1. More Demand / Begin Information

2. Fundamental Problems with Demand Estimation for Health Care Measuring quantity, price, income. Quantity first. It is typically very difficult to define quantity. We usually look at the stuff that is easiest to measure. Things like visits, days of service, and the like.

3. Problems w/ Demand Estimation The problem here is that the measures may not be meaningful. 5 days of inpatient care for observation is obviously not the same as 5 days of inpatient care for brain surgery. We could argue that 5 visits reflects more treatment than 4 visits, but it could simply indicate that the first 4 visits were not effective.

4. Episodes Episodes represent what may be a more theoretically desirable measure of output in a number of ways. An episode starts when someone starts to need treatment, and ends when they no longer need it. For example, an episode may include a few visits to the doctor, some inpatient hospitalization, and maybe some follow-up clinic visits.

5. Episodes It is usually defined chronologically. In principle, this is the best way to measure both instances of demand, and the costs of treatment. Particularly useful, for example, if the make-up of treatment has changed. If, over time, we have substituted outpatient for inpatient care, and we have a few more tests, but they are cheaper, then what is really important is not the number of visits, or the number of days, but the cost of the episode.

6. Episodes These seem great. What are the problems? –They are necessarily arbitrary. We must determine when the episode starts, and when it ends. Does a certain visit represents more of the same episode, or the beginning of another episode. –We must look much more carefully into the process that defines the episode, and at behavior within the episode. –We need complete data on individuals. If individuals go to several providers, or take considerable out-of-plan coverage, it may be very difficult to create episodes with any real confidence.

7. Income Most elementally, it is often difficult to find incomes. If we are looking at insurance claims, they often don't have people’s incomes on them. You can get an expenditure elasticity, but you'll have lots of trouble getting an income elasticity. Given that you have income, there are other concerns. Many economists, myself included, feel that many types of expenditures are more appropriately related to long-term, or permanent income, than to measured, or current income. If we try to estimate demand with current income, we get some problems with the demand elasticity.

8. Price If we treat coinsurance as simply a fraction, then the econometrics should not be too difficult. Rather than measuring price P, we are measuring net price rP. A 10 % change in coinsurance rate is simply the same as a 10 % change in net price. Even this simple example suggests that insurance is only important IF price is important. Visits Money Price Effective Price 40 30 20 10 20 30 40 Money price demand Effective demand

9. Kinks from Insurance 3 sections 1. Deductible - same as before Health Care Composite 2. Coinsurance - Other Goods trade off for more health care. 3. Limit - Insurer won't pay more. Back to previous slope. Budget constraint is now decidedly non- linear, and non-convex

10. More kinks Price is correlated with the error term. Since individuals with large values of the error term are likely to exceed a deductible, and conversely, V will be negative. That is, a large positive (+) error is correlated with a low price, because after the deductible, we're thrown into a low copayment (and vice versa). This is noted by error terms in graph. This suggests that the demand curve is more elastic (more negative).

11. Rand Experiment The Rand experimental data randomly assigned people to insurance coverages, thus addressing at least some of the problem. Generally these estimates gave coinsurance elasticities of about -0.2. What does this mean?

12. Time Prices Acton's work gets quoted a lot here. This type of analysis has been problematical because of difficulties in imputing valuations of time. Our table looks at his findings for outpatient visit demand, and physician services. We see that the own-price elasticity for travel time (-0.958) of a public outpatient department is about 4 times as large as for a private physician ( ‑ 0.252), presumably because there are numerous substitutes. The cross-price elasticities are positive, indicating that the two types of care are substitutes rather than complements

13. Information

14. Why do we care? Problem is asymmetric information. In many parts of the health care sector, there are information gaps. Sometimes the patient knows more than the provider. Examples? Discuss. Sometimes the provider knows more than the patient. Examples? Discuss.

15. The Lemons Principle Shows the problem when we have incomplete information. We will apply this principle DIRECTLY to the purchase of health insurance. Key feature these days.

16. Lemons and Cars We have incomplete information on the quality of cars. Some may be creampuffs Others may be lemons. What does that do to the market. Assume we have 9 cars, with quality levels varying from 0 to 2.

17. Idea Owners know how much their cars are worth but potential buyers DON’T. Owners know that cars are worth $1,000*Q, where Q is quality. Potential buyers are willing to pay $1,500 per unit of quality (they need cars) But they only know that the AVERAGE car is worth how much? A> $1,000. Why?

18. Equilibrium price? Suppose an auctioneer calls out a price of $2,000 per car. All 9 cars will be offered. Why? How many will be bid on? A> None. Because buyers only know that the mean quality level is 1 @ a price of $1,500. So you have 9 sellers, no buyers.

19. Equilibrium price? (2) $2,000 doesn’t work. Suppose auctioneer calls out a price of $1,500 per car. 7 cars will be offered. Why? The BEST ones are withdrawn since their worth more than $1,500. Average quality falls from 1 to 0.750. Potential buyers use price as an indicator of quality, and recognize that the cars being offered are lower quality. They would only pay $1,500*0.750 = $1,125. Still no bidders. There never will be.

20. WHY? When potential buyers know only the average quality of used cars, then the market prices will tend to be lower than the true value of top quality cars. High quality cars are driven out of the market by lemons. KEY -- Sellers have information. Buyers DON’T.

21. What if NEITHER has Info? Auctioneer starts at $2,000. Owners guess their cars have quality level Q = 1. All 9 cars are offered, but none are bid. If price is dropped to $1,500, all 9 cars are still offered. Buyers buy them. KEY is that the information is symmetric.

22. Next Time Bookies, insurance, and information.