Health Economics

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Health Economics?

Health economics is the implied study to investigate the whole of healthcare and promote healthy lifestyles and positive outcomes with the objective of making it accessible and affordable for everyone. The purpose is to apply economic principles and methods to analyze and improve the allocation of resources in the healthcare sector.

Health Economics

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Health Economics (

Healthcare is considered one of the most critical aspects of human life and well-being; the whole industry contributes a lot to major world economies in different ways. It analyzes the factors influencing the supply and demand for healthcare services. Moreover, health economists study different methods of financing healthcare, including public and private health insurance, government programs, and out-of-pocket payments.

Key Takeaways

  • Health economics is the study of the healthcare industry in terms of the industry costs, standards, and the overall analysis of the sector for its improvement.
  • Kenneth Arrow, an American economist, is considered the father of health economics.
  •  It covers all the aspects coming under the healthcare system from medical providers, business leaders, and policymakers.
  • A good health economics model leads to better services, reduced costs, and efficient growth payment facilities, including affordable policies and treatment.

Health Economics Explained

Health economics is the assessment of the healthcare industry and the medical systems operated across the world. Kenneth Arrow, a US economist and mathematician, first introduced the concept in a single article published in 1963 by the American Economic Review. He is considered the father of modern health economics.

Moreover, the Journal of Health Economics offers a platform to the researchers who are associated with and interested in the economics of the industry and publishes the latest research and development(R&D) in medical management. Every year, governments spend an allocated budget on the healthcare and medical system. To regulate policies, introduce campaigns, and run programs to help people. Hence, the implied study is the assessment of all the medical stakeholders, enterprises, and business models to make it more accessible, affordable, and swift for the people.

Only by in-depth analysis and study researchers and firms can understand the problems, pitfalls, and opportunities that are present in the healthcare industry. The better the understanding and application of health economics, the more efficient the medical and healthcare industry prospers. In addition, health economics evaluations often require interdisciplinary collaboration between economists, healthcare professionals, epidemiologists, and statisticians. These examine how scarce resources are. For instance, healthcare professionals, medical equipment, and funds are allocated to meet the healthcare needs of individuals and populations.

Health economists use a combination of quantitative and qualitative research methods, including statistical analysis, econometrics, and economic modeling, to study these aspects. Thus, these are not limited to individual countries; they also consider global health issues. Therefore, this includes studying the economics of infectious disease control, health aid, and international health policy.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.


The principles of health economics revolve around the key components that define the whole industry movement; they are as follows-

#1 – Markets, Demand And Supply

The whole healthcare market is based on different types of treatments, illnesses, and diseases. Therefore, patients often require and demand good quality healthcare services. Understanding the market and catering to the demand and supply chain is a core element of health economics.

#2 – Production, Resources, Scarcity And Opportunity Cost

It refers to the change in production and allocation of resources and funds to make sure that the opportunity cost finds appropriate utilization. Moreover, health economics jobs contribute reasonably well to the global economy, not only in terms of applications and scope but also in generating revenue for big industry players.

#3 – Incremental Analysis And The Margin

The core principle of health economics is that a small change in one variable brings an incremental change in another, deriving the marginal benefit and cost reduction in industry economics.

#4 – Efficiency And Equity

Equity in health economics refers to the fair distribution of healthcare resources and services. It involves addressing disparities in access to care and health outcomes, particularly among different socioeconomic groups.

#5 – Discounting

It deals with the concept of bringing affordable services at a discounted price for all types of illnesses and all types of patients. With rising inflation, it is becoming difficult for people to tend to medical services, and hence, industry economics must look forward to offering good quality services at affordable prices.

#6 – Time Horizons

Healthcare is equally about time. It is about services, amenities, payments, insurance, and accessibility. Health economics tends to analyze the different time horizons in which a patient can receive treatment and work in order to minimize it as much as possible.


Below are two examples of health economics:

Example #1

Suppose the US government is evaluating the cost-effectiveness of implementing a nationwide vaccination program against a prevalent infectious disease. Moreover, health economists would conduct a cost-effectiveness analysis to compare the costs of the vaccination program, including vaccine procurement, distribution, and administration, with the benefits measured in terms of averted cases of the disease, reduced mortality, and potential cost savings in healthcare expenditures.

The analysis would also consider factors such as the long-term economic impact, including productivity gains from preventing illness and the potential to reduce the healthcare system’s burden. By employing these principles, policymakers can make informed decisions about resource allocation, ensuring that the chosen intervention not only improves public health outcomes but does so in a cost-effective manner, maximizing the health benefits achieved with the available resources.

Example #2

Stellenbosch University, which is a town in South Africa, is making well-planned efforts to bring health economics to the world map. The university has introduced new modules in the industry. Professor Lungiswa Nkonki developed it under the Health Systems Programme, offering comprehensive training that will benefit people outside the classroom with practical approaches.

Furthermore, the professor explains that the two new modules are the first of their kind made for healthcare financing and priority setting. Therefore, along with the standard curriculum that includes biostatistics and epidemiology, the module will help students cover economic evaluation and healthcare financing through experiential learning. Hence, the module covers theory along with policy designing based on what works and what doesn’t with global industry players.


The importance of health economics is-

  • It aims to analyze the impact of stakeholders’ behavior on the healthcare industry costs.
  • Health economics explains how the health systems and frameworks across the world process, especially regarding monetary systems and payment.
  • By only the study of health economics, loopholes can be identified, and better facilities along with revised structures and improved models can be implied.
  • Health economics is not limited to the healthcare industry but also plays an integral role in global issues such as climate change, displacement, global pandemics, vaccination programs, obesity, disorders, etc.
  • Moreover, it helps in finding ways to make healthcare more affordable and introduce cost-effective solutions for both the public and private sectors.

Frequently Asked Questions (FAQs)

1. What are the challenges of health economics?

The challenges of health economics are –
– The inflated healthcare premiums are getting expensive and unaffordable for general people to purchase health insurance.
– Many facilities and treatments are only available in certain areas.
– Doctors, surgeons, and even general physicians tend to concentrate in metropolitan cities and leave or avoid rural areas.

2. What is the scope of health economics?

The scope of health economics is as follows –
– It operates in economic evaluations of macro and micro healthcare financing.
– Elaborates on the world healthcare systems, its pitfalls, issues, and challenges.
– With a proper understanding of health economics, the government and healthcare firms can offer better facilities, reduce industry costs, and improve affordability.

3. What role does health insurance play in health economics?

Health insurance is a critical aspect of health economics. It involves the pooling of risks to protect individuals from high healthcare costs. Hence, they study different insurance models to understand their impact on access to care, healthcare utilization, and overall system efficiency.

This article has been a guide to what is Health Economics. Here, we explain the topic in detail, including its importance, principles, and examples. You may also find some useful articles here –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *