2004 Annual Public Lecture

Why Economics Is Good For Your Health

Prices and incentives matter for our health and for and for health service reform, argued Professor Carol Propper, delivering the 2004 RES Public Lecture on Friday 3 December. She showed how economics is an essential tool for such pressing questions as why we are getting fatter, why nurses fiddle the figures in A and E departments, and why hospitals may collude.

Economists, in the field of health care, are often stereotyped as being interested only in the costs of certain activities. But economic analysis is far broader than simply counting the costs of activities in hospitals or that of new drug development.

The idea that individuals make trade-offs, based on the benefits and the full prices of competing activities is central to understanding whether restricting fast food outlets will curb the growth in obesity, whether bans on smoking in public places will stop people starting smoking, and whether the new market reforms in health care in the UK will deliver better health outcomes. For example:

  • Technological change is fattening: not only has agricultural innovation lowered the price of food; but, at the same time, technology has made work far less strenuous so we must now pay for, rather than be paid to, exercise. The combination of lower costs of consuming calories and higher costs of expending calories is behind the dramatic rise in obesity in the UK.
  • Cigarette taxes and bans: understanding people's responses to price - in terms of starting, continuing and quitting smoking - has been central to the debate about the usefulness of using taxes on tobacco as a way to discourage smoking. Recent restrictions on smoking in public buildings impose an extra cost on cigarette consumers - the cost of leaving their offices to stand on the street, raising the time and discomfort associated with smoking. Because these bans affect all people, they provide an opportunity for economists to see how smoking behaviour is affected by an increase in its time cost.
  • Health service reform: recent reforms have emphasised the value of incentives in producing better outcomes - for example, financial incentives for doctors, performance monitoring for a variety of health care providers and competition among hospitals. Economic research reveals that, in most cases, health care suppliers have responded to incentives. But these responses have not always led to the outcomes desired by the government.
  • Incentives for family doctors: the internal market reforms of the 1990s created GP fundholders, family doctors who were given budgets to buy care for their practice populations. Carol Propper's own research finds that GP fundholders increased their referrals - by about 10% - in the year before becoming a fundholder in order to increase the size of their budget once they became a fundholder. Once they became fundholders, their referral patterns dropped by about 10% and thereafter seemed to revert to their normal levels.
  • Waiting times: Carol Propper's research also finds that the GP fundholder scheme managed to reduce NHS waiting times for hospital admissions - but only where GP fundholders paid hospitals directly for treatment. In other words, fundholders were able to bring about beneficial changes in the way hospitals treated patients only when they had the money to pay for improvements. Without those incentives, hospitals would not respond to the wishes of referring doctors.
  • Competition and quality in health care: other research by Carol Propper examines the relationship between competition and quality of health care for all acute hospitals in the UK from the beginning of the internal market in the NHS in 1991 until 1999. Using an indicator of quality of care - the rate of deaths from emergency admissions for heart attacks - the research finds that competition was associated with higher death rates. In other words, competition was associated with lower quality.

For Further Information: contact Romesh Vaitilingam, RES Media Consultant, on 0117-983-9770 or 07768-661095 (romesh@compuserve.com)

Notes for Editors

The 2004 Royal Economic Society (RES) Public Lecture, 'Why Economics is Good for Your Health' by Professor Carol Propper, was delivered at the Royal Institution at 3.30pm on Friday 3 December.

Carol Propper is Professor of Economics of Public Policy and Director of the Centre for Market and Public Organisation at the University of Bristol. She has written widely on public economics and the economics of health care. Current research projects include the impact of competition and pseudo-competition on quality in health care and education, the analysis of poverty dynamics and the impact of incentives on the performance of public sector employees.

The Royal Economic Society was founded in 1890. Now in its second century, the RES is one of the oldest economic associations in the world. Currently it has over 3,300 individual members, of whom 60 per cent live outside the UK.

The first RES Public Lecture was delivered on 7 December 2001 by John Sutton, Professor of Economics at the London School of Economics (LSE), on 'A World Divided - Globalisation Games'. The second lecture was delivered on 4 December 2002 by Nick Crafts, Professor of Economic History at LSE, on 'Is Economic Growth Good for Us?' The third lecture was delivered on 4 December 2003 by Professor John Vickers, Chairman of the Office of Fair Trading, on 'Competition Economics'.

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