Block 1

BECE-141
Economics of Health
Indira Gandhi National Open University
School of Social Sciences and Education
Economics
Environment
Food
Education
Social
Health Care
BECE 141
ECONOMICS OF HEALTH AND

EDUCATION
School of Social Sciences

Indira Gandhi National Open University
EXPERT COMMITTEE
Prof. Atul Sarma Prof. P. K. Chaubey Prof. M S Bhatt Dr. Indrani Roy
Institute of Human I. I. P. A. Jamia Millia Islamia Chowdhury
Development New Delhi New Delhi. J. N. U.
New Delhi New Delhi
Dr. Ankush Aggarwal Sh. B. S. Bagla Prof. Gopinath Prof. Narayan
I. I. T. PGDAV, DU Pradhan Prasad
New Delhi New Delhi Faculty of Economics Faculty of Economics
SOSS, IGNOU, SOSS, IGNOU,
New Delhi New Delhi
Prof. K. Barik Sh. Saugato Sen Prof. B. S. Prakash
Faculty of Economics Faculty of Economics (Course Coordinator)
SOSS, IGNOU, SOSS, IGNOU, Faculty of Economics
New Delhi. New Delhi. SOSS, IGNOU, New Delhi.
COURSE PREPARATION TEAM

Block 1 Introduction
Unit 1 Health and Education for Human Capital Prof. Sushil Haldar, Jadavpur University.
Unit 2 Role of Health in Human Development Prof. Sushil Haldar, Jadavpur University.
Block 2 Foundations of Health Economics
Unit 3 Demand for Healthcare Services Dr. Satarupa Bandhyopadhyay, Assistant
Professor, Betune College, Kolkata.
Unit 4 Supply of Healthcare Services Prof. Sushil Haldar, Jadavpur University.
Unit 5 Measurement of Health Benefits Prof. Arijita Dutta, University of Calcutta.
Block 3 Health Policy
Unit 6 Market Failure and Role of Government Dr. Roopali Goyanka, I. P. College, Delhi
University.
Unit 7 Public Health Services Prof. Arijita Dutta, University of Calcutta.
Block 4 Health Sector in India
Unit 8 Status of Health and Medical Care in India Dr. Debjani Barman, Asst. Prof., IIHMR
University, Kolkata.
Unit 9 Health Policy in India Prof. Sushil Haldar, Jadavpur University.
Block 5 Economics of Education

Unit 10 Human Capital Prof. Sushil Haldar, Jadavpur University.
Unit 11 Demand and Supply of Education Ms. Aishna Sharma, Research Scholar,
JNU, New Delhi.
Block 6 Education Sector in India
Unit 12 Status of Educational Outcomes Dr. Salim Shah, University of Tripura.
Unit 13 Government Policy and Financing of Dr. Salim Shah, University of Tripura.
Education in India
General Editor
Content, Format and Editing: Prof. B. S. Prakash and Sh. B. S. Bagla
PRINT PRODUCTION Secretarial Assistance/Graphics

Mr. Yashpal
Assistant Registrar
IGNOU, New Delhi
September, 2021
© Indira Gandhi National Open University, 2021
ISBN:
All rights reserved. No part of this work may be produced in any form, by mimeograph or any other
means, without permission in writings from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from the
University’s office at Maidan Garhi,
New Delhi -110068 or visit our website: http://www.ignou.ac.in
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi, by
Registrar, MPDD, IGNOU, New Delhi.
Laser Typeset by: Tessa Media & Computers, C-206, Shaheen Bagh, Jamia Nagar, New Delhi-25
Printed at:
CONTENTS
Page No.
BLOCK 1 Introduction 7
Unit 1 Health and Education for Human Capital 9
Unit 2 Role of Health in Human Development 27
BLOCK 2 Foundations of Health Economics 49
Unit 3 Demand for Healthcare Services 51
Unit 4 Supply of Healthcare Services 68
Unit 5 Measurement of Health Benefits 88
BLOCK 3 Health Policy 105
Unit 6 Market Failure and Role of Government 107
Unit 7 Public Health Services 123
BLOCK 4 Health Sector in India 139
Unit 8 Status of Health and Medical Care in India 141
Unit 9 Health Policy in India 158
BLOCK 5 Economics of Education 173
Unit 10 Human Capital 175
Unit 11 Demand and Supply of Education 195
BLOCK 6 Education Sector in India 213
Unit 12 Status of Educational Outcomes 215
Unit 13 Government Policy and Financing of Education 231
in India
Glossary 249
Suggested Readings 257
COURSE INTRODUCTION
The first block (Block 1) is on ‘Introduction’ to the course. It has two units.
Unit 1 gives an account of the significance of ‘health and education’ for
formation of ‘human capital’. Distinguishing between the terms ‘physical
capital’ and ‘human capital’, it outlines the complementary effect of health
and education to ‘human capital’. It discusses the significance of ‘returns to
investment in human capital’ to show the role of human capital in enhancing
economic growth. Unit 2 is on the ‘Role of Health in Human Development’.
Introducing the concept of ‘Human Development Index’, it explains the
relationship between ‘health, income and healthcare expenditure’ to bring out
the causality between ‘health and poverty’. The unit also introduces the
concepts of ‘gender adjusted health equality (GAHE)’, ‘equally distributed
equivalent achievement (EDEA)’ and ‘concentration index (CI)’.
Block 2 deals with the theme of ‘Foundations of Health Economics’. The

block covers three major areas viz. Demand for Healthcare Services (Unit 3),
Supply of Healthcare Services (Unit 4) and Measurement of Health Benefits
(Unit 5). Unit 3 makes a distinction between health as a ‘consumption
good’ and health as a ‘investment good’. It also covers the concepts of utility
maximisation, market demand, demand elasticity, etc. in the context of
demand for health services. Unit 4 covers the issues of: (i) factor market for
healthcare services, (ii) determination of equilibrium price and (iii)
production and supply of healthcare services. Unit 5 explains the approach
to: (i) cost benefit analysis and (ii) impact evaluation, in the context of
measuring health benefits.
Block 3 deals with ‘Health Policy’. It has two units: Market Failure and
Role of Government (Unit 6) and Public Health Services (Unit 7). Unit 6
discusses the issues of: (i) characteristics of healthcare market, (ii)
government’s role in providing healthcare services and (iii) health insurance.
Unit 7 discusses issues relating to: (i) investment in public health services,
(ii) economics of health externality and (iii) economics of epidemiology.
Block 4 is specifically on ‘Health Sector in India’. It has two units: Unit 8

on Status of Health and Medical Care in India and Unit 9 on Health Policy in
India. Unit 8 covers the issues of: (i) trends in disease burden, (ii) healthcare
inputs, (iii) delivery and outcomes and (iv) measurement of health inequity.
Unit 9 covers the aspects of: (i) public health policies and programmes in
India and (ii) National Health Policies.
Block 5 is on Economics of Education. It has two units. Unit 10 is on

Human Capital. It covers the issues of: (i) linkage between health and
education, (ii) theoretical background from endogenous growth models, (iii)
linkage between human capital investment, fertility and poverty and (iv)
expenditure on educational services. Unit 11 is on Demand and Supply of
Education. It first makes a distinction between ‘individual demand for
education’ and ‘social demand for education’. It also covers the themes of:
(i) supply of education and (ii) role of industry in education.
Block 6 is on Education Sector in India. This block also has two units. Unit
12 is on the ‘Status of Educational Outcomes’ and Unit 13 is on
‘Government Policy and Financing of Education in India’. The unit on
‘educational outcomes’ discusses the trends in: (i) literacy rate, (ii)
participation and dropouts and (iii) quality and efficiency. The unit on
‘policies and financing’ covers the themes of: (i) National Policies on
Education (1968, 1986 and 2020), (ii) rationale on public financing of
education, (iii) PPP models of education and (iv) educational grants and
loans.
BLOCK 1
INTRODUCTION
BLOCK 1 INTRODUCTION
Block 1 is introductory to Economics of Health and Economics of Education.
It has two units. Unit 1 is on Health and Education for Human Capital. The
unit begins by making a distinction between ‘physical capital’ and ‘human
capital’. How both health and education mutually complements to enhance
human capital is described next. The linkage of health with economic growth
is then explained. Features of healthcare market like market failure and
information asymmetry are outlined. In light of these, how government
intervention for attaining ‘health equity’ is needed is explained in this unit.
Unit 2 is on Role of Health in Human Development. It introduces you to the
important composite development indicator viz. Human Development Index.
The unit then explains the relationship between health, income and health
expenditure. In particular, it explains the causality between health and
poverty. The unit then discusses the importance of health for ‘gender
development’. The concepts of GAHE (i.e. gender adjusted health equality),
EDEA (equally distributed equivalent achievement) and CI (concentration
index) are then described to help you appreciate the analytical features of
these indicators.
Health and Education
UNIT 1 HEALTH AND EDUCATION FOR for Human Capital
HUMAN CAPITAL
Structure
1.0 Objectives
1.1 Introduction
1.2 Health and Education for Human Capital
1.2.1 Distinction between Physical and Human Capital
1.2.2 Health and Human Capital
1.2.3 Education and Human Capital
1.2.4 Complementary Effect of Health and Education to Human Capital
1.3 Health and Economic Growth

1.3.1 Returns to Investment in Human Capital
1.4 Healthcare Market

1.4.1 Features of Healthcare Market
1.4.2 Market Failure and Information Asymmetry
1.4.3 Government Intervention for Health Equity
1.5 Let Us Sum Up

1.6 Key Words
1.7 Some Useful Books and References
1.8 Answers/Hints to Check Your Progress Exercises
1.0 OBJECTIVES
After reading this unit, you will be able to:
• define the scope of health economics;

