Health economics is a branch of economics concerned with issues related to efficiency, effectiveness, value and behavior in the production and consumption of health and health care. In broad terms, health economists study the functioning of the health care systems as well as health-affecting behaviors such as smoking.
A seminal 1963 article by Kenneth Arrow, often credited with giving rise to the health economics as a discipline, drew conceptual distinctions between health and other goods. Factors that distinguish health economics from other areas include extensive government intervention, intractable uncertainty in several dimensions, asymmetric information, prominence of insurance, large role of non-profit firms, restrictions on competition, role of equity and need, externalities and the presence of a third-party agent. In healthcare, the third-party agent is the physician, who makes purchasing decisions (e.g., whether to order a lab test, prescribe a medication, perform a surgery, etc.) while being insulated from the price of the product or service.
Because most nations have experienced rapid rises in health care spending over the past 50 years, health economics has emerged as its own discipline within economics. The production of health care and its distribution across populations fall within the definition of health economics as the study of how resources are allocated to and within the health economy.
Health economics is significant and interesting for three related reasons:

  1. The size of the health sector relative to the overall economy (roughly 18% in the US),
  2. National policy concerns that result due to the importance people attach to economic challenges they face in maintaining good health, and
  3. Many health issues have substantial economic elements, e.g., its important in personal spending, the large size of the health sector labor force, extensive capital devoted to the health sector (hospitals, nursing home beds, medical devices, etc.), variable growth in health expenditures that affect financing by governments, businesses, and individuals, and the differential quality of health care provision.

Health economics, drawing on the larger economic tool box, provides insights into health access, health care quality and health care costs, where the latter two dimensions are commonly referred to as health care value.