Health economics is more than euros

Let’s make one thing clear from the outset: health economics is not cost accounting, hospital financial management, or healthcare administration.

Health economics is economics. It is based on the same fundamental principles as economics in general: people make choices, choices involve opportunity costs, and people respond to incentives. In health economics, these principles are applied to health and healthcare. Euros matter, but they are not the centre of the analysis.

Health is capital

A core idea of health economics is to view health as a form of capital in which individuals can invest. In Michael Grossman's classic model, healthcare is only one input into the production of health; individuals’ own time and behaviour are also investments in health. Better health, in turn, generates healthy time that can be used for work, leisure, and other activities. Because time and money devoted to health have opportunity costs, health-related decisions are simultaneously always also economic decisions. From this perspective, health economics extends far beyond healthcare to include human behaviour and living environment.

Arrow’s insight

Healthcare differs in many ways from the standard economic ideal of competitive markets. In his seminal 1963 article, economist Kenneth Arrow highlighted uncertainty surrounding illness and treatment effectiveness as a defining feature of healthcare. We do not know when we will become ill or how well a treatment will work, and patients are generally unable to assess for themselves which treatment they need, having instead to rely on the expertise of physicians. This gives rise to many characteristic features of healthcare systems, including the central roles of insurance, trust, and professional ethics. Arrow’s key insight was that these unique features do not place healthcare outside the scope of economics. On the contrary, they are precisely the kinds of phenomena that economics can help us understand.

Technological progress does not eliminate the need to make choices

The rapid pace of technological progress in medicine makes the economic perspective increasingly important. When, for example, a new surgical technique improves mobility among patients undergoing hip replacement surgery, the primary medical questions concern its effectiveness and safety. An economist, however, asks additional questions: for which patients are the benefits greatest, how much additional value does the intervention generate, and what alternative uses of the same resources must be foregone? Amitabh Chandra and Jonathan Skinner have emphasized that the value of a new health technology may be substantial for carefully selected patients but can diminish as its use expands to patients whose expected utility is smaller. Consequently, even an effective technology is not automatically valuable in every possible context. Technological progress does not reduce the need for prioritization in healthcare. Rather, the more we can do, the more important it becomes to determine what should be done and for whom.

Health economics also provides a common framework for comparing very different healthcare interventions. An orthopedic surgeon naturally focuses on the impacts of hip replacement surgery, an oncologist on the effects of a new cancer drug, and a cardiologist on the potential of a new cardiac procedure. All may be effective treatments, but with limited resources they must also be evaluated across medical specialties. The economic perspective does not ask which specialty is most important. Instead, it asks where an additional unit of resources generates the greatest health benefit, and what the consequences are for other patients when those resources are allocated to one purpose rather than to another. In this sense, health economics offers the most systematic and comparable approach to studying choices that might otherwise be evaluated solely from the perspective of a particular disease, treatment, or specialty.

What lies ahead?

The future of health economics, however, extends well beyond the evaluation of new technologies. Population ageing, mental health challenges, and health inequalities raise important questions about how health is produced, why individuals make different health-related choices, and how healthcare incentives influence the behaviour of patients and professionals. Artificial intelligence adds yet another new dimension to these issues. It may reduce the costs of diagnosis and treatment and at the same time increase their utilization. The ultimate impact of technology depends not only on the technology itself but also on how individuals and healthcare systems respond to it.

The importance of health economics is unlikely to diminish as medicine advances – if anything, the opposite. The more medicine can achieve, the more choices arise regarding what should be done, for whom, and when. The major question of the future may not be what medicine makes possible, but rather how continuously expanding possibilities can be transformed into the greatest possible health and well-being within the limits of available resources. Rather than viewing health economics as cost accounting, it should be understood as a coherent and versatile set of tools for analysing and evaluating the resources, allocation, and consequences of health production.

Finally

Broader use of health economic methods across disciplines and in interdisciplinary collaboration can create value both in addressing healthcare challenges and in developing and implementing new health technologies. Health economics offers a diverse toolkit that helps us understand health-related decision-making, the role of incentives in shaping behaviour, and objectively compare interventions that contribute to health through very different mechanisms.

Authors

Marko Korhonen

Emmi Wilén