• relate the concept of human capital to health and education;
• distinguish between physical and human capital;
• derive the growth equation bringing out the conditions under which
higher growth of ‘per capita output’ can be realised;
• discuss the basic features of healthcare market;
• differentiate between healthcare market and markets for other goods and
services;
• illustrate the prevalence of market failure and information asymmetry to
result in ‘supplier induced demand’ in healthcare market; and
• explain why government intervention in healthcare market is desired.
9
Introduction
1.1 INTRODUCTION
According to medical science, health is defined as a state of physical, mental
and social well-being in the absence of any disease or abnormal conditions.
But economists define health as a durable good providing many services.
Grossman (1972) has argued that the flow of services generated from the
stock of health capital is consumed continuously over an individual’s life
time. The stock of health depreciates with age but can be maintained at an
efficient level by investments in healthcare services. Death occurs when an
individual’s stock of health falls below a critical minimum level.
Why do people desire to remain healthy? From an economic perspective,

there are two principles that drive people for demanding good health. Good
health is desired for both consumption and investment. From the
consumption perspective, an individual desires to remain healthy in order to
get utility by consuming goods and services. A healthy person feels good and
capable of enjoying life by consuming various other non-medical goods and
services. From an investment perspective, an individual who is in a positive
(good) state of health, needs to allocate less time to sickness and is therefore
having more healthy days available to work and enhance his/her future
income. Thus, a person who puts high value on future is more inclined to
pursue a healthy life style and increase the likelihood of enjoying healthy
days (as compared to a person who puts low value of future).
Health Economics is an applied field of study which allows the systematic

examination of the problems faced in promoting health for all. By applying
economic theories of consumer, producer and social choice, health economics
aims to explain the behaviour of individuals, healthcare providers, public and
private organisations and governments in decision-making.
Healthcare is classified as a ‘merit good’ because its consumption provides

benefits to others besides the individual. For instance, inoculation against a
contagious disease provides protection to the individual generating thereby a
private benefit. But it also provides a social benefit since it prevents others
from contracting the disease from the inoculated person. However, few
would want inoculation only to protect others i.e. the demand for healthcare
is mainly due to private benefit and is never made keeping the ‘social
optimum’ in view. In other words, the actual demand is less than the social
optimum. In order to extend this up to the social optimum, government
intervention becomes necessary. In many such contexts, health economics
can be useful in evaluating how certain problems (like market failure and
inequitable allocation of resources) can impact the health of a community or
population so that it can then be used to provide the necessary input to the
government on the required course of action. Such inputs for policy critically
fall in the areas of market regulation, formulation of national health policies
and programmes, etc.
10
1.2 HEALTH AND EDUCATION FOR HUMAN for Human Capital
CAPITAL
The human capital theory suggests that individuals and society derive
economic benefits from investments in people. However, traditionally,
economic theory has given emphasis on physical capital accumulation as the
principal source of economic growth, at least in the short-run. In the long
run, exogenous technical progress is considered as the determinant of growth.
The exogeneity of technological progress and the diminishing returns to
physical capital pose difficulty in explaining long-term economic growth
restricting the analytical capacity of the neoclassical models in their empirical
verification. This problem is solved by endogenous growth models which
gives emphasis on human capital (viz. education and health) accumulation.
1.2.1 Distinction between Physical and Human Capital

Physical capital implies non-human assets such as: (i) plant and machinery,
(ii) tools and equipment, (iii) office supplies, etc. that help in the process of
production. Human capital refers to: (i) stock of knowledge measured by
literacy rate and years of schooling, (ii) health status of the population
measured by life expectancy and quality of life index, (iii) talent, skills and
abilities brought-in by the employee to the organisation, etc. Thus, although
both the physical and human capital are durable, there are also some
differences noticed between the two.
Physical capital is tangible but human capital is intangible. Physical capital

can be traded in the market but the services of human capital can only be
hired. Physical capital is formed through technological progress and
economic development whereas human capital is generated through society
i.e. it originated through societal culture, customs, mobility and interactions.
Human capital can, therefore, generate positive externality to the society
whereas physical capital does not possess any such property. Physical capital
can be separated from its owner but human capital cannot be separated. A
country can accumulate physical capital within a very short period of time
but accumulation of human capital requires a long period of time. Mobility of
physical capital from one country to another is restricted by trade barriers
whereas it is the nationality and culture that makes it difficult to move human
capital from one country to another. Both the physical and human capital
depreciates but physical capital depreciates at a constant rate while in case of
human capital, natural ageing leads to its depreciation which can be
minimised by proper medical intervention.
1.2.2 Health and Human Capital

Becker (2007) and Schultz (2010) argued that good health and nutrition
enhance workers’ productivity. Healthier people not only live longer but
have stronger incentives to invest in developing their skills as they expect to
reap the benefits of such investments over longer periods. Better health 11
Introduction
increases the productivity of workforce by reducing incapacity, debility and
days lost due to sickness. Moreover, good health helps to forge improved
levels of education by increasing the levels of schooling and scholastic
performance. Health therefore impacts economic growth through the
demographic attributes. Shorter life expectancies inhibit investment in
education and other forms of human capital, since there is greater risk that
each individual may not survive long enough to benefit from investment.
Further, a large proportion of dependent population (due to poor health) has a
detrimental effect on rate of savings and thereby on capital investment and
growth. Healthier workers are more productive for a variety of reasons like
increased vigor, strength, attentiveness, stamina, creativity, etc. Ill health and
malnutrition reduce the physical capacity of the labour leading to lower
productivity and lower wages.
1.2.3 Education and Human Capital

Education is another equally important factor which, after health is in every
sense, the other fundamental requirement of economic development and
social progress. No country can achieve sustainable economic development
without substantial investment in its education sector. Education enriches
people’s understanding of themselves creating positive externality to the
society. It improves the quality of their lives and leads to broader social
benefits to individuals and society. Education raises people’s productivity
and creativity and promotes entrepreneurship and technological progression.
Lucas (1988) and Romer (1986) have elaborately explained the role of
education to human capital in economic development. But their emphasis is
different. Lucas’s interpretation of human capital is closer to population
wide education i.e. education of the masses (school level education) and not
directly related to the frontier knowledge domains like science and
technology to which Romer refers. Romer (1986) mentions three factors to
distinguish physical capital and human capital (the latter measured in terms
of knowledge accumulation or stock of ideas). These are: (a) development of
new knowledge has positive external effects on the production possibilities of
other firms (mainly because knowledge is non-rival in nature); (b) new
knowledge too is subject to diminishing value in its nature; and (c) such new
knowledge is more profitable when it leads to more efficient outcomes.
1.2.4 Complementary Effect of Health and Education to

Human Capital
Education of the poor helps improve their food intake not only by raising
their incomes and thereby in spending on their food but also by inducing
them to make better and healthier choices. Educated persons tend to consume
a healthier diet even when the total amount spent on food is held constant. In
other words, the relationship between education and better health and higher
life expectancy involves causation in both directions i.e. greater health and
lower mortality induces larger investments in education since rates of return
12
on such investments is greater when the expected amount of working time is for Human Capital
higher. Education has therefore emerged as the primary component of human
capital although over time it is observed that health and nutritional
expenditure facilitates a major part of investment in education. In short,
education, health, nutrition, water and sanitation are complementary to each
other, with investments in any one contributing to better outcomes in others.
Check Your Progress 1 [answer within the space given in about 50-100
words]
1) How is health defined from a ‘medical science’ perspective? In what way

it differs from an economics science perspective?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) How is health a durable good? How is it more precisely classified? Give
reasons.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) Define Health Economics. Who are the agents whom it covers in its
scope?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
4) In what respect is the neoclassical approach considered restrictive? How
is this overcome?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
13
Introduction
5) Distinguish between Physical and Human Capital.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
6) How is Health an integral part of Human Capital?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
7) Do you agree that the contribution of education to Human Capital is
complementary to health? Why?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
8) What is the difference in the respective perspectives of Romer and Lucas
(1988) on human capital?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
9) In terms of which three specific aspects, does Romer distinguish physical
capital and human capital?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
14
10) What is meant by ‘complementary effect of investment in human for Human Capital
capital’?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
1.3 HEALTH AND ECONOMIC GROWTH

The concept of human capital refers to the abilities and skills of human
resources of a country. Thus, human capital formation refers to the process of
acquiring and increasing the number of people with good health, education
and skills, critical for economic growth. In the mainstream macroeconomic
growth models, human capital in the form of schooling or enrolment has been
given a central place while the role of health has remained peripheral. This is
mainly because quantification of health by life expectancy cannot as
completely aggregate for the status of health as the ‘years of schooling’ does
for education. In other words, contribution of life expectancy was not
regarded as conclusive to productive health years during the working years as
the years of schooling was considered to human capital formation.
Notwithstanding this, we now proceed to analytically show how both health
and education indispensably remain as the two mutually complementary
components to economic growth in terms of average productivity of labour.
1.3.1 Returns to Investment in Human Capital

Following the endogenous growth model, consider a simple production
function as:
Yt Y ( K t , H t , Lt ) (1.1)
where Y is aggregate output, K is physical capital, H is human capital and L is

the labour force. Differentiating Equation (L), with respect to time t, and
placing the components for labour, physical capital and human capital in a
sequence, we get:
. ∂Y . ∂Y . ∂Y .
Y= L+ K+ H
∂L ∂K ∂H .
Dividing the above equation throughout by Y and subtracting

.
P
r=
P
(i.e. rate of growth of population) from both sides of the equation, we get:
15
Introduction . . . .
Y P Y L L Y I Y I P
. . . K . H
Y P L Y L K Y H Y P
.
y M PL IK IH
Or , .n M PK . M PH . r
y APL Y Y (1.2
where APL = Y/L is the average productivity of labour L/L = n, the rate of
growth of employment, K = IK = IK and H = IH = IH. The LHS of (1.2) is the
rate of growth of output minus the rate of growth of population or the
‘growth in per capita output’.
We assume that gross investment is equal to net investment and it is valid for
both physical and human capital. Now, decomposing r into the components
one each for the children, working population and old-age population, we
get:

