Explore the fundamental principles of health economics alongside its scope, significance, and notable milestones.

What is Health Economics? 

Health economics is a specialised field within economics that primarily revolves around the allocation and utilisation of limited resources within the healthcare system, with the ultimate goal of improving health outcomes for society. Economic theories and research methodologies are applied to analyse and tackle various health-related issues.

These issues encompass a wide range of topics, including: healthcare financing, provider compensation, healthcare policy impact, individual health behaviours, provider decision-making, and regulation of life sciences and healthcare markets.

Additionally, health economics explores the determinants of health and evaluates the cost-effectiveness of health technologies. When assessing health technologies, the focus is primarily on efficiency—ensuring that scarce resources are allocated to maximise overall societal benefit. Equity and fair resource distribution have always been central concerns in health economics and are increasingly emphasised in technology assessment discussions.

What are the top research trends in health economics? 

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Antimicrobial Resistance (AMR)

AMR is a serious global health issue and one of the world’s greatest public health threats with severe economic consequences. A misalignment of incentives means that currently, insufficient anti-microbials are being developed and coming to market. A sustainable antibiotic market characterised by research and development needs to be established to keep pace with the emergence of new resistant pathogens.

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Real-world Evidence (RWE)

RWE describes the range of evidence relating to patient health or experience or care delivery collected outside the context of randomised control trials. RWE can provide timely data at a reasonable cost, larger sample sizes that enable an analysis of subpopulations, and represent outcomes that reflect real-world practice. The way in which RWE continues to be incorporated into HTA and reimbursement decisions is of great interest to health economists.


Value Assessment

Valuing health outcomes should be at the heart of resource allocation and health and social care-related decision-making. Accurate value assessment is essential in informing reasonable reimbursement schemes for healthcare products/services. Researching new ways of valuing health interventions to which cost-effectiveness analysis may not apply very well is crucial to ensure evidence-based decision-making.

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Health Equity

The COVID-19 pandemic highlighted the stark health disparities across the world and going into 2023 these disparities are not going away. Health systems need to ensure the allocation of resources is such that there is broad access to high-quality care for all members of society.


Ageing Population

As populations worldwide continue to age, there is expected to be increased pressure on health systems and pension schemes’ sustainability. The allocation of resources across health care to fit the outcomes most desired by an ageing population will need to be considered.

Our ageing population – The Health Foundation

These topics reflect a wide range of issues, from economic analyses of specific treatments to broader questions about healthcare delivery and policy¹. It’s important to note that the field of health economics is vast and constantly evolving, with researchers tackling many different questions depending on their specific interests and the needs of the healthcare system.


What is the relevance of microeconomics and macroeconomics to health?

Economics is broadly split between macroeconomics and microeconomics, with the former referring to the functioning of an entire economy – national, multinational or global – and the latter referring primarily to how individual people, firms and organisations make choices. As a subdiscipline of economics, health economics is associated principally with microeconomics as it is often concerned with the interactions between patients and healthcare providers, healthcare providers among themselves and individuals’ health-related decision-making. As discussed in the following question, health economists use microeconomic tools in their day-to-day job, such as modelling the effect of increasing the number of nurses on a shift in a particular ward.

The centrality of microeconomic analysis does not mean that macroeconomics is not relevant to the economics of health. It is highly relevant for several reasons. The healthcare sector is an essential part of the economy, not only in terms of those who work and interact with it but also in the broader impact of healthcare and population health on the economy. Every country faces choices on to what extent public and private provision should fund certain aspects of their respective healthcare systems and how much public funding (if any) it receives. These are all contingent on specific historical, political and macroeconomic conditions. There is always a balance to be struck between choosing to spend public money, which could also be spent on things like defence and education, along with spending a sufficient amount to ensure a healthy, productive population that does not face the threat of poverty (and bad health) as a result of out-of-pocket expenditure on healthcare. There are clear correlations between positive wealth macroeconomic indicators like GDP and health outcomes like life expectancy. Better population health generally predicts better macroeconomic performance and vice versa. So, while it is undoubtedly true that much of the practice of health economics involves theoretical and applied microeconomic tools of analysis, it is also true that macroeconomics has a vital role in the study and practice of health economics, allowing us to explore how societies fund their healthcare systems, and how returns on investment in healthcare are understood in terms of the various benefits to society more broadly.

5 key insights: 

1, Macroeconomics refers to the functioning of the economy as a whole.  

2, Relevance to health economics: 

  • How much a country spends on healthcare overall, and how this is financed (publicly/privately etc.) 

