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Health economics is a branch of economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 concerned with issues related to efficiency, effectiveness, value and behavior in the production and consumption of health
Health is the level of functional or metabolic efficiency of a living being. In humans, it is the general condition of a person's mind, body and spirit, usually meaning to be free from illness, injury or pain...

 and health care
Health care
Health care is the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans. Health care is delivered by practitioners in medicine, chiropractic, dentistry, nursing, pharmacy, allied health, and other care providers...

. In broad terms, health economists study the functioning of the health care systems as well as health-affecting behaviors such as smoking.

A seminal 1963 article by Kenneth Arrow
Kenneth Arrow
Kenneth Joseph Arrow is an American economist and joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972. To date, he is the youngest person to have received this award, at 51....

, often credited with giving rise to the health economics as a discipline, drew conceptual distinctions between health and other goods.
Factors that distinguish health economics from other areas include extensive government intervention, intractable uncertainty
Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...

 in several dimensions, asymmetric information
Information asymmetry
In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure...

, barriers to entry
Barriers to entry
In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies...

, externalities and the presence of a third-party agent. In healthcare, the third-party agent is the physician, who makes purchasing decisions (e.g., whether to order a lab test, prescribe a medication, perform a surgery, etc.) while being insulated from the price of the product or service.

Health economists evaluate multiple types of financial information: costs, charges and expenditures.

Uncertainty is intrinsic to health, both in patient outcomes and financial concerns. The knowledge gap that exists between a physician and a patient creates a situation of distinct advantage for the physician, which is called asymmetric information.

Externalities arise frequently when considering health and health care, notably in the context of infectious disease. For example, making an effort to avoid catching the common cold
Common cold
The common cold is a viral infectious disease of the upper respiratory system, caused primarily by rhinoviruses and coronaviruses. Common symptoms include a cough, sore throat, runny nose, and fever...

 affects people other than the decision maker.


The scope of health economics is neatly encapsulated by Alan Williams' "plumbing diagram" dividing the discipline into eight distinct topics:
  • What influences health? (other than health care)
  • What is health and what is its value
  • The demand
    Demand (economics)
    In economics, demand is the desire to own anything, the ability to pay for it, and the willingness to pay . The term demand signifies the ability or the willingness to buy a particular commodity at a given point of time....

     for health care
  • The supply
    Supply (economics)
    In economics, supply is the amount of some product producers are willing and able to sell at a given price all other factors being held constant. Usually, supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell.In economics the...

     of health care
  • Micro-economic evaluation at treatment
    This is a list of types of therapy .* Adventure therapy* Animal-assisted therapy* Aquatic therapy* Aromatherapy* Art and dementia* Art therapy* Authentic Movement* Behavioral therapy* Bibliotherapy* Buteyko Method* Chemotherapy...

  • Market equilibrium
  • Evaluation at whole system level; and,
  • Planning, budgeting and monitoring mechanisms.

Health care demand

The demand for health care is a derived demand
Derived demand
Derived demand is a term in economics, where demand for one good or service occurs as a result of demand for another. This may occur as the former is a part of production of the second. For example, demand for coal leads to derived demand for mining, as coal must be mined for coal to be consumed....

 from the supply for health. Health care is demanded as a means for consumers to achieve a larger stock of "health capital." The demand for health is unlike most other goods because individuals allocate resources in order to both consume and produce health.

The above description gives three roles of persons in health economics. The World Health Report (p. 52) states that people take four roles in the health care:
1. Contributors
2. Citizens (stewardship)
3. Providers
4. Consumers

Michael Grossman's 1972 model of health production has been extremely influential in this field of study and has several unique elements that make it notable. Grossman's model views each individual as both a producer and a consumer of health. Health is treated as a stock which degrades over time in the absence of "investments" in health, so that health is viewed as a sort of capital
Social capital
Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...

. The model acknowledges that health is both a consumption good that yields direct satisfaction and utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....

, and an investment good, which yields satisfaction to consumers indirectly through increased productivity, fewer sick days, and higher wages. Investment in health is costly as consumers must trade off time and resources devoted to health, such as exercising at a local gym, against other goals. These factors are used to determine the optimal level of health that an individual will demand. The model makes predictions over the effects of changes in prices of health care and other goods, labour market outcomes such as employment and wages, and technological changes. These predictions and other predictions from models extending Grossman's 1972 paper form the basis of much of the econometric research conducted by health economists.

