. E.g. Providers (suppliers) know
and services. more about illness and treatments than patients
Price of Each providers are too small to In health care market, there are firms that have
products/ affect price levels, so they are all power influence prices.
services price-takers and not-price setters Examples
- monopolistic hospital in rural area with power
to set higher price,
- Drug company with patent is a monopoly with
the power to set price
Externalities There are no externalities or spill- Both positive and internal externalities may be
over effects because the costs and seen in health care market.
benefits are fully reflected by the Examples:
market price of goods and services. Positive: Immunization provides herd immunity
Negative: Smoking affects non-smokers
Consumer Consumer tastes are already Consumers seeking health care are not always
tastes and determined at the time the consumer in a position to make the best judgment about
sovereignty enters the market their welfare even if they have the ability and
freedom to do so
Profit Motive Producers seek to maximize profits In health care market not all firms are profit
and are driven to be efficient driven.
Interventions No interventions are needed from Governments can intervene in markets to
outside. correct market failure. E.g. taxes, subsidies,
regulations, providing services directly, etc.
UNIT 2 DEMAND AND SUPPLY THEORY
Law of Demand and Supply
Demand
- In economics, the term demand refers to effective demand backed up by purchasing power.
- Demand refers to the quantities or amount of well-defined commodity that consumers are willing and
able to purchase at each possible price.
- The demand for any products or services by an individual consumer (household) is influenced by
various factors:
 Price of the commodity
 The income (wealth) of the consumer
 The price of other (related) commodity

 The tastes and preferences of consumers

 Various organizational and institutional factors
- The combination of all these factors defines a demand function. The quantity demanded (Qd) is a
function of the price of the commodity (P), income (I), the price of other related commodities (RP),
preferences and tastes of individual (T) and other organizational and institutional factors of society(s).
i.e. Qd =f(P,RP,I, T, S)
Law of Demand
- The law of demand states that the quantity demanded varies
inversely with price of the commodity, other things remaining
constant.
- This means that as the price of a commodity falls (rises), people
will be willing purchase and able to pay more (less) for the
commodity.
- The law of demand applies to health care as in other markets: as
the price of health care increases, people demand less of it.
Limitations and exceptions of law of demand

- Health insurance: In case of health insurance, people may demand more health care even if price is
high, because they are subsidized by insurance companies.
- Urgency of health care: If a person is seriously ill and require health care, they will purchase health
care services at almost any price.
- Inferior goods/ Giffen: In case of inferior goods such as bread, there is an indirect relationship
between price and quantity demanded
- Fear of shortage: When people feel that a commodity is going to be scarce in near future, they buy
more of it even if there is a current rise in price.
- Change in income: If the consumer’s income increased, they will demand more goods or services
even at higher price.
Supply
- Supply is one of the forces that determine the price in the market.
- Supply refers to the quantity of a commodity which a seller is willing and able to sell at a given price in
a market at a given time.
Determinants of supply
Supply of a commodity is determined by number of factors:
- The price of goods or service
- The price of related goods or services
- Price of factors of production
- Technology and productivity of resources
- Expectation of producers
- The number of producers
- Taxation

Law of Supply
- The law of supply gives the relation between price and quantity supplied.
- The law of supply states that other factors remaining constant, as the price of a good or service rises,
the quantity supplied also raises i.e there is a direct relationship between price and quantity supplied.
Exceptions/ limitations of law of supply

- Health care as essential: Essential drugs and health care services may be supplied in higher
quantities as a state responsibility even at low prices.
- Perishable goods: Perishable goods must be available in the market at it right time whatever its price
is. So the seller becomes ready to sell his goods at any offered price.
- Fear of obsolete/ out of fashion: If the distributor thinks that the goods are going to be obsolete in the
near future, he sells at a lower price. E.g. selling near expiry drugs
- Stock clearance: When the medical distributor wants to clear its stock, he may sell large quantity of
goods at discounted price. E.g stock clearance to replace with new product.
Market Equilibrium
- Equilibrium in a market is a condition when supply equals demand.

- As shown in the figure, at price p2, suppliers are willing to supply more than buyers are willing to
purchase at that price. There will be excess supply and pressures to reduce prices.
- At price p3, buyers will be waiting to buy more than suppliers are willing to offer and there will be
pressure on prices to rise.
- Price and quantity will adjust until the point where buyers and seller are content to exchange a given
quantity (q1) at a given price (p1). This point is called equilibrium.
- If the demand or supply changes, then the price and quantity also changes. In this case, a new
equilibrium is achieved at different price.
- For example, if the demand curve is shifted outwards and supply remain unchanged, then equilibrium
is achieved at a price and quantity purchased higher than before.
- If the supply curve is shifted downwards and demand remain unchanged, then new equilibrium will be
achieved at lower price with greater quantity purchased than before.

Elasticity of Demand and Supply
Elasticity of Demand
- The elasticity of demand is a measure of the responsiveness of product demand to changes in one of
its determinants.
- Elasticity measures are particularly useful because they focus on the relative magnitude of changes
rather than absolute.
- The demand determinants for which elasticity measures are typically computed are the price of good
or service, the income of the consumer, and the price of related goods or services.
- In this context, there are three types of elasticity of demand:
i. Price Elasticity of Demand
ii. Income Elasticity of Demand
iii. Cross-Elasticity of Demand
i. Price Elasticity of Demand

- Price elasticity of demand measures the percentage change in quantity demanded for every unit
percentage change in price.
- A higher price elasticity of demand shows that consumers are price sensitive.
ii. Income Elasticity of Demand

- Income elasticity measures the response in quantity demanded due to change in income.
iii. Cross Elasticity of Demand

