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The Grossman model (1972) treats health as a durable capital stock that depreciates over time and can be replenished through investment (healthcare, diet, exercise). Individuals demand health both as a consumption good (it produces utility directly — feeling well) and as an investment good (healthy days increase productive time for work and other activities). The model predicts that the demand for healthcare is derived from the demand for health — people do not want medical care for its own sake but because it produces health. The health stock depreciates faster with age (explaining rising healthcare use), responds to education (more educated people are more efficient health producers), and is subject to budget constraints (income affects the quantity and quality of health inputs). The model provides the theoretical foundation for understanding why healthcare spending rises with age, income, and education.
Before Grossman's 1972 model, the economics of healthcare lacked a theoretical framework for why people seek medical care. The answer seems obvious — because they are sick — but this does not explain the variation in healthcare demand across individuals, over the lifecycle, or across socioeconomic groups. Grossman provided the framework by treating health as a form of capital that individuals produce, consume, and invest in over their lifetime.
The analogy to physical capital is productive. A factory has equipment that depreciates over time and must be maintained or replaced. Similarly, an individual has a health stock that depreciates (the body ages, wears down, becomes more susceptible to disease) and can be replenished through investment — healthcare services, healthy diet, exercise, rest. The optimal level of health stock at any point depends on the marginal cost of investment versus the marginal benefit of additional healthy time.
Health enters the individual's utility function in two ways. As a consumption good, good health provides direct utility — it feels good to be healthy, pain-free, and energetic. As an investment good, health produces healthy time that can be allocated to market work (earning income) or non-market activities (leisure, family). A sick day reduces both earnings and enjoyment. The demand for healthcare is therefore derived: people do not want surgery, medication, or hospital stays for their own sake. They want health, and healthcare is one of several inputs that produce it.
The model generates several testable predictions. Age: as the depreciation rate increases with age, maintaining health requires escalating investment, predicting the observed U-shaped age-expenditure profile (low spending in youth when depreciation is slow, high spending in old age when depreciation accelerates). Education: more educated individuals are more efficient health producers — they generate more health per unit of healthcare input — predicting that education improves health outcomes beyond what income alone would explain. Income: wealthier individuals can afford more and better health inputs, predicting the income-health gradient observed in every country. These predictions have been broadly confirmed empirically, establishing the Grossman model as the foundational theory of health demand in economics.