Face Validity

A judgment about the reasonableness of a measure based on its superficial examination preferably by people with relevant expertise/experience.

Factor Analysis

A multivariate statistical method of collapsing many (possibly) correlated variables into a smaller number of uncorrelated variables, and of exploring the structure of any relationships between these 'factors' or 'principal components'.

Factor Cost

Gross National Product and Gross Domestic Product become GNP at factor cost or GDP at factor cost when taxes are subtracted and subsidies added to these entities at market prices.

Factor of Production

An input in the production of goods or services. They are often classified into land, labour and capital.

Factor Substitution

The proposition that one input or factor of production (like labour) can, given sufficient time for adjustment and sufficient resources to effect the change, be substituted for another (like capital) to produce the same output. See Isoquant.

130 Fair Innings

Fair Innings

A term borrowed from cricket but equivalent to the singular usage 'inning' of baseball. It is the name given to the idea that individuals who have not yet had a 'fair innings' (in terms of length of life in reasonable health) should receive a higher weighting in cost-effectiveness analyses than those who have had a fair innings (and even higher presumably than those who have already had more than a fair innings). It has proved possible to make empirical estimates of the weights through surveys, but the principle is controversial.

Fair Premium

An insurance premium is actuarially fair when it is equal to the monetary value of the benefit insured multiplied by the probability of successfully claiming that benefit.


A general treatment of this topic from an economic point of view is under Equity. A famous concept of 'justice as fairness', which has much influenced economists, was developed by the US philosopher John Rawls (1921-2002). The foundation of what is probably the twentieth-century's most impressive contribution to political philosophy is a veil of ignorance. Rawls asks us to imagine ourselves to be the constructors of a just society, but being ignorant of our racial, social and economic position within that society, on the grounds that these are irrelevant to questions of justice. From this 'original position', he asserts that a rational person would select only two basic principles of justice. The first would be the liberty principle: a schedule of basic rights, including liberty of conscience and movement, freedom of religion, which ought to be equally distributed and as complete as is consistent with each having the same. The second would be the difference principle: social and economic inequalities are justifiable only if they are to the advantage of the least advantaged person. Economists (and others) have struggled to fit health into Rawls' scheme. Rawls himself explicitly excluded health from the operation of the difference principle, arguing that it was a 'natural good' like 'intelligence'. Many economists, philosophers and other analysts think that Rawls was wrong to exclude health in this way. See John Rawls (1971), Justice as Fairness, Cambridge: Harvard University Press. See Entitlement Theory, Equity, Interpersonal Comparisons of Utility, Utilitarianism.

Fieller's Theorem 131

False Negative

A test result indicating that a diseased individual is disease-free. False Positive

A test result indicating that a disease-free individual is diseased. FDA

Acronym for Food and Drug Administration. F-distribution

Used for random variables which are constrained to be greater or equal to 0. It is often used in the analysis of variance to compare the ratio of the variance of the means from a number of groups to the expected variance of those means if all the groups were the same. Also called the variance ratio distribution. Named after the British statistician Sir Ronald Fisher (1890-1962).


A method of remunerating professionals (especially medical doctors) according to an agreed fee-schedule specifying what is payable for each item of service supplied. It is to be distinguished from (though it may be used in conjunction with) capitation and salaried means of remuneration.

Fee Schedule

A list of services or procedures together with the fee for each payable by a third party payer like an insurance company.

Fieller's Theorem

A parametric method of calculating confidence limits of cost differences and effectiveness differences in cost-effectiveness analyses. See E.C. Fieller (1954),

132 Final Good

'Some problems in interval estimation', Journal of the Royal Statistical Society, Series B, 16, 175-85.

Final Good

A good or service that yields direct utility to an individual. Financial Appraisal

A procedure for assessing options that is similar to economic appraisal except that only the financial costs and benefits are considered, rather than opportunity costs and a wider set of benefits. See also Discounting. It is a vulgar error to confound financial appraisal with economic appraisal.

Financing Health Care

Typical aspects of finance that are examined by health economists include tax financing, subsidization of access to health care, income redistribution, insurance (public and private) and their consequences for efficiency, equity, total expenditure and patterns of use of services.

Finished Consultant Episode

A Finished Consultant Episode is a period of admitted patient care under a consultant within a National Health Service Trust in England. This is not always the same as a single stay (spell) in hospital.

Finnish Office of Health Technology Assessment

FinOHTA is an independent public assessment agency working as a part of Finland's National Research and Development Centre for Welfare and Health. It produces and disseminates health technology assessments. Its web address is www.stakes.fi/finohta/e/.

