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Health economics is the branch of economics that studies how societies allocate scarce
resources to producing, financing, and consuming health and health care. It applies the core
tools of economic analysis — scarcity, incentives, market behavior, and welfare analysis
— to a set of markets and decisions that behave unusually compared with most goods and
services: health care is heavily insured, information is unevenly distributed between patients
and providers, government intervenes extensively, and the “product” being purchased (better
health, or more years of life) is not directly tradable the way a car or a haircut is. Health
economists study everything from how a single patient decides whether to see a doctor, to how
a hospital prices a procedure, to how a national government decides which drugs a public
insurance system will pay for.
This guide answers “what is health economics” in real depth: its core questions and methods,
how it relates to its parent discipline of economics and to public health, its major subfields,
and — because this page is published by CASRAI, a
research-administration standards body — the funding landscape, research methods, and
career pathways that matter to anyone conducting or administering health economics research
specifically.
What Is Health Economics? A Working Definition
Health economics studies the production and consumption of health using the standard
apparatus of microeconomic theory — supply and demand, market structure, incentives,
uncertainty, and welfare economics — applied to a market that departs from textbook
assumptions in several specific, well-documented ways:
- Uncertainty and insurance. Individual health shocks are largely
unpredictable, which is why most health care is paid for through insurance rather than
out of pocket. Insurance itself changes behavior: moral hazard describes how
being insured against a cost can lead people to consume more of the insured good than they
would if paying the full price themselves, and adverse selection describes how
people who expect to need more care are more likely to buy (or buy more generous) insurance,
which can destabilize insurance markets if insurers cannot price for it. - Asymmetric information. Physicians typically know far more about a
patient’s condition and treatment options than the patient does, which creates the possibility
of supplier-induced demand — providers influencing utilization in ways
that serve their own incentives rather than only the patient’s needs — and is a central
justification economists offer for licensing, regulation, and third-party payment in health
care markets. - Externalities and public-good features. Some health interventions,
vaccination against a contagious disease being the clearest example, generate benefits to
people other than the person being treated. Markets left alone tend to under-provide goods
with large positive externalities, which is a standard economic justification for public
subsidy or mandate. - Government as a dominant payer and regulator. In most high-income
countries, government programs (Medicare and Medicaid in the U.S., national health services or
social insurance systems elsewhere) are the largest single purchasers of care, and government
also regulates entry, pricing, and quality in ways that shape the market directly rather than
leaving allocation to prices alone. - Health as a non-tradable, only partly observable output. Firms in most
industries sell a good whose value the buyer can assess. A patient often cannot fully judge
whether a treatment worked, what it was worth, or what the counterfactual would have been
— which is why health economists rely heavily on constructed outcome measures (like the
quality-adjusted life year, discussed below) rather than a simple market price to gauge value.
Because of these features, health economics spends much more of its energy than most
economics subfields on market failure, regulation, and the empirical evaluation of specific
interventions and policies — asking not just “what would an efficient market produce” but
“given that this market is not going to behave efficiently on its own, what allocation, price,
or coverage decision produces the most health, or the most value, for the resources available.”
How Health Economics Relates to Neighboring Disciplines
Health economics sits at the intersection of two established fields, and understanding it
means understanding what it borrows from each:
- Economics. Health economics is a subfield of economics in the same sense
labor economics or international economics is: it uses the discipline’s general theoretical
and empirical toolkit (utility theory, market analysis, econometrics, causal-inference design)
but specializes that toolkit to a specific domain. See CASRAI’s guide to
economics for the parent discipline’s full scope,
including microeconomics, macroeconomics, and econometrics — all three feed directly into
health economics research. - Public health. Public health is concerned with improving population health
through prevention, surveillance, and policy; health economics contributes the analytical tools
public health uses to decide how to spend limited prevention and treatment budgets — cost-
effectiveness analysis of a screening program, for instance, or the economic case for a tobacco
tax. See CASRAI’s guide to public health for the
broader discipline. The two fields overlap heavily in practice (many health economists work
inside schools of public health) but are organized differently: public health is defined by its
population-health mission and draws on many disciplines to pursue it, while health economics is
defined by its method and can be applied to public health questions, clinical care questions, or
health-system financing questions alike.
