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Health Economics

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What is Health Economics and why is it important?

Health economics is a discipline that uniquely addresses the intersection between economics and healthcare, illustrating the costs versus benefits of treatments, which has established itself as a key driver of health care decisions. Within the health economics landscape, the health of the individual and larger society holds an economic value and stands at the forefront of the public healthcare discussion on how to allocate resources to health. 

Informally introduced in ancient times, and formally introduced almost one hundred years ago, health economics is now the leading interdisciplinary science that bridges the gap between the theory of economics and the practice of health care. Government entities, payers, healthcare providers, and the pharmaceutical industry rely upon the recognized tools and analytical techniques of health economics. With the influx of health meta-data and real-world evidence (RWE), there is an unprecedented need for health economics to provide meaningful models and analyses to make this vast amount of data relevant in the healthcare decision-making process. Tools and techniques of health economics  include:

  • Cost-benefit analysis
  • Cost-effectiveness analysis
  • Cost-utility analysis 
  • Pharmacoeconomics 
  • Health technology assessment 

These relevant tools have served to establish the discipline as a reputable science that can transform and shape healthcare decision-making.   

The value of health economics

Health economics addresses poignant and complex issues and topics in healthcare with a system and approach that is inclusive of human, societal, and financial considerations. Health economics explores the value of healthcare interventions and outcomes and addresses “how to allocate scarce resources to satisfy human wants.”  Health economics can be used as a tool to:

  • Improve the quality of life
  • Shape healthcare policy 
  • Determine the value of healthcare interventions. 
  • Influences the discussion on healthcare pricing and reform.

In the public health arena, health economics brings together a wide array of stakeholders into a conversation on measuring and valuing the outcomes of healthcare interventions. Stakeholders include a cross-functional group of decision-makers such as: 

  • Healthcare providers and institutions
  • Insurance companies/payers
  • Pharmaceutical companies and manufacturers
  • Regulators (e.g., FDA, ISPOR)
  • Government entities
  • Patients

The interdisciplinary nature of health economics facilitates a broader debate and discussion, shaping discussions around formulary decisions, pricing models, label claims, and other relevant topics. 

What are the basic concepts of health economics?

Cost-Benefit Analysis

This type of analysis weighs the cost versus benefits of an intervention and evaluates the benefits as a monetary value. 


  • Costs including those of implementing an intervention.
  • Benefits including those resulting from an intervention, such as medical costs averted, productivity gains, and the monetized value of health improvements.


Cost-benefit analysis provides the net benefits (benefits minus costs) of an intervention. 

Cost-Effectiveness Analysis

Cost-effectiveness is a way to examine both the costs and health outcomes by comparing one intervention to another (or to the status quo). The tool estimates how much it costs to gain a unit of a health outcome, like a life-year gained or a death prevented. For instance, a cost-effectiveness analysis may describe the net costs to avert a disease, such as this analysis modeling the cost of preventing chlamydia infections among high-risk women. 

According to the National Institute for Health and Care Excellence (NICE), an intervention is deemed “cost-effective” if it leads to better health that would be achieved by using resources towards an alternative strategy. 

Cost-Utility Analysis

Cost-utility analysis assesses the quality and length of life that a person will gain as a result of an intervention.


Pharmacoeconomics compares the values of pharmaceutical drugs and is a component of health economics. Pharmacoeconomics can utilize a number of tools including cost-minimization analysis, cost-benefit analysis, cost-effectiveness analysis, or cost-utility analysis

Health technology assessment (HTA) in Health Economics

Health Technology Assessment (HTA) is a tool to aid reimbursement decisions and discuss how the pricing of health interventions compares to the benefits that these treatments provide to patients. 

Quality-adjusted life years (QALYs) in health economics

Quality-adjusted life-years (QALYs) in health economics are a tool to measure the value of an intervention and its benefits to human life. QALYs involve both the quality and quantity of life lived and are used to inform health insurance coverage determinations, treatment decisions, to evaluate programs, and to set priorities for future programs. 

Supply and demand in health economics

Grossman model of health demand

Published in 1972 by Michael Grossman, the Grossman model of health demand created a framework for understanding the relationship between consumer choices and health outcomes. In this model, health is viewed as a commodity that depreciates over time. This model has been widely used by health economists to form hypotheses of how consumer characteristics and demographics play into consumer choices, overall health, and length of life.

What questions does Health Economics answer?

Health economists examine the value of healthcare interventions, often through answering compelling research questions about a potential intervention or a comparison between two drugs. Topics of focus may include supply and demand, opportunity cost, efficiency, production of goods, and equity/fair distribution of resources. The work of a health economist may focus on the following questions

  • What is health and how do we put a value on it?
  • What influences health other than health care?
  • What influences the demand for health care and health care seeking behavior?
  • What influences the supply of health care? (The behavior of doctors and health care providers.)
  • Alternative ways of production and delivery of health care.
  • Planning, budgeting, and monitoring of health care.
  • Economic evaluation—relating the costs and benefits of alternative ways of delivering health care.

The History of Health Economics

The origin of health economics dates back to the 1930s when the American Medical Association created the Bureau of Medical Economics to study the intersection between economic matters and the medical profession. Then, in the 1950s, Selma Muskin introduced the concept that an investment in health could provide longer-term benefits to society at large. 

In 1963, some say that Kenneth Arrow launched modern health economics with his theories on social choice, general equilibrium theory, welfare theory, and economics information.

In 1987, Alan Williams contributed his “plumbing diagram” which served to further define the framework for health economics as a discipline.

What is in the scope of health economics?

According to Alan William’s plumbing diagram, health economics is divided into the following topics as a framework:

  1. What is health? What is its value?
  2. What influences health (other than health care?)
  3. Demand for health care
  4. Supply of health care
  5. Micro-economic evaluation treatment level
  6. Market equilibrium
  7. Evaluation at the whole system level
  8. Planning, budgeting, and monitoring mechanisms
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Current challenges in health economics

Health economics is facing a rapidly changing economic and political global system. The challenge of financial sustainability facing modern-day health systems  can be attributable to several factors including:

  • Population aging
  • Prosperity diseases
  • Large scale migrations
  • Rapid urbanization
  • Technological innovation in medicine.
  • Rising out-of-pocket health spending continues to threaten the affordability of medical care.

These factors are drivers for the further development and evolution of health economics.

What do health economists do?

Health economists examine how resources are used in health care and provide analysis and recommendations to shape health care policy. The work of health economists includes analyzing data, making assessments, and providing advice on the cost-effectiveness of treatments. They also evaluate the benefits of a new or proposed public health policy to government and payers. 

What are some types of careers in health economics?

Health economists often have a background in economics, statistics, healthcare/medicine, pharmacy, and/or business management. Careers in health economics include working for HEOR departments for research organizations or pharmaceutical companies, hospitals, government agencies, academic institutions, healthcare journals,  or health insurance companies.  Career opportunities abound within companies in the United States and across the globe, and there are undergraduate and master’s degree programs that can provide a sound foundation for preparation for a career in health economics.