Paasche Price Index

The Paasche index compares the cost of purchasing the current basket of goods and services with the cost of purchasing the same basket in an earlier period. It is an index number in which prices are weighted by current quantities:

PP = £ PnQn /£ PoQn where PP is the Paasche price index, Pn is the price per unit in period n and Qn is the quantity produced in period n. Named after the German economist Hermann Paasche (1851-1925). Cf. Laspeyres Price Index.


The medical specialty concerned with diseases of children. (Also spelled pediatrics.)

Paired Comparison

An experimental method in which raters compare two states of health at the same time and record one as 'better' than the other. An interval scale can be derived using this method and Thurstone's Law of Comparative Judgment.

Pairwise Comparison

A method of eliciting people's preferences for various characteristics of health services. It proceeds through survey instruments that ask subjects to make such (pairwise) comparisons as whether they prefer a general practitioner's surgery to have longer opening times combined with a night time deputizing service or shorter daytime opening combined with the general practitioners taking their own out-of-hours calls. See Conjoint Analysis.

248 Palliative Care

Palliative Care

Palliative care is mainly directed at providing relief to terminally-ill people through symptom and pain management. The goal is not to cure, but to provide comfort and emotional ease and to maintain the highest possible quality of life for as long as life remains. Also known as 'comfort care'.


An epidemic that is geographically widely dispersed. Panel

A group of respondents in a survey. As a member of such a panel, each may take part in several surveys or events over the course of a year or sequence of years.

Panel Data

Survey data in which each respondent has been observed several times. Parallel Export

An outward flow of goods in parallel trade. Parallel Group

A design feature of some clinical trials in which the treatment being investigated and the control are applied simultaneously to two separate groups of subjects. This is different from a crossover design where each subject gets the treatment and then the control (or the control and then the treatment) in sequence. Cf. Crossover Design.

Parallel Import

An inward flow of goods in parallel trade.

Parameter 249

Parallel Trade

A kind of arbitrage in which drugs are imported without the manufacturer's consent into a jurisdiction from a market having lower prices. Since drug prices are regulated in most countries, parallel trading is unlikely, however, to produce the usual implication of arbitrage - the emergence of a single (or close to single) price for each product overcoming inefficiencies arising from uncompetitive practices - because the price differentials reflect efforts to earn a return on research and development (R&D) investment rather than differences in production costs. Parallel trade, though legal in some jurisdictions (for example within the EU), is bitterly opposed by the pharmaceutical industry because it undermines the value of a patented product and because it effectively imports the results of other countries' regulatory schemes. It is not clear that parallel trade redounds particularly to the benefit of consumers or third party payers, as distinct from that of the parallel traders.


Parameters do not relate to the actual measurements or attributes of a variable but are quantities that define a theoretical model. For example, the coefficients on the input variables in a production function are parameters, as are the mean and standard deviation of a theoretical distribution which might be used to characterize an empirical distribution having the same estimated mean and standard deviation. The intercept and slope of a simple regression line (the regression coefficients) are likewise (like error variance) parameters of the regression model.

Parameters can also be values that are altered to see what happens in a model or a system. For example, the construction of a partial equilibrium demand curve normally assumes constant real income but it is often interesting to ask what happens if real income changes. In doing this one is effectively treating real income as a parameter rather than a value in an observed data set. The cost-effectiveness of a screening programme will depend on, amongst other things, the sensitivity and specificity of the screening test. In assuming different values for them in order to discover the consequences for cost-effectiveness, one is treating them parametrically. The term 'parameter' is often misused by, for example, being confused with variable or, even more vulgarly, with 'perimeter', as in the awful phrase 'within these parameters'.

250 Parameter Estimation by Sequential Testing

Parameter Estimation by Sequential Testing

PEST is a method for eliciting responses from subjects in experimental situations, for example, when measuring quality-adjusted life-years.

Parametric Test

A test that makes particular assumptions about distributions. Pareto Efficiency

A state of the world in which no one can have their welfare (as they see it) improved without someone else having their welfare (as they see it) reduced.

See Efficiency, Pareto Optimality.

Pareto Improvement

A change such that at least one person is better off (as judged by them) and no one is worse off (as judged by them). See Pareto Optimality.

Pareto Optimality

An allocation of resources such that no one can be made better off without at least one other person being made worse off. In both cases, being better off or worse off is judged from the viewpoints of the individuals in question. Its attraction to economists is threefold: (a) it does not require the direct comparison of individuals' utilities; (b) it is readily applicable to market transactions, where compensation takes place as a matter of course, usually in monetary form; (c) it seems to be relatively uncontroversial; after all, if anyone who could conceivably object to a proposed change is adequately compensated (as they see things), then who could - or ought to -possibly object? This gives away the implicit liberal political underpinning of the Paretian approach, which is an attraction to some and unappealing to others.

The Paretian approach is not able to categorize changes as desirable or undesirable when some have uncompensated losses. It is a vulgar error to infer from this that the Pareto criterion rules such changes out. It does not; it is simply silent about them. It is also silent about changes whose purpose is

Partial Equilibrium 251

to affect the distribution of income, or health (or utilities). It is, in fact, silent on quite a lot of important issues.

Economists have amused themselves (probably not anyone else) by considering awkward cases, like the negotiations that might be successfully concluded between a masochist and a sadist and how they can be regarded in terms of welfare enhancement. They have also examined the situation when transfers of income, otherwise not evaluatable in Paretian terms, are themselves sources of utility (for example to charitably inclined people). The approach is named after Vilfredo Pareto (1848-1923), the Italian economist who was a leader of the Lausanne School of Economics. See Efficiency, Extra-welfarism, Interpersonal Comparisons of Utility, Pareto Improvement, Welfare Economics.

