Human Capital

The stock of human skills embodied in an individual or group. In value terms it is usually measured as the present value of the flow of marketed skills (for example, the present value of expected earnings over a period of time). It is determined by basic ability, educational attainment and health status, among other things. The 'human capital approach' in early cost-effectiveness analy-

166 Human Resources ses tended to regard increases in human capital, or prevention of reductions in it, as the principal outcome of health care. This seemed to be the product of a distressing mental state in which the analysts were incapable of distinguishing people from carthorses - and is thankfully not an approach much taken today. When an outcome measure such as 'health' is also used there is also the risk of double-counting a benefit already included in the valuation placed upon an additional (quality-adjusted?) life-year. See Capital, Value of Life.

Human Resources

The treatment of human beings as inputs in the production of goods and services, in contrast to (though not to the exclusion of) their treatment as the ultimate end-purpose of health policies.

Hybrid Health Plan

Same as Point of Service plan. A health benefit plan in the USA that combines elements of managed care and traditional indemnification for medical fees. Members are encouraged to use a health maintenance organization or similar provider network but may also choose a doctor outside the network and be reimbursed for a part of the cost.

Acronym for healthy-years equivalent.


Same as earmarking.


A conjecture, preferably with a clear foundation in theory, that can be empirically refuted (at least in principle).

Hysteresis 167


This is a term in economics that has been borrowed from physics. It refers to a situation in which the past history of a variable can affect its current value. For example, the longer the period one has been off work through sickness, the less likely you are to find employment (regardless of your current state of health).


An adverse condition induced in a patient through the effects of treatment by a health professional.


Acronym for incremental cost-effectiveness ratio.

Acronym for the World Health Organization's International Classification of Functioning, Disability and Health. Its website is: icftemplate.cfm. See Disability.

Identification Problem

This arises in econometric attempts to estimate two or more relationships when each shares variables with another (for example, supply and demand share both price and quantity).

Impact Statement

A statement of all the identified and significant effects on the health care system of an option in economic appraisal and whom within the system they affect.


An impairment is usually taken to be any loss or abnormality of psychological, physiological or anatomical functioning. Cf. Disability, Handicap.

Incidence 169

Imperfect Competition

A market situation in which sellers need to search out the best price for their products. See Competition, Price-searching.


See International Network of Agencies for Health Technology Assessment.

In-area Emergency Services

Emergency medical care that is rendered within the service area of a health maintenance organization. A typical HMO plan provision covers members who are treated at any nearby emergency facility, rather than requiring them to go to a specific facility under contract with the HMO.


The response of individuals (patients, doctors and so on) to anything that relaxes any of the various financial and other limits on their ability to act as they prefer. Positive inducements to act in particular ways. Disincentives are negative inducements.

Inception Cohort

A group of patients who are assembled at the onset of the disease being investigated.


This has wholly different meanings in epidemiology and economics. In epidemiology, 'incidence' is the number of new cases of a disease identified during a time period. It is usually expressed as the proportion of those who are susceptible or at risk at the beginning or middle of the period.

In economics, 'incidence' is the ultimate distribution of the burden of taxation, after all effects arising from the elasticities of demand and supply have been allowed to work their way out and all tax shifting has occurred.

170 Inclusion/Exclusion Criteria

That the answer to the question 'who pays an indirect tax?' is not self-evident may be seen from the following diagram. Initially a price is established where supply S equals demand. When an excise tax is imposed (say a constant amount per unit of the good), the effective supply curve shifts to S and a new, higher price is established. Since demand is relatively elastic, price rises by an amount that is plainly less than the tax, so it would be an error to assume that the 'burden' of the tax falls entirely on consumers (in the case shown here, sellers bear a larger proportion than consumers).

Inclusion/Exclusion Criteria

These have two common uses. One refers to the medical or social standards determining whether a person may or may not be allowed to enter a clinical trial. The criteria usually include age, gender, type and stage of a disease, previous treatment history and other medical conditions. The aims are to identify experimentally appropriate participants and to avoid harming them. The other relates to the scientific standards set to determine which items in a literature (journal articles, book chapters and so on) will be included in a systematic review. The criteria usually include quality and specific tests related to the purposes for which the review is being conducted.

Incomplete Data J?J

Income Distribution

The way in which total income is divided amongst the households in an economy. Usually measured in terms of greater or lesser equality by a statistic such as the Gini coefficient.