- Elasticity measures the response in demand of a goods or services due to change in the prices of
other goods or services.
The degree of elasticity can be measured in following ways:

a. Perfectly inelastic demand (Ed=0): If the quantity demanded is constant regardless of the price, the
price elasticity of demand is zero and is said to be perfectly inelastic. E.g. insulin
b. Relatively Inelastic demand (Ed<1): If the change in quantity demanded is less than the change in
price, then elasticity coefficient is less than 1, and demand is relatively inelastic. E.g. tobacco
c. Unit elastic demand (Ed=1): If the quantity demanded changes proportionately to the price changes,
demand is said to be unit elastic. The elasticity coefficient is 1.
d. Relatively elastic demand (Ed>1): If the change in quantity demanded is greater than the change in
price, then elasticity coefficient is greater than 1, and demand is relatively elastic.
e. Perfectly elastic demand (Ed=): If the quantity demanded is extremely responsive to changes in
price, then it is said to be perfectly elastic demand.
Importance of Elasticity of Demand

i. Formulation of government policies
- Concept of price elasticity of demand is important for formulating government policies, especially the
taxation policy.
- Government can impose higher taxes on goods with inelastic demand.

ii. Decision of monopolist

- A monopolist health care provider considers the nature of demand while fixing price of his service/
product.
- If demand for the product/ service is elastic, the he will fix low price.
iii. Pricing decisions

- Elasticity of demand can be a basis for pricing decisions.
- Higher price may be fixed for products/ services with inelastic demand.
Elasticity of Supply
- The responsiveness of supply to changes in price of the service is given by the elasticity of supply.
- Like the elasticity of demand, supply is considered as elastic when coefficient of elasticity is greater
than 1 and inelastic when coefficient of elasticity is less than 1.
- For example, supply of hospitals may be regarded as relatively inelastic. In contrast, a relatively small
increase in wages may induce a relatively large increase in home care workers, making their supply
curve relatively elastic.
Importance of elasticity of supply

- Supply elasticity is important because it tells how quickly a provider can respond to a price increase.

UNIT 3 HEALTH CARE FINANCING
Existing Alternative Financing Schemes in Nepal
The health markets in Nepal are competitive, and in this unregulated, fee-for-service payment system,
providers are able to maximize profits by increasing volume, through the use of high technology, and by
intensive resource use, increasing the overall cost of care. This demands designing alternative system of
financing health care with incentives to contain costs.
There are basically three models of alternative financing that encourages more accountability,
sustainability, better efficiency and reduced cost:
i. Community based health insurance schemes (CHIS)/ Micro-insurance
- Typically, in such model, the community manages the setting and collection of premiums, the
contents of the benefit package, criteria for copayments and exemptions, and finally the choice of
providers.
- Two types of CBHI schemes existed in Nepal
o Government (public) schemes- initiated and financially & technically supported by government
o Private schemes- Supported by NGOs or based within cooperatives
- A pilot program for government supported community based health insurance scheme was
introduced in Nepal in 2003 from two districts. Four districts were added in 2005.
- The benefit packages of these schemes include consultation fees, diagnostic services, inpatient care
and the cost of medicines available at the health care facilities involved.
- After the introduction of free health care program, government supported CBHI schemes adapted by
expanding their benefit package beyond what is covered by free health care program.
- However, the population coverage of these schemes remained low and had small risk pools and
limited cross-subsidies.

ii. Targeted Policy

- Another innovative way of subsidizing the poor while at the same time ensuring that they get quality
of care is through the use of a targeted policy.
- Targeted free health services are currently provided by district hospitals.
- Outpatient, inpatient and emergency services and listed essential drugs at district hospitals are
provided free of cost to the targeted population (poor, elderly, children and vulnerable people).
- All services at district hospitals are provided at heavily subsidized prices to all.
iii. Social health insurance program

- The government of Nepal has been implementing a national social health insurance scheme since
2016.
- This is a family based health insurance scheme with annual contributions and benefit package
depending on the size of the family.
- National Health Insurance program has been planned for expansion to 40 districts by the end of FY
2074/75.
Social Health Insurance
Social health insurance (SHI) is one of the alternative financing mechanisms for raising and pooling funds
to finance health services. The ultimate objective of SHI is universal health coverage and secured access
to adequate health care for all at an affordable price.
- A social health insurance scheme ensures financing mainly through formal sector i.e. employee and
employer payroll contributions.
Key Features of Social Health Insurance are:

- Social health insurance is compulsory for the majority or for the whole population.
- It is legislated by government.
- Eligible members cannot opt out of a scheme or be excluded by the scheme.
- Premiums are collected according to ability to pay (i.e according to income).
- Benefit packages are standardized.
- Management by non-profit insurance funds
Advantages of Social Health Insurance

- SHI helps prevent people from falling into poverty due to health care costs- i.e catastrophic
expenditure since SHI combines prepayment and risk pooling.
- SHI may be more acceptable than tax funding in some countries as a framework for developing risk
pooling and social solidarity. This may be the case particularly in countries with a high current
dependence on user fees.
- SHI can provide a stable source of funding for health care, which is separated from the general
government budget and independent of budget provision.
- SHI is more just and more equitable than out of pocket spending and commercial insurance.
Disadvantages
- Special mechanisms may be needed to cover the poor who are unable to pay contributions.
- It may require and administrative effort to register members in the informal sector and to collect
contributions from them.

National Health Insurance Mechanism in Nepal
- National health insurance program (NHIP) is a social protection program of the Government of Nepal
that aims to enable its citizens to access quality health care services without placing a financial
burden on them.
- It is a family-based health insurance scheme.
Current Situation of NHI Program in Nepal

- GON has adopted a National Health Insurance Policy 2014 as a key policy guide with a vision to
ensure Universal Health Coverage.
- NHIP was initially rolled out in 2016 from three districts (Kailali, Baglung and Illam).
- Health Insurance Act was passed by parliament in 2074 B.S (2017 AD).
- The program is currently implemented by an autonomous body - Health Insurance Board
- This program is proposed for expansion to 40 districts by the end of FY 2074/75.
Purpose of Social Health Insurance Program in Nepal

- To address barriers in health service utilization and ensure equity and access of poor and
disadvantaged groups as a means to achieve Universal Health Coverage.
- To establish a mechanism for pooling of risks by equitable distribution of financial resources.
Implementation Modality
The modalities of Social Health Insurance Program in Nepal are discussed under different headings:
i. Benefit Package
- The benefit package includes selected drugs and health services for the members at health facilities
under NHIP.
- These include emergency services, out-patient services, selected in-patient services, selected
diagnostic services and selected drugs, in addition to any free services and drugs available at public
and contracted private health facilities.
- The maximum ceiling of benefit available to enrolled members is based on the size of the family.
ii. Member contribution

- The annual contribution amount a family has to pay for membership depends on the size of the family
Family Size Annual Contribution amount Maximum benefit ceiling per
per family family per year
Families upto 5 members NPR 2,500 NPR 50,000
Each additional member of the NPR 425 per additional NPR 10,000 per additional
family members member but a maximum
ceiling of 100,000 per family
iii. Provider payment mechanisms

- The enrolled members are able to receive drugs and services covered by the insurance program
without having to pay at any stage except
- PHCs are the first service point for enrolled members.
- After providing services to members, PHCs/ hospitals can claim the cost of providing services
covered in the benefit package from the Health Insurance Board.
- The committee reviews the claim and judges if it is in accordance with the agreement between the
two parties.
- Once approved, the health insurance board reimburses the facility for the amount claimed.