Pareto Optimum

A state of the world in which no one can have their welfare (as they see it) improved without someone else having their welfare (as they see it) reduced. Same as Pareto efficiency. See Pareto Improvement, Efficiency.

Pareto-preferred Move

Same as a Pareto improvement.

Partial Correlation

The correlation between two variables controlling for any interaction they may have with other specified variables. Cf. Multiple Correlation.

Partial Equilibrium

The 'partial' element in this term refers to a theoretical ploy used in economics to simplify analysis by focusing on the principal relationships and setting aside feedback effects and other effects deemed to be non-central, even at the price of some compromise in logical coherence. 'Equilibrium' refers to the solution of a set of simultaneous equations, some of which describe behavioural reactions to parameter changes. Thus a simple demand and supply analysis might posit a linear demand function, supply function and equilibrium condition:

252 Partial Equilibrium Theory

The equilibrium price is thus (a - c)/(d + b). All else is held constant (ceteris paribus) notwithstanding the fact that a change in price will affect the purchasing power of money income (so real income is NOT constant and the good may have a positive or negative income-elasticity) and that a change in S might affect the demand for labour and hence a person's income (so money income is not constant either). Absence of side-effects such as these can be regarded as stipulations for the circumstances under which the theory in question is applicable (that is, when the impact of a price change on income is likely to be minute because, say, the good whose demand is being investigated occupies a minute fraction of an individual's expenditure). When this is not sustainable a general equilibrium approach must be taken, or at least one that explicitly takes account of the consequential effects of any initial disturbance to equilibrium. See Nash Equilibrium.

Partial Equilibrium Theory

Classic demand-and-supply analysis in which each market is treated in isolation from all others. Cf. General Equilibrium Theory. See Partial Equilibrium.

Partworth Utility

The partworth is the element of the utility of a service that attaches to a particular attribute. See Conjoint Analysis.


A patent for an invention is a territorial intellectual property right granted by an official agency of the government to the inventor, giving the inventor the right for a limited period to stop others from making, using or selling the invention without the permission of the inventor. It is a temporary monopoly. When a patent is granted, the invention becomes the property of the inventor, which - like any other form of property or business asset - can be bought, sold, rented or hired. Patent laws exist in order to reward, and hence encour-

Payment by Results 253

age, innovation and invention. They have been particularly important for the pharmaceutical industry.

Patent protection is usually for 20 years from the date the patent application was filed. The practical life of most pharmaceutical patents is much shorter than this because it takes many years to bring a product to market, satisfy safety and efficacy regulatory agencies and to negotiate prices. Seven to ten years may be a realistic effective patent life over which a product must recoup its development costs (and those of other 'failed' products). Some countries permit extensions to a patent's term for a further term, usually to compensate patentees for delays in securing approval to market a drug.

Some countries allow the production, sale or use of a patented product, without the patent owner's permission, for the purposes of obtaining permission to market the product. Such an exception to patent rights (sometimes known as 'springboarding') is intended to allow generic drugs to enter the market as soon as possible after the patent on the drug expires.


The postulated pathway through which an organism (pathogen) such as a bacterium or virus produces disease.


The science of diseases of the body. It is also used to characterize the symptoms of a disease.

Payment by Results

This has a special connotation in the National Health Service of England, where it refers to the system, introduced in 2002, of financial controls and rewards through which the central ministry influences providers throughout the care delivery service. Providers are paid for the activity they actually deliver. Commissioners will have sufficient funding to look for alternative providers if agreed activity levels are not met. Primary Care Trusts will commission the volume of activity required to deliver service priorities, adjusted for case-mix from a range of providers using standard national tariffs for Healthcare Resource Groups. The tariff is adjusted for regional variation in wages and other costs of service delivery using a nationally determined formula.

254 PBAC


Acronym for Pharmaceutical Benefits Advisory Committee. PBI

Acronym for Pharmaceutical Benefits Scheme. Percentile

Same as centile. See Quantile. Performance Bias

A form of bias in clinical trials arising from the use of interventions that are not a formal part of the trial.


The period between the 28th week of pregnancy and the end of the first week of life.

Permanent Income

The regular annuity for an individual or organization whose present value equals the wealth of the individual or organization. It is used in economics as an alternative to current income on the grounds that people are more likely to consume, save and so on in relation to permanent income than to transitory income which may have substantial ups and downs.

Person Trade-off Method

Originally called the 'Equivalence of Numbers' method of creating a 'Quality of Well-Being' scale, this is a method of assigning utilities to health states that works as follows: subjects are asked a question of the following kind: 'If x people have health state A (described) and y have health B, and if you can

PEST 255

only help (cure) one group, which group would you choose?' One of the numbers x or y is then varied until the subject finds the two groups equally deserving of their vote. The undesirability (disutility) of situation B is x/y times as great as that of situation A and this ratio provides the index of the utility of one state relative to the other. See also Standard Gamble, Time Trade-off Method.