P 0
P  15 59
P  59
P 0
P P0 15  15
P P15 59  59 P59
P
r 15 15
. 59
. .
P P P0 15 P P15 59 P P59 P
.r1 1 .r2 2 .r3 3
Where, α stands for share of population, 0<αi<1, i=1, 2 and 3; r1, r2 and r3
stand for growth rate of child population, working population and old-age
population respectively. Substituting the value of r in Equation (1.2), we get,
rate of growth of output per capita as:
.
y MPL I I
= .n + MPK . K + MPH . H − (.r1α 1 + .r2α 2 + .r3α 3 ) (1.3)
y APL Y Y
Now, if we assume that the economy is at full employment, such that: (i) the
rate of growth of employment (viz. n) is equal to the rate of growth of
working population (r2) and (ii) average productivity of labour (APL) is equal
to marginal productivity (MPL), then Equation (1.3) can be written as:
.
y I I
= n(1 − α 2 ) + MPK . K + MPH . H − (α 1 .r1 + α 3 .r3 ) (1.4)
y Y Y
Since investment in human capital basically comprises of expenditure on

health and education, we can write: IH = IHE + IEE and Equation (1.4) can be
written as:
.
y I I I 
= n(1 − α 2 ) + MPK . K + MPH . HE + EE  − (α 1 .r1 + α 3 .r3 ) (1.5)
y Y  Y Y 
Equation (1.5) tells us that the growth of per capita output will increase if: (a)
rate of growth of employment (n) increases, (b) share of investment of
physical capital to total output increases and (c) if the health and education
expenditure as a proportion of total output increases. Conversely, growth of
16
output per capita is adversely affected if an economy is either characterised for Human Capital
by higher proportion of child or old-age population (as well as their
corresponding growth rates). Since health and educational outcome depends
I I
upon HE and EE , quality of labour force will improve if an economy
Y Y
spends higher proportion of its income on human capital formation. The
term MPH (marginal productivity of human capital) can be interpreted either
by considering stock of health or stock of knowledge. If we consider stock of
health by ‘life expectancy at birth’ as human capital, then MPH can be
interpreted as the incremental change in total output (Y) due to one year
increase in life expectancy at birth. In the same way, if we consider
education by ‘years of schooling’ as human capital, then MPH is interpreted
as marginal increase in output/income (Y) due to one unit increase in years of
schooling. The importance of health in developing countries can thus be
understood by the growth Equation (1.5).
Developing countries generally experience a higher proportion of child

population (α1) and its growth (r1) because of high fertility rate. If the
children, who are the potential human resource, remain unhealthy due to low
level of healthcare spending, the process of human capital formation will be
seriously affected. Since health and educational attainment are
complementary to each other, with one depending on the other, one can not
separate out health without considering education and vice-versa. Keeping in
mind the present low levels of investment in health sector in developing
countries like India, to reap the real benefit of demographic dividend in
future, accumulation of effective human capital is necessary. This is possible
by effective intervention in improving the health status of female population
in reproductive age group and all children in general as they are the potential
human capital resource. As of now, although India is passing through its
phase of demographic dividend (with its maximum share of person in
‘working age group’ expected to be attained by 2025), India spends just
about one percent of its GDP on health. India should therefore increase its
investment in health sector for getting returns from human capital in the
coming decades.
words]
1) Define the concept of human capital formation.

.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
17
Introduction
2) State the determinants of per capita growth of output?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) Decompose the growth of population in terms of age cohort and state the
expression for ‘per capita rate of growth in output’.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
4) How is human capital investment interpreted?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
5) Why is it particularly important to invest in healthcare in a developing
economy?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
1.4 HEALTHCARE MARKET

The term market refers to a situation where buyers and sellers interact to
trade goods and services. It is a place where the forces of demand and supply
interact to determine the prices of goods and services being exchanged.
Driven by mutual self-interest, while consumers try to pay the lowest prices
possible, producers try to sell at the highest possible price. The process
results in equilibrium in conditions of perfect competition where the quantity
demanded equals the quantity supplied. In order to ensure optimality, an
important condition to be met is perfect information about the price to both
18
the buyers and sellers. In other words, efficiency by optimal allocation of for Human Capital
resources is achieved under perfectly competitive market conditions, from
perfect information about the market in general and information on prices in
particular. This basic microeconomic principle is inapplicable in case of
healthcare market because of its specific features.
1.4.1 Features of Healthcare Market

The characteristics of healthcare market differ from those in a perfectly
competitive market due to the following factors:
a) Healthcare is a heterogeneous product or service as the patient can

experience a range of outcomes;
b) Some patients who have health insurance are paid for their health
expenditure by the third-party payer;
c) ‘Market price’ is lacking in feedback to reflect the actual value of the

resources used in healthcare. This is because healthcare is a service
provided by institutions that uses different kinds of inputs of which some
are quantitative and some are qualitative. The healthcare provider also
adds some profit margin along with these costs in setting the price of
specific healthcare. This may happen in case of other product markets
also but with a lesser degree of variation as compared to the services of
healthcare market.
d) Healthcare providers (doctors or suppliers) know more about illness and

treatments than their patients i.e. there is information asymmetry;
e) Individuals in poor health have a greater incentive to purchase health

insurance than those in good health.
In addition to the above, healthcare services possesses certain other peculiar

characteristics as stated below:
(i) Healthcare is intangible i.e. a medical service is incapable of being

assessed by the five senses; (ii) production and consumption of healthcare
service take place simultaneously i.e. healthcare providers are unable to
maintain an inventory of medical services or it is dispensed to the patient
directly and is non-transferable; (iii) the composition and quality of
healthcare services vary across individuals as well as across medical events;
and (iv) healthcare services are difficult to quantify.
The quality of healthcare services is not uniform and is subject to three types
of differences viz. structural, process and outcome. Structural quality is
reflected in the physical and human resources of healthcare provider e.g. the
level of amenities in hospital/nursing home, medical equipment and tools,
medical personnel and administration. Process quality refers to waiting time,
collection of background information of patients, diagnosis of the disease and
19
Introduction
treatment. Outcome quality refers to the impact of healthcare on the patient’s
health, patient’s satisfaction, post-care complications, etc.
1.4.2 Market Failure and Information Asymmetry

A market that meets all the conditions for efficient resource allocation is an
‘ideal’ in economic theory. In particular, the healthcare market is
characterised by the above outlined specificities. Efficiency in consumption
of healthcare means that consumers (i.e. patients) avail of the healthcare
services where they get the highest satisfaction. For producers (like hospitals
or doctors) of goods and services, being efficient means they produce
medical services at the lowest possible average cost. But, in reality,
healthcare market fails to achieve efficiency because of the difference in total
cost for different agents involved i.e. patients (consumers), healthcare
providers (suppliers), insurance companies (third-party payers), and society.
The economic impacts of pain and suffering are of concern to the patient and
society but may not be similarly relevant for healthcare providers or third-
party payers. In view of these factors, healthcare market remains inefficient
in allocating resources optimally. In other words, the power of the market
forces (demand and supply) to determine the equilibrium price and quantity,
and consequently determine optimum resource allocation, is greatly reduced.
Information Asymmetry: Doctors (suppliers) being more aware about

illness and treatments than the patients, patients are dependent on the doctor
to act in their best interest. But there is a conflict of interest as the doctor is
selling a service to the patient. The doctor is not only in a position to
determine the demand for the service (acting on behalf of the patient,
presumably for the patient’s welfare) but the doctor is also the supplier of the
services. In other words, both the demand and supply are jointly determined
by the same individual. The doctor driven by profit motive, might order
more services than necessary (e.g. if he/she owns a laboratory or imaging
equipment). Termed as ‘supplier induced demand’, the situation leads to
market failure. Besides this, situation of information asymmetry between
individuals purchasing health insurance and the insurance company results in
two other specific types of market failures termed as adverse selection and
moral hazard.
Individuals in poor health have a greater incentive to purchase health

insurance than those in good health. They also make greater utilisation of
healthcare, leading to higher payouts by the insurance company. Such a
situation in the healthcare market is termed as ‘adverse selection’. Further,
individuals covered by insurance tend to use more healthcare services by not
taking necessary precautions to stay healthy with the knowledge that they
have insurance coverage. This leads to inefficient use of resources and is
termed as ‘moral hazard’. Insurance companies try to correct this by
monitoring and restricting healthcare access and by charging ‘co-payments
and deductibles’.
20
1.4.3 Government Intervention for Health Equity Health and Education
for Human Capital
A public good is one that is non-excludable and non-rivalrous, and hence, a

good for which no demand schedule exists. A merit good is a good that
someone deems to be good for someone else in a way that is not expressed by
the immediate utility that the good provides, and hence, market demand
exists for a merit good. Certain type of healthcare like ‘immunisation against
a contagious disease’ is a merit good because, although it is not possible to
know exactly when the benefit will arise, such immunisation provides
protection to the individual and others. It yields a private benefit to the
immunised but also an external benefit to other individuals who are protected
from catching the disease from the immunised. Such healthcare generates a
positive externality to the society and hence is a semi-public good as it does
not satisfy the non-excludability or non-rivalrous property of public good.
Thus, not all healthcare services are public good but many of them are near-
public good and merit good. Some parts of it like hospital services, physician
services, medicines, etc. cannot be treated as public good as they are
characterised by neither non-rivalry nor non-excludability. In general,
consumption of a good, if it generates positive externality, is defined as a
merit good and in such cases social benefits exceed private benefit. Such
goods can either be produced by the private or the public sector. With merit
goods, individuals may not fully understand the private benefits of their
consumption and hence may not act in their own interest. Government
intervention is warranted in such cases.
words]
1) Under what circumstances a market is efficient?