Equity and Universal Health Coverage
WHO defines universal health coverage as:

…access to key promotive, preventive, curative and rehabilitative health interventions for all at an
affordable cost, thereby achieving equity in access. The principle of financial-risk protection ensures that
the cost of care does not put people at risk of financial catastrophe. (WHO 2005)
- This definition of UHC embodies three related objectives:
 equity in access to health services - everyone who needs services should get them, not only
those who can pay for them;
 the quality of health services should be good enough to improve the health of those receiving
services; and
 people should be protected against financial-risk, ensuring that the cost of using services does
not put people at risk of financial harm.
- UHC is firmly based on the WHO constitution of 1948 declaring health a fundamental human right
and on the Health for All agenda set by the Alma Ata declaration in 1978.
- UHC cuts across all of the health-related Sustainable Development Goals (SDGs) and brings hope of
better health and protection for the world’s poorest.
GON approaches for achieving equity and Universal Health Coverage

- Free Health Care Program was adopted in 2006
- Aama Program/ Safe Delivery Incentive Package
- Universal free treatment services for Uterine Prolapse
- National social health insurance program
- Reaching the unreached strategy.
- Referral support program with cash incentives up to NPR 8,000.
- Poverty stricken citizens fund: Cash support for eight types of health problems including treatment of
cancer, heart disease, acute renal failure head injury, spinal injury, Alzheimer’s and Parkinson’s
diseases and Sickle cell anemia
Challenges to achieving equity and universal health coverage in Nepal

i. Availability and accessibility
- Stock out of drugs at basic health facilities
- Although increment of service utilization by poor, it is still low.
- Geographical location and terrain: Distance, high transportation cost
ii. Lack of clear entitlement and procedures

- Poor targeting mechanisms: verification mechanisms to identify poor and ultra poor
- People younger than 75 years are not entitled for treatment benefits.
- Ambiguous procedures for entitlement of medical benefits to the poor and victims of conflicts.

iii. Insufficient financial protection

- There is no scheme to provide protection in the case of catastrophic illness.
- Social health security program enrolled in few districts but process is too slow.
- Provision of benefits of NRP 50,000 in case of cancer, kidney, heart and other chronic disease does
not adequately cover treatment costs.
iv. Unregulated private sectors

- Growing private sector contributing to high out-of pocket expenditure.
- Diversion of public funds to private sector through unjustifiable referring of patients to private facilities.
Figure: Three dimensions of universal health coverage

UNIT 4 ECONOMIC EVALUATION
Concept of Economic Evaluation
Economic evaluation is a comparative analysis of alternative courses of action in terms of both their costs
and consequences.
According to Drummond et al. (2005), two features characterize economic evaluation:
- It is a comparative analysis (i.e. it compares two or more different options), and
- It compares these options in terms of their costs and their consequences.
The basic tasks of economic evaluation are to

- Identify: alternatives, type of resources, outcomes
- Measure: resources, consequences
- Value: monetary terms, utility
- Compare: costs and consequences of alternative strategies
Features of economic evaluation

- Economic evaluation deals with costs and consequences of alternative courses of action.
- Economic evaluation concerns with choices. Resources are limited, and our consequent inability
to produce all desired outputs necessitates that choices must be made.
Types of economic evaluation:

The following table summarizes different types of economic evaluation
Type of Measurement/ Identification of Measurement/ Decision Efficiency
economic Valuation of costs consequences Valuation of making tier
evaluation in both alternatives consequences
Cost- Monetary units Single effect of interest, Natural units (e.g. Program Technical
effectiveness common to both life years gained, Level
analysis alternatives, but points of blood Decision
achieved to different pressure
degrees reduced, etc.)
Cost-utility Monetary units Single or multiple effects, Healthy years Health Technical
analysis not necessarily common (typically Sector Level moving
to both alternatives measured as Decision to
quality adjusted allocative
life years, QALY)
Cost-Benefit Monetary Units Single or multiple effects, Monetary units National Technical
Analysis not necessarily common Level and
to both alternatives Decision allocative
involving
different
sectors

Use of economic evaluation in health care

- Increasing pressures on health care budget have led to a shift in focus from merely assessing clinical
effectiveness, to one on assessing both clinical effectiveness and cost-effectiveness.
- Decision making process have emerged in several jurisdictions that enable the results of economic
evaluations to be used as an integral part of funding, reimbursement, or coverage decisions.
Cost Effectiveness Analysis
- Cost-effectiveness analysis is a type of economic evaluation that examines both the costs and health
consequences for the alternative courses of action.
- The cost effectiveness analysis compares the cost (in monetary units) of an intervention to its
effectiveness as measured in natural health units (e.g. years of life saved, cases prevented, etc.)
- Cost-effectiveness analysis is used when competing alternatives produce a common health
consequence (similar outcome unit).
- Cost-effectiveness analysis is typically expressed as a ratio of costs divided by health outcomes. The
cost-effectiveness ratio of one intervention can then be compared with that of another.
Steps of Cost-Effectiveness Analysis

i. Identification of two or more alternatives/interventions
- Cost-effectiveness analysis requires the identification of two or more intervention strategies.
- For example: we may wish to compare two types of diagnostic testing for malaria (mutually exclusive
interventions), or ARI treatment with treatment of diarrhoea (independent interventions).
ii. Identification of perspectives

- Cost-effectiveness analysis also depends on the perspectives of the decision maker.
- Whether the costing and evaluation is done from a standpoint of specific beneficiary or health
provider or from the overall societal perspective should be clearly stated.
iii. Determination of costs

- Detailed costing should be done for each intervention and should include more than the direct costs
alone.
- The total costs can be divided into following categories:
o Direct costs specifically linked to health interventions.
o Cost expenditures associated with adverse events
o Cost savings that accrue as a result of improved health outcome.
- In addition, cost-effectiveness analysis even assesses indirect, or opportunity costs.
iv. Determination of outcomes

- For cost-effectiveness analysis, the outcomes for both the alternatives should be measures in a
similar natural unit.
- For example in case of malaria diagnostic tests, the outcomes may be measure in terms of number of
true malaria cases identified.
- In case of ARI and diarrhoea treatment, the outcomes may be in terms of number of child mortalities
averted.
v. Determination of a cost-effectiveness ratio

- Once costs and benefits are measured, a cost-effectiveness ratio is determined.

