Health Economics
2025/2026
What is “Health Economics”?
• Economics is a social science concerned with studying the
behaviour of economic agents (people, firms, governments)
when confronted with scarcity.
• Health Economics is the discipline of economics applied to the
topic of health
• Economics of health is the study of choice making on health by
individuals, institutions, societies, nations and world under
conditions of scarcity
Health Economics
Why health economics has developed into a discipline in itself?
- On the one hand, characteristics of the health care markets
- The importance, in terms of size, of the health care sector in
the economy.
• The size and scope of the health care economy
• The importance of labor and Capital in the health Economy
• The share of health expenditures in family budgets- Household outof-pocket payment
Health care costs %GDP
Year
1970
1980
1990
2000
2005
2010
2017
Country
Austria
4,8
7,0
7,7
9,2
9,6
10,2
10,3
Belgium
3,8
6,1
7,1
7,9
9,0
9,8
10,0
Denmark
..
8,4
8,0
8,1
9,1
10,3
10,2
Finland
5,0
5,9
7,2
6,8
8,0
8,9
9,2
France
5,2
6,7
8,0
9,5
10,2
11,2
11,5
Germany
5,7
8,1
8,0
9,8
10,2
11,0
11,3
Greece
..
..
6,1
7,2
9,0
9,6
8,4
Hungary
..
..
..
6,8
8,0
7,5
7,2
Ireland
4,9
7,5
5,6
5,9
7,6
10,5
7,1
Italy
..
..
7,0
7,6
8,4
9,0
8,9
Latvia
..
..
..
5,4
5,9
6,1
6,3
Lithuania
..
..
..
6,2
5,6
6,8
6,3
Luxembourg
..
4,6
5,1
5,9
7,2
7,0
6,1
Netherlands
..
6,6
7,1
7,1
9,3
10,4
10,1
Norway
4,0
5,4
7,1
7,7
8,3
8,9
10,4
Poland
..
..
4,3
5,3
5,8
6,4
6,7
2,3
4,8
5,5
8,4
9,4
9,8
9,0
Slovak Republic
..
..
..
5,3
6,6
7,8
7,1
Slovenia
..
..
..
7,8
8,0
8,6
8,3
Spain
3,1
5,0
6,1
6,8
7,7
9,0
8,8
Sweden
5,5
7,8
7,3
7,4
8,3
8,5
10,9
United Kingdom
4,0
5,1
5,1
6,0
7,2
8,5
9,7
United States
6,2
8,2
11,3
12,5
14,5
16,4
17,2
Portugal
https://stats.oecd.org/
Out-of-pocket expenditures
TIME2005
Belgium
Bulgaria
Czechia
Denmark
Germany
Estonia
Ireland
Greece
Spain
France
Croatia
Italy
Cyprus
Latvia
Lithuania
Luxembourg
Hungary
Malta
Netherlands
Austria
Poland
Portugal
Romania
Slovenia
Slovakia
Finland
Sweden
2010
https://ec.europa.eu
2023
20,25
:
:
:
13,56
23,02
21,37
:
13,85
13,71
13,30
22,81
21,51
35,50
14,07
13,98
11,05
22,10
:
:
11,30
:
22,63
:
:
:
:
:
:
:
:
:
9,89
19,51
:
23,68
:
:
:
19,58
16,86
28,26
21,37
10,24
:
:
43,11
:
27,59
:
27,45
:
9,10
19,24
:
24,71
:
:
:
18,80
16,51
34,30
20,86
:
9,38
23,65
17,94
:
31,02
8,77
23,06
:
12,03
16,48
16,19
29,31
:
12,39
20,15
:
12,96
Variable
Total health and social
employment
Measure% of total civilian employment
Year
2000
2005
2010
2015
2018
Country
Austria
8,02
8,94
9,77
10,23
10,33
Belgium
9,75
10,8
11,77
12,79
13,13
Denmark
17,31
17,86
18,76
17,89
17,52
Finland
13,21
13,92
14,91
15,94
16,24
France
11,94
12,42
13,5
14,13
..
Germany
10,35
11,31
11,88
12,74
13,25
Greece
4,19
4,63
5,04
5,32
..
Ireland
7,83
9,67
12,2
12,21
11,73
Denmark
17,31
17,86
18,76
17,89
17,52
Lithuania
6,71
6,67
7,02
6,69
6,83
Luxembourg
6,67
7,89
8,93
10,4
10,46
Netherlands
12,26
14,28
15,88
15,64
15,29
Norway
17,76
19,24
19,51
20,13
20,31
Poland
6,11
5,66
5,86
5,91
5,98
Portugal
5,64
6,25
7,06
7,98
8,13
Spain
5,25
5,6
6,81
7,33
7,37
Sweden
16,69
16,84
16,44
16,87
..
Switzerland
10,38
11,28
11,79
13,02
13,8
United Kingdom
10,13
11,16
12,46
12,36
12,43
United States
10,73
11,75
13,37
13,3
13,38
https://stats.oecd.org/
Characteristics of Health Care
Markets
Perfect competition market
• Large number of buyers and sellers
• Homogeneous product – competion on prices
• Perfect information
• Demand and supply are independent
• No barriers to entry
• Individual producers are not able to set prices. They just decide the
quantities they produce.
