Health Economics & Policy 3 rd Edition James W. Henderson Chapter 5 Demand for Health and Medical Care

Production of Health l Production Functions l Health Status Measurement l Health Status Determinants

Production Function for Health l Health = H(medical care, other inputs, time) HS Medical Care Spending

Health Status Measurements l Mortality l Morbidity l Quality of life

Top 10 Causes of Death

Work Days Lost and Activity Impairmants

Health Status Determinants l Income and education l Environmental and lifestyle factors l Genetic factors l The role of public health

Demand for Medical Care l Derived demand l Demand function l Effect of health insurance l Physician induced demand

Need v. Willingness to Pay

Demand Function Q MC = M(HS, DC, ES, PF) l Health status l Demographic characteristics l Economic standing l Physician factors

Effect of Insurance on Demand

Physician Induced Demand l Physician as agent l Demand creation

Demand Inducement

Measuring Demand l Price elasticity of demand l Income elasticity of demand l The Rand health insurance experiment

Select Studies on Elasticity of Demand

RAND Experiment – l Randomly assigned 2,000 non-elderly families to insurance plans differing in 2 characteristics: –Coinsurance rate (0 – 95%) –Deductible (5, 10, or 15% of annual income) –Annual spending cap of $1,000 l Examined 2 important measures: –Health spending –Health outcomes

RAND Experiment Spending l Research question: How did assignment to groups affect spending? l Compare the 0% coinsurance group with the 25% group –0% group spent an average of $1,019 –25% group spent $826 (19% less) l Economic lesson: increase the price and reduce the amount consumed

RAND Experiment Health Outcomes l Study question: How did assignment to groups affect outcomes? l Health status assessment prior to the study – allows “before and after” l For average person – no substantial health benefits from free care l Exception: chronically-ill poor (6% of the study population)

RAND Experiment Conclusions l Instead of free for all care –Targeted benefits for chronic conditions l Better access to primary care –Exempt low-income from cost sharing l Study changed policy debate –Cost sharing limits demand without substantially harming health

Summary and Conclusions l Demand for medical care seems to be relatively insensitive to price changes l Individual income elasticities are relatively low indicating that medical care may be a necessity l Aggregate income elasticities are higher indicating that medical care may be a luxury