Chapter 9 Consumer Choice and Demand 1.Applying the standard budget constraint model 2.Two additional demand shifters-time and coinsurance 3.Issues in measuring health care demand 4.Empirical measurements of demand elasticities 5.Impact of insurance on aggregated expenditure 6.Other variables affecting demand

Applying the standard budget constraint Figure 9-1 demand for health capital determines the optimal amount of the home goods and health capital investment (consumers is rational and perfectly informed) The consumer’s equilibrium (see Figure 9-3) MRS (want to trade)=price ratio (be able to trade) Demand shifters Figure 9-3 => 9-4 (Demand curve derived from the standard budget constraint changes) Price elasticity: Ep=(dQ/Q)/(dP/P)=(dQ/dP)*(P/Q) Income elasticity: Ey=(dQ/Q)/(dY/Y)=(dQ/dY)*(Y/Q) Health status and demand Figure 9-5 Changed Preferences due to illness

(1) Additional demand shifters-time Time cost: the time spent acquiring services A example if money price increase $5 (Figure 9-6): 1. one hour of time valued at $10 (30 min travel+20 min wait+10 min doctor visit) 2. one visit priced at $25 3. travel and parking costs at $5 Ep (full price)=(-1/5.5)/(5/42.5)= Epm(money price)=(-1/5.5)/(5/27.5)=-1 The money price elasticity is smaller than the full price elasticity by the same proportion as the money price is smaller than full price Pm/(Pm+Pt)=27.5/42.5=0.647 Epm/Ep=-1/-1.545=0.647 Table 9-1 Acton’s time valuation Equation (1975, 1976) 1. the importance of time (Et=-0.958) 2. outpatient visits and physician visits are substitutes (Et=0.64)[t:own-time price for outpatient visits] Subsequent work usually supports an important role of time

(2) Additional demand shifters-coinsurance Figure 9-7: The effect of a coinsurance rate on health care demand 1. Insurance will increase demand for health care (Q1->Q”1) 2. Insurance will make demand for health care less elastic Figure 9-8 Market effect (a upward-sloping supply curve) Health Expenditure increases from P0V0 to P1V1

Issues in measuring health care demand Q: why do the reported elasticity vary so often? Individual and market demand function: Individual: the total quantity of visit market aggregate: the number of visit per capita Measurement and definitions 1.quantities of services in dollar; quantity of visits, patient days, or cases treated 2. the price of services Differences in the study populations: Minnesota VS Florida Data Resource: Insurance claim VS health interview Experimental and not experimental data

Empirical Measurements of demand Elasticities- price elasticity Table 9-2 Price Elasticities from selected studies: most reported elasticities range between 0.0 and -1.0 e.g. market aggregate Table 9-3 Firm (physician)-specific Price elasticites are higher the degree of market competition few substitutes for physician care, but many substitutes among individual physicians

Empirical Measurements of demand Elasticities-income elasticity Normal VS inferior; necessary VS luxury From table 9-4, health care are considered as “necessary goods” luxury goods in most cross-national studies Q: why is it inconsistent with individual and national data? A: Getzen (2000): national data shows technologies and economic well-being

Empirical Measurements of demand Elasticities-insurance elasticity A fixed coinsurance rate: the same as the price elasticity net price=r*P Adverse selection problem from non- experimental data Rand experimental data (1974): price and insurance do matter considerably.

Other variables affecting demand Ethnicity and gender 1.Blacks tend to consumer less 2.Females consumers difference in life stage Urban Versus Rural less care in rural: tastes, health status or longer travel distance? Education 1.efficient health producer or lower time preference 2.confounding factor: income Age Health status: Wedig (1988) smaller price elasticity for sicker people Uncertainty: higher precautionary demand for elderly