• Consumers act to maximize utility
• Producers maximize profit
• In equilibrium: P= cmg
• In equilibrium, economic profit is zero P= cmg= cmed
• The market will reach an equilibrium where the quantity supplied of
the product or service is equal to the quantity demanded (Q*, P*)
•
• "Pareto Optimum“. Social welfare is maximized.
Do these conditions occur in the
healthcare market?
• Arrow, KJ (1963). Uncertainty and the welfare economics of medical
care. The American Economic Review , 53 (5), 941–973care. The
American Economic Review , 53 (5), 941–973.
What is Health?
• The World Health Organisation (WHO) defined health in its
broader sense in 1946 as “a state of complete physical, mental,
and social well-being and not merely the absence of disease or
infirmity”.
• Health is a highly valued asset. rank high in the preference scale
of most people.
• Health is both a consumption and a production good. We
derive utility from health but we also produce health!
•The nature of good ( Health care)
Health care is not a homogeneous good/service.
Product diversity and differentiation: Preventive care, urgent care, oral care, medication..
Health care is generally tailored to the patient's needs.
There is still a lot of variety in quality.
Public health: Public good
Strong ethical considerations :
Social value attributed to the good.
Individuals, particularly in European societies, tend to agree that no one should be deprived of
healthcare. Acceptance of cross-subsidization: the healthier finance the less healthy, via insurance
Health as a right: Good of merit
Medical error
•Nature of demand
Intrinsic value of the good
The demand for health care is derived . Individuals consume health
care to produce health.
• In general, health care is not consumed because it provides direct satisfaction
to the consumer (lack of intrinsic utility in the good), but because the
individual wants to maintain health.
• State dependente Demand is irregular, largely unpredictable and
strongly determined by health status.
Consumption indivisibility
On the other hand, it often has the characteristics of indivisibility, i.e.
consumption is interdependent. Certain clinical situations, which may
encompass a set of interdependent consumptions (in a chain)
• Problems of information
• Product uncertainty: healthcare is generally an experience or even a
credence good
Supply conditions
• Very regulated market.
- Strong barriers to market entry (licenses, professional orders);
- Quality standards
.. ubiquitous regulation
• The existence of a third party (insurance) payer
--
Lower price elasticity of demand
- We will talk about moral hazard: lack of incentive to guard against risk where one is protected from
its consequences
State and other providers whose objective is not to maximize profit (non-profit).
• Competition, in addition to price, to attract consumers (quality, waiting ) .
Oveall, reduced salience of monetary prices
Supply conditions
Market structure
High fixed costs - Economies of scale.
Monopolies (local, national and international)
Monopsony in the job market
Market failures
• “market failure” is when a given market violates one of the conditions
for free market equilibrium
•Market failures
• Uncertainty
• Because most of are averse to risk (risk averse), health-related
uncertainty motivates individuals to demand health insurance.
• Problems in in insurance markets: adverse selection and moral
hazard.
• These two phenomena make health policy really difficult (and
interesting).
• Doctors also face uncertainty in making decision.
Market failures
Information problems
• Assimetric information
• Agency relationship- demand is not independent of supply.
• Insurance market failures: adverse selection and moral hazard (see later)
• Imperfect information
• Experience and Credence good
• Supply and demand are independently determined
Market failures
Externalities
• Other people’s health decisions affect you, while you neither bear the
costs nor receive the benefits, creates externalities
• Examples:
• Vaccinations and other preventative measures create positive externalities
• Public health: Public good
• Externalities undermine the efficient function of markets and often
require government intervention.
Market failures
Externalities
• Other people’s health decisions affect you creates externalities
• Positive externalities create benefits for those not involved in the market.
• A flu shot creates benefits both for the person who gets it and for those that the
person is in contact with. Private benefits are less than total benefits, so people will
underinvest in flu shots.
• Public health: Public good
• Negative externalities create costs for those not involved in the market.
• use of antibiotics fractionally increase the probability of the development of an
antibiotic-resistant strain of bacteria
• Externalities undermine the efficient function of markets and often require
government intervention.
Government intervention.
Market failures
Governments play a huge role in health markets because of the features just discussed.
When there are market failures, the market is inefficient in allocating resources.
The basis for the need for State intervention in the economy: improving efficiency
in the allocation of resources.
Government intervention is not the only solution, although solutions require at
the very least some sort of regulation. But… governments also fail
Some policies that encourage competition can make the market work better, but..
Ethics and justice
Even if efficient, the market outcome may not be equitable. Basis for the need for State
intervention in the economy: equity
Government intervention.
Market failures
Governments play a huge role in health markets because of the features just discussed.
When there are market failures, the market is inefficient in allocating resources.
The basis for the need for State intervention in the economy: improving efficiency
in the allocation of resources.
Government intervention is not the only solution, although solutions require at
the very least some sort of regulation. But… governments also fail
Some policies that encourage competition can make the market work better, but..
Ethics and justice
Even if efficient, the market outcome may not be equitable. Basis for the need for State
intervention in the economy: equity
Government Intervention
Payer
Regulator
Control of entry and exit into the market
Licensing of health professionals
Price controls, particularly in terms of prices paid by the government to providers
Regulating insurance market
Rigorous testing of new drugs and medical devices before they can come to market
………..
Provider