Chapter 2 An Overview of the Normative Economics of the Health Sector * * Helpful comments were received from R. Cookson, A.J. Culyer, J.P. Newhouse, T. Rice, T. Scott and G. Stoddart. I would like to acknowledge financial support of the Ontario Ministry of Health to the Centre for Health Economics and Policy Analysis.

This chapter provides an overview of normative analysis in the health sector in recent decades. It surveys two distinct, but related, literatures. The first is normative analysis of the operation of health care and health care insurance markets, market failure, and the scope for non-market institutional arrangements to improve the efficiency and equity of the financing, funding, organization and delivery of health care. The second is the debate about the most appropriate normative framework within which to carry out normative analysis in the health sector, focusing on the welfarist and extra-welfarist frameworks. This is a debate about assumptions and methods. Although the rival frameworks share the broad conclusion that market failure pervades the health sector, the diagnoses regarding nature of that failure sometimes differ and, more importantly, the prescriptions to improve efficiency and equity often differ. Because it is not always clear what writers mean by “welfare economics” and “extra-welfarism,” I briefly summarize key concepts of efficiency and key assumptions and elements of each framework. The three subsequent sections then analyze the nature of health care as an economic commodity and the implications of these characteristics both for the operation of health care and health care insurance markets and for the methods of normative economic analysis. Section 4 surveys prominent approaches to analyzing equity in health care. Section 5 examines the methods of normative analysis as applied to evaluate individual health care services. Finally, I end with some observations on recent discussions of the role of normative economic analysis in policy making and of health economists as policy advisors.