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close this bookHealth Economics for Developing Countries: A Survival Kit (London School of Hygiene and Tropical Medicine, 1998, 134 p.)
View the document(introduction...)
View the documentPublication Series - Health Policy Unit
View the documentAcknowledgements
View the documentPreface
View the documentChapter 1: Health Economics and its Contribution to Health Planning
View the documentChapter 2: Economic Development and Health
View the documentChapter 3: Financing Economic and Health Development
View the documentChapter 4: Health Care: the State versus the Market
View the documentChapter 5: Demand, Supply and the Price System
View the documentChapter 6: Concepts of Economic Efficiency
View the documentChapter 7: Inputs, Resources and Costs
View the documentChapter 8: Outputs, Health and Health Indicators
View the documentChapter 9: The Techniques of Economic Evaluation
View the documentChapter 10: National Accounts and the Health Sector
View the documentChapter 11: Health Sector Finance and Expenditure
View the documentChapter 12: Sources of Finance for the Health Sector
View the documentChapter 13: Budgetary Procedures: Budgetary Reform and Programme Budgeting
View the documentChapter 14: Approaches to Financial Planning: Resource Allocation Planning and the Financial Master Plan
View the documentSelected Bibliography
View the documentGlossary
View the documentBack Cover


Accounting system. The procedures for recording the money value of transactions - purchases, sales, receipts, payments etc - to show their effect on the financial position of the organisation.

Amortisation. The process of writing off the value of an asset over its working life. It can be calculated as an annuitised capital cost.

Annuitised capital cost. The cost of a capital good translated into an equivalent annual amount in order to make it comparable with operating costs.

Average cost. The cost per unit of output (total costs divided by total number of units of output). Also known as unit cost.

Benefit-cost ratio. Total discounted benefits divided by total discounted costs. The outcome should be greater than 1 for an investment to be potentially worthwhile.

Budget. A formal, written estimate of income and expenditure for a future period, leading to the allocation of funds to budget holders.

Budget holder. The officer responsible for the management of a budget and accountable for the use of budget funds.

Budgetary control. The process of checking actual income and expenditure against a budget so that expenditure can be controlled, progress monitored and remedial action taken if necessary.

Budgeting. The process of drawing up a budget and monitoring and controlling expenditure against the budget.

Capital. The stock of goods which are man-made and used in production (as opposed to consumption). Fixed capital (durable goods such as buildings) is usually distinguished from circulating capital (stocks of raw materials and semi-finished goods which are rapidly used up). In accounting conventions, capital goods are usually taken as those with a life of more than one year. Part of the initial cost of new health programmes will be the purchase of capital goods, which will lead to continuing expenditure in the future to operate buildings, equipment, etc. (see operating costs and recurrent costs). See also human capital.

Capital budget. The budget which is used to purchase capital goods.

Capital cost. The cost of employing capital goods. In an economic sense, it is the rate of return forgone by not using the funds spent on particular capital goods in other ways. In accounting terms, it is the money expenditure required to purchase capital goods.

Capital expenditure. Outlay of money on capital goods.

Capital funds. Sums of money available for purchasing capital goods.

Capitation payment. Payment per person irrespective of the number of items of service provided.

Charge. Price or fee.

Community financing. Ways of raising money that are organised and controlled by communities themselves. Contributions may also be provided in the form of materials and community or individual labour.

Constant prices. Prices of goods and services which have been adjusted to remove the effect of changes in the purchasing power of money (eg. inflation).

Consumer surplus. The excess of the amount a consumer is prepared to pay for a good (rather than go without it) over the amount actually paid.

Consumption. Acquiring goods or services in order to obtain immediate satisfaction (in contrast to investment which permits greater consumption in the future by increasing a country's productive capacity).

Co-payment. Requiring the insured user of services to pay part of the cost directly.

Cost. What has to be given up to achieve something. Either:

(a) the value of opportunities which are forgone in order to achieve something (the economic definition); or

(b) the total money expenditure required to achieve something (the accounting definition).