The 'viewpoint' adopted for the purposes of an economic appraisal (cost-effectiveness, cost-utility studies and so on) which defines the scope and character of the costs and benefits to be examined, as well as other critical features, which may be social value-judgmental in nature, such as the rate of discount. The perspective may be set by a client or determined by the analyst. Most textbooks advocate the use of the social (or 'societal') perspective, according to which all potential costs and benefits are to be included regardless of who bears or receives them. However this is merely a value judgment of the authors that the conscientious investigator need feel no scruple in ignoring. It has the virtue of inclusivity but the vice of demanding much work that may be irrelevant in particular circumstances. It also has the more dangerous vice of encouraging a belief that a single perspective, whether inclusive or exclusive, is the appropriate way to perform such analyses. In some cases, particularly where the potential clients for a study are heterogeneous in their interests and values, it may be desirable to adopt more than one perspective (for example, the perspective of workers and employers is likely to differ concerning the cost-effectiveness of health and safety practices in the workplace). Distributional issues, such as the weights to be attached to health gains accruing or denied to different sorts of people (old/young, fit/ill, geographical location and so on) ought in principle to be settled within any discussion of perspective, but they rarely are. For two contrasting views on perspective, see Marthe R. Gold, Joanna E. Siegel, Louise B. Russell and Milton C. Weinstein (eds) (1996), 'Appendix A: Summary Recommendations', in Cost-Effectiveness in Health and Medicine, New York and Oxford: Oxford University Press; chapter 5 in National Institute for Clinical Excellence (2004), Guide to the Methods of Technology Appraisal, London: NICE.


Acronym for parameter estimation by sequential testing.



See Pharmaceutical Management Agency.

Pharmaceutical Benefits Advisory Committee

An Australian statutory body that makes recommendations and gives advice to the Minister of Health about which drugs and medicinal preparations should be made available as pharmaceutical benefits. No new drug may be made available as a pharmaceutical benefit unless the Committee has so recommended. The Committee is required by the Act to consider the effectiveness and cost of a proposed benefit compared to alternative therapies (not just placebo).

Pharmaceutical Benefits Scheme

The Australian public support system for subsidizing approved prescription drugs. Its web site is http://www.health.gov.au/pbs/. See Pharmaceutical Benefits Advisory Committee.

Pharmaceutical Management Agency

An agency of the New Zealand government that conducts economic appraisals of drugs, maintains a list of approved subsidized drugs and manages the purchasing of hospital pharmaceuticals. Its web address is http://www.govt.nz/ urn.php?id=2%7C140.

Pharmaceutical Price Regulation Scheme

The Pharmaceutical Price Regulation Scheme (PPRS) regulates the overall profitability of pharmaceutical companies with sales of branded prescribed medicines to the National Health Service in the UK. Its objects are to secure the provision of safe and effective medicines for the NHS at 'reasonable' prices; promote a strong and profitable pharmaceutical industry capable of sustained research and development; and encourage the efficient supply of medicines to pharmaceutical markets in the UK and elswhere. It operates through negotiation based on companies' financial records and regulates both the return on capital (usually restricted to a range pre-tax of 17-21 per cent on

Physiatry 257

assets) and prices. It allows freedom of pricing for all new chemical entities, requires companies to seek permission for any price increases (which have to meet particular criteria), requires companies with NHS sales in excess of £25 million per annum to submit data on sales, costs, assets and profitability and to repay any excess profits over an agreed return on capital. Its web site is at: http://www.dh.gov.uk/PolicyAndGuidance/MedicinesPharmacyAndIndustry/ PharmaceuticalPriceRegulationScheme/fs/en.


The economics of drugs (cost-effectiveness and cost-utility analysis of their effects) and of the pharmaceutical industry.


The science of the action and/or mechanism of action of drugs on living tissue.

Phases in Clinical Trials

Clinical trials on humans are conducted in phases, prior to which tests on animals for toxicity will have been completed. Each phase has a different purpose. In Phase I trials, researchers test a new drug or treatment in a small group of healthy people (usually less than 100) for the first time to evaluate its safety, determine a safe dosage range and identify side-effects. In Phase II trials, the treatment is given to a larger group of people (100+) with the disease to see if it is effective and to further evaluate its safety. In Phase III trials, the treatment is given to large groups of people (1000-3000) preferably in doubleblind trials (sometimes multi-centre) to confirm effectiveness, monitor side-effects, compare it to commonly used treatments and collect information that will allow the drug or treatment to be used safely. There are also Phase IV trials: postmarketing studies yielding additional information about the drug's risks, benefits and optimal use. Cf. Postmarketing Surveillance.


Same as rehabilitation medicine, comprising such specialties as occupational therapy, physical therapy, speech therapy, audiology, prosthetics and orthotics.

258 Physician Behaviour Physician Behaviour

Doctors' behaviour is usually assumed by economists to be utility-maximizing behaviour in which the main arguments of the utility function are personal wealth, personal status (professional and social) and patient welfare/health. The weights attaching to these seem to be highly variable. More in the tradition of satisficing theory, some theories posit a target income. Some models have boldly assumed that the medical profession seeks to operate as a wealth-maximizing price-discriminating monopoly, and some professional behaviour in some jurisdictions seems consistent with this idea.

Physician Extender

While there is no precise or universally agreed definition of the scope of a physician extender's work, the term always refers to an advanced registered nurse practitioner or a physician assistant whose skills have been enhanced by an appropriate course of training. The idea is to substitute some of the extender for some of the physician.

Physician-induced Demand Same as supplier-induced demand.


The science of the functions of living organisms and their various parts. Physiotherapy

The use of physical exercise, massage and manipulation for the prevention and treatment of stress or trauma.


A figure showing the distribution of a non-continuous variable (such as social class) in which the size of the slice for each indicated value is proportional to the relative frequency of observations in that category of the variable.