In Grossman's model, the optimal level of investment in health occurs where the marginal cost
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...

 of health capital is equal to the marginal benefit. With the passing of time, health depreciates at some rate δ. The interest rate faced by the consumer is denoted by r. The marginal cost of health capital can be found by adding these variables: . The marginal benefit of health capital is the rate of return from this capital in both market and non-market sectors. In this model, the optimal health stock can be impacted by factors like age, wages and education. As an example, increases with age, so it becomes more and more costly to attain the same level of health capital or health stock as one ages. Age also decreases the marginal benefit of health stock. The optimal health stock will therefore decrease as one ages.

Beyond issues of the fundamental, "real" demand for medical care derived from the desire to have good health (and thus influenced by the production function for health) is the important distinction between the "marginal benefit" of medical care (which is always associated with this "real demand" curve based on derived demand), and a separate "effective demand" curve, which summarizes the amount of medical care demanded at particular market prices. Because most medical care is not purchased from providers directly, but is rather obtained at subsidized prices due to insurance, the out-of-pocket prices faced by consumers are typically much lower than the market price. The consumer sets MB=MC out of pocket, and so the "effective demand" will have a separate relationship between price and quantity than will the "marginal benefit curve" or real demand relationship. This distinction is often described under the rubric of "ex-post moral hazard" (which is again distinct from ex-ante moral hazard, which is found in any type of market with insurance).

Economic Evaluation in the United Kingdom

A large focus of health economics, is the microeconomic evaluation of the value of individual treatments. In the UK, the National Institute for Health and Clinical Excellence
National Institute for Health and Clinical Excellence
The National Institute for Health and Clinical Excellence is a special health authority of the English National Health Service , serving both English NHS and the Welsh NHS...

 (NICE) appraises certain new and existing pharmaceuticals and devices using economic evaluation.

Economic evaluation is the comparison of two or more alternative courses of action in terms of both their costs and consequences (Drummond et al.). Economists usually distinguish several types of economic evaluation, differing in how consequences are measured:
  • Cost-minimization analysis
    Cost-minimization analysis
    Cost-minimization is a tool used in pharmacoeconomics and is applied when comparing multiple drugs of equal efficacy and equal tolerabilityTherapeutic equivalence must be referenced by the author conducting the study and should have been done prior to the cost-minimization work...

  • Cost benefit analysis
  • Cost-effectiveness analysis
  • Cost-utility analysis
    Cost-utility analysis
    Cost–utility analysis is a form of financial analysis used to guide procurement decisions. The most common and well-known application of this analysis is in pharmacoeconomics, especially health technology assessment .-CUA in health economics:...

In cost minimization analysis (CMA), the effectiveness of the comparators in question must be proven to be equivalent. The 'cost-effective' comparator is simply the one which costs less (as it achieves the same outcome). In cost-benefit analysis (CBA), costs and benefits are both valued in cash terms. Cost effectiveness analysis (CEA) measures outcomes in 'natural units', such as mmHg, symptom free days, life years gained. Finally cost-utility analysis (CUA) measures outcomes in a composite metric of both length and quality of life, the Quality-adjusted life year (QALY). (Note there is some international variation in the precise definitions of each type of analysis).

A final approach which is sometimes classed an economic evaluation is a cost of illness study. This is not a true economic evaluation as it does not compare the costs and outcomes of alternative courses of action. Instead, it attempts to measure all the costs associated with a particular disease or condition. These will include direct costs (where money actually changes hands, e.g. health service use, patient co-payments and out of pocket expenses), indirect costs
Indirect costs
Indirect costs are costs that are not directly accountable to a cost object . Indirect costs may be either fixed or variable. Indirect costs include taxes, administration, personnel and security costs, and are also known as overhead.There are two types of Indirect Costs...

 (the value of lost productivity from time off work due to illness), and intangible costs (the 'disvalue' to an individual of pain and suffering). (Note specific definitions in health economics may vary slightly from other branches of economics.)

Health care markets

The five health markets typically analyzed are:
  • Health care financing market
  • Physician
    A physician is a health care provider who practices the profession of medicine, which is concerned with promoting, maintaining or restoring human health through the study, diagnosis, and treatment of disease, injury and other physical and mental impairments...

     and nurses services market
  • Institutional services market
  • Input factors market
  • Professional education
    Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...


