Phillips / Health Economics Copy Editor: Paul George 0727918494_4_001 Final Proof page 8 28.7.2005 7:13pm
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Chapter 1
These two issues are vitally important in economics and together they combine to form, what has been termed, the social welfare function, with its individual components of efficiency and equity. In constructing policy decisions there is a broad consensus that both of these aspects of social welfare should be considered in the location, method and degree of government intervention in health care, and there is general agreement that there is a need for a trade-off between achieving an efficient allocation of resources and ensuring that the resulting allocation is equitable. However, in recent years, economic pressures and political imperatives have tended to result in governments focusing more on efficiency as the main driving force in formulating health care policy. The notion of efficiency The term efficiency is used by economists to consider the extent to which decisions relating to the allocation of limited resources maximises the benefits for society and has been defined as ‘maximising well-being at the least cost to society’.22 The concept of efficiency embraces inputs (costs) and outputs and/ or outcomes (benefits) and the relationship between them, with a society being judged in efficiency terms by the extent to which it maximises the benefits for its population, given the resources at its disposal. The simplest notion of efficiency is the one synonymous with economy, and is often referred to as efficiency savings, where output is expected to be maintained, while at the same time making cost reductions, or where additional output is generated with the same level of inputs. This type of efficiency has been referred to as technical efficiency23 or operational efficiency,22,24 but also as cost-effectiveness.22,25,26 It is applied where a choice needs to be made between alternatives that seek to achieve the same goal, and exists when output is maximised for a given cost, or where the costs of producing a given output are minimised. It is widely used in the context where, for example, new therapies are compared against existing treatments, and authorities have to decide whether it is worth paying more for the potential additional benefits that the new therapy offers. However, technical efficiency or cost-effectiveness is not sufficient in order to establish priorities, both within health care systems and when comparing the provision of health care with other publicly funded services. In order to determine whether and how certain services should be provided, and in order to establish priorities, allocative efficiency must be used. This type of efficiency exists when it is impossible to make one person better off without at the same time making someone else worse off. It represents a situation where no input and no output can be transferred so as to make someone better off without at the same time making someone else worse off. This situation is called Pareto-efficient, referred to above. However, in reality, there may well be situations where a reallocation of resources would result in some people being made better off while others would be worse off. It is possible that there could be a net overall