Placebo Effect 259

In the figure, the slices are proportional to the frequency of words of various lengths in the first sentence of the entry for Bar Chart. The numbers above the percentages are the lengths of words in letters beginning with the smallest (1) and moving clockwise.

Ping-pong Method

A method of ascribing values to entities like health states or the equilibrating probability in a standard gamble experiment by successive approximations from above and below.


A non-active apparent treatment used in a clinical trial that is in appearance indistinguishable from an active treatment being investigated. The idea is to identify the effect of the specific treatment under investigation as distinct from 'treatment' in a general sense. From the Latin, meaning 'I will please'. See Placebo Effect.

Placebo Effect

The impact on health that a placebo may have even though it is not known to contain any active therapeutic ingredient. See also Hawthorne Effect.

260 Planning-Programming-Budgeting System Planning-Programming-Budgeting System

Broadly including output budgeting and programme budgeting.

Plumbing Diagram

May refer to Alan Williams' taxonomizing account of the scope of health economics. See Williams' Schematic of Health Economics.


Same as chiropody.

Point Estimate

A single sample statistic used to estimate a population parameter. Cf. a range of plausible values.

Point of Service Plan

Point of Service is a type of plan in the USA whose members can choose their services when they need them, either in a Health Maintenance Organization or from a provider outside the HMO at some cost to the member in the form of a reduced benefit level. The term is also used to describe a plan in which the primary provider directs services and referrals.

Point Prevalence

The prevalence of a particular condition at a particular date. Poisson Distribution

A distribution having the characteristic that the mean is equal to the variance. Named after the French mathematician Simeon Denis Poisson (1781-1840).

Positive Controls 261

Poisson Regression

A statistical model for count data based on the Poisson distribution. See also Negbin Model.

Polynomial Regression

A regression procedure for estimating non-linear relationships between dependent and independent variables (it may be quadratic, cubic and so on).

See Multinomial.


The total collection of individuals, events, technologies or other entities of interest (of which the human population of a jurisdiction is the most common example) from which samples are often taken.


Refers to the ability of an individual to retain their rights to medical care when they leave one jurisdiction for another or one insurance scheme for another. With full portability one's rights move with one. A characteristic of a health care system that is commonly desired or sometimes (as in Canada) required by statute.

POS Plan

Acronym for Point of Service plan. Positive Controls

The patients in a trial who receive a therapeutically active treatment (that is, not placebo) as controls in a trial of another active therapy.

262 Positive Economics Positive Economics

That branch of economics that is social science in the sense that it offers hypotheses and tests them empirically. It contrasts with welfare (or normative) economics in not making judgments about what is good for society. There is, however, good and bad positive economics, so even positive economics does not free one from the necessity of making value judgments, for example about what is 'good science'. Judgments about what is good for society are not a part of positive economics. Not all economists are as scrupulous as they ought to be in making these distinctions (this is a value-judgment) and some claim to be value-free in terms of social values when they are actually not being value-free at all (this is not a value-judgment). See Interpersonal Comparisons of Utility, Welfare Economics.

Positive Predictive Value

Positive predictive value (PV+) is the proportion of individuals with positive test results who really do have the disease being investigated. In the figure,

PV+ = a/(a + b). Cf. Negative Predictive Value, Sensitivity, Specificity.

Diagnosis Present Absent





(true positive)

(false positive)





(false negative)

(true negative)

Positive Rights Good

Although it is not a term in economics, the notion of positive rights is closely linked with the notion of a merit good. Positive rights are rights or guarantees to have certain things, in contrast to negative rights which are the rights to be free from certain things, like abuse or coercion. If a right exists at all, it is positive when its realization entails some action on the part of others and it is

Potential Pareto-efficiency 263

negative when its realization entails inaction on the part of another. Health care is often used as an example of a positive rights good.

Posterior Distribution

A probability distribution that takes account not only of the data but also of the prior distribution. See Bayesian Method.

Posterior Probability

A belief about the likelihood of an event that is a modified prior probability as the result of additional information. See Bayesian Method.

Postmarketing Surveillance

Routine follow-up studies of the use of drugs after their licensing for public use. A means of discovering effects of long-term use and any undiscovered adverse effects not revealed during earlier trials. See Phases in Clinical Trials.


After, but within one year of, giving birth. Post-test Odds

The odds that the patient has the target condition after a diagnostic test has been carried out (calculated as the pre-test odds times the likelihood ratio).

Potential Pareto-efficiency

The idea that, if gainers from a change could compensate losers and still gain, there is an increase in social welfare (even if the compensation is not actually paid). Another version is the idea that, if potential losers can offer gainers an equivalent gain sufficient for them to forgo the proposed change and still be better off than with the change, the change will not enhance welfare (even if

264 Power the equivalent is not actually paid). These contortions are gone through in order to avoid having to face up to the reality that a dollar of gain may not be of the same value to each person. See Efficiency.


See Statistical Power.

Acronym for Preferred Provider Organization.

Acronym for purchasing power parity.


Acronym for Pharmaceutical Price Regulation Scheme. Pragmatic Trial

A species of controlled clinical trial. Pragmatic trials measure effectiveness as distinct from efficacy and are not so much concerned with scientific questions of explanation (why something works or does not work) as with the degree of beneficial effect to be expected in real clinical practice. The pragmatic trial thus seeks to maximize external validity. A pragmatic trial is much less likely to use placebo as a comparator procedure than an explanatory trial, since placebo is unlikely in most cases to be a real-world alternative to the technology under review. Cf. Explanatory Trial.

Preadmission Review

A review of a patient's needs to determine whether admission to hospital is necessary.

