The fundamental basis of economics is that the resources we have are scarce, such idea holds true in the health care sector of the economy. Health economics helps us understand how the scarce resources the health care system are allocated among the many competing uses for those resources to satisfy our health care needs. In a market, there is a process of voluntary exchange between a buyer and a seller for a service or good. In the health sector the buyer; is the consumer and purchaser of health insurance, while the seller; is the hospitals and physicians.
Under ideal economic conditions the market will produce goods and services we want with the right quantities and lowest possible cost to the consumer. Information must be provided so that the buyers and sellers are aware of prices and quality of those goods and services. However, these conditions do not exist in the health care sector. We usually do not know the cost of the care we are going to consume for several reasons. We do not have sufficient understanding of treatment options, so we do not know exactly what type of care we should receive. Insurance coverage shields us from the direct cost of care. Hospitals and providers negotiate different rates with different health insurers. Very little neutral information about the quality of care is provided, information about services we actually need is usually limited and consumers have no real ability to separate the care needed from unnecessary care. To make a judgment between products, we must be able to judge value. Information from which to make decisions—present in markets for many other goods—is lacking in health care, which makes it difficult to judge value in the health care market.