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Health economical context

Cost of dementia

by Professor Hannu Valtonen, University of Kuopio (Finland)

Provision and utilisation of health services - the economic questions

Need, supply, demand and utilisation

For each individual, the utilisation of health services seems to be quite unproblematic - we go to doctor when we feel ourselves ill. If the illness turns out be of more severe kind, the doctor sends us to hospital, and finally, when the illness has been cured, we get out of the hospital. The same applies for various social support services (home help for the elderly, community services etc.). However, even as individuals, we may think e.g. that 'is this really so severe that I have to go to see a doctor? Is this worth a visit?' When we look at the whole health and social care system, then the determination of the utilisation is not simple, and it is not based only on the health needs or social support needs. In economics, we study the determination through the concepts need, demand and supply of health services, that together determinate the amount of services used in a given country during any given year.

By demand of social and health services we mean the amount of services people are willing to use with given prices. The 'prices' here refer not only to the user charges, but all the trouble and effort needed (travelling, time etc.) to obtain the services. The supply of services is defined respectively, it is the amount of services the suppliers (social service providers, doctors, health care institutions) would be willing to produce in given circumstances. The determination of the supply of health services varies from country to another, depending on the national policies concerning the organisation of health and social service sector (production; private, public etc; and financing, taxes, insurance, public and private) and the economic potential of the country (the availability of both manpower and monetary resources).

The actual quantity of services is determined by both demand and supply, and both of these forces may have an independent effect on the utilisation of services. For example, if in some region, some new service institutions are built, this new capacity may increase the used amount of services even if the needs of the population were unchanged.

The need for health services seems in every day language quite unproblematic: Health status is a state or condition of an individual, either subjective feeling about health and illness or more objectively e.g., by a doctor determined. The need for health services can also be understood narrowly (the person is diagnosed to suffer from some illness) or widely (in terms of physical and social functional capacity). Quite large proportion of individual health problems can be solved without actual professional health services.

In the case of social services, the definition of the need is more complicated: first, in many cases the need is not an individual phenomenon, but it concerns a family, a group of people, or even a neighbourhood. In a case of an elderly couple, where the husband is suffering from dementia, also the wife and maybe also the children taking care of their parents may need social support. Secondly, the need is often in every day speech or maybe even in research defined in terms of the support system (e.g. the need for 'income support' or 'maintenance grant'; that are services or income transfers) when the actual problem is a welfare loss (need in this sense) in people's life (e.g. poverty) caused by e.g., poor education, unemployment etc.. The basis for the need and the services potentially provided by the service system do not have a one-to-one equivalence. The elderly couple may need sympathy, information, encouragement, some one to talk with, social contacts and the service system may provide 'home help' (formally a home help worker is expected to do cleaning and shopping, a home nurse taking care of medication, measuring blood pressure etc., and both of them may informally act as a social contact). When evaluating the performance of the service system the needs from the elderly couple's point of view should be more important than the needs seen from the service combination point of view. A third special feature in the social services is, that as in the case of health needs, quite many of social functional problems can be solved or the individuals and families can be supported without the intervention of professional social services. In the case of families social problems, the informal care and support are very important. There are also cases, where it is not necessary to make a difference between health needs and social needs.

Short definitions for these concepts are:

  • need of social services - individual physical and social functioning, and social capacity of a group related to ability to benefit from social services and informal support
  • need of health services - morbidity, health status, ability to benefit from health services
  • demand of health and social services - the amount of health services people are willing to use determined by the health needs and other demand affecting factors
  • supply of health and social services - the amount of health services the providing organisations would be willing to supply for the people, the amount and organisation of the service supply depends on national policies and the economic potential of the country
  • use of health and social services - the amount of health services people are actually consuming, determined by demand and supply.

The demand for health and social services is influenced by other factors than the need for these services. These factors are such as gender, incomes, socio-economic status and education (with given needs, the utilisation of services differs between income groups and educational groups, or various cultural factors, with given needs and incomes, the utilisation of services varies across population groups with different cultural background). There may be many different 'other factors', and it is not possible to generate an exhaustive list of them.

The socio-economic impact of any health or social problem is linked with the determination of the health and social service utilisation: When a person is ill or has a social problem, he or she (and in fact the whole society) looses some welfare because of the illness (morbidity, mortality, problems in physical and social functional capacity) or lack of social support, cure and care. These welfare losses can be diminished by appropriate interventions. In other words, if the provision of services is insufficient, the people are paying the costs in terms of welfare losses. The various health and social care interventions require some resources that could have been used in some other activity to improve the welfare of the population (i.e. health and social care resources have opportunity costs).

Need and demand of social and health services

Term 'need' means in different contexts different things. In health economics, we use this term in both objective and subjective sense (4). We may talk about subjectively felt 'perceived need' when individuals feel that now they have to go doctor or they feel that they need some kind of social support. A person is also said to have need for health services, when a doctor after making a diagnosis states that the person in question has a disease that can be treated with some health services. I.e. the person can benefit from health services, and the term need refers to 'capacity to benefit' from the services. The term 'objective' refers always to some outsider (doctor, nurse, social worker, health care and social care professional etc.) making the evaluation of the need from outside. A person may have subjective need for health and social services, when according to his own evaluation (e.g. perceived health in surveys; perceived capacity to cope with everyday life) of his health is weak, and he could benefit from the services. The objective and subjective definitions of need are different perspectives to a person's mental, physical, and social functional capacity. They are not competing views of the need for services, and we cannot say that other of them is wrong.