Preference Reversal 265

Preclinical Trials

These are trials in the test tube or on animals designed to test such basic characteristics of drugs as toxicity and the strength and frequency of dosages that will be both safe and effective. They are a necessary preliminary stage before trials in humans may be carried out.

Predictive Validity

An instrument or measure that permits accurate predictions of future states of the construct in question.


Choices are usually assumed in economics to be the result of an interaction between preferences and constraints, where preferences are embodied in a utility function. 'Preferred' often means 'chosen rather than'. Most economists take preferences as primitive concepts, about which one need not enquire much (for example, as to their origin, causes or merit). Difficulties start to arise when people have preferences about (other people's) preferences or when they have preferences that everyone agrees are appalling (for example, a preference - taste? - for cannibalism). Preferences are usually also taken as constant over time. This poses particular difficulties when studying processes (like much education and some health care) whose aim (or consequence, regardless of aim) is to change people's values and/or preferences.

Preference Function

Same as utility function.

Preference Reversal

Preference reversal is a phenomenon widely observed in experiments designed to test the validity of the assumptions usually taken as underlying economic theories of behaviour (see Utility). In choices between pairs of simple monetary gambles, it has been found that individuals choose bets involving high probabilities of small gains (so-called P-bets) rather than bets offering a smaller chance of a larger prize (so-called $-bets) but attach a

266 Preferred Provider Organization higher monetary value to the $-bets. This evidence has generated a controversy as to whether the preferences that are assumed to underlie people's choices are better seen as context-free (the usual economic point of view, in which the means through which a preference is elicited is supposed to be irrelevant) or context-sensitive (the usual psychological point of view, in which the experimental means can affect the outcome). Preference reversal has not been much researched in health economics and so it is not known whether attempts to measure, say, willingness to pay through experimental means are biased or inconsistent as a result. See Framing Effect.

Preferred Provider Organization

A PPO differs from a Health Maintenance Organization (HMO) in that (a) the providers are paid not by the prepaying subscriber as with an HMO but by an insurance company or employer on a fee-for-service basis and (b) patients are usually able to avail themselves of non-PPO providers, albeit with substantial copayments. PPOs can range from a single hospital and its practising physicians contracting with a large employer to a national network of physicians, hospitals and laboratories which contract with insurers or employer groups. PPO contracts typically provide discounts from standard fees, incentives for plan members to use the contracting providers, and other managed care cost containment methods.


Same as antenatal.


Payment by the individual to the provider in advance of receiving (or needing) treatment.

Pre-post Study

Same as before and after study.

Prescription Drug

A drug that is available to a member of the public only when prescribed by a physician and obtained by a formally registered pharmacist. Cf. Over-the-counter Drugs.

Present Value

The value at a particular point in time of a future flow of income, health and so on. See Discounting.

Pre-test Probability

The proportion of people with the target condition in the population at risk at a specific time (point prevalence) or time interval (period prevalence). Same as prevalence.


The proportion of a population in which a particular medical condition prevails at a particular date (point prevalence) or over a period (period prevalence). Same as pre-test probability. Cf. Incidence.


Any procedure taken to stop a disease from either occurring (primary prevention) or worsening (secondary prevention). Some classifications also have tertiary prevention.

Price Discrimination

A process through which profit-seeking sellers in price-searchers' markets charge different prices for different increments of a good or service provided or charge different prices to different groups of buyers in segmented markets. In market-oriented systems of health care provision, the fact that rich patients may be charged more than poor ones for the same service has been held to be price discrimination (though the reasons given by its practitioners are




marginal cost curve

average cost curve

demand curve

\ (average revenue)

marginal revenue

Rate of output

Rate of output different).The figure shows the profit-maximizing price and output rate for a price-searcher who charges a single price (P). It is where marginal cost equals marginal revenue. Profit is shown by the shaded area. The demand curve shows not only the maximum amount that will be purchased at each price but also the maximum amount that will be paid for each additional unit of the good or service in question. For example, the maximum payable for the very first unit is Ob and the maximum payable for an additional unit when consumption is already at Q is Qa. The segment of the demand curve ba indicates the maximum amounts that would be paid by a person with this demand curve for increments of output in the range OQ. So the maximum the seller could obtain, if it were possible to charge the consumer the maximum willingness to pay, is the succession of prices in the segment, yielding additional profit Pba. In fact, in this case, one may readily see that the profit could be further increased by selling each unit at the maximum the buyer will pay up to output rate Q', where marginal cost equals price, which generates the same output rate as under price-taking conditions (though there is a transfer of consumer's surplus from consumer to seller which does not happen under price-taking).

This form of price discrimination is rarely seen in explicit form. Market segmentation is, however, widely practised. In this situation, the output is produced, we assume, under identical conditions for two (or more) segmented markets as in the second figure. The conventional profit-maximizing price is charged so that in each market the marginal cost is set equal to marginal revenue (whether by careful design or by chance) and the prices PA and PB are set in market segments A and B, respectively. The higher price is charged in the segment with the lower price-elasticity.

Price Mechanism 269

Price Mechanism 269

Price Index

A price index measures the average change in prices over time in a basket of goods and services and is used to adjust prices in periods other than the base period so as to make 'real' comparisons at constant prices. The Consumer Price Index (CPI) is a familiar example of such an index. See Laspeyres Price Index, Paasche Price Index.


A somewhat less satisfactory term for price-searching. It is less satisfactory because prices cannot be 'made' by firms independently of the demand for their product. Any firm that is not a price-taker has to discover (guessing, searching for, copying similar others, doing market research on, running econometric models of, consulting entrails concerning) the price that is most advantageous to it.