Although assumptions of textbook models of economic markets apply reasonably well to health care markets, there are important deviations. Many states have created risk pools in which relatively healthy enrollees subsidise the care of the rest. Insurers must cope with adverse selection
Adverse selection
Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information : the "bad" products or services are more likely to be...

 which occurs when they are unable to fully predict the medical expenses of enrollees; adverse selection can destroy the risk pool. Features of insurance market risk pools, such as group purchases, preferential selection ("cherry-picking"), and preexisting condition exclusions are meant to cope with adverse selection.

Insured patients are naturally less concerned about health care costs than they would if they paid the full price of care. The resulting moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...

 drives up costs, as shown by the famous RAND Health Insurance Experiment
RAND Health Insurance Experiment
The RAND Health Insurance Experiment was an experimental study of health care costs, utilization and outcomes in the United States, which assigned people randomly to different kinds of plans and followed their behavior, from 1974 to 1982. As a result, it provided stronger evidence than studies...

. Insurers use several techniques to limit the costs of moral hazard, including imposing copayments on patients and limiting physician incentives to provide costly care. Insurers often compete by their choice of service offerings, cost sharing requirements, and limitations on physicians.

Consumers in health care markets often suffer from a lack of adequate information about what services they need to buy and which providers offer the best value proposition. Health economists have documented a problem with supplier induced demand
Supplier induced demand
In economics, supplier induced demand may occur when asymmetry of information exists between supplier and consumer. The supplier can use superior information to encourage an individual to demand a greater quantity of the good or service they supply than the pareto efficient level, should...

, whereby providers base treatment recommendations on economic, rather than medical criteria. Researchers have also documented substantial "practice variations", whereby the treatment aols on service availability to rein in inducement and practice variations.

The U.S. health care market has relied extensively on competition to control costs and improve quality. Critics question whether problems with adverse selection, moral hazard, information asymmetries, demand inducement, and practice variations can be addressed by private markets. Competition has fostered reductions in prices, but consolidation by providers and, to a lesser extent, insurers, has tempered this effect.

Though the market for health care in the U.S. is primarily coordinated by competition, there is an abundance of regulations that inhibit market efficiency. A classic example is medical licenses. Some economists argue that requiring doctors to have a medical license constrains inputs, inhibits innovation, and increases cost to consumers while largely only benefiting the doctors themselves.

Competitive equilibrium in the five health markets

While the nature of health care as a private good is preserved in the last three markets, market failures occur in the financing and delivery markets due to two reasons: (1) Perfect information about price products is not a viable assumption (2) Various barriers of entry exist in the financing markets (i.e. monopoly formations in the insurance industry)

Ideological bias in the debate about the financing and delivery health markets

The health care debate in public policy is often informed by ideology and not sound economic theory. Often, politicians subscribe to a moral order system or belief about the role of governments in public life that guides biases towards provision of health care as well. The ideological spectrum spans: individual savings accounts and catastrophic coverage, tax credit or voucher programs combined with group purchasing arrangements, and expansions of public-sector health insurance. These approaches are advocated by health care conservatives, moderates and liberals, respectively.

Medical economics

Often used synonymously with Health Economics, Medical economics, according to Culyer, is the branch of economics concerned with the application of economic theory to phenomena and problems associated typically with the second and third health market outlined above. Typically, however, it pertains to cost-benefit analysis of pharmaceutical products and cost-effectiveness of various medical treatments. Medical economics often uses mathematical model
Mathematical model
A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used not only in the natural sciences and engineering disciplines A mathematical model is a...

s to synthesise data from biostatistics
Biostatistics is the application of statistics to a wide range of topics in biology...

 and epidemiology
Epidemiology is the study of health-event, health-characteristic, or health-determinant patterns in a population. It is the cornerstone method of public health research, and helps inform policy decisions and evidence-based medicine by identifying risk factors for disease and targets for preventive...

 for support of medical decision making
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...

, both for individuals and for wider health policy.

Behavioral economics

Peter Orszag
Peter R. Orszag
Peter Richard Orszag is an American economist who is a Vice Chairman of Global Banking at Citigroup. He is also a columnist at Bloomberg View...

 has suggested that behavioral economics is an important factor for improving the health care system, but that relatively little progress has been made when compared to retirement policy.

