Foundations of Health Economics
Yahye Hassan (Ph.D. Fellow)
September 2025
Learning Objectives
Be By the end of this module, students will be able to:
Define Define the concepts of economics and health economics and explain their scope.
Explain Explain the problem of scarcity and how it forces choices in health systems.
Apply Apply the concept of opportunity cost to health resource allocation.
Differentiate Differentiate between efficiency and equity in health service provision.
Analyze Analyze health as an output produced by multiple inputs (medical care, environment, lifestyle, genetics).
Discuss Discuss the relevance of health economics for public health policy and planning.
What is Economics?
Economics is broadly defined as the science of scarcity and choice, concerned with how
societies allocate limited resources to meet unlimited wants and needs.
It deals with trade-offs, prioritization, and rational decision-making. In health, this means
determining how governments, families, and organizations decide where to spend money
whether on hospitals, vaccines, or nutrition programs because resources are finite.
For instance, if a local authority has enough funds for only one health center or one
school, economics helps evaluate which option provides the greatest overall benefit
Core Economic Problem –
Scarcity
• Scarcity is the central economic problem that drives the entire
discipline of economics. Resources such as money, trained health
workers, and medical technology are limited, while human needs and
wants are virtually infinite.
• In the health sector, scarcity is experienced daily: there may not be
enough doctors for all patients, not enough vaccines for every child, or
not enough funding to cover all diseases.
• For example, in rural Somaliland, one district hospital may have a
single ultrasound machine, meaning not all pregnant women can be
scanned on time. This scarcity forces difficult choices and
prioritization.
Economics and Decision-Making
At its heart, economics is about decision-making, which involves choosing between competing
alternatives. Because resources are scarce, every decision involves trade-offs.
In health systems, this often means balancing preventive interventions against curative
services, or deciding whether to invest more in urban hospitals or rural health posts. A
government might decide to spend more on immunization campaigns to save more lives in the
long term, even though this reduces immediate spending on curative services.
These trade-offs highlight why economics is indispensable for health policy.
Opportunity Cost
Opportunity cost is the value of the next best alternative that is sacrificed
when a decision is made. It emphasizes that every choice has a cost not
just in money but in lost opportunities.
For example, if a government spends its limited resources on building a
cancer treatment center, the opportunity cost may be the community
health programs that could have prevented hundreds of malaria cases.
This concept ensures policymakers think carefully about the alternatives
forgone and the overall impact of resource allocation.
Trading off
• When trading off, you consider:
• Benefits → What do you gain?
• Costs → What do you pay or sacrifice?
• Opportunity Cost → What valuable option are
you giving up?
• Efficiency → Which option gives more results
for the same resources?
• Equity → Is it fair and just?
• Urgency → Which need is more pressing?
• Time Horizon → Short-term vs. long-term
effects.
Branches of
Economics
• Economics has two main branches: microeconomics and
macroeconomics. Microeconomics examines individual
decision-making such as how families decide whether to
visit a private clinic or buy medicines, or how providers set
prices for services. Macroeconomics, on the other hand,
looks at the broader picture such as how much of a
country’s GDP is allocated to health, or how inflation affects
medicine prices.
• In health economics, both perspectives are vital because
they connect household-level decisions to national and
global health policies.
What is Health
Economics?
• Health economics is the application of economic theories and
methods to the health sector. It focuses on how scarce resources
are used in producing and distributing health and healthcare
services, and how these affect health outcomes.
• Health economics explores issues such as how patients demand
health care, how hospitals supply services, how governments and
insurance systems finance care, and how interventions improve
population health.
• For example, it may study whether investing in malaria bed nets
provides greater health benefits than expanding hospital wards.
Why Health
Economics Matters
• Health economics is crucial because resources are limited but
health needs are endless. Every country, whether rich or poor,
faces the challenge of deciding how best to use finite budgets.
In public health, this might mean deciding whether to fund
widespread vaccination or to improve tertiary care hospitals.
• In Somaliland, for instance, the government may not be able to
provide MRI machines everywhere, so it must prioritize primary
care and preventive services. Health economics provides tools
for making these difficult decisions in a rational, evidence-
based way.
Scope of Health
Economics
• The scope of health economics is wide, encompassing health
care financing, evaluation of health programs, efficiency in the
use of resources, and equity in distribution.
• It also addresses questions about insurance, pricing, and
provider behavior. For example, health economics examines
whether community health insurance schemes can improve
access, whether free maternal health services increase equity,
or whether malaria bed nets are more cost-effective than
insecticide spraying.
• This broad scope makes health economics relevant for
students, policymakers, and practitioners alike.
Health as an Economic
Good
• Health can be viewed as an economic good because it
has both consumption and investment value. As a
consumption good, good health provides immediate
satisfaction and well-being. As an investment good,
health enables productivity, allowing people to work,
study, and contribute economically.
• For example, a malaria-free farmer is healthier, can
cultivate crops, and support his family, demonstrating
how health contributes not just to personal happiness
but also to national development.
The Concept of Health as Output
Health can be conceptualized as an output produced by a variety of inputs,
such as medical care, environment, lifestyle, and genetics.
Just like a factory produces goods using raw materials, health is produced
when different inputs interact. It can be measured using indicators like life
expectancy, infant mortality, and disability-adjusted life years (DALYs).
For instance, a country with widespread vaccination and good sanitation will
likely have higher life expectancy, demonstrating the link between inputs and
health as an output.
Inputs to Health
The major inputs that determine health outcomes are medical
care, environment, lifestyle, and genetics. These factors
interact in complex ways, shaping overall population health.
