Concept Architecture
Concept
Theoretically, Health Depreciation is the reduction in an individual's stock of health over time due to ageing, disease, injury and other biological processes. Within the Grossman Model, health depreciation represents the natural deterioration of health capital, creating the need for ongoing health investment to maintain or improve health status.
Mathematically, Health Depreciation is represented as the proportion of health capital lost during a given period. It forms part of the dynamic health capital accumulation equation, where the future stock of health depends on the current stock, the depreciation rate and investment in health.
In practice, Health Depreciation is estimated using longitudinal health data, epidemiological evidence, survival analysis and econometric models that quantify changes in health status over time. Estimated depreciation rates are incorporated into health capital models, prevention analyses and long-term health economic evaluations.
Purpose
Used to quantify the rate at which health capital declines over time, model changes in health status, evaluate preventive interventions, estimate long-term healthcare needs and support analyses of health investment and healthcare demand.
Mathematical Formulae
Primary Formula
H??? = H?(1 ? �) + I?
where:
- H? = health capital at time t
- � = health depreciation rate
- I? = health investment
Supporting Formulae
Health loss due to depreciation:
D? = �H?
where:
- D? = health capital lost during the period
Related Mathematical Methods
- Dynamic health capital modelling
- Human capital modelling
- Health production functions
- Longitudinal econometric modelling
- Survival analysis
Example
An individual has a health capital stock of 100 units with an annual depreciation rate of 4%. Health investment during the year is 6 units.
Health depreciation:
D? = 0.04 ? 100 = 4
Updated health capital:
H??? = 100(1 ? 0.04) + 6 = 102
The individual experiences a loss of 4 health units through natural depreciation, which is more than offset by health investment.
Excel Implementation
| Function | Example Formula | Health Economics Application |
|---|---|---|
= | =A2*B2 | Calculates health capital lost through depreciation. |
= | =A2*(1-B2)+C2 | Calculates updated health capital after depreciation and investment. |
SUM | =SUM(D2:F2) | Aggregates multiple health investment components. |
Solver | Solver Add-in | Optimises health investment under alternative depreciation assumptions. |
VBA (Optional)
Automate long-term simulation of health capital under alternative depreciation rates 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 (2)
Library
Publications
1
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 →
Frequently Asked Questions (6)
What is health depreciation?
The rate at which an individual's stock of health capital declines over time, generally assumed to accelerate with age.
Source: Grossman 1972
How does health depreciation differ from the wear on physical capital?
Both a machine and a stock of health lose value over time and need investment to be maintained, but health depreciation has features of its own. Its rate is assumed to rise as a person ages, so a given amount of maintenance buys less later in life, and the stock cannot be sold or transferred as a physical asset can. There is also a lower limit below which life cannot continue, which has no counterpart for ordinary equipment. Grossman (1972) built these properties into the demand-for-health model.
Source: Grossman 1972
Why does health depreciation accelerate with age?
Depreciation accelerates because the biological processes of ageing reduce the body's capacity to maintain and repair itself, so a given level of neglect costs more health as a person grows older. In the model this rising rate means that holding the health stock steady requires ever more investment with age, and eventually the investment needed exceeds what the returns justify. The accelerating rate is the mechanism through which the model produces declining health in old age.
Source: Grossman 1972
How does health depreciation affect health investment?
Because depreciation must be offset to hold the stock steady, its rate governs how much investment a person makes to maintain health. Rising depreciation with age raises the investment required, so people invest more in health as they age even as the stock they can sustain falls. At the point where the cost of offsetting depreciation exceeds the value of the healthy time gained, investment no longer fully compensates, and the stock is allowed to decline.
Source: Grossman 1972
How is health depreciation represented in economic models?
In the Grossman model, depreciation appears as a rate applied to the health stock each period, reducing it unless investment replenishes it, with the rate typically specified to increase with age. This lets the model trace a path of health over the life course, showing the stock rising in youth, held through working life by investment, and falling as depreciation outpaces what investment is worth. The rate is a key assumption whose form shapes the model's predictions about ageing.
Source: Grossman 1972
What are the limitations of the health depreciation concept?
The rate of depreciation cannot be observed directly and must be inferred or assumed, so its form in a model rests on judgement rather than measurement. Health decline is not smooth or purely age-driven, since illness, injury, and behaviour cause sudden or uneven losses that a steady rate does not capture. Treating depreciation as given also understates how far behaviour and past investment shape later decline, which limits the concept as a full account of how health erodes.
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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- HE-EE-EPR-015
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