Need can be measured both at individual level and at population level. At individual level e.g. perceived health is a valid subjective measure of health status. Objective measures that are often used, are e.g. the presence of long-term illnesses or a professional evaluation of a person's health status. At population level, e.g. morbidity figures express the health status of a population (like Estonians) to another population (Finns).

For our purposes it is important to remember that 'need' can also be defined as 'capacity to benefit', because this definition leads us to think how well the health and social services are organised - is all the 'capacity to benefit' met?

Need for health and social services leads to demand of these services. People are willing to consume various services, because they feel that they need them, they are sick, they have problems in everyday life, or service provider experts are telling them that they should use some of the services.

But, there are also other things that may have an effect on demand (reflecting people's willingness to use various services). One of them is quite obviously the incomes - if people have to pay all the costs of the health services they are using, the people with low incomes can use smaller amounts of services than richer people, even if their need for services is the same. We may reasonably assume that if the prices people are paying from their own pockets increase, the demand for the services decreases. If the prices of any good increase people can afford them less. Other factors that have similar effect than money prices are time costs - if a person has to travel long time to the service facilities, the time may affect the behaviour in the same way as money prices.

Further, it is known that there are also some other factors that affect on demand in addition of need and incomes, and time costs. It seems that in all countries, with the same need, people with higher education also are willing to use more health services than people with lower education. There are also other things that may affect on demand, such as sex, age, all sorts of cultural differences etc. Men and women, or people at different ages may use the services very differently.

Supply of social and health services

In figure 1. we have the determination of the utilisation of health and social services. The demand alone can not determinate the amount of services used during a given year, i.e. the people may be willing to consume more services than what actually will be consumed. In the determination of the utilisation we need also the concepts of supply: someone must produce the services, there must be a capacity to provide health services. The institutions and persons providing the services are willing to produce some amount of services depending on the capacity, availability of beds, personnel, facilities, technology etc. If the population is willing to use more services than what is available, the willingness to use does not change into utilisation.

We can empirically measure the supply by various health care capacity measures, numbers of different groups of personnel, available beds, numbers of primary care doctors etc.

Utilisation of health and social services

This is why (see the picture), the utilisation of services is a result of two different societal forces: demand and supply. In welfare service provision, social and health care, the supply has a relatively larger impact (there is relatively more power on the supply side than on the demand side) on service utilisation than in many other service or commodity markets. This is due to the agency relationship: The supplier of health services (doctor, health care professional) and to some extent also a supplier of social services knows usually more about the various welfare problems and interventions to meet them (illnesses, treatments and their potential effectiveness) than the customer, client, or patient does, and consequently the supplier has to act as an agent for her/him. The supplier has also more power in the interaction due to the professional expert position. Because of the information asymmetry and the professional position, relatively more power is concentrated in the supply side of the services. Sometimes it can be said that these services are 'supply-led' services indicating that supply organisation determines the utilisation of the services.

The whole socio-economic impact of any social or health problem has its origin in the determination of the needs, the utilisation of the services and the structure of the service system built to respond to the social and health needs of the population.

The socio-economic impact of dementia and Alzheimer's disease can be defined as comprising of these two components:

  1. the health and social welfare losses due to the illness, and
  2. the resources devoted in diminishing and preventing these welfare losses.

The components are measured in different units because welfare losses (anxiety, pain, suffering, stress, death, for individuals and their families) cannot and should not be measured in monetary terms, whereas the value of resources used in health and social care are to a large extent easily measurable in monetary terms [1].

All welfare losses due to dementia cannot be compensated, removed or prevented, but the progress of the illness might be changed, and the coping of the individuals and their families can be improved. The aim of the impact estimation should thus be

1) to estimate the scale of the problem (welfare losses, preventable welfare losses)

2) to estimate much and in what structures resources (formal and informal) are allocated to dementia care,

and after 1) and 2) are known

3) to evaluate, make recommendations, and have a public discussion about how the amounts and organisation of the resources could be reorganised in order to use the resources in diminishing the welfare losses as much as possible and reasonably compared to other welfare needs of the population.


  1. Johnson N, Davis T, Bosanquet N. The epidemic of Alzheimer's disease. How can we manage the costs? Pharmacoeconomics. 2000;18(3):215-23.
  2. Winblad B, Hill S, Beermann B, Post SG, Wimo A. Issues in the economic evaluation of treatment for dementia. Position paper from the International Working Group on Harmonization of Dementia Drug Guidelines. Alzheimer Dis Assoc Disord. 1997;11(Suppl 3):39-45.
  3. Winblad B, Ljunggren G, Karlsson G, Wimo A. What are the costs to society and to individuals regarding diagnostic procedures and care of patients with dementia? Acta Neurol Scand Suppl. 1996;168:101-4.
  4. Mooney G. Economics, medicine and health care. 3rd ed.: Harlow: Pearson Education; 2003.

[1] If indirect costs (production losses) are to be included in the costs, they should be kept separate from real resource costs.



Last Updated: Thursday 08 October 2009


  • Acknowledgements

    The EuroCoDe project received financial support from the European Commission. Neither the European Commission nor any person acting on its behalf is responsible for any use that might be made of the following information. Alzheimer Europe also gratefully acknowledges the support it received from Fondation Médéric Alzheimer for this project.
  • European Union
  • Fondation Médéric Alzheimer