Fixed Cohort Study 133


Acronym for Finnish Office of Health Technology Assessment. First-copy Cost

The cost of producing an early, experimental version of a drug.

First Fundamental Theorem of Welfare Economics

The proposition that, given particular assumptions, competitive markets are Pareto-optimal. The assumptions include these: markets are complete, property rights are well-defined and costlessly enforced, so that buyers and sellers can trade freely in all current and future goods; producers and consumers are selfish maximizers of their benefits and minimizers of their costs; that within these perfectly competitive markets prices are known by all individuals and firms; that the use of the price mechanism does not itself consume resources. Cf. Second Fundamental Theorem of Welfare Economics.

First Order Uncertainty

This is the idea in probability theory that, although you may not be in any doubt that a head is a head and a tail a tail, you will be in doubt as to which a throw of a fair coin will result in. If you doubt the fairness of the coin, then that is a type of second order uncertainty. See Uncertainty.

Fisher's Ideal Index

Fisher's ideal price index is the geometric mean of the Laspeyres and Paasche indices of price or quantity. Named after the British statistician Sir Ronald Fisher (1890-1962).

Fixed Cohort Study

A cohort study in which subjects are recruited and enrolled at a uniform point in the natural history of a disease or by some defining event and which does not permit additional subjects to be added subsequently. Cf. Open Cohort Study.

134 Fixed Costs

Fixed Costs

Costs that do not vary with output rates. Fixed Effect Model

This is a statistical model in which treatments are chosen at fixed levels (cf. Random Effect Model). A fixed effect model is useful for studying the effect of treatment at a specified level but any conclusion derived from it cannot be generalized. It is limited to the range of treatment levels studied.

Floor Effect

Opposite of a ceiling effect.


A variable having an interval of time dimension: so much per period. Cf. Stock, which is a variable at a particular date.

Focus Group

A group chosen to discuss and comment on a topic being researched. The group may be informed by relevant witnesses. Common outcomes are the insights, opinions and conclusions which result from the interaction between the participants. Similar to consensus panel.

Follow-up Study

Same as cohort study.

Food and Drug Administration

An organization within the US Department of Health and Human Services with responsibility for the regulation of pharmaceutical and other food and medicinal products.

Forest Plot

Framingham 135

See Meta-analysis. Formulary

A list of drugs approved for prescription and reimbursement by a hospital, pharmacy or third party payer.


A motive postulated for much economic behaviour. See Hospital Economics. Foundation Trust

A type of secondary care provider introduced in the English National Health Service in 2004 having more local autonomy than other secondary providers.

See Trusts.

Framing Effect

This is sometimes thought of as an 'irrational' (in terms of expected utility theory) response by subjects in experiments. It occurs when the same question, asked in somewhat different ways, elicits different answers. For example, people respond differently according to whether the choices presented to them are framed in terms of gains or in terms of losses. But, of course, this may not be irrational at all and, indeed, is not in the context of prospect theory. Cf. Reflection Effect. See Regret Theory.


A town in Massachusetts whose residents have been studied by epidemiologists for more than 50 years, especially in connection with diseases of the heart, lung and blood. The data collected in this massive set of data have been enormously influential.

136 Free Good

Free Good

In economics, a free good is not the same as a good that is offered free of charge. 'Free good' is a term used in economics to describe a good that is not scarce; it is one of which more is not demanded at a zero price than is available - as much is available as anyone wants at any price. It is not an economic good. It has no opportunity cost. Many goods and services that are offered free of charge are not 'free' in the economic sense, and health care is a classic example (for insured persons). An economic good that is offered free of charge will normally have required scarce resources in its production and there is likely to be an excess demand for it.

Free Loader

Same as free rider.

Free Lunch

The quip, 'There ain't no such thing as a free lunch', refers to the depressing fact that many of the best things in life are indeed not free (in the economist's sense of 'free').

Free Rider

One who consumes a good (especially a public good) without contributing to the cost of providing it.


The number of times an event occurs over a period of time. Frequency Distribution

A distribution of the frequencies with which an event or observation occurs.

See Beta Distribution, Gamma Distribution, Gaussian Distribution, Lognormal Distribution, Normal Distribution, Triangular Distribution, Uniform Distribution.

Frictional Unemployment 137

Frequentist Approach

Essentially this is the approach to probability adopted by classical statisticians who would estimate the probability of an event, say, the probability that a given individual x will have disease y, by taking a suitable sample of the relevant population, discovering the prevalence of the disease in that sample, and then inferring that the chances of x having y were the same as the prevalence rate in the sample. Strictly speaking, the frequentist approach depends upon a 'large' number of samples being taken. This approach is to be contrasted with the Bayesian approach. Much heat has been generated as to which approach is most useful (there is agreement about the maths), as may be expected, given that each approach depends upon particular (subjective) assumptions being made and holding true, though the nature of these assumptions is not the same in each. Cf. Bayesian Approach.