Health economics also draws on and contributes to health services research
(a broader, more applied field studying how health systems are organized, financed, and
delivered, of which health economics is one core discipline alongside biostatistics, sociology,
and health policy), epidemiology (which supplies the disease-burden and
effectiveness estimates that feed into economic evaluation), and biostatistics
and econometrics (which supply the statistical methods used to analyze
observational and trial data).
Major Subfields and Branches of Health Economics
Health economics is commonly organized around a small number of recurring subfields:
- Demand for health and health care. Models of how individuals choose to
invest in their own health (building on economist Michael Grossman’s 1972 “demand for health”
model, which treats health itself as a form of capital that depreciates with age and can be
invested in) and how they respond to the price of care, insurance design, and information. - Health insurance economics. The study of moral hazard, adverse selection,
risk pooling, and optimal insurance design — how much cost-sharing (deductibles,
co-payments, coinsurance) balances protecting people from financial risk against encouraging
overuse of low-value care. - Industrial organization of health care markets. How hospital and physician
markets behave under imperfect competition, the effects of provider consolidation and mergers
on prices and quality, and how payment mechanisms (fee-for-service, capitation, bundled
payment, value-based purchasing) change provider behavior. - Pharmaceutical and health technology economics. The economics of drug and
medical-device pricing, patent-driven R&D incentives, and formal health technology
assessment (HTA) — the structured process (used by bodies like the UK’s NICE and,
for Medicare, the U.S. framework created by the Inflation Reduction Act) of deciding whether a
new drug or device is worth its price relative to existing alternatives. - Economic evaluation methods. Cost-effectiveness analysis, cost-utility
analysis (which typically expresses outcomes in quality-adjusted life years, or QALYs), and
cost-benefit analysis — the formal methods used to compare the value of competing health
interventions on a common scale. CASRAI’s CHEERS 2022
checklist guide covers the current reporting standard researchers use when publishing this
kind of study. - Behavioral health economics. Applies behavioral economics — departures
from the standard rational-choice model, including present bias, loss aversion, and the use of
“nudges” — to health decisions such as smoking, diet, exercise, medication adherence, and
addiction (including the “rational addiction” literature originating with Gary Becker and Kevin
Murphy). See CASRAI’s guide to behavioral
economics for the parent methodology. - Labor and workforce economics of health. How illness and disability affect
labor supply and earnings, and separately, the labor market for health care workers themselves
— physician and nurse supply, licensure, and geographic distribution. - Economics of aging and long-term care. The financing of long-term care,
the economics of retirement and disability programs, and how population aging affects health
spending — a heavily NIA-funded area (see the funding section below). - Global and development health economics. Health financing, insurance
design, and intervention cost-effectiveness in low- and middle-income-country contexts, where
resource constraints make explicit prioritization especially consequential.
