Household Health Demand Session 200

Outline Household Health Demand Household Health Input Demand Health Production Function Rand Health Insurance Experiment

Part 1: Household Health Demand

How to trade beer for health? There is no store listed in the yellow pages where you can trade beer bottles for health IT DOESN’T HAVE TO BE BEER Why not consider “all the things one must sacrifice for health” –Beer, cigars, doctor bills, etc. Vector of goods X

How to trade beer for health? There is no store listed in the yellow pages where you can trade beer bottles for health The “trading” actually occurs along the production possibility frontier. Why not consider “all the things one must sacrifice for health” –Beer, cigars, money (spent on doctors), etc. Vector of goods X

Part 2 Health Care Demand

Application to Health The individual is both the consumer and the producer of health Step 1) Ask “How much health do I want, given that I will have to give up some things for it?” Step 2) Ask, “Given that I want to have this health level, what medical services should I buy?”

Health Demand vs. Health Input Demand The two problems are intertwined –Knowing how much health you want tells you how many inputs to buy –Could ask simply how utility varies with health inputs and figure out optimal health demand Life Satisfaction Health Inputs Health Prod. Fn.

Part 3: Household Health Production

Health Production Function Households “produce” health Producing something means combining inputs to make an output Health inputs are diet, rest, exercise, safe environments, and medical services How these are combined can be expressed mathematically

A Production Function Production functions are recipes that say: Combine inputs in this ratio and you will get this many outputs. Lemonade Recipe –1 cup –1 spoon –1 Lemon –4 Ice cubes –3 spoons of sugar –Water –5 minutes of time Old Fashioned Healthy Pregnancy Recipe –1 pregnant woman –3 measurements of weight gain and fundal height –3 measurements of blood sugar and blood pressure –Advice on signs of labor –Advice on danger signs

Production by both Government and Household For some aspects of health –The government produces part –The household produces part The more the government does, the less the household has to do and vice versa Malaria –Government kills mosquitoes –Household uses bednets Tradeoffs –The more the government does its part, the less the household has to do

Mathematical depiction of government and household roles in health H iJ =E+G(B J -  J )  Z J +F(A J -  iJ )  X iJ H iJ is the health of the i-th household in the J-th area E is environment G is Government health production B J is Best available Public Health Technology in area J  J is gap between Best and Actual in area J Z is goods purchased by govt of area J F is household health production A J is Best available household technology in community j  iJ is gap between best and actual by ith house in community j X iJ is good purchased by household i

Crowdout: Government vs. Household Many aspects of health system performance are affected by this balance –Financing health care Households out of pocket vs. government –Governing quality –Drawing in supplies of workers –Demand for medical services

Part 4 Applications

Demand Curve for Health pmpm Price m 1u D1 At Price P m the consumer Buys m 1 units of health Quantity

Effect of Insurance on Demand for Health pmpm Cp m m 1u m 1c D1 D2 Let “C” be copayment It is the fraction of Full price that is paid If C is 0.25 a price of $100 becomes $25

Empirical Studies How to Test Predictions: –Demand curve for medical care slopes downward –Education increases demand for medical services –Income increases demand for medical services Empirical Problems –Insurance distorts demand If richer people are more likely to have insurance could just be finding effects of insurance –Income effects on health distort demand If richer more educated people are more likely to be healthy we spuriously may find that wealth and education lower demand

Empirical Solutions Experimentally control the coinsurance rates to detect the effect of price on income –Letting people self-select their coinsurance rate would be a mistake. Healthy people would opt for cheaper premiums and lower coinsurance –Rand HIS study Study hypothetical markets –Method called “contingent valuation” or “willingness to pay”

The RAND Health Insurance Study (HIS) 5809 enrollees from 4 cities and 2 rural sites Enrollees agreed to participate for 3 or 5 years Persons were enrolled in one of six plans Full Coverage 25% co-payment 50% co-payment 50% co-payment for dental and mental and 25% co-payment for other care 150/450 deductible catastrophic cap

Means for Annual Use of Medical Services Per Capita PlanVisits per Person *** Expected Outpatient Expenses per Person*** Admission s per Person* Expected Inpatient Expenses per Person NS Free4.55$ %3.33$ %3.03$ %2.73$ *** p<0.001; * p<0.05; ns – not significant

Summary Medical care demand is secondary to the demand for health The concept of health capital can be used to study the way in which people anticipate the demand for health Empirical studies need to control for self- selection into insurance and self-selected health behaviors to study the demand for health