.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) Is the market for healthcare service imperfect? Why?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
21
Introduction
3) What are the three types of differences that exist in the healthcare market
making its services inconsistent?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
4) How is the term ‘supplier induced demand’ defined?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
5) How does ‘adverse selection’ occur in healthcare market? How is this
different from ‘moral hazard’?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
6) How is a ‘merit good’ different from a ‘public good’? Give example in
healthcare market.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
7) In what circumstances, government intervention is necessary in
healthcare market?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
22
1.5 LET US SUM UP for Human Capital
Analysis of the role of health and educational services in endogenous growth

models reveal that both are complementary to each other. Together, they
account for the formation of human capital in an economy. Developing
countries like India, which are expected to enjoy the benefit of demographic
dividend, should give higher priority for investment in healthcare and
education, as it helps towards formation of effective human capital.
However, the healthcare market is characterised by certain specific features
rendering it exposed to a unique situation in which doctors can induce what is
called as ‘supplier induced demand’. In addition, there could be collusion
with health insurance market, due to which patients critically ill could
consume more healthcare services by especially buying a healthcare
insurance, a situation termed as ‘adverse selection’. Such complexities of
healthcare market, coupled with lack of symmetry in price information and
over-use of healthcare due to insurance coverage (called moral hazard),
results in sub-optimal allocation of resources. Together, they lead to situation
of ‘market failure’. Since healthcare services are characterised by the
properties of being both a public good (e.g. inoculation against contagious
disease) and a merit good (by some of its services where their social benefits
are higher than the private benefit), societal considerations demand a key role
to be played by the government. Since the supply of healthcare services are
rendered by both the private and public sector, and the availability and access
to essential healthcare services needs to be ensured by the government, the
government’s intervention becomes necessary in the healthcare market.
1.6 KEY WORDS

Human Capital : Human capital refers to (i) stock of knowledge
measured by literacy rate and years of schooling,
(ii) health status of the population measured by life
expectancy and quality of life index, and (iii) talent,
skills and abilities brought-in by the employee to
the organisation.
Health as : Good health and nutrition enhance workers’
Human Capital productivity. Healthier people who live longer have
stronger incentives to invest in developing their
skills since they expect to reap the benefits of such
investments over longer periods. Better health
increases workforce productivity by reducing
incapacity, debility and number of days lost due to
sickness.
Market Failure : Inefficient allocation of resources due to
asymmetric information.
Marginal : If we consider, health stock (say, life expectancy at
Productivity of birth) as capital, then MPH is interpreted as the
23
Introduction Health (MPH) incremental change in total output due to one year
increase in life expectancy at birth.
Supplier : Driven by profit motive, and taking advantage of a
Induced Demand situation of information asymmetry, a doctor might
order more services than necessary. This leads to a
situation of market failure termed as ‘supplier
induced demand’.
Moral Hazard : In health insurance market, individuals covered by

insurance tend to use more healthcare and they
might not take necessary precautions to stay healthy
because of the knowledge of their insurance
coverage. This leads to inefficient use of resources.
The situation is termed as Moral Hazard.
Adverse : Individuals in poor health have a greater incentive

Selection to purchase health insurance than those in good
health. Individuals in poor health make greater
utilisation of healthcare than the healthy, leading to
higher payouts by the insurance company. This is
termed as Adverse Selection in healthcare market.
Merit Good : When the consumption of a good by some,

generates positive externality to others, resulting in
a situation where the social benefit is larger than the
private benefit, it is defined as a merit good. Such a
good does not unconditionally obey the dual
characteristics of a public good i.e. being non-
excludable and non-rivalrous in consumption. But
they are important for accumulation of human
capital and economic development.
Co-Payment : A ‘co-payment’ is a term associated with health

insurance where the insured has to pay a fixed
amount (as out-of-pocket expenditure) of total
hospital bills or fees claimed by the healthcare
institution. Co-payment discourages the insured to
visit frequently the doctors. If people (who have
health insurance) have to pay a small amount at
each visit to a doctor, they will only go to the
doctor when they actually need.
Deductible : A deductible is the amount that a policyholder

must pay each year toward his/her medical
expenses before the insurance company begin to
pay its share. The purpose of the deductible is to
help keep premiums low through cost-sharing and
by reducing the number of small claims and
unnecessary doctor visits.
24
1.7 SOME USEFUL BOOKS AND REFERENCES for Human Capital
1) Becker, G. S. (2007). ‘Health as Human Capital: Synthesis and

Extensions’ Oxford Economic Papers 59: 379-410, OUP.
2) Grossman, M. (1972). ‘On the Concept of Health Capital and the
Demand for Health’, Journal of Political Economy, 80:223-255.
3) Haldar, S. K. (2008). ‘Effect of Health-Human Capital Expenditure on
Economic Growth in India: A State-Level Analysis, Asia-Pacific Social
Science Review, 8(2), pp.79-97.
4) Lucas, R. E. (1988). ‘On the Mechanics of Economic Development’,
Journal of Monetary Economics, 22, 3-42.
5) Romer, P. (1986). ‘Increasing Returns and Long-Run Growth, Journal of
Political Economy’, 94 (5):1002-1037.
6) Santerre R. E. and Neun S.P. (2010). Health Economics: Theories,
Insights and Industry Studies (5th ed.), South-Western Cengage
Learning, USA.
7) Schultz, T.P. (2010). ‘Health Human Capital and Economic
Development’, Journal of African Economies, 19(3).
1.8 ANSWERS/HINTS TO CHECK YOUR

PROGRESS EXERCISES
Check Your Progress 1
1) Encompassing physical, social and mental wellbeing without any burden
of disease. From an economic perspective, it is a durable good whose
value depreciates with time due to age.
2) Though classified as a durable good due to its life long service to the
individual, it is more precisely classified as a ‘merit good’ in view of its
positive externality benefits.
3) Health economics is an applied area in which using microeconomic tools
important policy inputs. It covers individuals, healthcare providers,
public and private organisations and governments in decision-making.
4) It is restrictive in explaining long term economic growth due to the
exogeneity of technological progress and depreciation in the value of
physical capital. This limitation is overcome by the inclusion of human
capital as a determinant of long term economic growth.
5) Value of Physical capital depreciates with time while that of human
capital can be minimised by investment in healthcare (Sub-section 1.2.1).
6) Good health helps to forge improved levels of education while shorter
life expectancies inhibit investment in education. So health is primary
and a prerequisite to education.
25
Introduction 7) Educated persons can ensure that they take proper diet even with
constant expense on food.
8) While Lucas’s emphasis is on mass education, Romer emphasises on
frontier knowledge domains like science and technology.
9) Positive externalities of new knowledge due to its non-rival nature, such
new knowledge too is affected by diminishing values, etc. (Sub-section
1.2.3).
10) The relationship between education and better health and higher life
expectancy involves causation in both directions (Sub-section 1.2.4).
Moreover, education, health, nutrition, water and sanitation complement
each other.
1) Human capital formation refers to the process of acquiring and
increasing the number of people with good health, education and skills,
critical for economic growth.
2) Rate of growth of employment, share of investment in physical capital to
output, expenditure on health and education as a proportion of total
output (Equation 1.5, Sub-section 1.3.1).
3) Sub-section 1.3.1. Equation (1.5).
4) If we take it stock of health, then it is interpreted as: incremental change
in total output (Y) due to one year increase in life expectancy at birth.
Likewise, for education.
5) To raise productivity and reap the benefit of demographic dividend.
1) When information about prices is known to both producers and
consumers (Section 1.4).
2) No. Doctor knows more about the disease of the patient, he could have
profit motive, healthcare services are heterogeneous with a range of
outcomes, etc. (Sub-section 1.4.1).
3) Structural quality, process quality and outcome quality.
4) It is a situation where doctors may prescribe tests due to profit motive
alone and not due to the actual requirement of the patient.
5) Adverse selection means patients knowing their serious health condition,
purchasing health insurance policies to meet out the costs of healthcare.
Moral hazard refers to healthy persons taking healthcare insurance
policies and then neglecting to take care of their health.
6) Consumption of a good, when results in positive externality i.e. social
benefits are more than private benefit, is termed as a merit good (Sub-
section 1.4.3).
7) In the case of merit goods when due to lack of knowledge people may
under consume such goods government interference becomes necessary.
26
Role of Health in
UNIT 2 ROLE OF HEALTH IN HUMAN Human Development
DEVELOPMENT
Structure
2.0 Objectives
2.1 Introduction
2.2 Health and Human Development
2.2.1 Human Development Index
2.2.2 Health, Income and Healthcare Expenditure: Relationship
2.2.3 Causality between Health and Poverty
2.3 Health and Gender Development

2.3.1 Gender Adjusted Health Equality (GAHE)
2.3.2 Empirical Exercise
2.4 Health Inequality and Socio-Economic Status

2.4.1 Concentration Curve and Concentration Index (CI)
2.4.2 Empirical Illustration of CI
2.5 Let Us Sum Up

2.6 Key Words
2.7 Some Useful Books and References
2.8 Answers/Hints to Check Your Progress Exercises
2.0 OBJECTIVES
After reading this unit, you will be able to:
• outline the measurement issues of health at the individual level and at the
macro level;
• state the components and rationale behind the HDI, 2010;
• show the interdependence between income, healthcare expenditure and
health;
• explore the causality between health and poverty;
• discuss the concept of ‘equally distributed equivalent achievement’
(EDEA) in the context of ‘gender adjusted health equality’ (GAHE)
goals;
• define the concepts of Concentration Curve and Concentration Index
(CI); and
• estimate health inequality empirically (at the individual and group level)
• using Concentration Index.
27
Introduction
2.1 INTRODUCTION
For long, the principal indicator of the measurement of economic
development used to be taken as the growth rate of GDP or per capita GDP.
Cross country growth comparisons however suggested that a country having
higher level of income need not necessarily have a higher health status or
educational level. This meant that income or its growth does not always
ensure the well-being of the people. This realisation led to the development
of the concept of human development resulting in a distinct shift in the focus
of development economics from national income accounting to people-
centric indicators like the HDI in the 1990s. Human development came to be
defined as a process of enlarging people’s choices, particularly in three
essential choices viz. (i) by leading a long and healthy life, (ii) with skills
acquired by education and (iii) by having access to resources needed for
maintaining a decent standard of living. It was recognised that if these
choices are not available, many other opportunities would remain
inaccessible. For measurement purposes, for each dimension of human
development (viz. longevity, educational attainment and access to resources),
a relative ‘distance’ from a ‘norm’ was calculated, and a value between 0 and
1 assigned to help in its aggregation and serve as a composite indicator. In
this unit, we shall specifically focus on the analytical aspects linking health
with human development.
2.2 HEALTH AND HUMAN DEVELOPMENT

