What is the Grossman model?

A theoretical model treating health as durable capital that individuals inherit, invest in, and that depreciates over time, produced using healthcare and other inputs. Source: Grossman 1972

What does the Grossman model propose?

The Grossman model treats health as a durable stock of capital that a person inherits at birth, adds to through investment, and that depreciates over time. Health capital yields healthy time that can be used for work or leisure, which is why it is valued. Individuals produce health using inputs such as medical care and their own time, choosing how much to invest as they would with any asset. The model frames the demand for health care as derived from the demand for health. Source: Grossman 1972

How does the Grossman model treat health as capital?

Health is modelled as a stock, like physical capital, that provides a flow of services, in this case healthy days, over time. The stock depreciates, at a rate that generally rises with age, and can be replenished by investment. A person chooses a path of investment that balances the cost of adding to health against the value of the healthy time it yields. Health thus enters as both something valued in itself and a means to earn and enjoy income. Source: Grossman 1972

What does the Grossman model imply about the demand for health care?

In the model, health care is not wanted for its own sake but as an input to producing health, so the demand for care is derived from the demand for health. People use care to invest in their health stock, and how much they demand depends on how productive care is, its cost, and the value they place on healthy time. This explains why the demand for care responds to wages, education, and age, not to price alone. Source: Grossman 1972

What are the implications of the Grossman model?

The model implies that education can raise the efficiency of producing health, so the more educated may achieve better health from the same inputs, and that health investment changes as depreciation accelerates with age, so the stock declines toward the end of life. It also implies that health and income are linked, since healthy time supports earning. These implications have shaped how economists explain differences in health across age, education, and income. Source: Grossman 1972

What are the limitations of the Grossman model?

The model assumes individuals plan health investment rationally over the life course with good information, which fits poorly where decisions are shaped by uncertainty, habit, or limited foresight. Health is hard to measure as a single stock, and separating investment in health from consumption that happens to affect it is difficult. Empirical tests have given mixed support. The model remains influential as a framework rather than a precise account of how health is produced. Source: Grossman 1972

Grossman Model | HealthEconomics.wiki

Concept Architecture

Concept

Theoretically, the Grossman Model is an economic model of health demand in which health is treated as a durable capital stock that generates utility directly and indirectly through its contribution to healthy time available for work and leisure. Developed by Michael Grossman, the model is grounded in human capital theory and explains health investment as the outcome of rational utility maximisation under budget and time constraints.

Mathematically, the Grossman Model represents health as a dynamic capital stock that depreciates over time and is replenished through investment. Individuals maximise lifetime utility subject to time and budget constraints, choosing health investment until the marginal benefit of additional health capital equals its marginal cost. Structural optimisation, constrained maximisation and health production functions form the mathematical basis of the model.

In practice, the Grossman Model is estimated using structural or reduced-form econometric methods that relate health status, healthcare utilisation, health behaviours and socioeconomic factors to observed outcomes. The framework is widely applied in analyses of healthcare demand, preventive behaviour, labour supply and the economic determinants of health.

Purpose

Used to explain the demand for health, analyse health investment behaviour, evaluate healthcare utilisation, examine the economic determinants of health, and inform policy relating to prevention, healthcare financing and resource allocation.

Mathematical Formulae

Primary Formula

H??? = H?(1 ? �) + I?

where:

H? = health capital at time t
� = health depreciation rate
I? = investment in health

Health investment is chosen through lifetime utility maximisation subject to budget and time constraints.

Supporting Formulae

Health production function:

I? = f(M?, T?, E?)

where:

M? = medical care inputs
T? = time devoted to health production
E? = other health-producing inputs

Utility maximisation:

max U(H, Z)

subject to budget and time constraints.

Related Mathematical Methods

Dynamic optimisation
Constrained utility maximisation
Human capital modelling
Health production functions
Structural econometric modelling
Reduced-form econometric estimation

Example

An individual begins the year with a health capital stock of 100 units. Annual depreciation is estimated at 5%, while health investments through medical care, exercise and preventive activities contribute 8 units.

H??? = 100(1 ? 0.05) + 8

H??? = 95 + 8 = 103

The model predicts that health capital increases despite natural depreciation because investment exceeds health losses.

Excel Implementation

Function	Example Formula	Health Economics Application
`=`	`=A2*(1-B2)+C2`	Calculates updated health capital after depreciation and investment.
`SUM`	`=SUM(D2:F2)`	Aggregates multiple health investment components.
`NPV`	`=NPV(rate,benefit_range)`	Estimates discounted lifetime value of future health benefits.
`Solver`	Solver Add-in	Optimises health investment subject to resource constraints.

VBA (Optional)

Automate lifetime simulation of health capital under alternative depreciation rates, investment strategies and policy scenarios.

Sources

Grossman M. On the Concept of Health Capital and the Demand for Health. Journal of Political Economy. 1972;80(2):223?255.
Grossman M. The Demand for Health: A Theoretical and Empirical Investigation. National Bureau of Economic Research.
Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press.
Briggs A, Claxton K, Sculpher M. Decision Modelling for Health Economic Evaluation. Oxford University Press.
NICE. Health Technology Evaluation Manual.

