Health Economics (Part 2): Why Conduct Health Economic Evaluations?

Most existing health systems can reemerge after recalibration with their integral values intact and deliver in answer to its objectives.

Health Economics Today’s first article, titled What Is Value In Health Care?, explained the need for maximum health gains. Value in health care indicates that “health is a unit in itself and a precondition for economic prosperity”.  

Part 2 follows up and poses the question, “Why conduct health economic evaluations”? The answer is, “Health economic evaluations are conducted because they inform decision-makers.”

This way, decision-makers have relevant information to make the “right” choice; at the best value, depending on the desired outcome. In this case and article, it is “to maximise health gains”.

Bearing in mind, everything the world possesses is contained in ‘scarcity and choice’ because everything is finite. So, every choice comes with an opportunity cost.

Therefore, often the decision is based on the best possible combination to maximise benefits from consumption. And the realisation of whether or not “the intervention is cost-effective”? 

To clarify this, in the context of health care: Again, the main objective is to – maximise health gains. So, if an inexpensive intervention was introduced at a low cost but without health gains, then it was not cost-effective.

On the other hand, if a reasonably costly intervention was introduced; and health gains had increased, the latter intervention is cost-effective because it optimised population health. Though not cheap, it produced the desired outcome: Therefore, the reasonably costly intervention is cost-effective, or can be said to have come from a strategy that maximises a given objective at the lowest cost.

In theory, the question has a simple answer, but health economic evaluations and their application have other variables: comparatives, controls, interventions, outcomes, and uncertainties.

As we try to understand health economic evaluations and how they provide answers, the evaluations’ importance becomes evident; especially in health care.


The right to health with dignity is inclusive. Access to health and care facilities, providers, goods and services is a universal right that should be awarded without discrimination or prejudice.

In the nineteenth century, solidarity within a community meant the realisation of social rights; health care was one of these rights, which has evolved into an aspect of modern society that should be guarded closely. However, the last two years have seen a shake-up of world health care systems.

Since the emergence of Covid-19, life expectancy has been shortened; 90 per cent of countries report one or more disruptions to essential health services. All signs lead to the need for investment in universal health coverage (SDGS, 2021).

Malaysia is also affected. More than ever, health economic evaluations can inform challenging decision-making for Malaysia in the current situation. This article has been divided into five small sections. Each section touches on an aspect of health economic evaluation and how its results can contribute to a potentially significant decision:

(i)  Malaysian health care: Recalibration of the health system is vital.

(ii) Global summary and “overuse and misuse”: Quality and cost of care.

(iii) Investments in health care and savings.

(iv) Health care investment, health care savings, efficiency in health care, efficacy and effectiveness.

              (a) Health care investment: Health gains need to be maximised.

              (b) Health care savings: Not spend less, but rather to spend wisely.

              (c) Neither efficacy nor effectiveness is sufficient to justify reimbursement: Demonstrate                                                  efficiency.

              (d) Efficacy: An intervention that does more good than harm.

              (e) Effectiveness: The ability of an intervention.

(v) Three core principles of good health policy.

Malaysian Health Care: Recalibration Of The Health System Is Vital

Healthy People, Healthy Economy 

A healthy population is the foundation of a healthy economy. Ensuring healthy lives and promoting well-being is vital to building prosperous societies by increasing the productivity of labour.

Many countries have developed health care systems that are created, in part, in solidarity with fellow citizens as mutual support for one another. Although today in Malaysia, health care is funded by income-related social contributions and taxation through the central government.

Tax Financed In Malaysia, But Still The Same Fees Since 1977

In Malaysia, the health care system is tax-financed. In 2020, public health was financed by national expenditure at 54.6 per cent; and an extra 45.4 per cent of financial support came from the private sector.

However, fees collected by the Ministry of Health (MOH) only constitute about two per cent of the Ministry of Health (MOH) budget; the rest, 98 per cent of health services, is subsidised by MOH. 

Malaysian public hospitals face tremendous pressure from supporting 46 per cent of the nation (NHMS 2019), who rely entirely on existing tax-funded health care services. Subsidised health care relies heavily on public health care providers.

Current outpatient and specialist fees at MOH are still at RM1 and RM5, respectively, and has not changed for nearly forty years; and may require an evaluation for efficiency.

The economic circumstances and political stages have changed, so the operational content of health care should also change. 

