Health Policy

Health Policy in Health Economics and Health Systems

Health policy is the set of choices a government or health body makes about which health needs to address, which instruments to use and how much money to commit. In health economics it is treated as a resource allocation decision, so every policy is judged against the health and other benefits that the same money or authority could have produced elsewhere. The economic case for most policies rests on two arguments, that markets for health care fail in predictable ways and that society cares about how health and the cost of care are shared. Much of what goes wrong with a policy happens later, in the political process and in implementation.

Why governments make health policy

The HM Treasury Green Book (2026 edition) asks every proposal for a case for change explaining why businesses, households and charities cannot achieve the intended outcomes themselves, and it names market failure as a common rationale for government intervention. In health the familiar failures include unequal information between clinicians and patients, externalities from infectious disease, and adverse selection and moral hazard in insurance.

Efficiency is only half of the rationale. Everybody's Business (2007), the WHO framework that introduced the health system building blocks, lists four overall health system goals, namely improved health in level and equity, responsiveness, social and financial risk protection, and improved efficiency. Its leadership and governance block, also called stewardship, involves making sure strategic policy frameworks exist alongside oversight, regulation, incentives and accountability, so health policy is one of the steward's main tools.

The WHO Health Promotion Glossary (1998) separates health policy, whose primary concern is health services and programmes, from healthy public policy, which carries an explicit concern for health and equity in every area of policy. The distinction matters for appraisal, because a housing or transport measure can change health more than a service reform while falling outside any health budget.

Content, actors, context and process

Walt and Gilson (1994) argued that much health policy work focused on the content of reform and neglected the actors involved, the processes of developing and implementing change and the context in which policy is made. For an economist the lesson is practical, since a reform that looks efficient on paper can fail when the groups who bear its costs are better organised than those who gain.

Kingdon's multiple streams account, as summarised by Walt and colleagues (2008), describes problems, policy proposals and politics as separate streams that merge at particular junctures, opening windows of opportunity in which governments decide to act. Economic evidence usually sits in the policy stream, as a costed proposal ready for the moment a problem rises up the agenda.

Instruments and the incentives they change

Each policy instrument changes behaviour through a different economic channel, so the instrument should match the failure or distributional aim that justified action. A price measure suits a problem caused by prices, while an information campaign achieves little when the binding constraint is cost or supply. Regulation and licensing work through compulsion rather than price and depend on enforcement.

Most real policies combine several rows. Extra community nursing capacity, for example, usually needs a payment change too, or providers have no reason to move activity out of hospital.

Appraising options before a policy is adopted

The Green Book describes a six-stage cycle known as ROAMEF, covering rationale, objectives, appraisal, monitoring, evaluation and feedback. Its appraisal stage compares a shortlist of options, and the business as usual option must always be carried through to that shortlist as the benchmark, whether or not it meets the objectives. The shortlist should typically also include a do minimum option that just meets the objectives, which shows whether more ambitious options deliver real improvements. It also asks for switching values and distributional analysis.

For a policy funded from a fixed health budget, the question is whether the health gained exceeds the health lost elsewhere when other care is displaced. The opportunity cost is summarised by net health benefit.

$$NHB_j = \Delta E_j - \frac{\Delta C_j}{k}$$

where $NHB_j$ is the net health benefit of option $j$ in QALYs, $\Delta E_j$ is the health gain of option $j$ compared with business as usual in QALYs, $\Delta C_j$ is the net cost to the health budget compared with business as usual, and $k$ is the cost at which the system gives up one QALY through displacement. Among affordable options, the one with the largest positive net health benefit adds most to population health.