Price Mechanism

The market mechanism that sends price signals to producers about what to produce, to labour about whether to work and at what, and that allocates goods and services amongst consumers. Markets and the rules by which they operate are human creations and, in practice, are rarely perfect (not only in design but also in execution, since their operation is itself costly). It is usually assumed (by economists) that prices settle in an equilibrium from which they are disturbed by exogenous shocks. Provided the system as a whole is stable,

270 Price-searching a new equilibrium is expected to be established. The remarkable feature of this mechanism is that it works without any general external control or planning mechanism other than the existence (and enforcement) of exchangeable private property rights in goods and services, which define the uses to which the goods and services may be put (the so-called 'invisible hand'). There are many reasons why any particular market system may be very slow to adapt to change, which are as fascinating to contemplate as is the 'invisible hand' itself. One should not jump to the conclusion that, simply because a particular price mechanism operating in a particular market with its particular set of (human-made) rules succeeds in allocating resources, it does so in the best imaginable (or even best possible) way. See also General Equilibrium, Market Failure, Partial Equilibrium.


The market phenomenon that exists when a seller's decision to increase or reduce the rate of supply of a good or service will change its market price. The problem for the seller is to find the output rate and price that maximize their objective function (usually assumed to be profit). Since the demand curve that confronts the seller will have negative slope (cf. the demand curve under price-taking) the point on this curve that is best from the seller's perspective may need to be searched for: it is not given (as under price-taking); hence the name. Whatever the method used by the seller to locate the 'best' price, in logic, the profit-maximizing price and rate of output are determined by equality between marginal cost and marginal revenue. This is u PL


\ ^^ marginal cost curve

average cost curve

demand curve

(average revenue)

marginal revenue

Rate of output

Rate of output

Primary Care Trust 271

shown in the figure. The boxed area shows profit (maximized) at the price P and output rate Q, where marginal cost equals marginal revenue.


A market phenomenon under which the seller of a good or service cannot affect the market price by varying their own rate of output. The demand curve as it appears to the firm is perfectly elastic (a horizontal line) and price is not a choice variable; it is given by the market. Hence the name.

Primary Care

Primary care is that care provided by doctors and other generalists, including nurses, who are usually based in the community (as distinct from hospitals), who practise as generalists (see General Practitioner). A primary care professional (not always a physician) will frequently coordinate the care of ambulatory patients across various clinical professionals (for example dental, ophthalmic or nursing care) and other local non-clinical professionals (such as social services). They also serve as the first point of contact (gatekeepers) to the health care system as a whole. They refer patients judged to be more appropriately diagnosed and treated in other parts of the system. Primary care services commonly include health promotion, disease prevention, vaccination, family planning, health maintenance, counselling, patient education, and the initial diagnosis and first-line treatment of acute and chronic illnesses that are deemed not to require referral to a hospital-based specialist. Cf. Secondary Care, Tertiary Care.

Primary Care Trust

PCTs are trusts (since 2002) within the UK National Health Service with responsibility both for providing primary care services in their areas and for commissioning health care from hospitals and other specialist centres. They are required to develop health plans for their areas which are integrated with the plans of other agencies such as social services. PCTs have chief executives, chairs and boards comprising executive and non-executive directors. Cf. Secondary Care Trust.

272 Primary Prevention Primary Prevention

Primary prevention entails actions intended to deter, delay or prevent the occurrence or development of disease or injury by reducing risk factors. The actions include behaviour modifying actions such as health education, safety advice and legislation, as well as clinical interventions such as vaccination.

Cf. Secondary Prevention. See Prevention.


In health economics, this refers to one of the parties in the agency relationship. The principal is the party on whose behalf an agent acts. See Agency Relationship.

Principal Component

A constructed variable using factor analysis, through which many (possibly) correlated variables are collapsed into a smaller number of uncorrelated variables.

Prior Distribution

The probability distribution of a variable in the minds of analysts before they have collected any data. See Bayesian Method.

Prior Probability

A view about the probability of an event (which may be objectively or subjectively based) prior to the receipt of other information pertinent to the likelihood of that event. See Bayesian Method.

Probabilistic Sensitivity Analysis

A technique in decision analysis in which probability distributions are created for each element about which there is uncertainty. By simulating the consequences of random drawings from these distributions, it enables judgments to be formed about the robustness of decisions in relation to each element.

Producer's Surplus 273


The proportion of times (as a decimal fraction) an event would occur if an experiment were repeated a large number of times. More generally, the chances (however assessed) of an event occurring. It lies between 0 and +1. See

Bayesian Method, Likelihood.

Probability Distribution

A mathematical representation of the probability that a variable falls in the specified interval.

Probit Model

A statistical model of binary dependent variables based on the normal distribution.

Process Utility

The idea that utility might be gained from a process, like being reassured that one is well, rather than a health outcome. See extra-welfarism.

Producer Sovereignty

Not a standard term of art in economics though, on grounds of fairness, it ought to have the same status as consumer sovereignty. If the term existed, it would presumably describe a situation in which producers of goods (and services) determined the character and quantity of outputs, who consumed them and on what terms. The medical care market would seem an obviously approximate case, driven by the information asymmetry that denies non-doctors the ability to know their own needs.

Producer's Surplus

The difference between what a producer receives and the minimum required to compensate the producer for producing/selling. In the figure, the marginal cost curve (supply curve) in a price-takers' market defines the

274 Production Frontier

lower boundary of the producer's surplus (the triangle). Cf. Consumer's Surplus.