Health has been a multi‐dimensional concept, difficult to define and measure,
especially at the individual level. At the individual level, it includes risk of
mortality or morbidity, physical limitations caused by injuries, level of pain,
chronic health disorder, psychological well-being, etc. In other words, an
individual’s perception about the ill-being or well-being of health varies
widely as it is highly subjective depending up on the above factors. It varies
over time and across different age cohorts. In view of this, to assess the
health status of an individual, it requires a combination of subjective and
objective measures. To deal with this, the issue of measurement has followed
the approach of first assessing it at a macro level, using which the
individual’s health status can then be assessed. For instance, BMI (i.e. body
mass index) is tabulated for different regions, gender-wise, on the basis of
which an individual can assess for himself, whether he/she is obese or
overweight or fit. Similar indicator are available for malnutrition. You have
studied about these in Unit 7 of Course 11 (Indian Economy I). Another such
indicator about which we shall now study is SAHS i.e. self reported health
status. This is computed and used as follows.
At macro level, health status of a community or cohort can be assessed based

on the data collected on the performance of a group of individuals (belonging
to a specific age cohort). Using Likert scale (i.e. a 5 to 7 point scale used to
28
Role of Health in
allow the individuals to express how much they agree or disagree with a Human Development
particular statement), a group of individuals belonging to a specific age
cohort are asked to report their position ‘ordinally’ (i.e. in relative terms) on
some basic functions (e.g. walking, breathing, digestion, hearing, chronic
health disorder, etc.). Once observations on these parameters are recorded
for a group of individuals belonging to a specific age cohort, a cardinal
number (i.e. a numerical value) can then be assigned (for each ordinal
ranking) for each one of the specific functions. An individual can then obtain
a score based on his/her self-assessment of his health status. Such a score or
index obtained by the individual is known as ‘self assessed health status’
(SAHS). SAHS is easy to estimate and is shown to be a strong predictor of
more subjective measures of health. However, SAHS has some limitations.
Besides being subjective, it suffers from cultural bias. It is also influenced by
personality, general outlook, social and economic environment.
Health status at the macro level (viz. a country) can be estimated by

considering factors like life expectancy at birth (LE), infant mortality rate
(IMR), maternal mortality rate, morbidity prevalence rate, etc. Life
expectancy at birth (LE) is considered as the best measure of health for cross-
country comparison as it is assumed that countries showing higher LE
manifest higher health status. However, it may not be always true unless the
quality adjusted life years is taken into account.
2.2.1 Human Development Index

The computation of human development index (HDI) has evolved over time
since the 1990s. The Human Development Report (2010) used a revised
formula to measure the HDI by taking into account a combination of three
dimensions as follows:
• a long and healthy life captured by Life expectancy at birth (LE);

• knowledge dimension captured by ‘mean years of schooling’ and
‘expected years of schooling’; and
• access to resources for a decent standard of living captured by gross
national income (GNI) per capita (measured in $PPP i.e. purchasing
power parity dollars)
a) Life Expectancy Index (LEI)
LE − 20
LEI = (2.1)
85 − 20
LEI is 1 when Life expectancy at birth is 85 and 0 when Life expectancy

at birth is 20.
b) Education Index (EI)

��
�� = (2.2)
�
29
Introduction ��
Mean Years of Schooling Index (MYSI) = ��
, where 15 years of schooling
is taken to yield the value of 1 (the projected maximum to be attained by
��
2025). Expected Years of Schooling Index (EYSI) = �� , where 18 years of
schooling, equivalent to achieving a master’s degree in most countries, is
kept as the target yielding the full score of 1 on its attainment.
��
c) Income Index (��) = �� ,�� (2.3)
where PCGNI = Per Capita Gross National Income measured in $PPP. The
Income Index (II) is 1 when GNI per capita is $75,000 and 0 when GNI per
capita is $100.
Finally, the HDI is the geometric mean of the previous three normalised
indices:
1
Human Development Index (HDI) = [LEI .EI .II ]3 (2.4)
Illustration: The values of HDI of a country for the year 2011 and 2016 are
0.82 and 0.89 respectively. The country’s educational (EI) and income
indices (II) are assumed to be fixed over 2011-2016. The initial life
expectancy (for the year 2011) was 60 years. Estimate the value of LE for
the year 2016. What is the percentage increase in LE over 2011-16?
Using Equation (2.4), we can write:
HDI for 2011: 0.82 = HI 1 / 3 .EI 1 / 3 .II 1 / 3 (2.4a)

60 − 20
where HI = = 0.6153
65
HDI for 2016: 0.89 = (HI *) .EI 1 / 3 .II 1 / 3

1/ 3
(2.4b)
LE * −20 LE * −20
where HI * = = assuming LE* to be the life expectancy
85 − 20 65
for the year 2016. Divide Equation (2.4b) by (2.4a), we have:
0.89 ( HI *)1 / 3 .EI 1 / 3 .II 1 / 3
= = 1.0854.
0.82 HI 1 / 3 .EI 1 / 3 .II 1 / 3
Since EI and II are assumed to be the same for the two time points, raising
the above to the power 3, we get:
HI *
⇒ = 1.2785 ⇒ HI * = 1.2785 * HI = 1.2785 * 0.6153 = 0.7866
HI
LE * −20
⇒ = 0.7866 ⇒ LE* = 51.13 + 20 = 71.13
65
Hence, the percentage increase in life expectancy (LE) over 2011-2016 is:
LE * (2016) LE (2011) 11.13
100 100 18.55
30 LE (2011) 60
2.2.2 Health, Income and Healthcare Expenditure: Role of Health in
Human Development
Relationship
Following certain basic assumptions [that: (i) health stock depends on
healthcare spending; (ii) healthcare spending depends on income; and (iii)
change in income depends on current health status], a simple model to
describe the relationship between health, income and healthcare expenditure
can be specified as follows:
dY
Yt' h Ht (2.5)
dt
dH
H t' a St (2.6)
dt
S t = c + τYt (2.7)
dY
where 0<τ<1, change in income i.e. is expressed as a function of the
dt
dH
current health status Ht, change in health i.e. is expressed as a function
dt
of the current healthcare spending St spending on healthcare St is expressed as
a function of the current income level Yt with h, a, c, α, δ and τ all assumed to
be non-zero. Substituting the value of St in Equation 2.6, we get:
dH
H t' a c Yt (a c) Yt d Yt (2.8)
dt
where, d = a+δc and γ = δτ. Differentiating Equation (2.8) w.r.t time ‘t’ and
substituting the value of Yt' (obtained from Equation 2.5), we get:
d 2H dYt
H t'' h Ht h Ht (2.9)
dt 2 dt
Differentiating Equation (2.5) w.r.t time ‘t’ and substituting the value of H t'
obtained in Equation (2.8), we get:
d 2Y
Yt'' H t' d Yt d Yt (2.10)
dt 2
Equations (2.9) and (2.10) are 2nd order non-homogenous differential

equations. Therefore, solution of each equation consists of two parts: a
‘particular integral’ (PI) and a ‘complementary function’ (CF).
Let the trial solution of PI of Equation (2.9) be H t = k , so that, H t' H t'' 0

h
and the PI from Equation (2.9) becomes: PI = k = − . In order to find the
α
rt
CF, we consider the trial solution as: H t = Ae (i.e. we assume constant
compounded growth with respect to time ‘t’) so that H t' Are rt and
H t'' Ar 2 e rt . The homogenous part of Equation (2.9) thus becomes:
31
Introduction
d 2H
− αγH t = 0 . Inserting the trial solution of CF, we get:
dt 2
( )
Ar 2 e rt − αγ . Ae rt = 0 ⇒ Ae rt r 2 − αγ = 0
( )
⇒ Ae rt ≠ 0, r 2 − αγ = 0 ⇒ r = ± αγ
αγ h
The general solution of Equation (2.9) becomes: H t = Ae t where we
−
α
ignore the negative root. A is the arbitrary constant determined by the initial
h h
condition. Putting, t=0, we have: H 0 = A − ⇒ A = H0 + . Therefore, the
α α
complete solution of Equation (2.9) becomes:
 h αγ h
H t =  H 0 + e t − (2.11)
 α α
Equation (2.11) is the time path of health Ht. Since it can be assumed that
initial health stock (H0) is determined by initial level of income (Y0),
Equation (2.11) becomes:
 h αγ h
H t =  Y0 + e t − (2.11a)
 α α
Similarly, the time path of income can be derived as:
 d αγ d
Yt =  Y0 + e t − (2.12)
 γ γ
The time path of income and health is closely related. If we insert the value
of e t αγ obtained from Equation (2.11) into the Equation (2.12), we can see
that income is determined by health. In the same way, one can easily check
that health path is also influenced by level of income. This analytically
establishes the interdependence of health with healthcare spending and
income.
2.2.3 Causality between Health and Poverty

Health and poverty is jointly determined i.e. the two cannot be separated as
poverty cannot be eradicated without considering health issues of the
population. In other words, there is a two-way relationship i.e. health affects
poverty and poverty affects health. A vicious cycle of poverty is generated in
poor countries where low health status plays a major role in causing a low
level equilibrium trap. Among the reasons put forward to indicate how
poverty affects health are:
a) the poor have low level of material resources and hence they cannot
purchase healthcare from the market. As a result, they incur huge
medical expenses when they become sick;
32
Role of Health in
b) due to distance of public health centers/hospitals and the transportation/ Human Development
transaction costs involved, the poor cannot access the public healthcare
facilities;
c) in poor countries, public healthcare is poorly organised and managed.

