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Health economics is a branch of economics concerned with issues related to scarcity in the health markets.

The five health markets typically analyzed are:

Topics related to various aspects of health economics include the meaning and measurement of health status, the production of health and health care, the demand for health and health services, health economic evaluation, health insurance, the analysis of health care markets, health care financing, and hospital economics.

Health markets

Although assumptions of textbook models of economic markets apply reasonably well to health care markets, there are important deviations. Insurance markets rely on risk pools, in which relatively healthy enrollees subsidize the care of the rest. Insurers must cope with "adverse selection" which occurs when they are unable to fully predict the medical expenses of enrollees; adverse selection can destroy the risk pool. Features of insurance markets, such as group purchases 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" drives up costs, as shown by the famous RAND Health Insurance Experiment. 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", whereby providers base treatment recommendations on economic, rather than medical criteria. Researchers have also documented substantial "practice variations", whereby the treatment a patient receives depends as much on which doctor they visit as it does on their condition. Both private insurers and government payers use a variety of controls 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.

Nature of healthcare

Ideology and health

Competitive equilibrium in the five health markets

While the nature of healthcare 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)

Efficiency vs equity

The First Theorem of Welfare Economics states that any Walrasian equilibrium (that is, any competitive equilibrium) is Pareto-efficient. Its implications are that competitive markets will always be efficient. This result follows from the definition of a Walrasian equilibrium and the definition of Pareto efficiency. A key assumption to the proof of the theorem is local non-satiation of consumer preferences. It is that assumption that is often violated in the first two of the health markets and therefore the First Welfare Theorem does not hold for these markets.

In addition, even if the outcome in a health market is Pareto Optimal, the government deems it to be inequitable due to vast health disparity or lack of basic healthcare services.

So, government intervention is warranted for two reasons:

  • Absence of Pareto Optimality in a health market
  • Pareto Optimality with socially inequitable health outcome.

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

The healthcare 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 healthcare 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 synonimously with Health Economics Medical economics, according to Culyer [1], 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 models to synthesise data from biostatistics and epidemiology for support of medical decision making, both for individuals and for wider health policy.

See also

  • Health insurance
  • Important publications in health economics
  • Globalization and health
  • Journal of Health Care for the Poor and Underserved


  • Culyer, AJ (1989) A Glossary of the more common terms encountered in health economics" in MS Hersh-Cochran and KP Cochran (eds) Compendium of English Language Course Syllabi and Textbooks in Health Economics, Copenhagen, WHO, 215-234.
  • Michael F. Drummond (2005) Methods for the economic evaluation of health care programmes, Oxford University Press, ISBN 0-19-852945-7

External links

de:Gesundheitsökonomie zh:健康经济学

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