Income Effect

The effect on the demand for a good or service that arises from the impact on real income of a change in its price, ceteris paribus. It may be positive or negative. For example, a fall in price means that the same rate of consumption can be maintained at a lower level of expenditure. This is equivalent to an increase in the real income (one can now buy more of everything) and this will lead to a rise in demand for all income-elastic goods. If the good whose price has fallen is an income-elastic good itself, then there will be a further boost to demand deriving from this 'income effect'. Cf. Substitution Effect.

Income Elasticity

The responsiveness of something (usually demand) to a change in income.

See Elasticity.

Incomplete Data

It is common in clinical studies and cost-effectiveness analyses for the data to be incomplete. This may or may not be a significant problem. Examples of types of missing data include single missing items (such as failure to record a survey result for one item in an EQ-5D schedule), missing whole questionnaires, and missing data as a result of drop-out. Whether these omissions matter will depend partly on whether they are 'missing completely at random', in which case the sample remains representative, 'missing at random', in which case they can be imputed, or whether they are not randomly missing (sometimes termed 'non-ignorable non-response'). Ways of coping (which can hardly be commended) have included 'Last observation carried forward' , 'complete case analysis' (that is, using only complete cases with no imputed values, with the risk of bias if the sample with omissions is not representative); 'unconditional mean imputation' (that is, replacing missing data with the mean value of the data in the sample with omissions), with, again, evident risk of bias. Better methods include 'regression imputation',

172 Increasing Returns to Scale

'stochastic regression imputation' and 'multiple imputation' in which missing values are replaced by plausible alternatives in a process that takes account of the uncertainty about the right value to impute.

Increasing Returns to Scale

A feature of production functions. A production function exhibits increasing returns to scale if increasing all inputs in the same proportion increases outputs by a larger proportion.

Incremental Cost

Same as marginal cost.

Incremental Cost-effectiveness Ratio

The ratio of the difference between the costs of two alternatives and the difference between their effectiveness or outcomes.

Acronym for investigation of a new drug. Indemnification

The compensation or benefits payable under an insurance policy, or a principle of insurance, to the effect that an insured person should be retrospectively restored to the same financial position as before a covered loss.

Indemnity Insurance

Traditional private health care insurance which places few restrictions on the character of service covered or choice of provider.

Indifference Curve 173

Independent Practice Associations

An association of physicians and other health care providers, including hospitals, who contract with a Health Maintenance Organization (HMO) to provide services to its members but usually still see non-HMO patients and patients from other HMOs. Patients are usually seen in the physicians' own offices. The doctors maintain their own private practices and thus can contract with more than one HMO and see regular fee-for-service patients as well. The usual method of remuneration is capitation, though the other contracts may be fee-for-service.

Independent Variable

A variable that affects other variables but is not affected by them. See

Dependent Variable.

Indifference Curve

A locus of points in a figure having two goods, one on each axis, such that an individual is indifferent between all points on the curve. The curve is usually axiomatically taken to be convex to the origin, reflecting a diminishing marginal rate of substitution, and indicating that both goods are economic goods. If an individual is indifferent between two options, this is generally taken in economics to be equivalent to the statement that the two options have equal utility. A family of indifference curves (an 'indifference map') shows successive curves like contours on a geographical map. As one moves in a north o o

Slope at this point is the marginal rate of substitution

Slope at this point is the marginal rate of substitution a

Good X

174 Indirect Cost easterly direction, each indifference curve is associated with a higher utility number. An alternative name for an indifference curve is an 'iso-utility curve'.

Indirect Cost

In health economics, this refers usually to the productivity costs that may be the consequence of the use of a particular technology.

Indirect Tax

A tax on the production and sale of goods and services. Common taxes of this sort are Value-Added Tax (VAT), Sales Tax, Purchase Tax, Excise Tax, customs duty, stamp duty. Cf. Direct Tax.


An input in a production process that cannot be physically subdivided into smaller parts. Given sufficient time, it may be possible to acquire smaller versions of an indivisible input (say, an ambulance) but they, in turn, cannot be physically subdivided without changing their character (as when they are disassembled and become 'spare parts'). Cf. Fixed Costs.

Infant Mortality Rate

Deaths in one year of infants under 1 year of age divided by number of live births in that year, all multiplied by 1000.

Infectious Disease

Same as communicable disease. See External Effects, Vector. Inferential Statistics

The type of statistics in which samples are taken from which inferences are made about the character of the populations from which the samples came.