- Cost effectiveness ratios typically come in the form of average cost-effectiveness ratios (ACERs) or
incremental cost-effectiveness ratios (ICERs).
- When two interventions are independent (e.g. ARI and diarrhoea treatment), then average cost-
effectiveness ratios are calculated separately for each of interventions and one with lower ACER is
given higher priority
- For example: If ACER of ARI treatment is lower than ACER of diarrhoea treatment, ARI treatment
intervention is given a priority given.
- When two interventions are mutually exclusive (e.g. two types of diagnostic testing for malaria), then
incremental cost effective ratio is calculated.
vi. Decision making

- For independent interventions, they should be implemented in the order of their ACER starting from
the lowest ACER, until the budget is exhausted.
- For mutually exclusive programs and fixed budget, first dominated interventions are eliminated and
the more effective interventions are implemented until budget is exhausted. The incremental cost-
effectiveness data is interpreted using a cost-effectiveness plane and threshold criteria.
- The most effective strategy whose ICER is less than the threshold cost/life years after excluding
dominated strategies must be chosen.
Guidance on how to define the threshold cost/LY

Use gross domestic product (GDP) to derive categories of cost-effectiveness:
• Highly cost-effective: <1GDP per capita
• Cost-effective: between 1 and 3GDP per capita
• Not cost-effective: >3GDP per capita

Limitations of Cost-Effectiveness Analysis

- It does not provide information about whether or not to expand/ scale up the program.
- It doesn’t take into account the social desirability of health outcome.
- It overlooks the equity aspect of the intervention.
- It provides the information about technical efficiency rather than allocative efficiency.
- It cannot compare interventions which have differing consequences (outcomes).
- It is difficult to make policy decision based only on the comparison of the cost-effectiveness ratios.
- CEA cannot compare programs with different goals.
Examples for understanding CEA decision rule
1. Calculating ACER- For Independent programs

Suppose, three independent intervention have the following costs and ACERs
Intervention Costs Effectiveness ACER
A 100,000 10 10000
B 400,000 20 20000
C 900,000 30 30000
- As a decision rule, the interventions should be implemented in order of its ACER, starting from the
lowest ACER.
- Suppose we have a fixed budget of 600,000.
- In the above case, program A has the lowest ACER, so we start by implementing program A. Then
budget left is (600,000 – 100,000 = 500,000).
- With the remaining money, program B is implemented (second lowest ACER). Now remaining budget
is 500,000 – 400,000 = 100,000.
- The remaining money is not sufficient to implement program C.
2. Calculating ICER - for mutually exclusive programs

Suppose we have four mutually exclusive programs with following costs and consequences
Interventions Cost (in million) Effectiveness
A 9,000 0.3
B 2,000 0.2
C 500 0.1
D 10,000 0.4
- We order the given programs according to their effectiveness and calculate ICER.
Interventions Cost (C) Effectiveness (E) Change in Change in ICER
cost (C) E ( (C
C 500 0.1 500 0.1 5000
B 2,000 0.2 1500 0.1 15000
A 9,000 0.3 7000 0.1 70000
D 10,000 0.4 1000 0.1 10000
- Here, since A is dominated alternative (because ICER decreased for next intervention D). Therefore
intervention A is eliminated and ICER is recalculated.
Interventions Cost (C) Effectiveness (E) Change in Change in ICER
cost (C) E ( (C
C 500 0.1 500 0.1 5000
B 2,000 0.2 1500 0.1 15000
D 10,000 0.4 8000 0.2 40000

Cost Utility Analysis (CUA)
- Cost-utility analysis is a form of economic evaluation that measures the effect of an intervention on
both morbidity and mortality.
- By using a utility based outcome unit, such as QALY, to measure outcomes, cost-utlility analysis is
able to compare alternative health interventions that have completely different type of outcomes.
When should cost-utility analysis be used?

i. When health related quality of life is the important outcome. For example, in comparing alternative
interventions for the treatment of arthritis, no intervention is expected to have an impact on mortality,
and the interest is focused on how well the different interventions improve patient’s physical function,
social function and psychological well-being.
ii. When the intervention affects both morbidity and mortality and a common unit of outcome is desired
that combines both effects.
iii. When the programs being compared have a wide range of different kinds of outcomes and a common
unit of outcome is desired for comparison.
iv. When there is a limited budget situation and decision makers must determine which program or
services to fund for optimal outcome.
Steps in Cost-utility analysis

iv. Determination of outcomes

- The outcomes in CUA may be single or multiple, are generic as opposed to program specific, and
incorporate the notion of value and preferences.
- In CUA, the health outcomes are measured in quality-adjusted life years (QALYs) gained, or
disability-adjusted life-years (DALYs) lost.
- QALYs and DALYs represent an implicit trade-off between qualtity and quality of wellbeing.
v. Determination of Cost-utility ratio and decision making

- Once costs and benefits are measured, an incremental cost-utility ratio is determined with its unit as
cost per DALY/QALY.
- The incremental cost utility ratio is the ratio of incremental cost of a program from a particular
viewpoint to the incremental health improvement attributable to the program.
- The interventions are selected in the order of lowest ratio (best intervention) to highest ratio until the
budget is expended.
- The lower the incremental ration for an intervention, the higher priority should be in terms of
maximizing health benefits.
Benefits: CUA can address both productive efficiency and allocative efficiency
Limitations: QALYs do not capture differences in the process characteristics of interventions (such as
respect, autonomy, provision of information, etc.)

