Healthcare Economics

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Table of Contents
Introduction......................................................................................................................3

Concepts of technical and allocative efficiency..........................................................3

How the current rapid increased investment in research and innovation for all ICU
related activities can increase the technical efficiency...............................................4

Impact of increased investment on allocative efficiency............................................5

Conclusion.......................................................................................................................6

References........................................................................................................................7

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Introduction
The health systems in many developing countries are facing the challenge of serious
resource limitations to pursue the goal of developing the health condition of the
population. This limited ability to effectively encounter the needs of the healthcare is
aggravated by the inefficiency of the healthcare systems, mainly with public health
centres (Islam et al., 2018). The technological advancements and ever-changing
demands of medical care, mainly in the ICU activities have led to problems in ensuring
effective critical care for the patients. The investments in developments of ICU
equipment are constantly increasing with the rapid growth of the healthcare services
and technology market (Mulley, 2016). This has created risks, opportunities and
structural questions for the company’s manufacturing in the sector and with the broader
healthcare value chain. The main purpose of this study is to describe the conceptions of
technical and allocative efficiency. It will then demonstrate how the current rapid
increased investment in the research and innovation can increase the technical
efficiency of a company. With the context of health economics, the study will lastly
portray the impact of the increased investment on allocative efficiency. The following
study will be developed in the background of Brandon Medical that manufactures
equipment’s used in the ICU and used in community health services. 

Concepts of technical and allocative efficiency

In healthcare, decision-makers are constantly facing the issue of settling the growing
demands of healthcare facilities with the accessible funds. Several economists claim
that the achievements of greater effectiveness from scarce resources are the foremost
standard for the priority set. In healthcare, efficiency is about using the resources for the
best value of the money (Decker et al., 2017). The health care services provided by the
equipment’s manufacturer could be seen as the immediate product mainly aimed to
improve the health of the people. Efficiency is seen as the relation between the
resource points such as cost in the practice of labour and capital and the intermediate
output or the final health outcomes (Vuong et al., 2018). The increasing investment in
the health centres in developing countries has placed tremendous importance and

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interest in the formal health care system. There are mainly two basic processes of
efficiency, allocative and technical efficiency. 

In healthcare economics, allocative efficiency is defined as the level of production where

the value of the good or service is equal to the marginal cost of the manufacturing
(Schmitz & Winkler, 2018). It is accomplished when the goods and services have been
circulated in response to the demand of the consumers in an ideal way and when the
marginal utility and marginal cost of the services and goods are equal. It is referred to
as the degree of equality between the marginal costs and marginal benefits (Vuong et
al., 2018). The marginal cost here is the cost of producing one additional item and
marginal benefit is the benefit manufacturer gets by producing the additional item. The
notion of allocative efficiency not only takes account the productive efficacy of the
healthcare capitals but also the efficiency in which the outcomes are distributed among
the public (Decker et al., 2017). This societal viewpoint is rooted in welfare economics
and has direct implications on the opportunity costs. Pickett (2018) states that allocative
competence is attained when the resources are distributed for maximising the wellbeing
to the society. He argues that it occurs when both the manufacturers and consumers
have free access to information providing them with the best possible decisions for
production and purchase. As per the conception of allocative efficiency, the consumers
need to have free choice on the goods and services that could maximise their
satisfaction. 

On the other hand, technical efficiency in economics is the efficiency in which a given
set of input is used to crop an output (Scott et al., 2017). An organisation is technically
effective if it is manufacturing the extreme output from the least amount of inputs, such
as cost, workforce and technology. It is referred to as the physical relationship between
the resources and health outcomes. An organisation achieves this position when the
extreme possible result is achieved with a defined set of resource inputs (Islam et al.,
2018). The intervention is precisely unproductive if the same output is achieved with the
same or less input. Technical efficiency is crucial for achieving allocative efficiency.   

For enhancing the efficiency and effectiveness of the health centres, the management
of these centres needs to improve methods for tackling the problem of acceptability,

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accessibility and intensity of use along with the obedience with the medical instruments
(Decker et al., 2017). For these methods, the management needs to have an
understanding of the efficiency level of the health centres. 

How the current rapid increased investment in research and innovation for all ICU
related activities can increase the technical efficiency
The intensive care unit has slightly changed over the years with the increased
investment in research and innovation. Even though the technology in healthcare has
improved a lot, there hasn’t been any changes or advances in the care administered in
the ICU (Scott et al., 2017). One of the biggest problems that ICU equipment’s
manufacturing company faces is in developing alarms. Many ICU providers are trying to
resolve the fatigue of alarm in the ICU. Different types of apparatus and devices in the
ICU such as pulse rate monitors and pumps end of making noise at once creating
confusion among the caretakers. Due to this, nurses and doctors eventually end up
turning the sound, which could be unsafe for the patients if the alarm is serious (Islam et
al., 2018). Increasing investment in the alarms could not only decrease the chances of
duplicate alarms and sound but will also make an easier life for the clinical staff. They
would also have to pact with fewer machines setting off the false alarms. 

Several ICU device vendors are dedicated to building their merchandises more
accomplished of interoperability and sharing data between the other devices from
dissimilar makers (Schmitz & Winkler, 2018). Increased investment in research and
innovation will allow the company to produce time-saving sensors. The fitting of the
sensors that could alert the clinicians regarding the serious tasks doctor performs for
the patients (Zhao et al., 2019). For example, many patients in the hospital have their
beds at a specific angle for developing pneumonia. Most of the nurses check these
manually by using protractors in some of the cases. However, with advanced sensors,
nurses could monitor the angle of the bed’s patients and could alert the staffs when
required to be adjusted.  

