Concept Architecture
Concept
Theoretically, Health Capital is the stock of health possessed by an individual that generates utility directly through wellbeing and indirectly by increasing the amount of healthy time available for work, leisure and other productive activities. Originating from the Grossman Model, health is viewed as a durable form of human capital that depreciates naturally over time but can be maintained or increased through investment.
Mathematically, Health Capital is represented as a dynamic stock variable that evolves through the interaction of depreciation and health investment. The mathematical framework models changes in health over time, with current health determined by the previous stock, the rate of depreciation and investments in medical care, preventive care and healthy behaviours.
In practice, Health Capital is not observed directly but is estimated using proxy measures such as self-reported health status, quality-adjusted life years, functional status, morbidity indicators or composite health indices within econometric and decision-analytic models. The concept is widely applied in analyses of healthcare demand, prevention, productivity and long-term health investment.
Purpose
Used to represent an individual's stock of health, analyse health investment decisions, model changes in health over time, evaluate healthcare interventions and examine the relationship between health, productivity and economic welfare.
Mathematical Formulae
Primary Formula
H??? = H?(1 ? �) + I?
where:
- H? = health capital at time t
- � = health depreciation rate
- I? = health investment
Supporting Formulae
Health investment function:
I? = f(M?, T?, E?)
where:
- M? = medical care inputs
- T? = time devoted to health production
- E? = other health-producing inputs
Related Mathematical Methods
- Dynamic health capital modelling
- Health production functions
- Human capital theory
- Dynamic optimisation
- Structural econometric modelling
Example
An individual has a health capital stock of 90 units. Annual depreciation is estimated at 6%, while preventive care and healthy lifestyle investments contribute 10 units.
H??? = 90(1 ? 0.06) + 10
H??? = 84.6 + 10 = 94.6
The individual's health capital increases because health investment exceeds annual depreciation.
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 the present value of future health benefits generated by health capital. |
Solver | Solver Add-in | Optimises health investment under budget or resource constraints. |
VBA (Optional)
Automate simulation of health capital trajectories under alternative depreciation rates, investment levels and intervention 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.
Related Concepts (1)
Library
Publications
4
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 →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 →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 →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
4
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 →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 →Kenneth J. Arrow — Portrait (Wikimedia Commons) — Wikimedia Commons contributors, Openly licensed (see file page) ed., 2017 (Wikimedia Commons)
Openly-licensed portraits of Kenneth Arrow, whose 1963 paper “Uncertainty and the Welfare Economics of Medical Care” founded modern health economics by analysing information asymmetry and insurance in medical markets. Each image on the category page carries its own open licence.
Image (Wikimedia Commons)View source →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 health capital?
The stock of health an individual holds at a given time, modelled as a durable asset that yields healthy time and depreciates with age.
Source: Grossman 1972
Who developed the concept of health capital?
The idea was formalised by Michael Grossman, who modelled health as a stock of capital that a person inherits and then adds to through investment. In his framework health yields time free from illness that can be used for work or leisure, and the stock depreciates over time, so individuals devote resources to maintaining it. Health enters the model both as something wanted for its own sake and as a durable input to other activity. Grossman (1972) set out this treatment, which underpins much later demand-for-health analysis.
Source: Grossman 1972
How does health capital yield value?
Health capital yields healthy time, days not lost to illness, which a person can use for work or for leisure, so it is valued both for the income it supports and for its own sake. A larger stock means more healthy time and a lower chance of illness. Because the return takes the form of usable time rather than money directly, the value of health capital depends on what that time is worth to the individual.
Source: Grossman 1972
How is health capital maintained?
Health capital is maintained by investment that offsets the depreciation the stock undergoes with age. Investment uses inputs such as medical care, time spent on health-promoting activity, and other resources, combined through the individual's own health production. Because depreciation tends to accelerate with age, maintaining a given stock requires rising investment over the life course, and at some point the cost of maintaining it exceeds the value, so the stock is allowed to decline.
Source: Grossman 1972
Why does health capital depreciate?
Health capital depreciates because the body ages and its functions decline, so a stock left without investment falls over time, and the rate of decline generally increases with age. Depreciation is what makes health a durable but wasting asset rather than a permanent endowment, and it is why continued investment is needed simply to hold the stock steady. The accelerating rate in later life is central to how the model explains falling health toward the end of life.
Source: Grossman 1972
How does the concept of health capital inform economic analysis?
Treating health as capital lets economists analyse health decisions with the tools used for investment, framing care, prevention, and lifestyle as ways of investing in an asset that yields future returns. It underlies the view that the demand for health care is derived from the demand for health, and it connects health to education, income, and age through their effect on producing and maintaining the stock. The concept anchors the economic study of how health is generated.
Source: Grossman 1972
Trust Record
Verified by Dr Darrin Baines
British health economist
Professional identity: darrinbaines.org
Verification date: 18 Aug 2025
Content version: 1.0.0
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- Term code
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