Class 8: Challenging assumptions that support demand theory; how skepticism regarding these assumptions are fueling the current health policy debate at both the state and federal levels Does modern demand theory provide a reasonable basis for evaluating the social welfare of medical care services?

Four constructs that are key to understanding modern demand theory Utility and Social Welfare A person chooses among goods offered in a market. These choices are his Revealed preferences. These choices are assumed best for the persons individual benefit. Deriving demand curves and the elasticity of these curves Consumer Surplus as a measure of increase (or decrease) in social welfare

Critique of 6 assumptions that underlie modern demand theory 1) A person is the best judge of his or her own welfare 2) Consumers have sufficient information to make good choices 3) Consumers know with certainty the results of their consumption decisions 4) Individuals are rational (regarding the choices they make in a free market) 5) Individuals reveal their preferences through their actions 6) Social welfare is based solely on individual utilities, which in turn, are based solely on the goods and services they consume

Rice gives evidence that suggest that each of these 6 assumptions may not hold for medical care. What evidence or argument does Rice use to make his point? Does Rice take a reasonable approach to analyzing each assumption? Is Rice’s reasoning persuasive? Is Rice persuasive but so abstract that it is not sufficient to drive health policy reform? Do Rice’s conclusions suggest an obvious link to a popular health policy issue?

How demand theory answers four key health policy questions Is comprehensive NHI necessarily inefficient? Should patient cost sharing be encouraged over other policy levers? Should people pay higher co-pays for medical services the demand for which is more price elastic? Can people choose the right health plan?

Rice assumes you recognize the assumption linked to each of these policy questions. What assumptions are at play in each of these health policy questions? Does how you think about these linked assumptions make a difference in your answer to the health policy question? Having studied the arguments for and against the 6 demand theory assumptions, how have your answers to these health policy questions changed.