Scarcity

Scarcity in Health Economics

Scarcity is the starting point of economic analysis and the reason health economics exists as a discipline. In his 1932 essay on the nature of economic science, Lionel Robbins framed economics as the study of human behaviour as a relationship between "ends and scarce means which have alternative uses". In health care, time, money, staff, beds, equipment and knowledge are limited relative to the uses competing for them, so not every potentially beneficial treatment, service or programme can be provided to every person in every circumstance. Scarcity forces choice, gives rise to opportunity cost and is the reason economic evaluation is needed. It differs from a temporary shortage and from a budget constraint, and it leads to rationing whether or not that rationing is made explicit.

What scarcity means

Scarcity exists whenever the available quantity of a resource is insufficient to support every competing use. A resource does not need to be extremely rare for it to be scarce. It is scarce when using it for one purpose prevents or limits its use for another purpose, which is the sense of "alternative uses" in the Robbins definition.

Many kinds of healthcare resource may be scarce.

• public and private funding;
• clinicians’ and patients’ time;
• hospital beds;
• operating-theatre capacity;
• medicines and vaccines;
• diagnostic equipment;
• donor organs;
• trained personnel;
• healthcare facilities;
• transport and supply capacity;
• information and evidence; and
• managerial and administrative attention.

Scarcity can exist even within wealthy health systems. Greater resources may expand what can be provided, but healthcare needs, expectations and technological opportunities may also expand.

Scarcity creates choice

When resources have competing uses, a choice must be made about which uses will receive them. In a formal model this choice appears as a resource constraint. A simplified version is shown below.

$$\sum_{i=1}^{n} R_i \leq B$$

The terms are defined as follows.

• $R_i$ is the amount of the limited resource allocated to activity $i$;
• $n$ is the number of competing activities; and
• $B$ is the total amount of the resource available.

The constraint means that the combined resources allocated across activities cannot exceed what is available.

The equation does not determine how the resource should be allocated. It only makes the constraint explicit. Additional evidence, objectives, values and decision rules are needed to choose among the competing uses.

Scarcity and opportunity cost

Scarcity gives rise to opportunity cost. When a resource is allocated to one activity, it is no longer available for its next-best alternative use. The value of that forgone alternative is the opportunity cost of the decision.

For example, suppose a health service has enough specialist capacity either to expand one treatment programme or to reduce waiting times for another service. Choosing the expansion means giving up at least some of the health benefits that the alternative service could have produced.

The financial price paid for an intervention is not necessarily its complete opportunity cost. The relevant opportunity cost is the value of the best alternative use displaced by the decision. In health care that value is usually expressed as the health, or other valued outcomes, that the displaced activity would have produced.

Scarcity and resource allocation

Resource allocation is the process of distributing limited resources among competing uses. Scarcity makes such decisions unavoidable at every level of a health system, from national budgets to individual consultations. Allocation decisions may occur at several levels.

• Governments allocate resources across healthcare and other public services.
• Health systems allocate budgets across populations, programmes and providers, including the balance between prevention, treatment, rehabilitation and public health.
• Commissioners and insurers decide which services or technologies to cover.
• Programme managers choose between expanding eligibility, increasing treatment intensity, improving follow-up or funding another intervention.
• Healthcare organisations allocate staff, beds, equipment, operating time and capital.
• Clinicians allocate appointment time, diagnostic capacity and treatment slots among patients.
• Patients allocate their own income, time, transport, caregiving responsibilities and attention among healthcare and other needs.

These decisions may be explicit, such as a published coverage policy, or implicit, such as waiting times caused by limited capacity.

Scarcity at one level can create consequences at another. A workforce constraint, for example, can affect organisational capacity, patient waiting times and the effectiveness of a funded programme.

Scarcity and rationing

Rationing is the limitation of access to healthcare because available resources cannot satisfy every claim on them. Because scarcity is universal, every health system rations in some way, whether or not the word is used.