QALY and DALY
Quality Adjusted Life Years (QALY)

- QALYs are health indicators which measures the amount of years of life lived, taking into
consideration that some of those years are lived in less than perfect health.
- The advantage of QALY as a measure of health output is that it simultaneously capture gains from
reduced morbidity (quality gains) and reduced mortality (quantity gains), and integrate these into a
single measure.
- In the conventional approach to QALYs, the quality adjustment weight (i.e. health related quality of life
weight- HRQoL) for each health state is multiplied with the duration of time in that state.
- HRQoL scale ranges from 0 to 1 where 1 is considered as a perfect health and O as death.
- To satisfy the QALY concept, the quality weights must be
o Based on preferences
o Anchored on perfect health and death
o Measured on an interval scale
QALY example
- A person who gets some disability at the age of 10, lives with condition for 35 years and suffers
premature death at the age of 45. If the life expectancy is 60 years and the health related quality of
life weight associated with the condition is 0.75, then the undiscounted QALY of this person is
QALY = QALY before disability + QALY during disability

= 110 + 0.7535
= 36.25
- The QALY loss would be 60- 36.25 = 23.75
Disability Adjusted Life Years (DALY)

- DALY is an alternative tool as a means of quantifying the burden of disease.
- It takes into account not only premature mortality, but also disability caused by disease or injury.
- The DALY measure facilitates comparisons of all types of health outcomes by attaching disease
weights where value 0 represents full health and value 1 represents death.
- The two important components in calculating DALY are years of life lost (YLL) due to premature
mortality and years lived in disability/ disease
(YLD)
DALY = YLL + YLD
- Years of life lost (YLL) measures number of
years lost assuming that life expectancy of a
person of same age and gender is same for all
countries of the world (highest potential life
years has been proposed).
YLL = Number of death  life expectancy at the
age of death
- YLD measures equivalent of healthy years lost
due to morbidity and disability.
YLD = number of cases  average duration of
disease  disability weight

Differences between QALY and DALY

i. The life expectancy used in the QALY concept depends on the situation. The life expectancy used in
the DALY is set at the greatest reported life expectancy.
ii. TH disability weights in the QALY are based on preferences. The disability weights in the DALY are
not preferences but are person trade-offs score from a panel of experts.
iii. Although both sets of disability weights are based on the scale of 0 to 1, QALY weights can take on
any value depending on the health state. In contrast, DALY weights can take only one of the seven
discrete values.
iv. The QALY does not use age-weights. The DALY uses age weights that give lower weights to years of
the young and the elderly.
Methods of elicitation of disability weights

Several methods are being used to elicit the health related quality of life (HRQoL) and disability weights.
i. Virtual Analogous Scale (VAS)
- The respondents are asked to rate health states on a rating scale of range 0 to 1, where one
assumed as the perfect health and zero assumed to be death.
- VAS is simple method is simple but has been criticized because it does not involve a trade-off
between quantity for quality of years.
ii. Time Trade Off

- Time trade off is the most common technique for elicitation of HRQoL weights in QALYs.
- In this method, the respondents are asked to indicate their preferred choice between two alternative
health scenarios where alternative A is living in a specific compromised health state for X years
followed by death and alternative B is living for a shorter amount of years T in perfect health followed
by death.
iii. Person Trade Off

- In this method, people are asked to trade off between extending the lives of people with full health vs
improving the health expectancy of people with some disability from sub-optimal to perfect health.
- This method is used to elicit disability weights for the DALY from a panel of experts, while HRQoL
weights in QALY are usually found by interviewing lay people and patients.
iv. Standard gamble method

- In this method, the respondents are asked to choose between the certainty of an intermediate health
state and the uncertainty of a treatment with two possible outcomes, where one of the outcomes is
more attractive than the certain outcome, and the other is less attractive.
Cost-Benefit Analysis
Cost benefit analysis (CBA) is a method of economic evaluation where the monetary value of the
resources consumed by a health intervention (costs) is compared with the monetary value of the
outcomes (benefits) achieved by the intervention.
- In many aspects, CBA is broader in scope than CEA/CUA.
- Cost benefit analysis is appropriate when a decision maker wants to know if a single intervention
policy or a number of intervention policies are worth investing. (Are benefits greater than costs?)
- In the cost-benefit analysis, both the cost and consequences of healthcare programs are measured in
monetary units.

- Benefits include the total benefits the population receives in all sphere of their welfare. It includes
o Benefits in terms of improvement in Length of life
o Benefits in terms of improvement in morbidity condition (Quality)
o Benefit in terms of resource saved due to improvement in health condition
Advantages of cost-benefit analysis over CEA/CUA

- CBA answers the questions whether a program/goal is worth achieving given the social opportunity
cost of all the resources consumed.
- CBA converts all costs and benefits to money and is not restricted to comparing programs between
different sectors. It can inform the resource allocation decisions both within and between the sectors
of economy. CEA/ CUA is necessarily restricted to the comparison of health care programs that
produce similar units of outcome.
- Cost-effectiveness analysis/ cost utility analysis address mainly questions of production efficiency
with outcomes restricted to health benefits. In contrast, CBA is broader in scope and able to inform
questions of allocative efficiency.
Step in cost-benefit analysis

iv. Identifying, measuring and valuing consequences

- For cost-benefit analysis, the outcomes for both the alternatives should be measures in terms of
monetary unit.
- There are three general approaches to the monetary valuation of health outcomes
o Human capital approach
o Revealed preferences
o Stated preferences of Willingness to Pay (WTP)
v. Determination of cost-benefit indicators and decision making

- Two common cost-benefit indicators are used for comparison:
o Net benefit /Net present value (NPV): It is calculated by subtracting the cost of an intervention from its
benefit. When the benefit is bigger than the cost, the net benefit will be greater than zero. This means
that the value of the outcomes is worth more than the costs, so the intervention is worthwhile.
o Benefit-cost ratio (BCR): This is simply the benefits divided by the costs. Higher the BCR, the more
worthwhile is the intervention.
- Form a societal perspective, a long as net benefits are greater than zero, or benefits exceeds costs
(BCR>1), the intervention should be implemented.
Approaches to Monetary Valuation

