What is Health Economics?

by Pierre Nathie


July 04, 2020

What is Health Economics?

Health Economics is the study of the allocation of resources to and within the health economy. Health economics is still a relatively new discipline with an evolving scope and pedagogy. Despite this caveat few other fields of study are more relevant to unravelling the meaning of today’s headlines, or more pertinent to the lives of individuals1

It is fair to acknowledge the fact that Health Economics is used at different degrees across the globe. In the UK for example Health Economics is championed by the National Institute for Health and Care Excellence (NICE) and is used systematically before authorising a new drug or a new device into the National Health Service (NHS) for England and Wales. In the USA Health Economics is gaining more interest by the private health insurance companies. Case in point, out of OECD countries, the United States allocates by far the largest share of GDP to health care spending i.e. 17.8% in 20192 . Likewise, in 2015, U.S. consumers spent 18.3 percent of their budgets on health care as opposed to 7.3 percent on food, and 15.6 percent on housing.1

Critics of the U.S. healthcare system often wonder what Americans are getting for their money, which is a legitimate question when plotting the Life Expectancy of different countries against their health care expenditures.

Life Expectancy vs. Health Expenditure per capita graphic
Life Expectancy vs. Health Expenditure per capita graphic
Graph #1: Life Expectancy vs. Health Expenditure per capita

While the choice of a health care treatment seems purely medical to most people, Physicians and other providers increasingly believe in evaluating and comparing alternative treatments on economic grounds1. To help them, Health Economists seek to determine whether spending on new technology is worth it. More specifically, the purpose of economic evaluation is to inform, so the key inputs to any economic evaluation are evidence about the effects of alternative courses of action.3

Why Health Economics differs from other fields of economics?

While classical economics studies the production, distribution, and consumption of goods and services in a perfectly competitive market, health economy fulfils none of the prerequisites of such markets.

No single Consumer nor Producer can influence the price The markets, especially the pharmaceutical one, are highly concentrated around a few large producers
The product is homogenous and not differentiable Health goods are highly differentiated (think of branded drugs) and increasingly so (think of personalised medicine)
Consumers are perfectly informedThe information of patients versus practitioners is highly asymmetrical
There are no barriers to enter or exit the marketThe health care market is highly regulated resulting in strong barriers to enter it

What are the tools of economic evaluation?

Economic evaluation always involves a comparative analysis of alternative interventions

graph 2 picture
graph 2 picture
Graph #23

Incremental Cost Effectiveness Ratio (ICER)
The ICER compares the cost of two interventions with their respective effects of two interventions e.g. in terms of Quality-Adjusted Life Years (QALYs)

ICER formula
ICER formula

Health Economics as a powerful Sales & Marketing tool:

While the primary relevance of Health Economics for BioMedTech companies is to justify a (better) reimbursement fee, it can also be deployed as a tactical tool to help convince other stakeholders of the targeted health care system.

This pragmatic deployment of Health Economics methodology involves:

  1. List the relevant commercial endpoints
  2. List the related opposable evidences
  3. Build a tactical sales methodology, describing which evidence to use with which stakeholder and when (see Miller Heiman)