Scarcity and rationing are related but different.

• Scarcity is the underlying condition of limited resources relative to competing wants and needs.
• Rationing is one consequence of scarcity and describes how access is limited or prioritised.

Rationing may occur through several mechanisms.

• eligibility criteria;
• waiting lists;
• clinical prioritisation;
• coverage restrictions;
• geographical availability;
• patient cost sharing;
• limits on service capacity; or
• decisions not to adopt or continue particular technologies.

Avoiding an explicit rationing decision does not eliminate scarcity. It may instead allow rationing to occur through delay, unequal access, local variation or unrecorded professional judgement.

Scarcity is not the same as a temporary shortage

A shortage is a particular situation in which the quantity supplied is below the quantity demanded under prevailing conditions. In market terms it is excess demand at the prevailing price, and it may be temporary, local or linked to a specific supply disruption. Because many health services are free or heavily subsidised at the point of use, excess demand in health care often shows up as waiting lists rather than higher prices.

Scarcity is broader and more fundamental. It exists because resources have alternative uses and cannot satisfy every possible demand, and it persists even when a market clears or a supply disruption ends.

Two examples show the difference.

• A temporary disruption in vaccine deliveries can create a vaccine shortage.
• The need to choose how much health funding should be allocated to vaccination rather than other services reflects scarcity.

Resolving a specific shortage does not eliminate the underlying economic condition of scarcity.

Scarcity is not the same as a budget constraint

A budget constraint limits how much an individual or organisation can spend. It is one important expression of scarcity, but scarcity is not confined to money.

A service can remain constrained even when additional funding is available because it lacks one or more of the following.

• trained staff;
• physical capacity;
• equipment;
• time;
• suitable evidence;
• supply-chain capacity; or
• the ability to implement change safely.

Focusing only on the financial budget can therefore overlook the resource that is actually limiting care.

Needs, wants and demand

Scarcity involves competing wants and needs, but these terms are not identical. Health economists distinguish them because allocating resources according to need can differ sharply from allocating them according to demand.

• Need may refer to a person’s capacity to benefit from healthcare or another normatively defined requirement.
• Want refers to something a person or group desires.
• Demand commonly refers to a willingness and ability to seek or obtain a good or service under specified conditions.

Healthcare needs can exist without effective demand, particularly when people face financial, geographical, informational or institutional barriers.

Resource-allocation decisions should therefore not assume that observed demand captures every important health need.

Scarcity and economic evaluation

Economic evaluation compares alternative uses of resources in terms of their costs and consequences. Scarcity provides the reason economic evaluation is needed. If every beneficial intervention could be provided without displacing another activity, there would be less need to compare competing uses of resources.

Economic evaluation can help decision-makers examine several questions.

• what additional resources an intervention requires;
• what outcomes it is expected to produce;
• which alternative activities may be displaced;
• whether the additional benefit justifies the opportunity cost;
• how uncertainty affects the comparison; and
• whether resources could produce greater benefit elsewhere.

Economic evaluation informs resource allocation, but it does not make the complete decision. Equity, feasibility, rights, severity, affordability and other institutional considerations may also matter.

Scarcity, cost-effectiveness and affordability

Cost-effectiveness and affordability address different consequences of scarcity. A technology may be considered cost-effective because its expected benefits justify its opportunity cost at a stated threshold. It may still create a budget impact that cannot be accommodated immediately.

Conversely, a low-cost intervention may be affordable but provide insufficient benefit compared with another use of the same resources.

Decision-makers should therefore keep four questions apart.

• whether an intervention offers good value relative to alternatives;
• whether the required expenditure fits within the available budget;
• whether the necessary staff, infrastructure and implementation capacity exist; and
• what services or outcomes may be displaced.

Scarcity, efficiency and equity

Scarcity creates pressure to use resources efficiently, but efficiency is not the only objective of a healthcare system. Health economists usually treat efficiency and equity as separate objectives that can conflict.