- There are three general approaches to the monetary valuation of health outcomes
i. Human capital approach
ii. Revealed preferences
iii. Stated preferences of Willingness to Pay (WTP)

i. Human Capital Approach

- This approach attempts to quantify the loss of a person’s marginal productivity as a result of ill health
i.e. the marginal loss in economic output that results from a person not being able to work.
- It is based on assumption that each individual contributes to a society’s productivity.
- The monetary value of lost productivity due to ill health is calculated by multiplying the duration of
illness by the amount that person would be earning (i.e market price of their labour) during that time if
they were not ill.
Problems with human capital approach

- Not equitable: because higher-wage workers will be deemed to have higher indirect benefits than
lower-wage earners.
- There may be no labour market and therefore no market price for many groups including
homemakers, the elderly and children.
- Intangible costs are not included
ii. Observed/ Revealed Preferences

- Observed preference studies examine the actual choices (preferences) that decision-makers or
individuals express in real life.
- Estimated values of life vary widely and estimation seems to be very context and job-specific.
- The problem with this approach is that the estimates of individual observed preferences cannot be
assumed to be the same across different situations.
iii. Stated Preferences

- This approach uses surveys to elicit the maximum amount individuals are willing to pay (WTP) to
receive something or to avoid something.
- This method is applicable for both real and hypothetical scenarios.
- There are two main methods for eliciting stated preferences:
a. Contingent Valuation
 Contingent valuation seeks to describe a hypothetical market for a good.
 Respondents are then asked about the maximum value they are willing to pay ‘contingent’ on this
hypothetical market.
b. Discrete Choice Experiment (DCE)

 Discrete Choice Experiment involves asking individuals to state their preference over hypothetical
alternative scenarios.
 Each alternative is described by several attributes (convenience, quality of service).
 Price is treated as one of these attributes and therefore marginal WTP for an attribute can be
derived.
Strengths of stated preferences (WTP survey)

- They can be used to estimate directly any change in net social welfare
- The desired scenarios can be set up exactly as the analyst would like.
- They can be applied to any situation and therefore can be used to elicit preferences for a theoretical
intervention or service.
- Since money is the denominator, it has a universally accepted value and can be easily understood.

Disadvantages
- This technique is open to bias because respondents can find the hypothetical situation difficult to
understand.
- WTP tends to be positively related to the income of respondent.
- Estimates are based on what people say they would do and not what they actually do.
- The people who respond may not be representative (often better educated people tend to
participate).
Equity
- Equity is a policy objective which seeks to establish fairness in the allocation of resources.
- Equity in health implies that ideally everyone should have a fair opportunity to attain their full health
potential and, more pragmatically that no one should be disadvantaged from achieveing this potential.
Equity has been operationalized in health care in different ways

i. Horizontal Equity:
- The horizontal equity is concerned about ensuring that people with the same level of health
disadvantage are treated equally.
- There are three popular ways of defining horizontal equity in health care
 Equal access to health care for equal needs
 Equal utilization of health care for equal needs
 Equal health care expenditure for equal needs
ii. Vertical Equity

- In contrast to horizontal equity, vertical equity is concerned with treating people differently when the
level of need among them differs- i.e. trying to lessen the gap between the haves and have nots
through preferential treatment of the latter.
- It has been referred to as a form of positive discrimination to promote equity in health services.
Is equity in health an unrealistic goal?

- The concept of equity in health care embodies the notion of fairness and justice in the distribution of
health care resources and benefits.
- The aim of policy for equity in health is not to eliminate all health differences, but rather to reduce or
eliminate those differences that are considered to be unfair and avoidable.
- Therefore equity is different from equality. Equity does not mean the equal sharing of a good.
- Equality in health cannot be achieved for several reasons and therefore is not a feasible goal.
i. Many factors influence health in addition to health care.
ii. Genetic differences between people mean that complete inequality of health is simply impossible.
iii. There is no consensus on what is meant by good health
iv. If no more resources are made available to health services to achieve this goal, then to achieve
equal health some people’s health will need to improve and some deteriorate.
Resource allocation mechanism for equity

There can be a variety of resource allocation mechanisms to achieve equity goals in health. However,
none of these mechanisms achieve equality:
- Distribution according to equality of expenditure per capita.
- Distribution according to initial health status
- Distribution according to capacity of benefit

- Distribution according to expenditure required to exhaust the capacity of benefit

- Distribution according to equality of access (utilization, cost of access)
Methods of measuring equity in health care

i. Lorentz curve and Gini coefficient
- It is a graphical representation of income distribution.
- In the field of health, Lorentz curve is a way to measure
horizontal equity.
- The X-axis of the curve represents the cumulative
proportion of individuals by level of health resource, ranked
in increasing order.
- Y-axis represents the cumulative total proportion of health
resource of relative region.
- If the health resource is equally distributed, the Lorentz
curve is a diagonal line (line of perfect equality).
- The more it deviates from the diagonal, the larger the degree of allocation inequality.
- Gini coefficient is the ratio of the area between the line of perfect equality and observed curve to the
area between perfect equality and line of perfect inequality
- The Gini coefficient ranges from 0 to 1. Higher the Gini
coefficient, the more unequal is the resource being distributed
across the population.
ii. Concentration Curve

- The concentration curve plots the cumulative percentage of
the health resource variable (y-axis) against the cumulative
percentage of the population, ranked by living standards,
beginning with the poorest and ending with the richest (x-axis).
- If the curve is above the line of equality (diagonal), the health
variable is more concentrated amongst the poor.
Efficiency in Health Care
- Efficiency is a general term used to describe the relationship between inputs and outputs; which in
turn can be valued respectively in terms of costs and benefits.
- Efficiency is concerned with maximizing benefits with the resources available, or minimizing costs for
a given level of benefit. In health care, benefits may be interpreted as health gains.
There are a number of different types of efficiency

i. Technical Efficiency/ Operational Efficiency
- Technical efficiency refers to the physical relation between resources (capital and labour) and health
outcomes.
- Technical efficiency on the other hand is concerned with achieving maximum outputs with the least
cost.
- An intervention is technically inefficient if the same (or greater) outcome could be produced with less
of one type of input.
- Example: In a treatment of certain disease, a RCT showed that 10 mg daily dose is as effective as a
20 mg dose. The lower dose is technically more efficient.