Inferior Good

Information Cost 175

A good for which a change in income causes an opposite change in demand. The income-elasticity is negative. In an extreme case and if money income does not change, it is possible to conceive of the demand for a strongly inferior good actually having a positive relationship to price, though alleged examples of this so-called 'Giffen good', named after the British statistician Sir Robert Giffen (1837-1910), are hotly contested and none are known in the health care literature. Cf. Normal Good.


The study of information and its management, processing and dissemination. Information Asymmetry

The usual asymmetry relates to the difference in the information known to a patient, or member of the public, and that known to a professional such as a doctor or nurse. Another asymmetry is that between insurers and those insured. The information asymmetries in health care have deep-reaching consequences for its organization, regulation and financing, mainly in order that the lay person (patient, potential patient, carer) is not exploited. For a fuller discussion, see Asymmetry of Information.

Information Bias

A form of bias that occurs when subjects' responses are affected by beliefs and values that colour their responses to questions that are not about such beliefs and values. Also known as 'observational bias'.

Information Cost

A form of transaction cost that relates to the cost of acquiring and interpreting information (for example, about the quality of locally provided doctors' services).

176 Informational Rent Informational Rent

The surplus over and above the minimum required by a provider to supply a service that arises because of an informational advantage (say, about costs) that they have but to which the purchaser is not privy. See Purchaser-provider Split, Rent.


Same as factor of production. The resources that are used in production processes. See Production Function.

In Situ

A Latin tag meaning 'in a particular location' or 'in its original place'. In the treatment of cancer it refers to the original location of a cancer before it has metastasized. When interventions on cells or tissue take place on the living tissue, cells and so on in the body rather than in the laboratory, the tissue and so on is said to be 'in situ'.

Instantaneous Rate

A term used by some epidemiologists to mean what economists simply call 'rate'.

Instrumental Variables

A method of statistical estimation of models with endogenous regressors (that is, regressors that are correlated with the error term). It relies on variables ('instruments') that are good predictors of an endogenous regressor but that are not related to the error term. These can be used to purge inconsistency caused by endogeneity.


Health insurance consists of a contract between the client and the insurer to the effect that, in the event of specified events occurring, the insurer will pay

Intangibles 177

certain sums of money either to the insured person or to the health service agency. By pooling risks the insurer is able to select premiums that actuarially (after allowances for other expenses and so on) make it worthwhile for the purchaser. For the insured person, the advantage of insurance is that the probability of a large financial loss through lost earnings or expenses of medical care is exchanged for the certainty of a smaller loss (the payment of a premium). The standard expected utility explanation for people insuring is as follows. The figure shows how utility varies with income. Diminishing marginal utility of income is assumed. When income is $30 000, utility is Oa, when income is $5000, utility is Ob. Suppose that an uninsured individual would have to pay out $25 000 if they fell ill. Let the probability that this will occur be taken as 0.4. The expected value of income is therefore 0.4 x $5000 + 0.6 x $30 000 = $20 000. The expected utility of this expected income is Oc (0.4 x Ob + 0.6 x Oa), assuming that the utility function stays where it is in sickness or in health. Now, however, suppose that insurance can be bought at an actuarially fair premium of $10 000. Paying this sum (for certain) leaves an income of $20 000, whose (certain) utility is Od. Since Od > Oc, plainly the expected utility-maximizing individual will prefer Od, the insurance choice. Such an individual will also still choose to insure even when the premium is actuarially unfair, so long as it is not too unfair. See also Adverse Selection, Copayment, Creaming, Deductible, Dumping, Loading, Moral Hazard, Skimping.


The literal sense of 'not capable of being touched' is not the general sense in which this term is used in economic analyses. Often misnamed 'intangible costs' in some cost-effectiveness analyses, these effects are usually undesired

Income ($000s)

178 Integrated Care states or consequences of decisions such as pain, disutility and disappointment that have it in common that they are not quantified or measured. It is not a satisfactory term since few, if any, consequences are truly intangible in this sense. There are, in fact, many quantifying measures of pain, disutility and so on. See Tangibles, Utility.

Integrated Care

A medical benefit programme in the USA that is provided by an employer and which coordinates workers' compensation insurance with group health coverage to provide seamless medical care to the employee. Two separate insurance policies are issued: one for workers' compensation and one for health insurance.

Intellectual Property Right

These (IPRs) are exclusive private property rights such as copyrights, trademarks or patents to use ideas in particular ways and for particular purposes which deny their use to others without agreed compensation of the owner.

Intention to Treat

A method of analysis in randomized clinical trials in which all patients who are randomly assigned to one of the treatments are analysed together, regardless of whether or not they actually received or completed that treatment. One of the reasons for this type of analysis is to guard against any bias that might be introduced when dropping out is related to the outcome.