A reconfiguring of content and services is top on the “need” list: Recalibration of the health system is vital because expenditure needs to be justified. And the high cost associated with health care has to be managed in order to restore sustainability to an imploding health care system. A health economic evaluation would provide data and information to assist government decisions. Perhaps, more so today, in the Covid 19 situation, which has set all governments back, including Malaysia’s. Financial stringency is a reality and has pushed decision-makers in the medical sector to “set the house in order”.

Global Summary And “Overuse And Misuse”: Quality And Cost Of Care

 Worldwide Occurrence

Globally, the financial viability of health care systems is increasingly strained under the weight of:

a) Ageing populations

b) Non-stop introduction of new health technologies (or expensive advances in medical science); and,

c) Increasing expectations from patients and caregivers concerning the quality and cost of health care.

Much of these issues are already in existence before the pandemic. In addition to these three points, most hospitals face further constraints from ongoing financial instability as the unexpected ravages of the Covid-19 pandemic continue to fester. Malaysia is not spared from these problems.

It is in these times that “overuse” and “misuse”** are highly noticeable within the health care system: Where a) overuse is “the use of health care resources and procedures in the absence of evidence that the service could help the patients subjected to them” (Bialit Health Purchasing, 2014); and b) misuse, means “failure to execute clinical care plans and procedures properly” (Bialit Health Purchasing, 2014)). Overuse and misuse affect the quality and cost of care for the country.

Investments In Health Care And Savings

The National Health Investment To Maximise Health Gains

The government needs to select suitable investments with ‘population health efficiency’ in mind. Suitable investments must yield maximum health gains for a healthy Malaysian society, thus guaranteeing a healthy economy that continues with increased investments that deliver, without wasting money.

The health care sector is a productive one — more healthy people in a country point toward a robust economy. “Maximum health gains” is when sickness is prevented, then healing the person from illness when it occurs.

Later, delivering health care to the person and giving them a quality of life when there is no cure. Investments in health must be cost-effective.

To reiterate, the critical point: The country does not have infinite resources to devote to health care. Therefore, avoid poor investments with little or no health return.

Health Care Investment, Health Care Savings, Efficiency In Health Care, Efficacy And Effectiveness

Health Care investment

Public capital investments must see the best and most significant health return for every RM1 spent to maximise health gains on a national level. In addition, health gains need to be maximised productively and efficiently.

Yet, health care investments are not typical financial entries that can be justified traditionally.

For example, many countries routinely screen women between 50 and 70 years old for breast cancer. Similarly, new generation cholesterol-lowering drugs are only reserved and prescribed for patients with a high risk of heart disease.

This is because screening women of all ages for breast cancer and treating every single patient with high cholesterol with new medicines is not an efficient use of resources. Investments cannot be justified when costs are too high in relation to the benefits gained.

Health Care Savings

On the reverse, efficiency in health care does not mean generating savings. Instead, efficient investment in the context of maximum health gain means spending more money on health care to ensure good value, that is to say, health gains. Additional expenditure is fully justified if it results in significant health gains.

Making choices in the presence of scarcity involves looking at costs and health effects. Unfortunately, most people (including policy-makers), tend to forget this, and look exclusively at the cost of an investment.

However, when cost determines the investment, satisfaction in investment has to show a return on top of the capital amount: This is not the case with health care.

The objective is not to ‘spend less, but rather ‘spend wisely’. The European Commission’s 2020-2024 Strategic Plan seeks to: “Provide expertise on health systems and support actions that help prevent and minimise the impact of ill-health on individuals and economies”.

Its rationale is to improve the quality and effectiveness of public expenditure while contributing to national prosperity and social cohesion. It also encourages and supports innovation; and the uptake of modern technologies for better care delivery and cost-effectiveness. 

Neither Efficacy Nor Effectiveness Is Sufficient To Justify Reimbursement: Demonstrate Efficiency

Health economics aims for greater efficiency in health care: Therefore, investments in health must be a cost-effective investment. Especially seeing as efficiency is recognised as “the third step of evidence”, whenever an intervention (a public health campaign, a new medicine, a surgery and so on), is evaluated.

In effect: efficiency measures whether health care resources are being used to get the best value for money. 

Neither efficacy nor effectiveness is sufficient to justify reimbursement by the health system. Therefore, it is crucial to demonstrate efficiency: the third step.