Hence, public hospitals cannot manage to provide adequate healthcare to
the patients. This leads to deterioration of health of the patients who then
need immediate and proper medical intervention. Moreover, poor people
reside in remote and rural areas, where public healthcare facility is either
inadequate or unavailable;
d) one can avoid some of the diseases by taking preventive measures, but
due to lack of income, the poor are unable to take such preventive
measures;
e) poor families prefer more number of children since they provide

economic incentives to the parents by working instead of going to
school. This adversely affects the reproductive health of the mothers and
newborn babies; and
f) poverty makes the people more vulnerable to infectious and

communicable diseases increasing the probability of their death. Due to
lack of income poor people cannot consume nutritious food.
Likewise, following reasons are put forward to indicate how health affects
poverty.
a) Malnourished children are less attentive in the class and their

performance is poor compared to healthy children. The absenteeism in
school is also found to be high among the unhealthy children. Unhealthy
children in the long-run are forced to join informal or unorganised sector
where wage rate is low and irregular. This aggravates poverty.
a) Mortality is found to be high among the poor. If the principal earner of a
family dies at an early age, the whole family falls into poverty. The
dependents (viz. children) are forced to join informal jobs to avoid
destitution aggravating poverty in the long-run.
b) Catastrophic health expenditure faced by poor people leads to poverty. If
a member of a poor family suffers from an incurable disease, the family
is forced to borrow to spend on medical care leading to poverty.
b) If the majority of the population of a country suffer from communicable
and contagious disease, the foreign direct investment as well as tourism
will be adversely affected. As a result, the health status of the poor
counties will remain poor.
words]
1) How is the health status of a country measured?

33
Introduction
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) Define Self-Assessed Health Status (SAHS). What are its advantages and
disadvantages?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) How is Human Development defined? How is it different from economic
development?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
4) How does health enter into the human development index (HDI)?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
5) The values of HDI of a country for the year 2011 and 2016 were 0.72
and 0.81 respectively. The country’s educational (EI) and income indices
(II) are assumed to be fixed over 2011-2016. The initial life expectancy
(for the year 2011) was 65 years. How do we estimate the value of LE
for the year 2016? What is the percentage increase in LE over 2011-
2016?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
6) How does health affect poverty?
.....................................................................................................................
34 .....................................................................................................................
Role of Health in
..................................................................................................................... Human Development
.....................................................................................................................
.....................................................................................................................
7) How does poverty affect health?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2.3 HEALTH AND GENDER DEVELOPMENT

Human development index (HDI) is gender insensitive whereas ‘gender
development index’ (GDI) is gender inequality adjusted human development.
Gender development plays an important role in the context of inclusive
growth and social justice. Gender discrimination directly affects the well-
being of women, thus, gender equality is a legitimate policy goal.
Discrimination against female is not generally observed in the developed
counties but is more acute in the counties in Asia, especially South Asia
including China and Korea.
According to Global Gender Gap Report-2016 compiled by World Economic

Forum (WEF, 2016), out of four pillars of development (viz. health and
survival, work force participation, educational attainment and political
empowerment), India’s position is almost at the bottom (India is placed at
142nd rank out of 144 countries). India has been progressing in terms of
economic growth but such economic growth fails to correct gender imbalance
in respect of health and survival.
2.3.1 Gender Adjusted Health Equality (GAHE)

Following the methodology developed by UNDP (1995), we consider X to
be the indicator of development, say, the literacy rate with X f and X m
standing for female and male literacy rate respectively. We further assume
that X f < X m and N f and N m are the female and male population size. The
overall or mean literacy ( X ) is therefore given by:
N f X f + Nm X m
X = (2.13)
N f + Nm
(2.13) can be written as: X = Pf X f + Pm X m where, Pf and Pm are the

proportion of female and male population respectively. We want to increase
X on the one hand and reduce ( X m − X f ) on the other. In order to solve
this problem, we consider a social valuation function for achievement that is
35
Introduction
‘additively separable, symmetric and of constant elasticity marginal
valuation’ as:
X 1−ε
V(X ) = , for ε≥0 but ε≠1 (2.14a)
1− ε
V ( X ) = ln X , for ε=1 (2.14b)
where ε stands for inequality aversion parameter with ε ≥ 0 being considered
to reflect a preference for equality. For any pair ( X f , X m ) of female and
male achievements, we can construct an ‘equally distributed equivalent
achievement’ variable, X EDEA , defined as the level of achievement that, if
attained equally by women and men as ( X EDEA , X EDEA ), would be judged to
be exactly as valuable socially as the actually observed achievements
( X f , X m ). We, therefore, have:
1
{
X EDEA = Pf X 1f−ε + Pm X m1−ε }
1−ε (2.15)
where, XEDEA, is formed from (Xf, Xm) by taking what is called as ‘(l – ε)
average’ of Xf and Xm rather than a simple arithmetic average of the female
and male achievements. The optimum trade-off between higher achievement
and gender equality is achieved through XEDEA for ε > 0. When ε = 0, XEDEA
reduces to X , the simple arithmetic average i.e. there is no concern for
equality. But when ε > 0, there is a social preference for equality (or an
aversion to inequality) measured by the magnitude of the parameter ε. Thus,
ε is interpreted as preference to equality. Equation (2.15) is valid for literacy
rate (or work force participation rate) but is not directly applicable to life
expectancy. This is because potential life expectancy of female is higher than
that of male. Women’s higher potential life expectancy is anticipated in
demographic projections as well; for the year 2050, for example, life
expectancy in industrial countries is projected at 87.5 years for women and
82.5 years for men, averaging to 85 years (UNDP 1993). In considering the
disaggregation of the HDI by gender, the UNDP has used separate goal posts
for maximum life expectancy for females and males as 87.5 and 82.5 years
respectively, reflecting a 5 year gender gap. Minimum life expectancy has
been taken to be 27.5 years for females and 22.5 years for males, giving the
same range of variation (60 years) for both sexes.
In the disaggregation of the HDI by gender in the UNDP’s report, female and
male achievements in life expectancy, X f and X m , have been assessed
through:
L f − 27.5 L f − 27.5
Xf = = (2.16)
87.5 − 27.5 60
Lm − 22.5 Lm − 22.5
Xm = = (2.17)
85.5 − 25.5 60
where Lf and Lm are the actual female and male life expectancies.
36
Role of Health in
The simple arithmetic mean (AM) X of Xf and Xm, assuming equal Human Development
population share of female and male:
Xf Xm 1 L f 27.5 Lm 22.5 1 1
X . . Lf Lm 50
2 2 60 60 2 60
1 (Lf Lm ) 50
(2.18)
60 2 2
1 L 25
L 25
60 60
L f + Lm
where, L =
2
Thus, the approach to adjusting for gender inequality for life expectancy must
first involve a rescaling to take note of the potentially greater longevity of
women. Such adjustments are a part of the methodology already under use
by UNDP in estimating GDI. Therefore, instead of taking simple AM of X f
and X m , we take (1 – ε ) average (for ε > 0). As before, we form the average
X EDEA , for ε ≠ 1 as:
1− ε
X EDEA = 0.5 * X 1f − ε + 0.5 * X m1− ε (2.19)
Using Equations (2.15) and (2.18) and inserting the adjusted values of X f
and X m , and replacing L for life expectancy, we get:
1−ε 1−ε 1−ε
 LEDEA − 25   L f − 27.5   L − 22.5 
  = 0 .5 *   + 0 .5 *  m  (2.20)
 60   60   60 
when 0, LEDEA L , if 0, LEDEA L . Thus, LEDEA is the gender adjusted

Life Expectancy.
UNDP (1995) has suggested the value of ε = 2, which is assumed to be

moderate inequality aversion parameter in preference to equality.
2.3.2 Empirical Exercise

A numerical exercise will help us to understand the problem of ‘equally
distributed equivalent achievement’ in respect of health variable viz. LE. In
order to simplify the problem, let us consider two countries, A and B. The
life expectancy of the two countries, for male and female, is given below.
Country Female Life Male Life Expectancy

Expectancy (LEf) (LEm)
A 72 70
B 72 74
37
Introduction
From Equation ( 2.20), we can write:
1−ε 1 / 1− ε
 L EDEA − 25    LE m − 22.5  
1−ε
 LE f − 27.5 
 60  = 0.5 *  60
 + 0.5 * 
 60
 
       
LEDEA stands for equally distributed equivalent achievement representing

gender adjusted life expectancy at birth. Now, we insert the values of LEf and
LEm and setting inequality aversion parameter, ε=2 which are assumed to be
moderate as suggested by UNDP (1995) for country A:
1 / 1− 2
 LEDEA − 25    70 − 22.5  
1− 2 1− 2
 72 − 27.5 
 60  = 0.5 *  60 
 + 0.5 * 
60  
 
    
L
Or,  EDEA
60
− 25 
 [
= 0.5 * (0.7416) + 0.5 * (0.7916 )
−1 −1
]−1
= 0.7657
 
⇒ LEDEA = 60 * 0.7657 + 25 = 70.94
In the same way, we can estimate the EDEA of life expectancy for country B
as:
1 / 1− 2
 LEDEA − 25    74 − 22.5  
1− 2 1− 2
 72 − 27.5 
 =
  0.5 *   + 0.5 *   
 60    60   60  
⇒ LEDEA = 0.7957 * 60 + 25 = 72.74
Gender adjusted life expectancy (LEDEA) is socially desirable. It makes some

optimum trade-off between overall life expectancy and gender differential in
life expectancy.
In the context of focusing on health for optimum human resource

development, ‘reproductive and child health’ (RCH) is kept as the broader
goal. RCH has a multidimensional sphere which includes pregnancy, child
birth and post partum care, maternal and infant nutrition, breastfeeding,
sexual behaviour, STDs and HIV/AIDS and reproductive rights. Under these
circumstances, there is an increasing thinking in the scientific community on
the need to stress on maternal health in essence of their reproductive health
problems. India, at the aggregate level is expected to enjoy the benefit of
demographic dividend roughly after 2025 but only the numbers of working
age cohort cannot guarantee to generate sufficient income if the health status
of the future working population remains poor. Thus, in order to get the real
benefit of demographic dividend in near future, we must know about the
present health status of the mothers and children so that appropriate measures
can be undertaken to improve RCH.
38
Role of Health in
Check Your Progress 2 [answer within the space given in about 50-100 Human Development
words]
1) Define gender adjusted heath equality.