Interdecile Range

The central 80 per cent of (ordered) observations (that is, excluding the first and tenth deciles). See Quantile.


A payment for the use of borrowed money denoted as a percentage of the sum borrowed. See Discounting, Internal Rate of Return, Time Preference.

Intermediate Good 179

Interest Group Theory

The basic theory comes from the economic approach to political decision making, in which government activities are viewed as processes through which wealth or utility is redistributed between individuals and groups. For some, the unit cost of collectively organizing so as to procure a transfer from others is less than the value of the transfer; for others, the contrary is the case. People can thus be seen as demanders and suppliers of transfers. Representative democracy and its agents are seen as the mechanisms through which these interests are played out and equilibria established.

Interior Solution

An equilibrium that is not a corner solution. For example, in the figure, the tangency of the indifference curve with the budget line is an interior solution. Cf. Corner Solution.

Intermediate Good

A good or service that does not itself yield utility to an individual but that might be used to create another good or service that is a final good or be used in conjunction with other goods and services to yield utility. Although it is sometimes said that health care does not yield utility (apparently on the ground that illness has negative utility), cost-effective health care does: that is (expected) utility is higher with it than without, even though utility might have been even higher had the need for health care not arisen in the first place.

Good X

180 Internal Cost and Benefit

Internal Cost and Benefit

A cost or benefit that accrues to the decision maker in question rather than being thrust upon an external party. Cf. Externality.

Internal Market

Market-like arrangements used within publicly provided services like health care. The central characteristic of internal markets is that the players are divided functionally into purchasers (sometimes called 'commissioners') and providers with the former contracting with the latter to provide services of specified types to a specified group of clients (usually defined on a geographical basis) at an agreed cost and to agreed standards. The UK's National Health Service is essentially organized as the world's largest internal market, in which Primary Care Trusts commission (they are also providers of primary care services) hospitals to provide secondary care. See Purchaser-provider Split.

Internal Rate of Return

That discount rate (see Discounting) that makes the net present value of costs and benefits equal zero. Thus, with Bt and Ct representing costs and benefits in year t, the annual internal rate of return is r in the formula:

Internal Validity

The reliability and accuracy of a clinical trial's results. Cf. External Validity. International Classification of Diseases

The International Classification of Diseases (ICD) is designed to promote international comparability in the collection, processing, classification and presentation of mortality statistics and is published by the World Health Organization. The current classification is the tenth edition (ICD-10). The codes are as follows:

International Network of Agencies for Health Technology Assessment 181


Infectious and parasitic diseases




Diseases of the blood and blood-forming organs


Endocrine, nutritional and metabolic diseases, and immunity dis-



Mental and behavioural disorders


Diseases of the nervous system and sense organs


Diseases of the circulatory system


Diseases of the respiratory system


Diseases of the digestive system


Diseases of the skin and subcutaneous tissue


Diseases of the musculoskeletal system and connective tissue


Diseases of the genitourinary system


Complications of pregnancy, childbirth and the puerperium


Certain complications originating in the prenatal period


Congenital malformations, deformations and chromosomal disor-



Symptoms, signs and ill-defined conditions


Injuries, poisonings and certain other consequences of external



External causes of morbidity and mortality

International Classification of Functioning, Disability and Health

The World Health Organization's comprehensive definition of disability. ICF's website is

International Network of Agencies for Health Technology Assessment

An international network of health technology assessment agencies. The Network aims to accelerate exchange and collaboration among agencies, promote information sharing and comparison, and prevent unnecessary duplication of activities. Its website is at

182 International Society for Pharmacoeconomics and Outcomes Research

International Society for Pharmacoeconomics and Outcomes Research

ISPOR is a multidisciplinary and multiprofessional international organization for promoting pharmacoeconomics and health outcomes research. Its website is

