The burning of crop residue in the open field has become a significant concern for climate change mitigation efforts worldwide. This practice has led to air quality impairment, smog, haze, heat waves, and different health problems. These could be avoided by adopting sustainable crop residue management practices (SCRMPs) and enabling farmers to engage in SCRMPs. Assessing the health effects at the household level is critical for understanding this problem and finding a solution. Using the primary dataset of 420 farmers from Punjab, Pakistan, we estimated the incurred impacts and costs of crop residue burning. We calculated the health and environmental benefits associated with adopting SCRMPs by comparing the two groups of farmers (adopters and non-adopters). Furthermore, we used a propensity score matching technique to measure the causal impact of SCRMPs adoption on health costs. The findings showed that a surprisingly large number of farmers are all aware of the adverse effects of residue burning, and many do not burn crop residues and instead use SCRMPs. This study found that households with chronic and non-chronic diseases become acute, and the severity increases during the burning period. They spend USD 13.37 to USD 8.79 on chronic and non-chronic diseases during the burning season, respectively. Consequently, the use of SCRMPs has a positive effect on healthcare costs. Our study findings highlight the meaningful implications for developing a new policy to promote the sustainable utilization of crop residues and enhance their adoption in Pakistan.