Mental Health Economics

Mental health economics incorporates a vast array of subject matters, ranging from pharmacoeconomics
Pharmacoeconomics refers to the scientific discipline that compares the value of one pharmaceutical drug or drug therapy to another. It is a sub-discipline of health economics. A pharmacoeconomic study evaluates the cost and effects of a pharmaceutical product...

 to labor and welfare economics. Mental health can be directly related to economics by the potential of affected individuals to contribute as human capital. In 2009 Currie and Stabile published "Mental Health in Childhood and Human Capital" in which they assessed how common childhood mental health problems may alter the human capital accumulation of affected children. Externalities may include the influence that affected individuals have on surrounding human capital, such as at the workplace or in the home. In turn, the economy also affects the individual, particularly in light of globalization. For example, studies in India, where there is an increasingly high occurrence of western outsourcing, have demonstrated a growing hybrid identity in young professionals who face very different sociocultural expectations at the workplace and in at home.

Mental health economics presents a unique set of challenges to researchers. In health economics, the health status of an individual may be given a value such as HYE (Health Year Equivalents); however, in mental health economics, valuations may not be the same for affected individuals. For instance a suicidal individual may place higher utility on death than life. Additionally, individuals with cognitive disabilities may not be able to communicate preferences. These factors represent challenges in terms of placing value on the mental health status of an individual, especially in relation to the individual's potential as human capital. Further, employment statistics are often used in mental health economic studies as a means of evaluating individual productivity; however, these statistics do not capture "presenteeism", when an individual is at work with a lowered productivity level, quantify the loss of non-paid working time, or capture externalities such as having an affected family member. Also, considering the variation in global wage rates or in societal values, statistics used may be contextually, geographically confined, and study results may not be internationally applicable.

Though studies have demonstrated mental health care to reduce overall health care costs, demonstrate efficacy, and reduce employee absenteeism while improving employee functioning, the availability of comprehensive mental health services is in decline. Petrasek and Rapin (2002) cite the three main reasons for this decline as (1) stigma and privacy concerns, (2) the difficulty of quantifying medical savings and (3) physician incentive to medicate without specialist referral. Evers et al. (2009) have suggested that improvements could be made by promoting more active dissemination of mental health economic analysis, building partnerships through policy-makers and researchers, and employing greater use of knowledge broker
Knowledge broker
A Knowledge broker is an intermediary , that aims to develop relationships and networks with, among, and between producers and users of knowledge by providing linkages, knowledge sources, and in some cases knowledge itself, A Knowledge broker is an intermediary (an organization or a person), that...


See also

  • Health administration
    Health administration
    Health administration or healthcare administration is the field relating to leadership, management, and administration of hospitals, hospital networks, health care systems, and public health systems...

  • Health care
    Health care
    Health care is the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans. Health care is delivered by practitioners in medicine, chiropractic, dentistry, nursing, pharmacy, allied health, and other care providers...

  • Health care compared - tabular comparisons of the US, Canada, and other countries not shown above.
  • Health care politics
    Health care politics
    Health policy can be defined as the "decisions, plans, and actions that are undertaken to achieve specific health care goals within a society." According to the World Health Organization, an explicit health policy can achieve several things: it defines a vision for the future; it outlines...

  • Health consumerism
    Health consumerism
    Health consumerism is a movement which advocates patients’ involvement in their own health care decisions. It is a movement from the “doctor says/patient does” model to a partnership model. Health consumerism tries to encourage health information empowerment and the transfer of knowledge so that...

  • Health crisis‎
  • Health Economics Journal
    Health Economics
    Health Economics is a journal published by John Wiley & Sons, covering the subject of health economics. It was established in 1992, and is published monthly.- See also :* Health economics* Journal of Health Economics...

  • Health insurance
    Health insurance
    Health insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is...

  • Health policy analysis
  • Important publications in health economics
  • Journal of Health Care for the Poor and Underserved
    Journal of Health Care for the Poor and Underserved
    The Journal of Health Care for the Poor and Underserved is an academic journal founded in 1990 by David Satcher, then President of Meharry Medical College who later became the 16th Surgeon General of the United States...

  • Medical debt
    Medical debt
    Medical debt refers to debt incurred by individuals due to health care costs and related expenses.Medical debt is different from other forms of debt, because it is usually incurred accidentally or faultlessly...