For example, even the best hospital cannot compensate for
unsafe drinking water, which causes repeated diarrheal
illnesses. Similarly, lifestyle choices such as smoking can
undermine otherwise good health care services.
This holistic view highlights that improving health requires
interventions across multiple areas, not just hospitals.
Medical Care as Input
• Medical care is one of the most visible inputs to health,
encompassing hospitals, clinics, medicines, vaccines,
and health workers. It plays a direct role in reducing
disease burden by diagnosing and treating illness.
• For example, vaccination campaigns prevent diseases
like measles, while hospitals provide emergency
surgeries. However, medical care alone cannot solve all
health problems without preventive measures like
mosquito control, malaria cases will keep increasing
despite available treatment.
Environment as
Input
• Environmental conditions are critical inputs to health,
including access to clean water, sanitation, safe
housing, and pollution control. Many health challenges
in developing countries are environmental in origin.
• For example, lack of clean drinking water in rural
Somaliland communities contributes to diarrheal
diseases and child malnutrition.
• Improving environmental inputs through sanitation
projects or clean energy can reduce the burden of
disease significantly, often more than curative health
care alone.
Lifestyle as Input
For example, a diet high in sugar and
Lifestyle choices such as diet, physical low in fruits increases diabetes risk,
activity, smoking, and alcohol while sedentary behavior contributes
consumption have profound impacts to obesity. Encouraging healthy
on health. Non-communicable lifestyles through education, taxation of
diseases like diabetes, hypertension, unhealthy products, or community
and heart disease are often linked to exercise programs is an important
poor lifestyle choices. strategy for improving health
outcomes.
Genetics as Input
Genetics refers to the inherited traits that influence susceptibility to disease. Some
health conditions, such as sickle cell anemia or certain cancers, are directly linked to
genetic factors. While genetics cannot be changed, health systems can manage their
effects through screening, early diagnosis, and treatment.
For example, newborn screening for sickle cell anemia enables early interventions that
improve survival and quality of life. Thus, while genetics is a fixed input, its effects can
be mitigated with proper healthcare strategies.
Health Inputs are
Interdependent
• Health outcomes are shaped by the combined effects of medical
care, environment, lifestyle, and genetics. These inputs interact in
complex ways, meaning no single factor is sufficient by itself.
• For example, a malaria program that provides bed nets (medical
input) is more effective when combined with clean housing
(environmental input) and proper usage practices (lifestyle input).
• This interdependence emphasizes the need for integrated
approaches to public health rather than isolated interventions.
Measuring Health Economically
Health economists use standardized measures such as Quality-Adjusted Life
Years (QALYs) and Disability-Adjusted Life Years (DALYs) to assess health
outcomes. A QALY represents one year of life in perfect health, while a DALY
represents one year of healthy life lost due to illness or disability.
These measures allow policymakers to compare very different interventions for
example, whether investing in malaria prevention saves more healthy life years than
investing in HIV treatment. Such tools are critical for prioritizing scarce resources.
Efficiency in Health
Inputs
• Efficiency in health means producing the maximum health
outcomes with available resources or achieving the same
outcome with fewer resources.
• For example, treating malaria with generic medicines instead of
branded ones reduces costs without reducing effectiveness.
Similarly, training community health workers to provide basic
services is a more efficient way of expanding coverage than relying
only on doctors.
• Efficiency ensures that limited resources have the greatest
possible impact on health outcomes.
Equity in Health Inputs
Equity refers to fairness in the distribution of health
services, ensuring that disadvantaged populations
also have access to care. In many countries, rural
populations face inequities compared to urban
residents, such as longer travel distances to
hospitals or lack of medicines.
For instance, if malaria drugs are available only in
city hospitals, rural children may die unnecessarily.
Equity aims to correct these imbalances so that
everyone has a fair chance at good health,
regardless of geography or income.
Case Example – Malaria Control
• Malaria control programs illustrate how inputs lead to outputs. Inputs may
include insecticide-treated nets, indoor spraying, and artemisinin-based
combination therapy. The expected output is reduced malaria incidence and
mortality.
• For example, in Tanzania, large-scale bed net distribution campaigns have
significantly reduced child deaths. This case study shows how combining
preventive and curative inputs produces measurable improvements in health
outcomes.
Case Example – Nutrition Programs
• School feeding programs demonstrate the input-output framework in
another way. Inputs such as providing daily meals at schools lead to
outputs like improved child growth, reduced anemia, better attendance,
and enhanced learning outcomes.
• For example, UNICEF-supported feeding programs in East Africa have
improved both health and education outcomes, showing that investing in
nutrition generates multiple social and economic benefits.
Why Foundations Matter
Understanding these foundations is essential because they underpin
more advanced topics in health economics, such as cost-benefit
analysis, cost-effectiveness analysis, and health planning.
Without a clear grasp of scarcity, opportunity cost, and the input-
output model of health, it is difficult to evaluate health interventions
or plan policies effectively.
These concepts provide the analytical lens through which all other
health economics topics will be understood.
Scenario: Health Resource Allocation in a Rural District
• Imagine you are part of a district health committee in Somaliland with a limited budget of $100,000 to spend on child
health for one year. The district faces high malaria incidence, poor nutrition among school children, and rising cases of
pneumonia. You have the following options:
• Buy 10,000 insecticide-treated mosquito nets ($100,000).
• Provide school meals for 2,000 children for one year ($80,000).
• Train and equip 50 community health workers for pneumonia diagnosis and referral ($90,000).
• Split the budget across two or more options.
• Task for Students:
• Discuss in small groups: Which option(s) would you prioritize and why?
• Consider scarcity, opportunity cost, efficiency, and equity in your discussion.
• Present your group’s decision in 3 minutes.
Thank You
