Have you heard the term “health economics”?

Sure, you kind of understand what it might include, but did you realize that it is actually an entire scientific discipline?

Moreso, did you realize this discipline is growing in its implications for your independent medical practice?


Simple…   Because payers have embraced health economics to help them manage healthcare resource utilization and the expenses that go with it.   And if your practice is like most, payers control a good deal of your practice income…

Introduction to “Health Economics”

Health economics is defined as the branch of economics concerned with issues related to efficiency, effectiveness, value, and behavior in the production and consumption of health and health care.

There are a lot of sophisticated implications in that short definition. So let’s try to break it down.   In short, health economics is focused on understanding what the buyer gets for their particular spend. As mentioned above, the payer is particularly interested in understanding what they get for their large share of total healthcare spending.

At a population level, what are the benefits received for the sum of all their healthcare spending.   There are several different types of health economic evaluations that are used quite frequently to evaluate the benefits of specific healthcare interventions. They include the following:

1. Cost-minimization analysis

2. Cost-effectiveness analysis

3. Cost-utility analysis

Cost minimization analysis assumes the interventions have identical outcomes and can be compared strictly on price.

Cost effectiveness evaluates the cost per some unit of effectiveness (e.g., # hospitalizations, # asthma exacerbations, decrease in mmHg of blood pressure, decrease in mmol/L of HgbA1c).

Cost utility analysis evaluates the cost per some unit of patient quality of life (e.g., SF36 score, per 5% improvement in patient satisfaction).

These methods, when applied, give the healthcare decision maker (e.g., payer) information to make coverage decisions. For example, a health economics study may highlight that Drug A is associated with an average total medical claims cost of $9,783 per patient per year while Drug B is associated with $7,125. This association may be enough for the payer to favor Drug A on its formulary, or exclude Drug B all together.

Growing Importance of Health Economics to the Practice Owner

So why does this matter to the practice owner?

Quite simply, because health insurers are looking for more and more of this kind of information in support of (or not) all types of medical interventions.

A discipline that was primarily applied in supporting pharmaceuticals and medical devices, is now being applied to justify payer coverage for specific medical groups.   At the very least, practices that deliver less value to the payer when viewed through the health economics lens are at risk for lower reimbursements.

The payer can truly justify a lower reimbursement for those practices that cost them more.   On the other hand, medical practices have a growing opportunity to embrace health economics principles in support of their business. By applying health economics principles with their own practice, they have the opportunity to highlight the value they truly deliver back to the greater healthcare system in a way that can justify higher reimbursements.


We have reviewed the definition and importance of the discipline of health economics to the medical practice. We have also seen how this discipline is exploding in our current healthcare environment. This explosion truly brings opportunity for the savvy medical practice that embraces its application in their practice and proves their value to the health insurance industry.


Value Vitals helps healthcare leaders meet and exceed their goals. With over two decades of experience in healthcare consulting, Value Vitals leverages the power of the Science of Value, Technology & Programming, and Industry Know-how to overcome barriers and drive results that exceed expectations.