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Health expenditures and mental health

Theme: Money, money, money


Every society must decide how much to spend on health care. The decision involves trading off the disposable income of the healthy working-age population against the health of the sick and the old. In essence, the trade-off is between having lower disposable income, on the one hand, and living a longer and healthier life, on the other. Societies solve this problem in different ways. Both the market system and the state-run systems are imperfect, each in their own way. There is the third-party payment problem that causes excessive spending in the United States and the rationing of health care in the state-run European health care systems.

The economics of mental health differ from other health care issues. Mental health problems are often invisible to others, yet in many cases affect individuals severely in ways that only they themselves can assess. Given the chance, most of those affected would be willing to pay a very high sum to free themselves from their symptoms. Relatives often suffer just as much and in the case of children and young adults may suffer even more. Yet, in a state operated health care system they cannot express their willingness and are hampered by lack of knowledge and the rationing of care.

A modern market economy produces high standards of living, yet a market economy also has adverse effects on mental health. The rat race, conspicuous consumption and the consumption of goods that have negative health effects are all features of a free market system. The market supplies computer games that captivate the attention of young men, a distribution system that matches the providers of alcohol with teenagers, and illegal drugs that gradually destroy them. The path to mental health problems is often a longwinded one.

A public health care system tackles the mental health consequences. But in such a system, government budgeting often does not consider fully the trade-offs between spending on mental health care, the caring for the chronically mentally ill, and other related issues.

In Iceland there were 8300 individuals fully or partially unable to work in year 2021 due to mental health problems in a country with a labour force of 205.8 thousand (3.9% of the sum of labour force and the number affected). The table below shows numbers from the government budget.


Public expenditures on health-care related issues in 2020 (million euros with share of GDP in parentheses)

Source: Department of Health and the Social Security Administration


It is notable that disability benefits caused by mental health problems exceed direct expenditures on health care. The difference between 89 million and 177 million would at first blush be a prima facie case for increased expenditures on health care but this ignores considerations of effectiveness. From an economic standpoint, health care expenditures should be increased until additional expenditures do not generate corresponding savings in benefits. Raising expenditures on health care from 89 to 90 million euros would be justifiable if the increase lowered benefits by at least one million. However, this ignores the intensity of the suffering among the patients. The benefits they receive in no way compensate them fully for the suffering. The psychic cost of chronic depression/anxiety has been measured to be 56 thousand euros, which is a higher number than for most other ailments. [1],[2] Moreover, the external effect on relatives is not included. [3]

A holistic approach to mental health would involve a combination of preventive measures and health care. Kindergartens and pre-school can help those born into troubled families, measures to discourage the use of alcohol and illegal drugs in schools would stave off problems in early adulthood as would state subsidised psychological help to children and teenagers, sensible law enforcement tackling the illegal sale of alcohol and illegal drugs, and of course timely health care interventions. Other apparently unrelated measures would also help such as the provision of affordable housing to young families and paternity leaves to enhance the general quality of life.

While economics teaches that a market economy generates an efficient allocation of resources, this does not apply to health care due to several market failures. An efficient allocation of resources to mental health provision is difficult to attain but very desirable in the light of the suffering involved. □

References by request

  1. Buason, A., Norton, E. C., McNamee, P., Thordardottir, E. B., & Asgeirsdottir, T. L. (2021). The causal effect of depression and anxiety on life satisfaction: An instrumental variable approach. NBER Working Paper No. 28575. Retrieved from

  2. Asgeirsdottir, T. L., Birgisdottir, K. H., Ólafsdóttir, T., & Olafsson, S. P. (2017). A compensating income variation approach to valuing 34 health conditions in Iceland. Economics & Human Biology, 27(A), 167-183.

  3. Mentzakis, E., McNamee, P., Ryan, M., & Sutton, M. (2012). Valuing informal care experience: Does choice of measure matter? Social Indicators Research, 108, 169-184.

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