Who Funds Health Economics Research
Health economics research in the United States is funded through a mix of federal agencies,
each with a distinct role, plus a smaller number of large private foundations:
- Agency for Healthcare Research and Quality (AHRQ). AHRQ is the federal
agency most directly focused on health services research, and health economics is a substantial
share of what it funds — research on health care cost, quality, financing, and delivery,
including dedicated dissertation-support (R36) and career-development mechanisms aimed at
building the health-economics and health-services-research workforce specifically. - National Institutes of Health (NIH). NIH does not have a single institute
dedicated to health economics, but several institutes fund it as part of their disease- or
population-focused missions. The National Institute on Aging (NIA), through its
Division of Behavioral and Social Research, is one of the most consistent funders of health and
retirement economics — including long-running data infrastructure like the Health and
Retirement Study — see CASRAI’s guide to NIA. The
National Institute on Minority Health and Health Disparities (NIMHD) funds
research on the economics of health disparities and access; the National Institute on
Drug Abuse (NIDA) and National Institute on Alcohol Abuse and Alcoholism
(NIAAA) fund substance-use economics (including work in the rational-addiction
tradition); and the National Cancer Institute (NCI), through its Healthcare
Delivery Research Program, funds cost and value-of-care research in oncology. NIH’s Office of
Behavioral and Social Sciences Research (OBSSR) coordinates behavioral- and social-science
funding priorities, including health economics, across these institutes. - National Science Foundation (NSF). NSF’s Economics Program, housed in the
Directorate for Social, Behavioral and Economic Sciences, funds basic (non-disease-specific)
health economics research as part of its general economics portfolio — theoretical and
empirical work on insurance markets, health care industrial organization, and related topics
that is not tied to a specific NIH disease mission. - Centers for Disease Control and Prevention (CDC). CDC funds economic
evaluation of specific public health and prevention programs (for example, the cost-effectiveness
of a vaccination or screening program) as part of its broader prevention and surveillance
mission, distinct from AHRQ’s health-services-research focus. - Private foundations. The Robert Wood Johnson Foundation,
the largest U.S. foundation dedicated specifically to health, funds research and programs
touching health economics, health equity, and health system performance — see CASRAI’s
guide to Robert Wood Johnson Foundation
grants. The Commonwealth Fund funds research specifically on health
insurance coverage, health system performance, and international health system comparisons. - Research infrastructure. The National Bureau of Economic Research
(NBER) Health Economics Program is not itself a primary grant-maker in the way the
agencies above are, but it is the discipline’s central hub for circulating pre-publication
working papers and convening researchers, and several of its affiliated centers (including its
retirement- and disability-research work) are themselves funded by NIA and the Social Security
Administration. See CASRAI’s guide to writing
for the NBER, IZA, and CEPR working-paper series.
Outside the U.S., major national funders play an equivalent role — the UK’s National
Institute for Health and Care Research (NIHR) funds health economics and health technology
assessment work directly, and NICE itself commissions economic evaluation as part of its
appraisal process; Canada’s CIHR and the EU’s Horizon Europe program fund health economics
within their broader health research portfolios.
Research Methods and Tools in Health Economics
Health economists draw on a common set of empirical and modeling methods, generally split
into two broad categories:
- Econometric and causal-inference methods. Because health-related behavior
and outcomes are rarely subject to a controlled experiment, health economists rely heavily on
quasi-experimental designs to estimate causal effects from observational data —
instrumental variables, difference-in-differences, regression discontinuity design (often
exploiting sharp eligibility cutoffs like a Medicare age threshold or an insurance-coverage
income cutoff), and natural experiments created by policy changes. See CASRAI’s guides to
regression discontinuity design and
natural experiments for how these
designs work in practice. - Economic evaluation and decision-analytic modeling. Cost-effectiveness and
cost-utility analysis, often built as decision trees or Markov models that simulate a
population moving through health states over time to project long-run costs and outcomes
(quality-adjusted life years) beyond what a single trial’s follow-up period can observe. The
CHEERS 2022 checklist (linked above) is the current standard for reporting this type of study
transparently. - Discrete choice and stated-preference methods. Used to elicit how patients
or providers value different attributes of care (waiting time, side-effect risk, mode of
delivery) when no market price directly reveals that value — see CASRAI’s guides to
discrete choice
experiments and conjoint
analysis. - Survival and longitudinal data analysis. Methods for analyzing time-to-event
outcomes (mortality, disease progression, time to treatment discontinuation) and following
individuals or claims over time, often using large administrative datasets such as Medicare
claims, all-payer claims databases, or national health survey panels. - Statistical and modeling software. Stata is the most widely used package in
applied health economics for regression and panel-data work (see CASRAI’s comparison of
SPSS vs. Stata), alongside R for
newer causal-inference and simulation work, and dedicated decision-modeling software for
building cost-effectiveness models.