Efficiency concerns how resources are used to produce valued outcomes. It may involve obtaining more health from available resources or achieving a stated outcome with fewer resources.

Equity concerns how health, access, costs and opportunities are distributed across people and groups.

An allocation can improve total health while raising concerns about fairness. Another allocation may produce fewer aggregate health gains but give priority to people with greater severity, poorer access or greater disadvantage.

Scarcity makes these trade-offs unavoidable, but economics alone does not prescribe the ethical weight that should be assigned to each consideration. Decision criteria and value judgements should be stated transparently.

Illustrative example with one £2 million budget and four competing uses

The options and figures in this example are hypothetical and chosen only to show the logic of scarcity. Suppose a healthcare organisation has an additional budget of £2 million. It could use the funding in any of four ways.

• expand a preventive programme;
• purchase a new diagnostic technology;
• increase mental-health service capacity; or
• reduce a waiting list for elective treatment.

Each option may produce benefits, but the same £2 million cannot be spent fully on every option.

Selecting one option means giving up some or all of the benefits available from the alternatives. Showing that the selected activity produces benefit is therefore insufficient. The relevant test is whether it uses the constrained resources better than the alternatives it displaces.

To make the opportunity cost concrete, assume each option needs the whole £2 million, the preventive programme would produce 120 quality-adjusted life years (QALYs), the waiting-list option 90 QALYs, and each of the other two options fewer than 90. Funding the preventive programme gains 120 QALYs, and its opportunity cost is the 90 QALYs that the next-best option, the waiting-list reduction, would have produced. Funding the waiting-list option instead gains 90 QALYs but forgoes the 120 QALYs of the preventive programme, leaving the population 30 QALYs (120 minus 90) worse off than the best available use of the budget.

The example also requires examination of non-financial constraints. Funding a programme will not deliver its expected benefits if the necessary workforce, infrastructure or implementation capacity is unavailable.

Explicit and implicit allocation

An explicit allocation decision uses stated rules, criteria or processes. Examples include a published benefits package, coverage recommendation or prioritisation framework. In the rationing literature this is called explicit rationing.

An implicit allocation decision limits care without a clearly stated allocation rule. Examples may include long waits, local service variation, limited appointment availability or decisions made differently across individual cases. This corresponds to implicit rationing, much of which operates through clinical discretion within fixed budgets.

Explicit decisions can be controversial because the trade-offs are visible. However, implicit allocation does not avoid trade-offs. It may make them less transparent and harder to evaluate for consistency or fairness.

The balance between the two is debated. Some analysts argue that implicit rationing at the point of care responds better to the complexity of clinical decisions and to individual patients' circumstances, and that explicit rationing tends to concentrate conflict and dissatisfaction. In practice, health systems use a mix of explicit and implicit mechanisms.

Technical efficiency and allocative efficiency

Scarcity creates at least two important efficiency questions. They are distinct, and a service can perform well on one while performing poorly on the other.

Technical efficiency

Technical efficiency asks whether a given output could be produced using fewer resources, or whether more output could be produced from the same resources. Examples include reducing avoidable waste, improving workflow or using existing capacity more effectively.

Allocative efficiency

Allocative efficiency asks whether resources are distributed among activities in a way that best advances the decision-maker’s objectives. A service can be technically efficient but still represent a poor allocation if the same resources could produce more valuable outcomes elsewhere.

Improving technical efficiency may release resources, but those released resources still require an allocation decision.

Dynamic scarcity

Available resources, technologies and needs change over time. The constraints that bind a health system in one period may differ from those that bind it in the next.

Many factors can change the extent of scarcity.

• population growth and ageing;
• changes in disease patterns;
• new technologies;
• workforce supply;
• economic conditions;
• prices;
• productivity;
• infrastructure investment;
• public expectations;
• emergencies; and
• changes in clinical practice.