The value of $k$ depends on whose budget pays. The NICE technology appraisal and highly specialised technologies manual (PMG36) states that, given the fixed NHS budget, the appropriate maximum acceptable ICER is the opportunity cost of programmes displaced, and it works with a range of GBP 25,000 to GBP 35,000 per QALY gained. Claxton and colleagues (2015), using English NHS programme budgeting data, put the central estimate of that displacement cost at GBP 12,936 per QALY at 2008 expenditure. The Green Book instead gives a willingness-to-pay value of GBP 70,000 per QALY in 2020-21 prices for valuing health effects in wider government appraisal. The NICE range and the Claxton estimate concern health given up inside a fixed NHS budget, while the Green Book value reflects what the public would pay for health, so a cost-benefit analysis and a cost-effectiveness analysis of one intervention can disagree.

Worked example with two options for avoidable admissions

All numbers in this example are illustrative. A regional health body wants fewer emergency admissions among adults with long-term conditions. Against business as usual it compares option A, more community nursing, and option B, a payment to general practices that review patients within seven days of discharge. Each avoided admission saves GBP 2,400, and the health body uses $k$ = GBP 15,000 per QALY as its displacement cost.

1. Net cost of option A. The nursing expansion costs GBP 6.0 million a year and avoids 1,500 admissions, saving 1,500 × 2,400 = GBP 3.6 million. The net cost is 6.0 minus 3.6 = GBP 2.4 million, for a gain of 300 QALYs.

2. Net cost of option B. The incentive costs GBP 1.5 million and avoids 500 admissions, saving 500 × 2,400 = GBP 1.2 million. The net cost is 1.5 minus 1.2 = GBP 0.3 million, for a gain of 60 QALYs.

3. Cost per QALY. Option A costs 2,400,000 / 300 = GBP 8,000 per QALY against business as usual, and option B costs 300,000 / 60 = GBP 5,000 per QALY. Option A adds GBP 2.1 million and 240 QALYs over option B, or 2,100,000 / 240 = GBP 8,750 per QALY, which is below $k$.

4. Net health benefit. Option A displaces 2,400,000 / 15,000 = 160 QALYs elsewhere, leaving a net health benefit of 300 minus 160, or 140 QALYs. Option B displaces 300,000 / 15,000 = 20 QALYs, leaving 60 minus 20, or 40 QALYs. At the PMG36 figure of GBP 25,000 the displaced amounts are 2,400,000 / 25,000 = 96 and 300,000 / 25,000 = 12 QALYs, giving 204 and 48, so A still ranks first.

5. Switching value. Holding the QALY gain at 300, A falls to the net health benefit of B when its net cost reaches (300 minus 40) × 15,000 = GBP 3.9 million. That requires savings of 6.0 minus 3.9 = GBP 2.1 million, or 2,100,000 / 2,400 = 875 avoided admissions. Below 875 avoided admissions, B becomes the better choice.

6. Who pays. The community services budget carries the full GBP 6.0 million for A, while the GBP 3.6 million saving appears in hospital budgets. Unless budgets are pooled, the body that must approve A sees a cost two and a half times the net figure, which is why health system organisation and budget impact analysis matter as much as the cost per QALY.

The appraisal favours A, with a warning that the case rests on avoided admissions and on a transfer between budgets.

Implementation, monitoring and evaluation

The Green Book separates appraisal, before a proposal is approved, from evaluation, after it is implemented, and asks analysts to consider from the outset how a proposal will be evaluated, with the Magenta Book as the government guidance on evaluation. Monitoring then tracks delivery.

Because policies are rarely randomised, evaluation leans on quasi-experimental designs such as interrupted time series, difference-in-differences and the synthetic control method, which build a counterfactual from untreated places or earlier periods. A simple before and after comparison confuses the effect of a policy with trends and other events.

Minimum unit pricing for alcohol in Scotland shows evaluation written into the law. The Alcohol (Minimum Pricing) (Scotland) Act 2012 makes the provisions expire at the end of six years unless Scottish Ministers order them to continue, and it requires a report after five years on their operation and effect, including effects on groups of people that may be defined by age, gender, deprivation and alcohol consumption. A 50 pence floor per unit applied from 1 May 2018. Wyper and colleagues (2023) used a controlled interrupted time series with England as the control and found a 13.4% reduction in deaths wholly attributable to alcohol and the largest improvements in the four most deprived deciles. The floor was raised to 65 pence from 30 September 2024.