3, Microeconomics focuses on how individual people and firms make decisions.   

4, Relevance to health economics:  

  • How do individual health professionals decide whom to treat
  • How do individual patients choose to interact with the healthcare system 

5, Health economics is synonymous with microeconomics, is there room for macroeconomics in health?  

  • The macro and micro scales of economic activity have distinct yet overlapping relevance to health economics in practice
  • Much of health economics can be understood as microeconomics, and the interactions between patients and practitioners/providers
  • It is important to understand the broader macroeconomic and societal context within which individual decisions are made 

What is economic evaluation for healthcare interventions?

Economic Evaluation is central to Health Economics in practice. As economics is the science of choice under resource constraints, an Economic Evaluation in Healthcare supports decision-makers in making evidence-based choices about which health interventions offer the most efficient use of resources for maximum health, determining how resources are spent and allocated.

An Economic Evaluation compares two or more different interventions, measuring their costs and outcomes. Costs are the value of resources used and can include things like the price of a medicine or the number of hours of nurses’ time involved, while outcomes are generally the health gains afforded by a treatment. Most commonly, health gains are measured using Health Economics as Quality-Adjusted Life Years (QALYs) – a measure of how many years of life in full health gained as the result of the intervention. This measure combines quantity and quality of life gained. It is useful because it allows comparison across treatments and conditions.

A common misconception is that Economic Evaluation is only concerned with reducing costs and finding the cheapest available option. While this is true for one type of analysis, Cost-Minimisation Analysis, this technique is only recommended for choosing between two equally effective interventions. The main forms of Economic Evaluation are Cost-Effectiveness Analysis (CEA) and Cost-Utility Analysis (CUA). Typically, CEA uses condition-specific outcome measures, e.g., life-years gained or percentage of sight restored, while CUA uses QALYs to measure health gains, though the former tends to be also used to refer to the latter. The result of one CUA is presented in terms of Incremental Cost-Effective Ratio/s (ICER), which tells us how much more (or less) the innovative treatment costs per QALY gained. A health intervention is deemed cost-effective (and likely to be adopted) if the ICER (e.g., the new intervention’s additional cost per QALY) falls below a pre-established threshold. In the UK, this threshold is typically between £20,000-£30,000 (although there are exceptions) and is set by the National Institute for Health and Care Excellence (NICE). Similar entities exist in other countries. These bodies make evidence-based decisions considering the assessed treatments’ efficacy, safety, and cost-effectiveness.

History of health economics through the decades

Dive into the fascinating history of health economics, tracing its evolution through key milestones and pivotal moments across different periods. From the ground-breaking work of Kenneth Arrow in the 1960s, addressing the uncertainties in healthcare, to the emergence of key concepts like the ‘quality-adjusted life year’ (QALY) in the 1970s and its subsequent impact on healthcare decision-making, each decade unfolds a unique narrative of economic thought and practical application in the healthcare domain. Delving into pivotal studies, policy shifts, and the changing landscape of pharmaceutical innovation, this comprehensive overview provides insight into health economics’ development, shedding light on its relevance amidst contemporary challenges and future research avenues.



When the respected economist Kenneth Arrow completed his paper on the challenge of managing uncertainty in health care, he would have had no expectation that it would set the course for the creation of a…



The desire to find a way to measure the benefits of health treatments or to somehow pin down their value would go on to dominate health economic research and activity during the next decade.  It…



If we characterise the 1960s as driven by theoretical thinking around the social contract between individuals and healthcare systems and the practicalities of analysing data to measure costs and efficiency; and the 1970s as concerned…



Work continued apace in the 1990s on generating ‘cost per QALY’ evidence. In 1996, a breakthrough research paper[i] demonstrated just how useful ‘cost per QALY’ evidence could be. The paper, by Bengt Jonsson…



By the early 2000s there had been a notable downturn in the number of breakthrough drug treatments launched to market. There was concern that the pharmaceutical industry was losing its scientific edge — instead of competing…



Health economists began to focus less on cost effectiveness per se, but more on its link to affordability and the impact on healthcare budgets, and on the challenges posed by curative treatments – with large…



The 2020s have been characterised by global health threats, notably the COVID-19 pandemic requiring rapid development of new vaccines and therapeutics, and the emerging challenge of Anti-Microbial Resistance, requiring new “Netflix” style subscription models.


Timeline Colour Key
Evolving Pathways of Health Economics: A Decade-by-Decade Exploration

What is the future of health economics? 


OHE’s contribution to health economics