A resource-allocation decision that was reasonable at one time may need reassessment when these conditions change.

Innovation can reduce some constraints by improving productivity or preventing illness. It can also create new demands by making additional beneficial interventions possible.

Uncertainty and scarcity

Allocation decisions are often made without complete information about costs, outcomes, uptake or implementation. Uncertainty does not remove scarcity. It makes the consequences of allocating scarce resources less predictable.

Decision-makers may respond in several ways.

• conducting sensitivity or scenario analysis;
• collecting additional evidence;
• adopting an intervention conditionally;
• limiting initial use;
• monitoring outcomes and expenditure;
• delaying an irreversible decision; or
• scheduling reassessment.

Further research also uses scarce resources and takes time. Its expected value should therefore be considered against its cost and the consequences of delaying a decision.

Common misunderstandings about scarcity

Scarcity is often confused with absence, poverty or a lack of money. Several misunderstandings recur in debates about health care funding and priority setting.

Scarcity means that nothing is available

Scarcity does not mean complete absence. A resource can be available and still be scarce because there is not enough to satisfy every competing use.

Scarcity can be eliminated by increasing the budget

Additional funding may reduce a particular constraint, but other limits may remain. Needs, technologies and expectations can also expand.

Only low-income health systems face scarcity

Every health system faces scarcity because no system can provide every potentially beneficial service without limits. High-income systems also face waiting lists, workforce limits and decisions about which new technologies to fund.

A beneficial intervention should always be funded

Benefit alone does not establish that an intervention represents the best use of scarce resources. Its costs, consequences, alternatives and displacement effects must also be considered.

Scarcity makes equity irrelevant

Scarcity makes choices necessary, but it does not determine which social values should govern those choices. Equity can be an explicit objective of resource allocation.

Unspent money proves that resources were not scarce

Resources may remain unused because of workforce shortages, implementation delays, procurement constraints, restricted budgets or an inability to transfer funds between purposes. Underspending can therefore reflect a binding non-financial constraint rather than an absence of scarcity.

What transparent scarcity-based decisions should show

Scarcity makes trade-offs unavoidable, so the credibility of an allocation decision depends partly on how clearly its basis is stated. A decision that records its reasoning can be checked for consistency and revisited when circumstances change.

A transparent allocation decision should identify each of the following.

• the objective of the decision;
• the resource or resources that are constrained;
• the available quantity or budget;
• the population affected;
• the competing alternatives;
• the expected costs and consequences;
• the relevant opportunity costs;
• important non-financial constraints;
• uncertainty;
• equity and distributional considerations;
• the criteria used;
• the authority responsible for the decision; and
• arrangements for implementation, monitoring and reassessment.

Transparency does not eliminate disagreement. It makes the basis of the choice visible and open to scrutiny.

How scarcity, opportunity cost, allocation and rationing fit together

Scarcity is the condition that resources are insufficient to satisfy every competing want and need. It creates the necessity of choice.

Opportunity cost describes what is forgone when that choice is made. Resource allocation determines where the resources go. Rationing describes how access may be limited as a consequence.

These concepts are connected, but they should not be treated as interchangeable.

Sources

• Robbins L. An Essay on the Nature and Significance of Economic Science. London: Macmillan; 1932.
• Samuelson PA, Nordhaus WD. Economics. 19th ed. New York: McGraw-Hill/Irwin; 2010.
• Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. 4th ed. Oxford: Oxford University Press; 2015.
• Mechanic D. Dilemmas in rationing health care services: the case for implicit rationing. BMJ. 1995;310:1655-1659.
• Palmer S, Raftery J. Economic notes: opportunity cost. BMJ. 1999;318:1551-1552.
• World Health Organization. Making Fair Choices on the Path to Universal Health Coverage: Final Report of the WHO Consultative Group on Equity and Universal Health Coverage. Geneva: World Health Organization; 2014.