Production Frontier

Same as production possibilities curve.

Production Function

A technical relationship between inputs and the maximum outputs or outcomes of any procedure or process, also sometimes referred to as the 'technology matrix'. Thus a production function may relate the maximum number of patients that can be treated in a hospital over a period of time to a variety of inputs like doctor- and nurse-hours, and beds. For econometric purposes the relationship is usually postulated to be in a particular mathematical form, of which one is the so-called Cobb-Douglas production function, X = kAaBP, where X is the rate of output (or throughput of clients), k, a and P are positive constants, and A and B are rates of use of two inputs. The production function specifies efficient combinations of inputs required at each rate of output, viz., the fewest of each needed to produce that output (see Efficiency). Depending on the values of parameters like a and b an equal proportional increase in all inputs may entail either a larger, smaller or equal increase in output. This corresponds to increasing, decreasing or constant returns to scale.

Production Possibilities Curve

Productivity Cost 275

A locus indicating the boundary between all the combinations of goods and services that an economy can produce with given resources and technologies, and those it cannot. Its slope is the marginal rate of transformation, showing in two dimensions the minimum amount of one good or service that must be sacrificed in order to produce an additional unit of the other (or the maximum that can be produced of one for a given sacrifice of the other). Also known as a production frontier or transformation curve.

O Output of good B


This refers to the output of goods and services produced by one or more factors of production. Total factor productivity is the rate of output divided by the amount of all inputs used in production where each input is usually weighted by its share in total cost. The rate of growth of total factor productivity is sometimes also referred to as the residual after the contributions of capital and labour to the growth of gross domestic product have been accounted for. See also Average Product, Marginal Product.

Productivity Cost

A substitute term for indirect cost (or for a part of indirect costs) often chosen so as to avoid confusion with the accountants' usage of 'indirect cost'. A

276 Professional Standards Review Organizations productivity cost is the opportunity cost of an individual's time not spent in productive work activity. The status of this category of cost has been a matter of controversy, with some arguing that, if the (extra-welfarist) perspective from which a study is being conducted considers health as the only relevant outcome, then costs that do not fall on the health sector ought to be disregarded. It seems more consistent, however, with the extra-welfarist perspective to allow the objective function to include whatever those with appropriate responsibility for deciding such matters want it to include. So the minister of health (say) may require that analyses are to take account both of health consequences and of resources costs falling on the health services, the social services and the personal sector. The conventional welfarist approach would include any effects that directly or indirectly affect individuals' utilities. If a consequence of a particular intervention to improve health actually does increase work productivity, then, as a strictly practical matter, this might affect incomes, the demand for health services (and health care insurance) and generate additional resources to produce health care. It would then seem curmudgeonly for any 'minister' to treat such effects as irrelevant and ask analysts to ignore them.

Most analysts have expressed concern at the potential equity implications of including work-related productivity costs, fearing that this might lead to systematic bias in technologies that favour the working population over children, the unemployed and the retired, or the very productive over the not so productive. Of course, any procedure that ruled these costs out of all consideration would then deny decision makers the opportunity of assessing them and forming a judgment about their significance for distributional equity. This is, however, to encourage an ostrich-like approach to public decision making. See also Friction Costs, Human Capital.

Professional Standards Review Organizations

Professional Standards Review Organizations (PSROs) were mandated under United States Public Law 92-603 in order to promote cost-containment in hospitals by reducing 'overutilizatiori while maintaining 'proper quality of care'. PSROs are locally based vetting agencies responsible for conducting reviews of the quality and appropriateness of hospital services. See Utilization.


The economic concept of profit differs from the accounting concept by deducting from revenue not only the obvious costs of production but also the opportunity costs of owner's time (especially important in small businesses

Proportionality 277

like nursing homes) and the opportunity cost of capital (effectively the rate of return that could be earned on the assets if they were invested in a risk-free asset like a government bond adjusted for the kind of risk of default common to firms of this size and type). Economic profit is always less than accounting profit. In a perfectly competitive economy, profits are zero when it is in equilibrium. See Competition.


A forecast of the future progress and pattern of a disease and its symptoms. Programme Budgeting

Similar to output budgeting except that the basis for classification is the target client group (the 'programme') rather than the output or outcome in question. Examples include maternity care, child care and care of the elderly.


Usually relates to the proportion of household or personal income that is taken in taxes; a progressive tax is one for which the proportion of income taken in tax rises as income rises, a regressive tax is one for which that proportion falls, and a proportional tax is one for which it remains constant.

Cf. Regressivity. See Ability to Pay.

Proportional Hazards Regression Model

Same as Cox proportional hazards model.


Usually relates to the proportion of household or personal income that is taken in taxes; a proportional tax is one for which the proportion of income taken in tax is constant as income is the larger, a regressive tax is one for which that proportion falls, and a progressive tax is one for which it rises.

278 Proprietary Drug

Proprietary Drug

Same as over-the-counter drug.

Prospect Theory

An approach to decisions under uncertainty that provides an alternative account for the phenomenon of risk aversion to that of expected utility theory and which helps to explain why framing effects exist. Prospect theory differs from expected utility theory in assigning 'decision weights' rather than probabilities to outcomes and in assuming that decision weights tend to overweight small probabilities and underweight moderate and high probabilities. It also differs from expected utility theory in that it replaces the notion of utility with 'value', defined in terms of deviations from a reference point. The value function has a different shape for gains and losses. For losses it is convex and steep, for gains it is concave and flatter. Although hardly in current use in health economics, it is likely to make an appearance in the future, initially, perhaps, in topics like health status measurement that use experimental methods. Cf. Expected Utility Theory, Regret Theory. See Reflection Effect, Utility.

