21 January 2022

Population Health Finance: Why allocative efficiency should be embedded in NHS finance processes

One of the key principles in economics is scarcity. There is not enough resource to meet all needs. As healthcare professionals, we can all recognise this theory. Given scarcity exists in healthcare, how do we go about prioritising our resources? HEU health economist Jack Ettinger shared this personal example of why allocative efficiency is the route to help us answer this question.

My grandad is in his mid-80s. He has atrial fibrillation, diabetes and is becoming frailer and frailer. Two weeks before Christmas he had a visit from a speech therapist as he was having problems swallowing. I am told the therapist was wonderful. They were clearly good at their job and listened attentively to his needs. The speech therapist gave my grandad some verbal advice and left him a leaflet. Whilst this was helpful, my grandad complained the benefit to him was minimal. This was not a new experience for him. In the last three months he had, on top of two hospital trips, visits from physio, speech, and occupational therapists. They all left him with similar advice and the same problem. Only minimal benefit for a lot of effort.

Whilst the NHS is brilliant at providing as much healthcare as it can given its limited resource, it, and other healthcare systems internationally, are not always the best at making sure those resources provide the most value for money. One of the reasons for this is that allocative efficiency is not embedded into healthcare management and finance.

What is allocative efficiency and why should we care about it?

Allocative efficiency in economics-speak is where marginal benefit is equal to marginal cost. In health, allocative efficiency is achieved when resources are allocated between health programmes in such a way that maximises health. It is all about maximising value.

This is contrasted with technical efficiency. Technical efficiency is about producing the most possible output for the least possible input. This is the common approach to efficiency in healthcare, for example in targets to reduce length of stay. Whilst it is indeed important to minimise costs, there is an issue with this approach called Jevon’s paradox:

‘Increasing the efficiency with which a resource is used tends to increase the rate of consumption of that resource’.

Specifically, to healthcare beds this idea manifests itself in Roemers law:

‘A hospital bed built is a hospital bed filled.’

A focus on technical efficiency without regard to allocative efficiency means you could just end up doing more and more of activities that contribute little to health. Sound familiar? This is exactly the situation my Grandad finds himself in. Spending a vast amount of time interacting with healthcare services whilst not actually getting much healthier.

This is all very well, but how can this principle be used in practice?

Population health management (PHM) is the first step. PHM is all about planning health services to best meet the health needs of the population, not just around the delivery of healthcare services. This is an approach that should be enabled by the movement to integrated care systems which should foster new ways of working between all levels of care.

But this is just the start. There are methods which will allow ICSs to think about allocative efficiency more explicitly in their decision-making processes. One such way is by using the STAR tool which has previously been championed by the Health Economics Unit. STAR stands for socio-technical allocation of resources. The tool brings together, for each element within a care pathway, total costs and value to patients.

What this could mean for my grandad? Instead of receiving lots and lots of healthcare that is doing only a small amount of good, he would receive the interventions that provide the most value. Furthermore, by only providing interventions that will provide value, resources could be freed up to help someone else’s grandparents.

Embedding allocative efficiency in healthcare

The Health Economics Unit is working with the Midlands Decision Support network to introduce the STAR approach into COPD pathways to a number of ICSs in 2022.

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