An intervention can only be regarded as efficient if there is general agreement that money spent on the intervention is money spent wisely. The critical parameter lies in the relationship of the intervention cost and the size of the health gains, known as the cost-effectiveness ratio. 


Efficacy is the extent to which an intervention does more good than harm under ideal circumstances. As an illustration: A new drug for a disease is compared with a placebo (or control), over 12 weeks.

In that time, it is determined that the drug works well against that disease. Therefore, the drug is said to be functioning well. When that happens, the drug establishes efficacy.


Effectiveness is the ability of an intervention to have a meaningful effect on patients in everyday clinical conditions. In actuality, most studies are positioned somewhere along that spectrum between efficacy and effectiveness. In the real world, people have different sets of co-morbidities.

They are not always adherent to treatment and are followed up over a more extended period. We might see different endings for some patients in the real world.

For example, suppose the new intervention has reduced problems and improved the patient’s quality of life compared with the former in the real world: The new intervention is effective.

In Health Economics Today, (Part One), What Is Value In Health Care?, it is noted that there is no clear answer if an intervention has monetary value. But cost-effectiveness analysis is a way to examine costs and health outcomes of one or more interventions. It compares an intervention to another intervention (or the status quo), by estimating how much it costs to gain a unit of a health outcome, like a life-year gained or a death prevented.

So, what is an acceptable cost-effectiveness ratio? Few cases have a narrative as clear as a case that provides costly treatment; and yields almost no health gains. Or has there been a highly beneficial treatment that costs next to nothing (highly efficient)?

Three Core Principles Of Good Health Policy

 First of all, maximising health gains is the basis of good health policy. Yet, a sound health system is not limited to evaluating its efficiency. It actively encourages efficiency. Hence, responsible health policy stands on three defining pillars: quality, solidarity, and sustainability. 

As a society, Malaysians agree that collective resources, from taxes and other contributions, are invested in high-quality health and health care activities to maximise health gains, given scientific knowledge advances. 

The second pillar, is solidarity. Solidarity in health care means that the health care system is funded by all citizens (through income taxation). Health care should become an accessible social service, and everyone should receive the same type and quality of treatment, irrespective of social status, gender and income.

Studies have shown a society that can close the health gap (the difference in health between people with high and low incomes), reduces overall mortality and has significant benefits for the economies.

Unfortunately, Covid-19 has further deepened existing inequalities, hardest-hitting the poorest and most vulnerable communities. It has spotlighted health, economic disparities and fragile social safety nets that leave vulnerable communities to bear the brunt of the crisis. 

Lastly, but not least, sustainability: Keeping the Malaysian health care system accessible and affordable to all in the long term. Health expenditure has to be managed so that it does not keep rising at an unsustainable rate if we want to continue offering the same high quality of care to everyone in the future.

Health economic evaluations play a crucial role in helping to achieve effective, efficient and accessible health care for all. Essentially, government can make informed decisions with the proper evaluations.

Health economic evaluations completed following standard professional guidelines that come with plans; uncertainty analyses; validated estimates for budget impact at a population level, are highly beneficial to policy-makers and care providers. In addition, evaluations offer insights into investments for cost-effective interventions for more sustainable health systems and economies.

However, the health sector occasionally makes a mistake by only looking at cost; thereby, ignoring the critical balance between cost and effect. Without this delicate equilibrium, the primary purpose of having a health policy that maximises health gains is forgotten.

The necessity of having health economic evaluations completed following standard professional guidelines is highly beneficial to policy-makers and care providers for its potential to deliver a cohesive all-rounded answer — limited only by its parameters.  

So, recalibrations of health systems are very real and much needed. Most existing systems can reemerge with their integral values intact and deliver in answer to its objectives, and policymakers can see a more robust version with a great capacity to accommodate change as it learns to harness innovations to meet future challenges.

*Intervention: In medicine, a treatment, procedure, or other action taken to prevent or treat disease, or improve health in other ways.

**The terms “overuse” and “misuse” in context of cost-effectiveness are technical terms in pharmacy and have been defined for easy reading for the purposes of this article.

June W.Y. Choon, PhD, writes for Health Economics Today. Her next article will illustrate some setbacks and development of health economic evaluation in health policy.

June Choon was a former academic and health economics researcher from Monash University. She is now the Principal Science Officer at Health Economics and Outcomes Research (hEOR) – an HEOR unit of the Galen Centre for Health and Social Policy.

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