Career and Training Pathways
Health economists typically hold a PhD, most often in economics with a health field
concentration, though also commonly in health policy, health services research, or a school of
public health’s health economics track; a smaller number enter applied roles with a master’s
degree (an MPH with a health economics/policy concentration, or a master’s in health
administration). PhD training follows the standard economics-PhD structure — core
microeconomic theory and econometrics coursework, comprehensive exams, and an original
dissertation, typically supervised in an economics department, a school of public health, or a
public policy school with a strong health economics faculty group — followed for many by a
postdoctoral fellowship (often funded through NIH T32 institutional training grants or AHRQ’s
dissertation and career-development mechanisms) before an academic, government, or industry
position.
Career paths split roughly into three tracks: academic research (economics
departments, schools of public health, medical schools, and public policy schools);
government and policy analysis (agencies such as AHRQ, CMS’s Office of the
Actuary, CBO, and their international equivalents, where health economists analyze the fiscal
and coverage effects of proposed policy); and applied industry roles
(pharmaceutical and health-technology companies’ health economics and outcomes research, or
“HEOR,” teams, which build the economic-evaluation evidence used in pricing, reimbursement, and
regulatory submissions; consulting firms; and health insurers’ internal research groups).
Two U.S.-based professional societies anchor the field: the American Society of
Health Economists (ASHEcon), the primary U.S. membership organization for health
economists, and AcademyHealth, the broader U.S. professional home for health
services researchers (of which health economists are one core constituency), which publishes
the journal Health Services Research and hosts an annual research meeting.
Internationally, the International Health Economics Association (iHEA) is the
field’s global membership body, holding a biennial World Congress. Unlike some applied fields,
health economics has no separate licensure or certification requirement beyond the doctoral (or
master’s-level applied) credential itself.
Frequently Asked Questions
What is the difference between health economics and health policy?
Health economics is a method — applying economic theory and quantitative analysis to
health questions. Health policy is a broader, more applied field concerned with the design,
implementation, and evaluation of laws, regulations, and programs affecting health and health
care; health economics is one of the main analytical tools health policy researchers and
analysts use, alongside political science, law, and ethics.
What is the difference between health economics and health services research?
Health services research (HSR) is the broader, multidisciplinary field studying how health
care is organized, financed, and delivered, and how those factors affect access, cost, and
quality. Health economics is one of HSR’s core constituent disciplines, alongside biostatistics,
sociology, and health policy analysis — an HSR study might combine economic analysis with,
for example, qualitative interviews or clinical outcomes research.
Do you need a PhD to work in health economics?
A PhD is generally required for independent academic research roles and most senior
government policy-analysis positions. Many applied roles — particularly in pharmaceutical
health economics and outcomes research (HEOR), consulting, and health insurance analytics
— are accessible with a master’s degree (an MPH or master’s in health economics,
economics, or health policy), though a PhD remains common at the senior level in those settings
too.
What is a QALY and why does health economics use it?
A quality-adjusted life year (QALY) combines length of life and quality of life into a single
number, so that interventions with very different kinds of benefit (a treatment that extends
life versus one that improves function without extending it) can be compared on a common scale
in cost-effectiveness analysis. It is the standard outcome measure in cost-utility analysis and
underlies most formal health technology assessment frameworks internationally.
Is health economics a growing field?
Demand for health economists has grown substantially with the expansion of value-based
payment models, drug-pricing and health-technology-assessment policy in the U.S. and
internationally, and the pharmaceutical industry’s continued reliance on health economics and
outcomes research (HEOR) evidence to support pricing and reimbursement decisions — alongside
steady academic and government demand tied to health care’s persistently rising share of
economic activity.
Related CASRAI Resources
This guide is part of CASRAI’s Branches of Science
series, which maps the major academic and scientific disciplines along with the
research-administration context — funding, methods, and career pathways — that a
general encyclopedia entry typically omits. Health economics sits directly between
economics, its parent discipline, and
public health, the population-health field it most
often serves. Related discipline guides include
behavioral economics, whose methods health
economists apply to patient decision-making, and
medical imaging, one of the clinical technology
areas whose cost-effectiveness health economists formally evaluate through health technology
assessment.