Friction Cost

Friction cost is the name given in cost-effectiveness and cost-utility analyses to the loss of productive work time that is incurred between the time that an employee is absent from work through accident or sickness and their replacement by another. It is a form of productivity cost. Some studies in these genres, particularly early ones, used the human capital approach in assessing the benefits of health care and tended to assume that replacement took place only when the injured/sick employee returned to work. The friction cost approach recognizes that there is usually more than merely frictional unemployment in any economy (that is, there is involuntary unemployment too) and this pool of potential workers may have the effect of substantially reducing the time for which a job is vacant. These costs, it should be noted, do not include the expenses incurred by firms in paying 'sick pay' and the like, which are transfers and not opportunity costs in any sense.

Frictional Unemployment

That part of total unemployment in an economy caused as people change jobs, engage in job search from a position of not being employed (and therefore, perhaps, are freer to travel to interviews and so on). Frictional unemployment exists even when there is technically full employment because most people change jobs at some time and many do so frequently in dynamic economies. See Friction Cost, Full Employment, Involuntary Unemployment, Natural Rate of Unemployment, Structural Unemployment.

138 Frontier Frontier

A locus of combinations of inputs, outputs or outcomes that constitutes the boundary between what is possible with given technologies and resources and what is not. See Health Frontier.


The F-test can be used to test whether the standard deviations of two populations are equal.

Full Employment

A situation where all who wish to work at going wage and salary rates do so. This is not synonymous with zero unemployment thanks to frictional unemployment. Most governments seek to achieve a level of unemployment (to put it rather negatively) that is the lowest rate consistent with non-accelerating inflation, the so-called NAIRU. See also Structural Unemployment.

Full Profile Conjoint

A form of conjoint analysis in which the subjects prioritize the full range of the attributes of services. Cf. Adaptive Conjoint Analysis, Pairwise Comparison.

Funnel Plot o s ~

Observed effect size, here relative risk

Funnel Plot 139

A graph of sample size plotted against effect size that is often used to investigate publication bias or the heterogeneity of studies in systematic reviews. Each blob in the scatter plot indicates the results of one study. The name arises from the fact that precision in the estimation of the true treatment effect increases as the sample size of the component studies increases. Because large studies estimate effect size more precisely than small studies, they tend to lie in a narrow band at the top of the scatter plot, while the smaller studies, with more variation in results, fan out over a larger area at the bottom, thus creating the impression of an inverted funnel. In the absence of bias the plot should resemble a symmetrical inverted funnel.

Gail and Simon Test

Used to explore quantitatively and qualitatively the homogeneity of the effects of treatment in a clinical trial amongst subgroups and to identify subgroups of patients with greater or lesser levels of treatment effect. See Mitchell H. Gail and R. Simon (1985), 'Testing for qualitative interactions between treatment effects and patient subsets' Biometrics, 41, 361-73.

Gambler's Fallacy

The incorrect belief that the probability of an event occurring rises the longer the time that has elapsed since its last occurrence.

Game Theory

Game theory consists of models of strategic decisions, as the parties to the game move or propose moves and countermoves. The playfulness implied by the label is by no means a common characteristic either of the game in question (which may be a war) or of the players (who may be criminals). See

Expected Utility Theory.

Gamma Distribution

A probability distribution often used to model individual heterogeneity, especially in duration analysis. The gamma distribution is related to the beta distribution and has two free parameters generally labelled a (alpha) and 0 (theta). See Frequency Distribution.


The medical specialty concerned with diseases and abnormalities of the stomach and intestine.

General Equilibrium 141


A community-based provider (often a general practitioner) who in managed care plans and public health care systems coordinates the patient's diagnosis and treatment across the various possible disciplines and professions and who refers patients to secondary care for specialist treatment.

Gaussian Distribution

Same as normal distribution. Named after Karl Friedrich Gauss (1777-1855), the German mathematician and astronomer.

Acronym for Gross Domestic Product. GDP Deflator

An index of the general price level in the economy: the ratio of GDP (Gross Domestic Product) in nominal (cash) terms to GDP at constant prices.

Acronym for general equilibrium.

General Equilibrium

A state of an entire economy in which there is no excess demand or supply and no incentive for any actor to change their behaviour. It is modelled by multiple equations describing the relationships between independent and dependent variables in systems of equations that reflect the behaviour of the actors in the system, the technical possibilities open to them and the nature of any significant interactions between the various sectors. Cf. Partial Equilibrium. See Arrow-Debreu Equilibrium, General Equilibrium Theory.