  • Pharmacoeconomics
    Pharmacoeconomics refers to the scientific discipline that compares the value of one pharmaceutical drug or drug therapy to another. It is a sub-discipline of health economics. A pharmacoeconomic study evaluates the cost and effects of a pharmaceutical product...

  • Pharmacoepidemiology
    Pharmacoepidemiology is the study of the use of and the effects of drugs in large numbers of people.To accomplish this study, pharmacoepidemiology borrows from both pharmacology and epidemiology. Thus, pharmacoepidemiology is the bridge between both pharmacology and epidemiology...

  • Philosophy of Healthcare
    Philosophy of healthcare
    The philosophy of healthcare is the study of the ethics, processes, and people which constitute the maintenance of health for human beings. For the most part, however, the philosophy of healthcare is best approached as an indelible component...

  • Prescription costs
    Prescription costs
    Prescription costs are a common health care cost for many people and also the source of considerable economic hardship for some. These costs are sometimes referred to as out-of-pocket prescription costs, since for those with insurance, the total cost of their prescriptions may include expenses...

  • Public health
    Public health
    Public health is "the science and art of preventing disease, prolonging life and promoting health through the organized efforts and informed choices of society, organizations, public and private, communities and individuals" . It is concerned with threats to health based on population health...

Further reading

  • Alastair M. Gray, Philip M. Clarke, Jane Wolstenholme, Sarah Wordsworth (2010) Applied Methods of Cost-effectiveness Analysis in Healthcare, Oxford University Press. Preview ISBN 0199227284
  • Arrow, Kenneth J. "Uncertainty and the Welfare Economics of Medical Care" The American Economic Review Vol. 53 No. 5 (Dec. 1963) 941-973
  • Drummond, Michael F. (2005) Methods for the Economic Evaluation of Health Care Programmes, Oxford University Press. Preview. ISBN 0-19-852945-7
  • Fuchs, Victor R.
    Victor Fuchs
    Victor R. Fuchs is an American health economist. He has been called "the dean of health economists" by New York Times economics columnist David Leonhardt.He is the Henry J. Kaiser, Jr. Professor at Stanford University, emeritus...

     (1998) Who Shall Live? Health, Economics, and Social Choice, Wspc.
  • Mahar, Maggie, Money-Driven Medicine: The Real Reason Health Care Costs So Much, Harper/Collins, 2006. ISBN 978-0-06-076533-0
  • Starr, Paul
    Paul Starr
    Paul Starr is a Pulitzer Prize-winning professor of sociology and public affairs at Princeton University. He is also the co-editor and co-founder of The American Prospect, a notable liberal magazine which was created in 1990...

    , The Social Transformation of American Medicine
    The Social Transformation Of American Medicine
    The Social Transformation of American Medicine is a book written by Paul Starr and published by Basic Books in 1982. It won the 1984 Pulitzer Prize for General Non-Fiction as well as the Bancroft Prize.Capers Jones wrote,...

    , Basic Books, 1982. ISBN 0-465-07934-2
  • Wennberg, John and Gittelsohn, Alan. "Small Area Variations in Health Care Delivery" Science Vol. 182 No. 4117 (Dec. 1973) 1102-1108
  • Whittington, Ruth (2008). Introduction to Health Economics: A Beginners Guide Preview. ISBN 978-0-9545494-5-9.
  • A.J. Culyer and J.P. Newhouse, ed. (2000). Handbook of Health Economics, Elsevier. 1A. Description. Elsevier.
  • _____ (2000). Handbook of Health Economics, 1B. Description. Elsevier.


  • Health Economics
    Health Economics
    Health Economics is a journal published by John Wiley & Sons, covering the subject of health economics. It was established in 1992, and is published monthly.- See also :* Health economics* Journal of Health Economics...

    . Aims & scope and links back-issue titles and abstracts.
  • Journal of Health Economics
    Journal of Health Economics
    The Journal of Health Economics is a peer-reviewed academic journal that publishes articles about health economics and related fields concerning human health care and medicine. The journal is published six times annually by Elsevier. The editor in chief is J.P. Newhouse. According to the Journal...

    Aims & scope and links to back-issue titles and abstracts.

External links




  • Oxford Outcomes - leading international Health Outcomes Consultancy
  • Mapi Values - leading provider of Health Technology Assessment and Value Demonstration