STUDY OBJECTIVE: (1) To provide a didactic and conceptual (rather than mathematical) link between multilevel regression analysis (MLRA) and social epidemiological concepts. (2) To develop an epidemiological vision of MLRA focused on measures of health variation and clustering of individual health status within areas, which is useful to operationalise the notion of "contextual phenomenon". The paper shows how to investigate (1) whether there is clustering within neighbourhoods, (2) to which extent neighbourhood level differences are explained by the individual composition of the neighbourhoods, (3) whether the contextual phenomenon differs in magnitude for different groups of people, and whether neighbourhood context modifies individual level associations, and (4) whether variations in health status are dependent on individual level characteristics. Design and PARTICIPANTS: Simulated data are used on systolic blood pressure (SBP), age, body mass index (BMI), and antihypertensive medication (AHM) ascribed to 25 000 subjects in 39 neighbourhoods of an imaginary city. Rather than assessing neighbourhood variables, the paper concentrated on SBP variance between individuals and neighbourhoods as a function of individual BMI. RESULTS: The variance partition coefficient (VPC) showed that clustering of SBP within neighbourhoods was greater for people with a higher BMI. The composition of the neighbourhoods with respect to age, AHM use, and BMI explained about one fourth of the neighbourhood differences in SBP. Neighbourhood context modified the individual level association between BMI and SBP. Individual level differences in SBP within neighbourhoods were larger for people with a higher BMI. CONCLUSIONS: Statistical measures of multilevel variations can effectively quantify contextual effects in different groups of people, which is a relevant issue for understanding health inequalities.