142 General Equilibrium Theory General Equilibrium Theory

An extension of partial equilibrium theory, in which the feedbacks between sectors and other interactions are explicitly modelled. In general equilibrium theory, the consumer is envisaged as being endowed with a bundle of real goods rather than 'income'. See Nash Equilibrium.

General Practitioner

A doctor, dentist or other health care professional who diagnoses and treats the health problems of individuals and families in the community and who may refer more complex or technically demanding cases to a hospital specialist. See also Gatekeeper, Primary Care.


The extent to which the results or conclusions of one piece of empirical evidence may be validly transposed to other situations. In statistics the term 'exchangeability' is sometimes used.

Generalized Least Squares

A generalization of ordinary least squares which relaxes the assumption that the error terms are independently and identically distributed across observations.


Usually used to describe drugs that are no longer patent protected and that are generally sold under a name related to their chemical character rather than their brand name. Thus the generic name for the famous antidepressant Prozac is fluoxetine and the generic name for the world's best-selling (2004) patented anti-cholesterol medicine Lipitor is atorvastatin (global sales $10.3 thousand million).

Gini Coefficient 143


The science of heredity and inherited characteristics. Geometric Mean

A measure of central tendency, the geometric mean is the nth root of n positive real numbers multiplied together.


The medical specialty concerned with the diseases and care of elderly people. Gerontology

The study (usually multidisciplinary) of old people and aging processes. GHM

See Groupe Homogène de Malades. Giffen Good

A type of inferior good. It is supposed to generate an upward-sloping demand curve, though the evidence for its empirical validity is contested.

Gini Coefficient

The Gini coefficient was invented by the Italian statistician Corrado Gini (1884-1965) as a measure of income inequality, though it can be (and has been) used to measure, say, the distribution of health or of health care resource consumption. The Gini coefficient is a number between 0 and 1, where 0 corresponds to perfect equality (everyone has the same income, health care and so on) and 1 is perfect inequality (one person has all the income, health care and so on). While the Gini coefficient is mostly used to measure income inequality, it can be used to measure wealth inequality as well.

144 Global Budget

The Gini coefficient is calculated using areas on a Lorenz diagram. Let the area between the line of perfect equality and Lorenz curve be A, and the area underneath the Lorenz curve be B; then the Gini coefficient is A/(A+B). See Lorenz Curve.

0 100 Cumulative % of persons or households

Global Budget

An overall financial allocation to a hospital or other health care provider, sector or region, out of which it is expected to provide or purchase health services. It is generally based on a previous year's global allocation with adjustments for inflation and special pleading.

Acronym for generalized least squares.

Acronym for Gross National Product. Gold Standard

In health economics one is most likely to encounter this term in its sense of an instrument or procedure that is taken as a valid measure or example of good practice against which the validity of others can be tested.

Gross National Product (GNP) 145

Gompertz Function

Benjamin Gompertz invented a Law of Mortality to the effect that the mortality rate increases in a geometric progression. Hence, when death rates are plotted on a logarithmic scale, a straight line known as the Gompertz function is obtained. Benjamin Gompertz (1779-1865) was a self-educated (being denied access to English universities by virtue of being Jewish) English mathematician (of Dutch parentage).

Gompertz's Law of Mortality

See Gompertz Function.

Goodness of Fit

A measure of the extent to which the predicted values of a variable estimated in a model agree with the observed data.

Gross Domestic Product (GDP)

The total expenditure by residents and foreigners on domestically produced goods and services in a year.

Gross Investment

An economy's total investment before deducting capital consumption (or fixed capital formation) but including the value of any change in physical stocks of goods. See Investment.

Gross National Product (GNP)

GNP is GDP plus income earned abroad by residents and less income earned in the economy by foreigners: GDP plus 'net property income from abroad'.

146 Group Insurance Group Insurance

An insurance arrangement under which a group of people are covered by a common policy (as when employees are covered by their employer).

Groupe Homogène de Malades

The French equivalent of Diagnostic Related Group.


See Clinical Guidelines.

Guttman Scale

A method of scaling qualitative entities such that any point on the scale indicates an accumulation of characteristics. Also known as cumulative scaling or scalogram analysis. Suppose there are ten ordered statements. Then a score of six will indicate that a subject agrees with the first six statements and a score of ten indicates that there is agreement with all ten. The scale is ordinal. Named after Louis Guttman (1916-1987). See Louis Guttman (1944), 'A basis for scaling qualitative data', American Sociological Review, 9, 13950.


Also 'gynecology'. See Obstetrics and Gynaecology.

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