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Technology will host a range of benefits for ICU related activities. For example, many of
the hospitals in the UK don’t have full-time critical care medical doctor as the staff.
Though, facilities at the hospital can take benefit of telemedicine and could have
intensivists for monitoring the situations of the patients. Hospitals could also use
technological advancements so that staffs and nurses could make improved personal
relations with the patients in the ICU (Zhao et al., 2019). An application that can provide
information about the patient to his family can help in building a relationship. These
applications would allow the family to note their recovery goals. It will provide nurses
and staffs to give more personalised care to the patients. Increased investment and
health technologies is an important part of the solution to the world’s greatest global
health challenge. 

The healthcare industry has seen noteworthy changes that have resulted from the
employer and consumer demands, changed regulatory frameworks and technological
disruption. Traditional healthcare organisations and equipment’s manufacturers have
generally struggled to keep pace with this change. Many of these companies have
unable to develop their capabilities and then transforming the company to the required
pace.  

The increased investment will surely improve the technical efficiency of the organisation
as it consists the investigating activities that the company aims to do with the desired
result of the discovery for creating a new product or service (Schmitz & Winkler, 2018).
Increased investment will help in developing the portion that is referred to the actual
application of the new thinking or science so that a better product or service could be
developed. Investment is the first step for improving the technical efficiency of an
organisation. The research and development efforts lead to an developed type of
business procedure, by increasing the marginal productivity and cutting the marginal
costs. With increased investment, companies will be able to move faster in terms of
capability building execution and sales. They will be able to rapidly deliver the
requirements and could improve the value of creating solutions (Ahram et al., 2017).
The companies will also be able to demonstrate their ability to retain and attract talent,
mainly in the areas such as software solutions, technology services and analytics.

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Furthermore, increasing the investment in research and innovation will leverage the
company with people and technology to meet the unique requirements of the clients.  

Impact of increased investment on allocative efficiency

Pickett (2018) defines allocative efficiency as the characteristic of an efficient market.
Increased investment will help to allocate the resources in the way that all the engaged
parties get the benefits. Allocational efficiency shows an optimal scattering of the goods
and services to the clients in the economy. It also shows the optimal delivery of the
monetary capital to the organisations or the projects among the stakeholders. One of
the main impacts that the increased investment will bring is that the parties will be able
to use the precise and freely available data to be imitated in the market for making
decisions on how to allot the resources (Ahram et al., 2017). Increased investment will
also to collect and reflect on all the data available in the market. Based on that,
organisations in healthcare, mainly the ICU unit’s manufacturers can make accurate
decisions. It will also beneficial for them in allocating the resources for manufacturing
products needed by the general population. As allocative efficiency happens at the
meeting of the supply and demand curves, increased investment will boost both
demand and supply. 

Pickett (2018) suggests that allocative efficiency mainly occurs in highly efficient
markets. With increased investment, goods and services will be well distributed. It will
also help in making the market more informational and transactional and fuel the
greatest amount of economic growth. In the allocative efficient market, main actors
through the private and public sectors provide their resources for the investment which
collectively benefit everyone, in their society the most. The investments also maximise
profits and spur economic growth.      

Conclusion
The study described the concepts of technical and allocative efficiency. It demonstrated
how the current rapid increased investment in the research and innovation can increase
the technical efficiency of a company. It then outlined the impact of the increased
investment on allocative efficiency. In conclusion, it could be said that the technical
efficiency discourses the problems of using the given capitals to maximise the

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advantages, productive efficiency of choosing the dissimilar arrangements of resources
for achieving the enhanced health benefits for a given budget. It is also identified for the
allocative efficiency to happen, the market needs to be informationally and
transactionally efficient. The preferences from society dictate how the resources are to
be allocated. The healthcare companies get success when they base their business
models as per the needs of the customers. This approach from the organisations shows
confidence in their services.   

References
Ahram, T., Sargolzaei, A., Sargolzaei, S., Daniels, J. and Amaba, B., 2017, June.
Blockchain technology innovations. In 2017 IEEE Technology & Engineering
Management Conference (TEMSCON) (pp. 137-141). IEEE.

Decker, R.A., Haltiwanger, J., Jarmin, R.S. and Miranda, J., 2017. Declining dynamism,
allocative efficiency, and the productivity slowdown. American Economic
Review, 107(5), pp.322-26.

Islam, M.M., Poly, T.N. and Li, Y.C.J., 2018. Recent advancement of clinical information
systems: Opportunities and challenges. Yearbook of medical informatics, 27(01),
pp.083-090.

Mulley, A.G., 2016. The Role of Shared Decision Making in Acheiving Allocative
Efficiency in Health Systems. Shared Decision Making in Health Care: Achieving
evidence-based patient choice.

Schmitz, H., & Winkler, S. (2018). Information, Risk Aversion, and Healthcare
Economics. In Oxford Research Encyclopedia of Economics and Finance.

Scott, N., Hussain, S.A., Martin-Hughes, R., Fowkes, F.J., Kerr, C.C., Pearson, R.,
Kedziora, D.J., Killedar, M., Stuart, R.M. and Wilson, D.P., 2017. Maximizing the impact
of malaria funding through allocative efficiency: using the right interventions in the right
locations. Malaria journal, 16(1), pp.1-14.

Pickett, S. (2018). Essays in Healthcare Economics (Doctoral dissertation, Rice

University).

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Vuong, Q.H., Ho, T.M., Nguyen, H.K. and Vuong, T.T., 2018. Healthcare consumers’
sensitivity to costs: A reflection on behavioural economics from an emerging
market. Palgrave Communications, 4(1), pp.1-10.

Zhao, Y., Morita, H. and Maruyama, Y., 2019. The measurement of productive
performance with consideration for allocative efficiency. Omega, 89, pp.21-39.