ii. Production Efficiency/ Economic Efficiency

- Productive efficiency is a situation in which the economy could not produce any more of one good
without sacrificing production of another good.
- Productive efficiency means that health care resources are put to the best use possible and produce
as much health outcomes as they can.
- In health care, productive efficiency enables assessment of the relative value for money of
interventions with directly comparable outcomes.
ii. Allocative Efficiency

- Allocative efficiency is used to inform decisions about resource allocation in broader contexts.
- The concept of allocative efficiency takes account not only of the productive efficiency but also the
efficiency with which these outcomes are distributed among the community.
- Allocative efficiency is achieved when resources are allocated so as to maximize the welfare of the
community (when the pattern of output matches the pattern of demand).
- With allocative efficiency, all objectives compete with each other for implementation. For example,
“should we allocate more resources to the prevention of childhood injury or improve clinics for
children with chronic disease such as asthma?” is a question of allocative efficiency.
- Allocative efficiency is about whether to do something, or how much of it to do, rather than how to do
it.
- Allocative efficiency in health care is achieved when it is not possible to increase the overall benefits
produced by the health system by reallocating resources between programs.
Purposes of different efficiency

 Technical efficiency- Using given resources to maximize advantage
 Production efficiency- Choosing different combinations of resources to achieve the maximum health
benefit for a given cost.
 Allocative efficiency- Achieving the right mixture of health care programs to maximize the health of
the society.
Methods of efficiency analysis

i. Unit Cost Analysis
- Unit costs are input costs divided by an output variable.
- Price differences may cause variations in unit cost estimates to be mistaken for efficiency changes.
ii. Stochastic frontier Analysis (SFA)

- It is a parametric efficiency analysis technique.
- SFA employs advanced econometric methods to estimate a stochastic frontier equation which is
either a production or a cost function with an error term.
iii. Data Envelopment Analysis (DEA)

- DEA employs mathematical programming methods to estimate a deterministic production frontier.
- It can derive a single indicator of efficiency while allowing for multiple output and input variables and
without using price or cost data.

UNIT 5 NATIONAL HEALTH BUDGET
Health Sector Revenue, expenditure and national budget
Major Highlights of National health budget

- The share of health budget in FY 2016/17 is around 4.1% of the national budget.
- More than one-fourth amount of health budget are allocated for administrative budget.
- Total health budget has increased by 10.44% as compared to previous financial year.
- The EDPs support has increased accounting for 24% share on Nepal’s health sector budget.
- Government spending on health as a whole is steadily increasing. 88.8% of the total health sector
budget was expended in FY 2015/16.
Category Share of budget (FY 2015/16) Share of budget (FY 2016/17)
Administrative Budget 30% 27%
Development Budget 70% 73%
Total health budget More than 36.7 billion NRS (4% of More than 40.5 billion NRS (4% of
National budget) national budget)
National Budget More than 819 billion NRS More than 982 billion NRS
Sources of Health Budget

Sources Share of budget (FY Share of budget (FY % Increase
2015/16) 2016/17)
GON 79% 76% 6.8%
EDPs 21% 24% 23.86%
Total Budget 10.44%
Sources of Revenue and Expenditure in Nepal
The total health expenditure in Nepal is funded from three major sources:
i. General Government
- Most general government health expenditures are principally undertaken by the central government
and funded mainly through general taxation.
- Government is the primary and stable source of financing for health budget contributing to almost
76% of total health budget.
- The general government expenditure represents about 40% of total health expenditure.
ii. Out of Pocket Payment

- The largest source of financing for health care in Nepal is out-of-pocket payments.
- Most private services are paid for out-of-pocket and a large portion of total out-of-pocket payments is
made to private providers, which are utilized by both wealthier and poorer groups
- Out of pocket expenditures contribute to 48% percent of total health expenditure in Nepal (2014).
- High out of pocket expenditure is associated with lower financial protection.
iii. Foreign grants and loans

- Foreign grants and loans come through bilateral and multilateral commitments and is a significant
source of financing in the health sector.
- Bilateral and multilateral agencies, called external development partners (EDPs) provide funding for
health through two channels; direct and indirect funding.
- EDPs share in the health sector budget is around 20-25%.

- However, donor support contributes to only about 5-7% of total health sector expenditure (as per
2008-2010 data).
iv. Other sources

a. Social health insurance
- Health insurance program of Nepal has two revenue sources: Government budget and prepaid
membership contributions.
- Government budget - Two billion Nepali rupees allocated in FY 2074/75
- Voluntary contributions from members- 63 million Nepali rupees in FY 2073/74
- Private sector financing
Health Sector Budgeting
A national level budget preparation process (as presented in the Budget Formulation Directive) is:
1. Medium Term Fiscal Forecasts
- Ministry of Finance (MoF), National Planning Commission (NPC), Central Bank and Line Ministries
prepare expenditure forecasts (aggregate budget envelop) – based on the macro economic situation,
past budget expenditure, the performance of line ministries and government development policies
and priorities.
- MoF and NPC presents first draft of sector wise ceilings to ‘Resource Committee’ (includes NPC,
MoF, Central Bank, FCGO and chaired by the Vice-Chairman of the NPC)
2. Budget Guidelines and Ceilings

- NPC and MoF affix Ministry and Region wise budget ceiling.
- MoF forwards Ministry and Region wise ceilings and budget preparation guidelines to Line Ministries
including MOH.
3. Detailed Budget Preparation

- Budget Preparation:
- Line Ministries inform budgetary ceilings to subordinate offices.
- Sub-ordinate offices prepare budget demands:
o District level office submits budget demands to concerned Department
o Concerned Department consolidates budget demands of District level offices and includes its
own demands and submits to the concerned Ministry.
- Ministry discusses Policy, Budget and programs.
- Ministry submits budget demands (district level and central level project/ offices, department and
own budget of the Ministry) to NPC/MoF.
- Budget Review / Finalization:

- NPC, MoF review budget demands and undertake policy discussions with each Line Ministry.
- Line Ministries submit policy and program of coming year to the Prime Minister’s office and
Council of Ministers with advice to NPC and MoF (April)
- Detailed line item review of Line Ministries budget is done by MoF in presence of NPC
- MOF compiles preliminary budget. Parliamentary Committee on Finance reviews budget, policy
and programs.
- Budget is finally reviewed by NPC, Council of Ministers and other designated authorities.