Prospective Cohort Study

An observational study of a cohort of initially disease-free individuals whose exposure to risk factors and whose health are followed over a period of time. It is usually regarded as the design of choice for an observational study. Same as observational cohort study.

Prospective Payment Assessment Commission

A US agency that advises the Congress and the Secretary of Health and Human Services on maintaining and updating Medicare payment policies for hospitals and other facility services. It is also responsible for the analysis of Medicaid hospital payments and issues related to health care reform.

Prospective Payment System

A mechanism through which US Medicare reimburses hospitals on the basis of a given sum per case in a Diagnosis Related Group.

Public Choice Theory 279

Prospective Reimbursement

Used by insurers: a method of reimbursing health service providers (especially hospitals) by establishing rates of payment in advance which are paid regardless of the costs in actual individual cases.

Prospective Study

A trial in which individuals are followed forward from a particular date and the effect of future events on them is investigated.


The specialty dealing with prostheses or prosthetic devices, like artificial limbs.


Acronym for Professional Standards Review Organizations. Psychiatry

The medical specialty concerned with mental illness. PTO

Acronym for person trade-off method.

Public Choice Theory

Based on the idea that individuals in public positions make decisions according to their own interest rather than voluntarily follow any rules for maximizing social welfare. See Median Voter Model.

280 Public Good

Public Good

A good or service that it is not possible to exclude people from consuming once any is produced (clean air is a classic example and clean water another, though one can be avoided by migration to an urban environment and the other by swimming off one of the 47 British beaches named by the European Commission in 1990 where the water was - at that time - too polluted for safe swimming). Public goods are non-rival in the sense that providing more for one person does not entail the other having any less (the marginal opportunity cost of provision to another consumer is zero). Most public goods are not wholly public in this sense and whether health care itself has significant public good characteristics is a point of debate. Some programmes (especially those called 'public health') have considerable public good characteristics and even the care consumed by an individual may have a public aspect by virtue of any 'sympathy' that others may feel, so the consumption of one may in this way affect the utility of many others. Thus, if the alleviation of someone's ill-health is valued by any other than that individual, and there is more than one such externally affected person, then the externality will have the attribute of publicness.

The first-order rule for optimizing the output of a public good entails adding the marginal value each consumer attaches to the good at a variety of outputs and selecting that output at which the sum of the marginal values (marginal social value) is equal to marginal social cost. In the figure, the two demand curves D1 and D2 are to be interpreted as marginal value curves for two individuals, 1 and 2. The boldly drawn curve D is the vertical summation of

Purchaser 281

these two curves. At output rate Q, which is the optimal rate, the individuals value additions to the output rate at amounts Qa and Qb, whose sum, Qc, the marginal social value, is equal to the marginal social cost. Note that, in economics, a public good is not defined by whether it is produced in the public sector - which also produces private goods (that is, ones that do not have the characteristics described above) - or the private (where the charitable sector often produces public goods). See External Effects, Median Voter Model.

Public Health Medicine

The study of disease prevention and promoting health through the use of collective agencies and actions (for example, population vaccination, health education, water purification). Virtually the same as social medicine.

Publication Bias

A bias in the published literature arising from the criteria (which may in part be arbitrary) used by editors to select articles for journals. The bias includes a preference for 'new' results (rather than confirmation of 'old' ones), 'positive' results (rather than 'we don't know') and familiar languages (rather those that are unfamiliar to the review team). See Systematic Review.

Pulmonary Medicine

The medical specialty concerned with diseases and abnormalities of the lungs. See also Respiratory Medicine.


A term that has acquired a special meaning in the UK National Health Service, where it denotes various collective agencies such as Strategic Health Authorities or Primary Care Trusts that have statutory powers and centrally determined budgets to commission health care and related services on behalf of local communities. See Block Contract, Payment by Results, Purchaser-provider Split.

282 Purchaser-provider Split Purchaser-provider Split

An aspect of internal markets for health care in which the purchasing or commissioning of services on behalf of groups of the population (often geographically defined) is not done by providers of services. See Commissioning.

Purchasing Power Parity

Rates of currency conversion that eliminate the differences in price levels between countries are termed purchasing power parity rates of exchange. Each is the ratio of price levels in two jurisdictions having different currencies, where the prices used are those of a common bundle of goods and services. This is sometimes called 'absolute purchasing power parity' to differentiate it from relative PPP, which states that the rate of appreciation of a currency is equal to the difference in inflation rates between it and that in another jurisdiction. The purpose of PPPs is to obtain more reliable ways of making international economic comparisons (for example, of health care expenditures) than can be done by using exchange rates (which are subject to many other determinants). The Organization of Economic Cooperation and Development (OECD) publishes PPP rates for OECD countries that are regularly updated and compared with exchange rates. The table on page 283 shows recent PPPs for the countries of the OECD in national currency units per US dollar, together with comparative price levels, which are ratios of PPPs to average exchange rates.

Purposive Sample

A sample of a set of subjects chosen not randomly but with particular criteria in mind (for example, they are the children of parents with some genetic characteristic of interest).


The probability, when the null hypothesis is true, of obtaining a sample result that is at least as unlikely as what is observed. It is often called statistical significance.

Purchasing Power Parity 283

Purchasing power parities for OECD countries, 2004

Purchasing power parities

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