Cost-benefit analyses. A form of economic evaluation where all the costs mid benefits are expressed in money terms. In principle, this form of analysis enables one to assess whether a particular objective is worth achieving. However, estimation difficulties often reduce cost-benefit analysis to a consideration of those costs and benefits that are easy to express in money terms.

Cost-effectiveness analysis. A form of economic evaluation where the costs are expressed in money terms but some of the effects are expressed in physical units (eg. life years gained, cases detected). It is usually used to compare different ways of achieving the same objective (eg. saving lives) and assumes the objective is worth achieving.

Cost-sharing. Sharing the costs of providing a particular type of health care between the patient and agencies such as the provider of care and the employer of the patient.

Demand. The quantity of goods or services that consumers wish and are able to buy at a given price in a given period.

Depreciation. Decrease in value of a capital good because of passage of time, wear and tear etc. An allowance for depreciation may be included as an operating cost in accounts.

Development budget. The budget for activities which promote a country's development. Many governments have a development budget to finance (often from external sources) activities which will increase the country's productive capacity. Some countries may have a capital rather than a development budget.

Development cost. The cost of setting up new activities (construction, equipping, training, etc.) as opposed to the costs of operating or running them.

Development expenditure. Money outlay on setting up new activities.

Development funds. Money available for new activities such as constructing buildings, setting up training programmes, etc. The majority of development funds tend to be spent on capital rather than recurrent items.

Discounting. The process of calculating the present value of costs and benefits occurring in the future by applying a discount rate. (The procedure is the reverse of calculating the annual increase in a sum invested at a given rate of interest).

Discount rate. The annual rate at which the value of a future cost or benefit is reduced to find its present value. The discount rate expresses society's time preference rate. For example, at a discount rate of r, an event occurring in a years' time has a present value of (1 + r)-n.

Earmarked tax. A tax assigned to a specific purpose (also called hypothecated).

Economics. Economics is concerned with those aspects of human behaviour, and those institutions, which affect the use of scarce resources to produce and distribute goods and services to satisfy human wants.

Economic evaluation. A process whereby the costs of programmes, alternatives or options are compared with their consequences (in terms of improved health or savings in resources). Also known as the cost-benefit approach or economic appraisal, it embraces a family of techniques including cost-effectiveness analysis and cost-benefit analysis.

Efficiency. Relates to output per unit cost of the resources employed. Resources are being used efficiently if a given output is produced at minimum cost, or maximum output is produced at a given cost ('operational' efficiency). Economists also use the term in the wider sense of cost-effectiveness and cost-benefit analysis ('allocative' efficiency).

Elasticity. The degree of responsiveness of one variable to changes in another. If responsiveness is high, it is termed elastic; if low, inelastic. The concept is applied widely, but most commonly to the variables affecting demand and supply (eg. price elasticity, income elasticity).

Eligibility. The right to benefit from a service by virtue of membership of a defined group such as an insurance scheme, community or workplace.

Equity. Fairness or justice.

Equivalent annual cost. The recurring annual sum or annuity, which over the life of the project has a present value equal to a lump sum payment made now.

Expenditure. Outlay of money to purchase goods or services.

Externality. Externalities exist when the level of consumption or production of some good or service by a consumer or firm has a direct effect on the level of welfare of another consumer or firm, as opposed to an indirect effect through the price mechanism. These effects may be desirable or undesirable. An often quoted example in the health field is the protection against disease provided to others when an individual is immunised.

Factors of production. The inputs required for making a commodity. Typically classified as land, labour and capital.

Fee-for-service. Payment of a charge per item of health care received (eg. consultation, drug, diagnostic test).

Finance. The provision of money when and where required. Hay be to purchase capital goods, or recurrent goods and services such as drugs and manpower.

Financing methods. Ways of raising financial (and sometimes other) resources to provide services. Financing methods include fee-for-service, insurance schemes and payroll taxes.