- Budget Presentation:
- Finance Minister presents a budget speech.
- Parliament appropriates the budget.
Budget Preparation Process at MOHP

- At MoHP the responsibility for budget preparation and monitoring lies with the Policy, Planning and
International Cooperation Division (PPICD).
- The Planning Section and Finance and Budget Section of the Division coordinate budget preparation
and reporting.
- The Planning Section deals with the policy and physical performance aspect of the budget, while
financial figures are provided and monitored by the Finance and Budget Section.
 DoHS provides guidance on the 3-year resources available (ceilings) and the components that
should go into ASIP (annual strategic implementation plan) to D(P)HOs.
 D(P)HOs in consultation with District Development Committee finalizes ASIP.
 Taking into consideration the district ASIPs, policies and strategies stipulated in the National
Plan, the Sectoral Business Plan, and other project/program documents, the DOHS/MOHP
completes a three-year national ASIP.
 The MoHP also compiles a national Annual Work Program and Budget (AWPB) - the AWPB is
also presented at the annual review meeting of donors in April to obtain commitments and
determine their share of funding for the coming fiscal year.
 After obtaining donor commitment, MoHP submits the budget proposal to the NPC and MoF for
discussion.
 The final budget is presented in the Parliament for appropriation.
Budget Execution (including fund release)

- After appropriation of the budget, the MOF issues authorization for expenditure to the MOHP, with a
copy to Financial Comptroller General's Office (FCGO) and Office of the Auditor General (OAG).
- MoHP, in turn, releases expenditure authorization to the DoHS, which is passed on to the spending
units by end July to enable them to obtain funds from the respective District Treasury Control Office
(DTCOs). A copy is also sent to FCGO and concerned DTCOs.
- Reimbursement of expenditures incurred by GoN-funded programs does not require a separate
authorization from the FCGO as DTCOs are automatically authorized to release funds against the
submission of the claim (Statement of Expenditure), by the spending units.
Accounting Process
- The bills are sent by account officers at D(P)HO to DTCO.

- The DTCO makes the payments
- The details of expenditure are entered form respective offices electronically through Transaction
Accounting and Budget Control System (TABCUS).
- The FCGO’s database gets updated.
- The internal audit is conducted by FCGO/DTCO each trimester, but the reports are issued annually.
- The Auditor General conducts two types of external audit: compliance and performance. Performance
audit is conducted regularly on selected programs in selected districts, whereas the compliance audit
is conducted for 100% of all district transactions.
- For the purpose of financial monitoring, the FCGO periodically provides budget vs actual spending
reports to MOHP.

National Health Accounts
- National Health Accounts is a tool specifically designed to inform the policy process, including policy
design and implementation, policy dialogue, and the monitoring and evaluation of health care
interventions.
- It was initiated in 2000 AD under Nepal Health Sector Support Program (NHSSP) of MOH with the
support of GIZ.
- Health Economic and Financing Unit (HEFU) of the MOHP is a designated focal point for the National
Health Account process and responsible for the production of the report.
- Three rounds of National Health Account reports have been produced to date.
Benefits of National Health Accounts (NHA)
- NHA can also be used to determine the level of catastrophic spending, the mix of public-private
health care services provided, the impact of health financing reforms, and even health outcomes.
- NHA can provide decision makers with systematic information on health spending for policy making
and monitoring purposes.
- If maintained properly, NHA can produce an internationally comparable data set on health
expenditure.
- NHA can track health expenditure trends, an essential element in heath care monitoring and
evaluation.
- NHA can be used to answer many essential questions, including:
 how much money is spent on health?
 what is the financial burden on private households in the form of out-of-pocket expenditure?
 what kind of services are being purchased?
Challenges
- The necessary data for NHA is data is generated through various surveys (e.g. health facility costing
survey, household survey). Therefore the process is very costly.
- In every rounds of survey, a new database is created making it impossible to show trends.
- HEFU of MOH has been unable to retain skilled staff, which has led to the loss of institutional
memory, affecting the quality and timely production of NHA data.

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UNIT 1 HEALTH ECONOMICS AND HEALTH CARE FINANCE

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Introduction to Social Market and Health Care Market

Characteristics of General Market

Health Care Market

Characteristics of health care market/ causes of general market failure

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Differences between health care market and general market

UNIT 2 DEMAND AND SUPPLY THEORY

Law of Demand and Supply

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 The tastes and preferences of consumers

Limitations and exceptions of law of demand

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Exceptions/ limitations of law of supply

- Equilibrium in a market is a condition when supply equals demand.

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Elasticity of Demand and Supply

i. Price Elasticity of Demand

ii. Income Elasticity of Demand

iii. Cross Elasticity of Demand

The degree of elasticity can be measured in following ways:

Importance of Elasticity of Demand

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ii. Decision of monopolist

iii. Pricing decisions

Importance of elasticity of supply

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UNIT 3 HEALTH CARE FINANCING

Existing Alternative Financing Schemes in Nepal

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ii. Targeted Policy

iii. Social health insurance program

Social Health Insurance

Key Features of Social Health Insurance are:

Advantages of Social Health Insurance

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National Health Insurance Mechanism in Nepal

Current Situation of NHI Program in Nepal

Purpose of Social Health Insurance Program in Nepal

ii. Member contribution

iii. Provider payment mechanisms

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Equity and Universal Health Coverage

WHO defines universal health coverage as:

GON approaches for achieving equity and Universal Health Coverage

Challenges to achieving equity and universal health coverage in Nepal

ii. Lack of clear entitlement and procedures

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iii. Insufficient financial protection

iv. Unregulated private sectors

Figure: Three dimensions of universal health coverage

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UNIT 4 ECONOMIC EVALUATION

Concept of Economic Evaluation

The basic tasks of economic evaluation are to

Features of economic evaluation

Types of economic evaluation:

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Use of economic evaluation in health care