.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) Define Equally Distributed Equivalent Achievement (EDEA) in respect
of life expectancy.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) Why re-scaling of LE of both male and female is needed to estimate
EDEA of LE?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
4) Assume that female and male life expectancy is 63 and 62 respectively
of a country, A. The maximum life expectancy for females and males
are 87.5 and 82.5 years respectively, reflecting a 5 year gender gap. The
Minimum life expectancy has been taken to be 27.5 years for females
and 22.5 years for males, giving the same range of variation (60 years)
for both sexes. Find gender adjusted life expectancy (viz. EDEA of LE)
of the country A.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2.4 HEALTH INEQUALITY AND SOCIO-

ECONOMIC STATUS
Health and health seeking behaviour of the individuals depends on socio-
economic status. The term socio-economic status includes: income,
occupation, consumption pattern, education, caste, culture, life style, religion,
living conditions, work place environment, residence in rural or urban, etc.
39
Introduction
Age of an individual also affects health as children and old-age people are
more vulnerable with their probability of death being higher than the youth.
Thus, a large number of predictors affect the health of an individual. Health
inequality varies between different socio-ethnic and cultural groups. Health
inequality also directly varies with the educational status of individuals.
Geo-climatic conditions, occupations and income also affect the inequality of
health of different communities.
2.4.1 Concentration Curve and Concentration Index (CI)

Health inequality is much more serious than income inequality. Income
inequality can be reduced by imposing tax or by other measures but health
inequality is structural in nature i.e. there is no automatic mechanism to
eliminate health inequality. It requires longer time to bring down health
inequality as compared to income inequality as the latter can be reduced even
in short term by transferring income from rich to poor. Health inequality may
create negative externality. For instance, a domestic helper with TB has a
higher chance of affecting others by TB, especially kids, and the old aged.
There are three classes of inequality measures viz. (i) Lorenz class (e.g. Gini
coefficient), (ii) Entropy class (e.g. Mean Log Deviation, Theil Index,
Coefficient of Variation) and Welfare Based Measure (e.g. Atkinson Index).
All these measures, with their own merits and demerits, are used mainly to
estimate income, education and health inequality. But Concentration Curve
(CC) and Concentration Index (CI) are explicitly used to identify socio-
economic inequality i.e. whether it is more pronounced at one point in time
than another or in one country than another. But a concentration curve does
not give a measure of the magnitude of inequality whereas the concentration
index (CI) does it by quantifying the degree of socio-economic inequality
with a particular focus on a health variable. It is used to measure and compare
the degree of socio-economic inequality in respect of: child mortality, child
immunisation, child malnutrition, adult health, health subsidies, healthcare
utilisation, etc. In this section, we will first define the CI and its properties.
We then describe its estimation procedure for grouped and micro-data.
Concentration Curve (CC) plots the cumulative percentage of health variable

against the cumulative percentage of population ranked by socio-economic
status. For instance, in Fig. 2.1, horizontally we have measured cumulative
percentage of population ranked by income and vertically we have measured
the cumulative percentage of ill health. The figure depicts that ill health (bad
health) is disproportionately higher among the poor people since the CC lies
above the line of equality. In other words, it plots shares of the health
variable against the variable for living standards. The CI is defined as twice
the area between the CC and the line of equality (i.e. the 45-degree line).
Thus, when there is no socio-economic inequality, the CI is zero. The
convention is to assign a negative value to CI when the curve lies above the
line of equality to indicate disproportionate concentration of ill-health among
40 the poor, and a positive value when it lies below the line of equality. In
Role of Health in
particular, if the health variable is a ‘bad’ like ill health [e.g. infant mortality Human Development
rate (IMR), malnutrition, anemia], a negative value of CI means ill-health is
higher among the poor.
Fig. 2.1: Concentration Curve
Mathematical form of CI: If the health variable is bad and the corresponding
cumulative proportion of persons ranked by income) is continuous:
1
CI = 1 − 2 ∫ Lh ( p)dp (2.21)
0
1
where, ∫L
0
h ( p)dp stands for the area between CC and line of equality.
For a discrete variable of living standards, it is:

2 n
1
CI =
Nµ
∑h r
i =1
i i −1−
N
(2.22)
i
where hi is the health sector variable, μ is its mean and ri = is the
N
fractional rank of individual i in the living standards distribution with i = 1
for the poorest and i = N for the richest. For computational purposes, a more
convenient formula for CI, defined in terms of the covariance between the
health variable and the fractional rank in the living standards distribution, is
given as:
2
CI = Cov(h, r ) (2.23)
µ
Note that if we expand (2.23), we get (2.22). Hence, there is no difference

between Equations (2.22) and (2.23).
In case of grouped data, the CI is estimated by using the formula:

CI = (P1 L2 − P2 L1 ) + (P2 L3 − P3 L2 ) + .....(PT −1 LT − PT LT −1 ) (2.24)
41
Introduction
where PT is the cumulative proportion of the sample ranked by economic
status in group t (t =1,2,3…T ), and Lt is the corresponding concentration
curve ordinate.
Properties of Concentration Index (CI): The properties of the CI depends

on the measurement characteristics of the variable of interest. It is an
appropriate measure of socio-economic-related healthcare inequality when
healthcare is measured on a ratio scale with non-negative values. The main
properties of CI are:
a) CI is invariant to multiplication of the health sector variable of interest

by any scalar;
b) CI is not invariant to any linear transformation of the variable of interest.
Even adding a constant to the variable will change the value of the
concentration index;
c) measurement of health inequality often relies on self-reported indicators
of health. A concentration index cannot be computed directly from such
categorical data, although the ordinal data can be transformed into some
cardinal measure and a concentration index can be computed; and
d) unlike the Gini Coefficient, the CI lies between –1 and +1.
2.4.2 Empirical Illustration of CI

Exercise 1: Hypothetically, the SAHS and income of 10 individuals are
recorded as in Table 2.1. Calculate the CI for this individual sample data.
Table 2.1: SAHS Data by Income
Individuals 1 2 3 4 5 6 7 8 9 10
SAHS 19.2 13.6 18.1 13.9 14.5 13.5 39.3 30.3 25.1 38.7
Income(’00) 574 609 1470 1885 2320 2529 3431 3654 4413 4529
The income of the individuals are given in ascending order, therefore, we

need not arrange these. If income is given in a haphazard order, we have to
re-arrange data first in ascending order and proceed. Necessary calculations
towards estimation of CI are shown in Table 2.3.
Table 2.2: Computations for Estimation of CI Using Data in Table 2.1
Income SAHS Income Fractional hiri

(’00) (hi) Rank Income (ri)
574 19.2 1 0.1 1.92
609 13.6 2 0.2 2.72
1470 18.1 3 0.3 5.43
42
Role of Health in
1885 13.9 4 0.4 5.56 Human Development
2320 14.5 5 0.5 7.25
2529 13.5 6 0.6 8.1
3431 39.3 7 0.7 27.51
3654 30.3 8 0.8 24.24
4413 25.1 9 0.9 22.59
4529 38.7 10 1 38.7
∑226.2 ∑144.02
Inserting the computed values in Equation (2.22) we get:
2 n
1 2 1
CI =
Nµ
∑h r
i =1
i i −1−
N
=
10 * 22.62
* 144.02 − 1 −
10
= 0.1733
This is positive which means that good health (SAHS) is higher among the
richer and the CC will lie below the line of equality.
Exercise 2: Estimate CI for grouped data as given in Table 2.3.
Table 2.3: Estimation of CI for Grouped Data
WG NB RPB CPB U5MR ND RP CPD CI

(PT) D (LT)
Poorest 29939 23 23 154.7 4632 30 30 -0.0007
nd
2 28776 22 45 152.9 4400 29 59 -0.0267
Middle 26528 20 66 119.5 3170 21 79 -0.0592
th
4 24689 19 85 86.9 2145 14 93 -0.0827
Richest 19739 15 100 54.3 1072 7 100 0.0000
Total/ 12967 118.8 15419 -0.1715
Mean 1
Note: WG=Wealth Group, NB=Number of Births, RPB= Relative % of Births, CPB= Cumulative
Percentage of Births, U5MR=Under Five Mortality Rate Per Thousand, ND= No. of Deaths, RPD=
Relative Percentage of Deaths, CPD= Cumulative Percentage of Deaths, CI=Concentration Index.
Source: World Bank.
In case of group data, the CI is estimated using formula 2.24. Using Equation
(2.24), we get:
CI= (0.23 * 0.59 – 0.45 * 0.30) + (0.45 * 0.79 – 0.66 * 0.59) +
(0.66 * 0.93 – 0.85 * 0.79) + (0.85 * 1 – 1 * 0.93)
= (–0.0007) + (–0.033) + (–0.0578) + (–0.08) = – 0.1715
In Equation 2.29, PT is the cumulative proportion of the sample ranked by

economic status in group t (t =1,2,3…T), and Lt is the corresponding
concentration curve ordinate (measured in proportion).
43
Introduction
words]
1) What is meant by socio-economic status (SES)? How is health inequality

related to SES?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) Define Concentration Curve (CC). Under what circumstances CC will lie
above and below the Egalitarian line? Can CC coincide with the line of
equality?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) What is Concentration Index (CI)? What does it capture?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
4) Give the economic meaning of CI if it becomes negative, zero and
positive.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
5) State the properties of CI?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
44
Role of Health in
6) Find the CI from the following data Human Development
Individuals 1 2 3 4 5 6 7 8 9 10
SAHS 21.3 13.6 18.1 14.9 12.5 13.5 26 30 25 38
Income(’00) 500 450 525 1800 1300 1250 900 1400 1150 4500
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
7) Find the wealth based health inequality using group CI.
Cumulative
Wealth % of Cumulative % of (%)of
Group Births Births % of Births U5MR Mortality Mortality
lowest 8331 25.16 25.16 837.27 34.27 34.27
second 7432 22.44 47.60 665.91 27.26 61.53
middle 6518 19.68 67.28 468.65 19.18 80.71
forth 6032 18.22 85.50 308.84 12.64 93.36
highest 4802 14.50 100.00 162.31 6.64 100.00
Total/Mean 33115 100.00 2442.9 100.00
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2.5 LET US SUM UP