Health policy beside neighbouring ideas

Several neighbouring concepts are narrower parts of health policy. A coverage policy fixes the rules for which technologies and services a payer funds, and health technology assessment applies evidence to individual technologies within those rules. A programme is the organised set of activities that delivers a policy objective, while a clinical guideline advises on care without itself settling funding or entitlement.

Governance or stewardship describes the institutions through which policy is made and enforced, so weak governance shows up as policies announced but never implemented. Universal health coverage is a goal that many health policies pursue.

Limits and common misreadings

Economic appraisal improves health policy only when its limits are kept in view. Five errors recur.

1. Treating announcement as delivery. A policy without funding, authority or assigned responsibility changes little.
2. Confusing cost effectiveness with affordability. A policy can add health per pound spent and still be unaffordable for the budget holder who must pay, as step 6 of the example shows.
3. Using one value of a QALY everywhere. The value of $k$ should follow whose resources are used.
4. Ignoring distribution. A policy that raises total health can still widen inequality, which is why distributional cost-effectiveness analysis and the Green Book's distributional analysis exist.
5. Assuming evidence decides. Values, rights and political feasibility also shape a decision, and the equity-efficiency trade-off is a judgement that analysis can inform but not settle.

Sources

• Claxton K, Martin S, Soares M, Rice N, Spackman E, Hinde S, Devlin N, Smith PC, Sculpher M. Methods for the estimation of the National Institute for Health and Care Excellence cost-effectiveness threshold. Health Technology Assessment. 2015;19(14):1-503. https://doi.org/10.3310/hta19140
• HM Treasury. The Green Book (2026). Updated 28 October 2026. https://www.gov.uk/government/publications/the-green-book--2/the-green-book-2026
• National Institute for Health and Care Excellence. NICE technology appraisal and highly specialised technologies guidance: the manual (PMG36). Published 31 January 2022, last updated 13 October 2026. Sections 6.3.1, 6.3.4 and 6.3.7. https://www.nice.org.uk/process/pmg36
• Nutbeam D. Health Promotion Glossary. WHO/HPR/HEP/98.1. Geneva: World Health Organization; 1998. https://iris.who.int/handle/10665/64546
• Scottish Parliament. Alcohol (Minimum Pricing) (Scotland) Act 2012 (asp 4), sections 2 and 3. https://www.legislation.gov.uk/asp/2012/4
• Scottish Government. The Alcohol (Minimum Price per Unit) (Scotland) Amendment Order 2024 (SSI 2024/128). https://www.legislation.gov.uk/ssi/2024/128/made
• Walt G, Gilson L. Reforming the health sector in developing countries: the central role of policy analysis. Health Policy and Planning. 1994;9(4):353-370. https://doi.org/10.1093/heapol/9.4.353
• Walt G, Shiffman J, Schneider H, Murray SF, Brugha R, Gilson L. 'Doing' health policy analysis: methodological and conceptual reflections and challenges. Health Policy and Planning. 2008;23(5):308-317. https://doi.org/10.1093/heapol/czn024
• World Health Organization. Everybody's Business. Strengthening Health Systems to Improve Health Outcomes. WHO's Framework for Action. Geneva: WHO; 2007. https://iris.who.int/handle/10665/43918
• Wyper GMA, Mackay DF, Fraser C, Lewsey J, Robinson M, Beeston C, Giles L. Evaluating the impact of alcohol minimum unit pricing on deaths and hospitalisations in Scotland: a controlled interrupted time series study. Lancet. 2023;401(10385):1361-1370. https://doi.org/10.1016/S0140-6736(23)00497-X