Interpersonal Comparisons of Utility

An influential book by Lionel (later Lord) Robbins (1898-1984) entitled An Essay on the Nature and Significance of Economic Science (London: Macmillan, 1932) provided not only the most commonly met definition of economics that is still in use (see Economics) but also introduced into economics the highly influential distinction between normative and positive. In positive economics, making interpersonal comparisons of utility has been regarded, at least by economists influenced by logical positivism, as 'meaningless' partly on the grounds that one person's utility is not observable to anyone else and partly because making such interpersonal comparisons was held to involve ethics -and ethics, according to logical positivism, is scientifically meaningless. In welfare economics a similar ban on making interpersonal comparisons exists amongst staunch users of the Pareto criterion but on less clear grounds, since this seemed to deny welfare economics the possibility of addressing most practically relevant ethical issues in public policy (even Pareto himself did not hesitate to make them when necessary, as in policy judgments). Interpersonal comparisons are explicitly disallowed in the Arrow social welfare function, and Arrow himself described interpersonal comparisons of utility as having 'no meaning'. Thus, for example, policy measures to alleviate extreme poverty might be agreed to be highly desirable but they could not be Pareto improvements if they were to involve involuntary sacrifices by the rich (they might be actual improvements but the criterion could not say whether that was so).

Yet people plainly have empathy and make interpersonal comparisons of subjective feelings and experiences all the time, especially within families and other groups having important things in common, and the 'states of mind' of others are not invariably invisible, though we may sometimes be deceived about them, nor is our objective behaviour uninfluenced by what we perceive others to feel. While several very distinguished economists (some of whom are mentioned in the Preface) have provided penetrating analyses involving interpersonal comparisons of utility, many still do their best to avoid analysis involving them.

Health economists have tended to be far less squeamish regarding interpersonal comparisons than other economists, especially those adopting the

Interval Scale 183

extra-welfarist position, largely because health and the equity of its distribution lie at the heart of so much public policy and a concern on the economists' part that economics be able to contribute to the solution of the enormous resource allocation issues that arise in the field of health. This is not to suggest that it is any economist's business to make distributional value judgments; rather it is to suggest that their orderly discussion (by economists among others) in public policy debate is highly desirable and to the benefit of those whose business it is to make such judgments. See also Arrow Social Welfare Function, Perspective, Quality-adjusted Life-year, Social Welfare Function, Utility.

Interquartile Range

The central 50 per cent of (ordered) observations, that is, excluding the first and last 25 percentiles.

Interrater Reliability

An indicator of the consistency of the rating or score assigned to an entity by different judges. Cf. Intrarater Reliability.

Interrupted Time Series

A study design in which measurements are taken over time, interrupted by occasions of treatment.

Interval Regression

A variant of the orderedprobit model that can be used when threshold values are known.

Interval Scale

A scale of measurement in which, like temperature measurement, the ratios of intervals between the points on the scale are the same for each set of possible numbers and the zero point is arbitrary. Each set of possible numbers is a linear transformation of another. See Utility.

184 Interviewer Bias

Interviewer Bias

A form of bias that arises in social surveys when the expectations or prejudices of the interviewer colour the respondents' responses.

Intrarater Reliability

An indicator of the stability of the rating or score assigned to an entity by the same judge on different occasions. Cf. Interrater Reliability.

Investigation of a New Drug

A formal stage of testing a new drug in the USA for which approval from the Food and Drug Administration is required before trials on human subjects may proceed.


Investment is the change in the stock of capital over a period. In national income accounting, investment (descriptively) consists of expenditures on house building, plant and equipment, and stocks (inventories). In each case, it is only new output produced during the accounting period that is included.

See Gross Investment, Net Investment.

Investment Appraisal

Same as option appraisal.

Invisible Hand

Describes the way in which markets apparently coordinate the activities of thousands of people without any evident 'steering'. See Price Mechanism.

Isoquant 185

Involuntary Unemployment

Unemployment that exists when workers are willing to accept jobs at the going wage but cannot find vacancies.

Acronym for Independent Practice Association. IPR

Acronym for intellectual property right.


A line in a two-input diagram along which costs are constant. Similar to a budget constraint. See Isoquant.

Isoproduct Curve

Same as isoquant.


A contour in a two-input diagram showing the lowest combinations of the two necessary in order to produce a given rate of output. Being 'on' an isoquant implies that the organization in question is technically efficient. Selecting an appropriate point on the isoquant will produce cost-effectiveness (the opportunity cost of producing that rate of output will be minimized). To achieve this one needs to know the prices (ideally the marginal opportunity costs) of the two inputs. The cost-minimizing combination of inputs at each rate of output is where the isoquant for that output rate is tangential to an isocost line. Selecting the appropriate isoquant (and, of course, the appropriate point on it) will produce general efficiency in the sense of marginal cost equals marginal value. To achieve this one needs to know the marginal social value of the output in question. See Cost-effectiveness Analysis.

186 Iso-utility Curve Iso-utility Curve

Same as indifference curve.

Item Non-response

Occurs in surveys when a respondent does not provide data for a particular variable.

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