Measuring the health status of an individual is more of a subjective
phenomenon. To make it objective, a method like SAHS is used. There is a
close linkage between health, healthcare spending and income. The HDI,
2010 is a composite index which takes into account the education and the
health attainment for which the ‘mean years of schooling’ and ‘life
expectancy at birth’ are respectively used. There is a two-way causality
between health and poverty. Whereas HDI is gender insensitive, GDI is
adjusted for gender inequality. GDI, adjusted for health inequality, is
nowadays used by UNDP. These concepts are first explained and then
illustrated for empirical computations. Further, to accommodate for varying
levels of socio-economic attainment, two measures of health inequality,
namely the concentration curve and concentration index are also discussed in
the unit.
45
Introduction
2.6 KEY WORDS
SAHS : Health status is first ordinally recorded for certain

health related functions like walking, breathing,
digestion, hearing, chronic health disorder etc. An
individual can the self-assess to obtain a pre-
specified score as a cardinal number for each of
specific health related functions. The score or
index so obtained by the individual is known as
self assessed or self reported health status (SAHS).
Human : Human development is a process of enlarging

Development people’s choices – the three essential choices
identified as: a long and healthy life, with
knowledge or skill acquired by ‘years of
schooling’ and with ability to access resources
needed for maintaining a decent standard of living.
In Human Development, human beings are both
the means and the ends in the development
process.
Equally : An optimum trade-off between higher achievement

Distributed and gender equality is achieved by an Equally
Equivalent Distributed Equivalent Achievement variable,
Achievement XEDEA for a positive inequality aversion parameter
(EDEA) ε, ε > 0.
Concentration : Concentration Curve (CC) plots the cumulative

Curve percentage of health variable against the
cumulative percentage of population ranked by
socio-economic status.
Concentration : The concentration index (CI) is directly related to

Index the concentration curve, and quantifies the degree
of socio-economic related inequality in a health
variable.
2.7 SOME USEFUL BOOKS AND REFERENCES

1) Grossman, M (1972). ‘On the Concept of Health Capital and the
Demand for Health’, Journal of Political Economy, 80 : 223-255.
2) Haldar, S.K., (2008). ‘Effect of Health-Human Capital Expenditure on

Economic Growth in India: A State-Level Analysis’, Asia-Pacific Social
Science Review, 8 (2), 79-97.
3) Hurd, Michael and Arie Kapteyn (2003). ‘Health, Wealth and the Role of
46 Institutions’, Journal of Human Resources, 38(2), 386-415.
Role of Health in
4) United Nations Development Programme, (1990). Human Development Human Development
Report, Oxford University Press, New York.
5) United Nations Development Programme, (2010). Human Development

Report, Oxford University Press, New York.
6) Wagstaff, A., E. van Doorslaer, and N. Watanabe. (2003). ‘On

Decomposing the Causes of Health Sector Inequalities, with an
Application to Malnutrition Inequalities in Vietnam’, Journal of
Econometrics 112(1): 219–27.
7) World Economic Forum. (2016). ‘The Global Gender Gap Report’,

World Economic Forum, Geneva.
2.8 ANSWERS/HINTS TO CHECK YOUR

PROGRESS EXERCISES
1) For a country, HDI has come to replace the earlier used PC NI.
2) SAHS is a measure of one’s own assessment of health related to pre-

recorded ‘conditions of health’ arrived at for a group of individuals with
similar backgrounds. Though it makes the task of assessment of health
easier, it suffers from the influence of cultural, social, economic,
personality and general outlook factors.
3) Human development is taken to encompass three types of choices, each

in the areas of health, education and overall ability to access other
resources and opportunities (Sub-section 2.2.1).
4) Health is factored-into HDI through the proxy ‘life expectancy’.
5) Follow the same steps indicated in the ‘illustration’ in the Sub-section

2.2.1.
6) Through malnourishment, mortality and catastrophic health expenditure.
7) Low income, high healthcare cost, transaction/transport cost, inability to

take preventive measures, etc.
1) GAHE is defined as ‘(l – ε) average’ where ε represents inequality

aversion parameter with ε ≥ 0 being considered to reflect a preference for
equality (Sub-section 2.3.1).
2) EDEA is defined as the level of achievement that, if attained equally by

women and men, would be judged to be exactly as valuable socially as
the actually observed achievements (Sub-section 2.3.1). The optimum
trade-off between higher achievement and gender equality is achieved
through XEDEA for ε > 0. 47
Introduction
3) This is because potential life expectancy of female is higher than that of
male (Sub-section 2.3.1).
4) Follow the steps shown in the illustration in Sub-section 2.3.2.
1) The term socio-economic status includes: income, occupation,

consumption pattern, education, caste, culture, life style, religion, living
conditions, work place environment, residence in rural or urban, etc.
2) Concentration Curve (CC) plots the cumulative percentage of health

variable against the cumulative percentage of population ranked by
socio-economic status (Sub-section 2.4.1).
3) The CI is defined as twice the area between the CC and the line of
equality (i.e. the 45-degree line). Concentration index (CI) quantifies the
degree of socio-economic inequality with a particular focus on a health
variable.
4) When there is no socioeconomic inequality, the CI is zero. A negative

value of CI means ill-health (Sub-section 2.4.1).
5) Invariant to multiplication by scalar, non invariant to any linear

transformation including addition of a constant, etc. (Sub-section 2.4.1).
6) Follow the steps in exercise 1 of Sub-section 2.4.2.
7) Follow the steps in exercise 2 of Sub-section 2.4.2.
48

Block 1

Uploaded by

Copyright:

Available Formats

Block 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Block 1

Uploaded by

Copyright:

Available Formats

BECE-141

ECONOMICS OF HEALTH AND

School of Social Sciences

COURSE PREPARATION TEAM

Block 5 Economics of Education

PRINT PRODUCTION Secretarial Assistance/Graphics

Block 2 deals with the theme of ‘Foundations of Health Economics’. The

Block 4 is specifically on ‘Health Sector in India’. It has two units: Unit 8

Block 5 is on Economics of Education. It has two units. Unit 10 is on

1.3 Health and Economic Growth

1.4 Healthcare Market

1.5 Let Us Sum Up

• define the scope of health economics;

Why do people desire to remain healthy? From an economic perspective,

Health Economics is an applied field of study which allows the systematic

Healthcare is classified as a ‘merit good’ because its consumption provides

1.2.1 Distinction between Physical and Human Capital

Physical capital is tangible but human capital is intangible. Physical capital

1.2.2 Health and Human Capital

1.2.3 Education and Human Capital

1.2.4 Complementary Effect of Health and Education to

1) How is health defined from a ‘medical science’ perspective? In what way

1.3 HEALTH AND ECONOMIC GROWTH

1.3.1 Returns to Investment in Human Capital

where Y is aggregate output, K is physical capital, H is human capital and L is

Dividing the above equation throughout by Y and subtracting

Since investment in human capital basically comprises of expenditure on

Developing countries generally experience a higher proportion of child

1) Define the concept of human capital formation.

1.4 HEALTHCARE MARKET

1.4.1 Features of Healthcare Market

a) Healthcare is a heterogeneous product or service as the patient can

c) ‘Market price’ is lacking in feedback to reflect the actual value of the

d) Healthcare providers (doctors or suppliers) know more about illness and

e) Individuals in poor health have a greater incentive to purchase health

In addition to the above, healthcare services possesses certain other peculiar

(i) Healthcare is intangible i.e. a medical service is incapable of being

1.4.2 Market Failure and Information Asymmetry

Information Asymmetry: Doctors (suppliers) being more aware about

Individuals in poor health have a greater incentive to purchase health

A public good is one that is non-excludable and non-rivalrous, and hence, a

1) Under what circumstances a market is efficient?

Analysis of the role of health and educational services in endogenous growth

1.6 KEY WORDS

Moral Hazard : In health insurance market, individuals covered by

Adverse : Individuals in poor health have a greater incentive

Merit Good : When the consumption of a good by some,

Co-Payment : A ‘co-payment’ is a term associated with health

Deductible : A deductible is the amount that a policyholder

1) Becker, G. S. (2007). ‘Health as Human Capital: Synthesis and

1.8 ANSWERS/HINTS TO CHECK YOUR

2.3 Health and Gender Development

2.4 Health Inequality and Socio-Economic Status

2.5 Let Us Sum Up

2.2 HEALTH AND HUMAN DEVELOPMENT

At macro level, health status of a community or cohort can be assessed based

Health status at the macro level (viz. a country) can be estimated by

2.2.1 Human Development Index

• a long and healthy life captured by Life expectancy at birth (LE);