Library

Publications

Book
The Economics of Health and Health Care — Folland, Goodman, Stano & Danagoulian, 9th Edition ed., 2024 (Routledge)
The market-leading general health economics textbook, giving comprehensive coverage of health economics through core economic themes and balancing theory, empirical evidence and public policy. The ninth edition adds chapters on health disparities and pandemic economics.
BookView source →
Book
Health Economics — Charles E. Phelps, 6th Edition ed., 2018 (Routledge)
A comprehensive overview of health economics combining current economic theory, recent research and empirical studies, providing tools to analyse the economic behaviour of patients and providers in health care markets. Includes extended treatment of the Affordable Care Act.
BookView source →
Book
Health Economics — Bhattacharya, Hyde & Tu, 1st Edition ed., 2014 (Palgrave Macmillan)
An international, policy-oriented introduction to modern health economics covering the demand for health (Grossman model), insurance and information economics, health care supply, and comparative health policy, balancing intuition with mathematical formality.
BookView source →
Book
Health Economics: Theory, Insights, and Industry Studies — Santerre & Neun, 6th Edition ed., 2012 (Cengage Learning)
An applied US-focused health economics text building on core economic theory, covering costs and benefits of health care choices, insurance, health care reform, the Nyman theory of insurance, and the Grossman model, with numerous real-world industry studies.
BookView source →
Journal articleFeatured
Uncertainty and the Welfare Economics of Medical Care — Kenneth J. Arrow, Vol. 53, No. 5 ed., 1963 (American Economic Review)
The founding paper of health economics as a discipline, analysing how uncertainty, asymmetric information, trust and the special features of medical markets prevent them from behaving like ordinary competitive markets — the intellectual origin of the entire field.
Journal ArticleView source →

Media

Video
Health Economics — Marginal Revolution University — Tyler Cowen & Alex Tabarrok (Marginal Revolution University), CC BY-ND 4.0 ed., 2023 (Marginal Revolution University / YouTube)
A free, openly-licensed (Creative Commons) video series introducing the economics of healthcare markets — asymmetric information, moral hazard, insurance and the demand for health — taught by economists Tyler Cowen and Alex Tabarrok.
Video (YouTube)View source →
Video
MIT 14.01 Principles of Microeconomics — Lecture 25: Health Economics — Jonathan Gruber (MIT OpenCourseWare), Fall 2018 ed., 2018 (MIT OpenCourseWare / YouTube)
A full university lecture on health economics from MIT’s flagship microeconomics course, taught by Jonathan Gruber, covering health insurance, adverse selection, moral hazard and the economics of healthcare markets.
Video (YouTube)View source →
Media
Michael Grossman — Portrait (Wikimedia Commons) — Wikimedia Commons contributors, Openly licensed (see file page) ed., 2020 (Wikimedia Commons)
Openly-licensed images of health economist Michael Grossman, whose 1972 human-capital model of the demand for health remains foundational to the field. Each image on the category page carries its own open licence.
Image (Wikimedia Commons)View source →

Frequently Asked Questions (6)

What is the Grossman model?
A theoretical model treating health as durable capital that individuals inherit, invest in, and that depreciates over time, produced using healthcare and other inputs.

Source: Grossman 1972
What does the Grossman model propose?
The Grossman model treats health as a durable stock of capital that a person inherits at birth, adds to through investment, and that depreciates over time. Health capital yields healthy time that can be used for work or leisure, which is why it is valued. Individuals produce health using inputs such as medical care and their own time, choosing how much to invest as they would with any asset. The model frames the demand for health care as derived from the demand for health.

Source: Grossman 1972
How does the Grossman model treat health as capital?
Health is modelled as a stock, like physical capital, that provides a flow of services, in this case healthy days, over time. The stock depreciates, at a rate that generally rises with age, and can be replenished by investment. A person chooses a path of investment that balances the cost of adding to health against the value of the healthy time it yields. Health thus enters as both something valued in itself and a means to earn and enjoy income.

Source: Grossman 1972
What does the Grossman model imply about the demand for health care?
In the model, health care is not wanted for its own sake but as an input to producing health, so the demand for care is derived from the demand for health. People use care to invest in their health stock, and how much they demand depends on how productive care is, its cost, and the value they place on healthy time. This explains why the demand for care responds to wages, education, and age, not to price alone.

Source: Grossman 1972
What are the implications of the Grossman model?
The model implies that education can raise the efficiency of producing health, so the more educated may achieve better health from the same inputs, and that health investment changes as depreciation accelerates with age, so the stock declines toward the end of life. It also implies that health and income are linked, since healthy time supports earning. These implications have shaped how economists explain differences in health across age, education, and income.

Source: Grossman 1972
What are the limitations of the Grossman model?
The model assumes individuals plan health investment rationally over the life course with good information, which fits poorly where decisions are shaped by uncertainty, habit, or limited foresight. Health is hard to measure as a single stock, and separating investment in health from consumption that happens to affect it is difficult. Empirical tests have given mixed support. The model remains influential as a framework rather than a precise account of how health is produced.

Source: Grossman 1972

Trust Record

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British health economist

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Verification date: 18 Aug 2025

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Grossman Model