Financing sources. The origin of the financial resources used to provide services. Sources include individuals, commercial and industrial organisations, governments and external donors.

Financing system. The set of activities concerned with the provision of money for health services that can be considered as a connected whole.

Fiscal. To do with public expenditure and with raising government revenue, for instance through taxation.

Fixed costs. Costs which do not vary with the level of output in the time period considered (usually one year).

Foreign exchange. The currency of other countries. It is required by individuals and institutions to buy goods and services from, or make gifts or loans to, people in other countries.

Free market. A market in which the forces of supply and demand are allowed to operate unhampered by government regulation or other interference (see market).

Funds. Sums of money and credit.

Government revenue. The money that government receives (from income tax, customs duties, borrowing, etc).

Gross domestic product (GDP). A measure of the total flow of goods and services produced in a country in a year. Outputs of goods for final consumption and investment and services are valued at market prices and added up. Many socialist countries use instead “material balance” which excludes health care and other services to households.

Gross national product (GNP). GNP equals GDP plus the income received by domestic residents from investment abroad less income earned in the country paid to foreigners abroad.

Health sector. The part of the economy which is involved in activities intended to improve health. The term may be used to mean health services but it is often used synonymously with the term health system, to cover both health services and health-related activities.

Health System. The health system includes health services and all health-related activities. It is composed of a number of levels - the first level (the first point of contact between the system and the people) and intermediate and central levels.

Household expenditure. The total outlay of money by a household (usually over one year). Payments made in kind may be valued in terms of their money equivalent.

Household income. The money and/or goods received by a household over some time period. It is often calculated net of tax and includes salaries and wages, and also goods produced by the household, such as agricultural products, which are consumed within the household or sold.

Human capital. The skills and capabilities stored in an individual and generated by investment in education training and health, and more generally resulting from work experience.

Hypothecated tax. Tax reserved for a particular purpose.

Income. The money and/or goods received by individuals, households, companies or governments over some time period (usually a year).

Income distribution. The way in which total national income is divided among households in the economy.

Incremental cost. The additional cost of one programme, alternative or option over and above another.

Inelastic. See elasticity.

In-kind payment. Payments made not in terms of money but in goods or services.

Inputs. Goods and services used in production, such as capital goods (buildings, equipment), labour, raw materials, etc.

Insurance. An agreement to pay a premium at regular intervals for which the insurer will cover the cost or pay compensation if the event that is insured against occurs (eg. illness, fire, theft). Insurance spreads the risk between all people contributing so that the cost of treating one person's illness, for instance, can be paid for by everyone's contributions.

Investment. Expenditure on capital goods which are then used in production. In a more general sense, it means undertaking any activity which involves a sacrifice (eg. payment of money) followed by a benefit (eg. enjoyment of a good).

Marginal benefit. The change in total benefit in response to a small change in the level of consumption. Marginal private benefit refers to benefits experienced by the individual doing the consuming; marginal social benefit includes also benefits experienced by others in society.

Marginal cost. The change in total cost at a given scale of output when a little more or a little less output is produced. Marginal private cost refers to costs internal to the individual or agency, whereas marginal social cost includes also costs external to the individual/agency (ie. costs to society as a whole).

Market. A market exists when buyers wishing to exchange money for a good or service are in contact with sellers wishing to exchange goods or services for money.

Means test. Making the distribution of a benefit (eg. subsidised health care) available to individuals only after an investigation of their 'means' (ie. income and/or wealth).

Merit good. Goods or services where government believes individuals should not be allowed free choice of whether to consume because of lack of information about their effects (good or bad).

Monopoly. A monopoly exists when a firm or individual produces or provides and sells the entire output of sine commodity or service.

National income. The money value of all goods and services earned in a country over a specified time period. It may be calculated as the sum of either incomes or expenditures of all residents, companies and government bodies. GDP and GNP are related measures.

Operating cost. The cost of operating an enterprise or service, also called recurrent costs. In general, those costs of providing a service that vary with the level of output (eg. drugs) in contrast to those which are fixed over a given time period, usually a year (eg. capital costs). Usually calculated on an annual basis.

Opportunity cost. The benefits to be derived from using resources in their best alternative use. It is therefore a measure of the sacrifice made by using resources in a given programme. When economists use the term 'cost', they mean opportunity cost. This nay not be the same as health care expenditures.

Outputs. The end-result of production, that is what is produced.

Overheads. The costs pertaining to general services (eg. administration) which do not necessarily arise from the operation of a given programme

Payroll tax. A tax levied on employers' wage bills. It is often used to finance social insurance.

Per capita national income. The total national income of a country divided by the total population.

Per diem. The dally rate for reimbursement of hospital expenditures, usually based on the hospital average daily cost.

Present values. The value now of future costs or benefits discounted at a given rate.

Price discrimination. Charging different prices to different consumers, for the same good or service, where the price differences do not reflect differences in cost of supply.

Price index. A price index shows how the prices of a set of goods and services have changed over time. A given physical quantity of items is priced at current prices at regular intervals. The resulting total money value of the items is then expressed as a percentage of their value at some base year.

Private health insurance. Health insurance that is sold by either commercial firms or non profit-making organisations to individuals or groups. Such insurance is voluntary for the individual or group as a whole (though it may be compulsory for members of the group, eg. employees of a firm).

Private sector. That part of the economy of a country which is not directly controlled by the public sector.

Production. The process of producing goods and services which satisfy human wants.

Productivity. The output per unit of input in a given time period, eg. number of visits per physician per day.

Public goods. Commodities or services that (a) can be used, consumed or enjoyed by an increasing number of people without diminishing the amount available to others (b) are available to everyone in the catchment area independent of the size or existence of payment and (c) cannot be withheld from non-payers.

Public sector. That part of the economy of a country that comes within the scope of central government, including local government authorities and public corporations.

Real terms. A variable (such as national income, or health expenditure) is expressed in 'real terms' if its value has been adjusted to remove the effect of changes in price. The resulting value is said to be at a constant price.

Recurrent budget. The budget which can be used to purchase items of a recurrent nature, such as salaries and raw materials, as opposed to once-and-for-all payments for capital goods.

Recurrent costs. Costs that 'recur' ie. the costs of running an enterprise, such as salary and raw materials costs. Also known as operating costs.

Recurrent expenditure. Outlay of money on items that 'recur' year after year (salaries, raw materials, etc.)

Recurrent funds. Money available to spend on items of a recurrent nature.

Resources. The inputs that are used to produce and distribute goods and services. They are conventionally classified into land (including natural resources), labour (people) and capital (goods made to produce other goods). In health programmes they include inputs which are not under the control of the health sector, such as a patient's tine.

Scarcity. The lack of a commodity in relation to the demand for it. Resources are scarce, and thus choices must be made on how to allocate them.

Sector. The economy of a country can be divided into 'sectors'. The broadest classifications are between the 'private' and 'public' sectors, and the economic and social sectors. The latter can be divided into sectors with common activities such as manufacturing and agriculture in the economic sector and education and health in the social sector.

Social benefit. The benefit from an activity to society and not merely to the individual or agency carrying it out.

Social cost. The cost of an activity to society and not merely to the individual or agency carrying out the activity.

Social insurance. An insurance scheme set up and controlled by government or public agencies to provide protection against unemployment, old age, sickness etc. Social insurance is usually compulsory for the whole population or for certain groups and is often financed by a payroll tax. Also called social security.

Supply. The quantity of goods or services coming on the market at a given price in a given time period.

Time cost. The cost individuals incur in being inactive through illness or in travelling to and waiting for health services. Time can be valued in terms of its opportunity cost (ie. value of lost production/leisure).

Unit cost. The total cost of an activity divided by the number of units of output produced. Also known as average cost.

User charge. Requiring the users of a service to pay a fee.

Utility. The satisfaction/pleasure derived from consuming some quantity of a good or service.