1. Health and Health Care Demand
Be sure to distinguish the difference between the demand for health care as an input, and the demand for health, as in the demand for the optimal stock of health.
We don’t derive utility from medical procedures per se…we derive utility from the healthy time the procedure provides.

2. The Determinants of Health
Medical Care and Health
Education and Health
Income and Health
Inequality and Health
Lifestyle and Health
Environment and Health

3. Grossman

5. Think of Hmin as barely alive…multiple diseases, curing the first/worst disease has large payofffs in terms of healthy days, but there are diminishing returns to curing diseases, or improving health. H is health stock change in H is net investment in health. Gross investment minus depreciation.

6. Grossman Model
Investment in health as a form of human capital the Grossman model
Pure Consumption Model
Also make analogy to a car. It generates transportation services. It depreciates, it requires maintenance, etc
In the pure consumption model, investment in health is purely because good health enters the utility function and NOT that it generates health days which earn income as in the pure investment model. That is to say the cost of health care is larger relative to the monetary return on investment. The return is “psychic” in that it is the reduced disutility received from fewer sick days.

7. Grossman Model r + d is gross investment
D (delta) is rate of depreciation, ie the rate at which health stock declines if you do nothing.
r is rate of return on alternative investments. Ie opportunity cost of investment.
MEI (MEC) marginal efficiency of investment (capital)
The shape and position of the MEI depend on technology and wages. It represents the ability of the individual to turn health inputs into health stock.

8. As Age

9. Age
Aging results in two effects: The increase in the rate of depreciation. Things break quicker, more frequently thus requireing more upkeep (ie higher d). Second the rate of return on a given investment is lower (rate of return in terms of ability to convert investment into health stock).
As people age the d (depreciation) increases lowering the optimal health stock. Older people purchase a greater amount of health care due to higher d, but have a lower health stock.
We can also think about people of same age, etc, but experiencing a higher d. It results in larger gross investment, yet lower health stock.
Also MEI shifts from (in this picture) MEI’ to MEI and therefore optimal health stock goes from H2 (point C) to H1 since D went from d0 to d1 as well.
It shifts in because the return from health investments is lower.
* However they often forgo some investments. Ie plastic surgery, hip, knee surgery, or other quality of life stuff if they have few expected years left. Why fix the windshield on a car that only has a 1,000 miles left? Ie the costs is high relative to the change in H.

10. Wage Effect
As wage rate increases the MEI shifts to MEI’ and optimal health stock increases to H2. Note that this demonstrates the equilibrium, not the transition. Obviously there needs to be an increase in health investment to reach the higher health stock. Demand for health care inputs rises.
Pure investment model:
However the MEI could shift down if the increased opportunity cost of time in producing H ie the cost of capital. So the net effect depends on optimal health depends. I think the demand for health care unambiguously goes up?
Once retirement hits, healthy days generate no additional income so optimal health falls to Hmin as health depreciates.

11. Education
As education increases the MEI shifts to MEI’ and optimal health stock increases to H2. Note that this demonstrates the equilibrium, not the transition.
Education makes you more efficient at turning health investments into H (health stock). More educated people are better at following instructions for pills, more knowledgeable about what is bad for you, etc.
OR Education may result in lower depreciation rate thus increasing the optimal health stock for a given amount of investment.
Higher education=better health in Rich and Poor countries.
Pure investment model:
However the MEI could shift down if the increased opportunity cost of time in producing H ie the cost of capital. So the net effect depends on optimal health depends. I think the demand for health care unambiguously goes up.

12. Uncertainty
The MEI shifts due to increased future earnings that occur through improved health stock. More health stock, results in more certainty about future earnings. Importantly the increased investment in health HAS to AFFECT future earnings, otherwise it is merely a move down along current MEI schedule. Thus the uncertainty. He weighs the costs and benefits of H2-H0.

13. Practice
What happens to MEI if someone gets goes to college? What happens to the optimal health stock H? And what happens to demand for health inputs?
What does this mean for expanding health insurance to less educated?

14. Practice
What happens to MEI if someone gets cancer? What happens to the optimal health stock H? And what happens to demand for health inputs?
Using the Grossman Model what would you predict the differences would be between US citizens and A Citizen of Sub- Saharan Africa (Botswana, Lesotho, etc) in terms of their demand for HIV prevention?

15. The Consumption Model Pure Investment model vs. Pure consumption model
In the pure consumption model, investment in health is purely because good health enters the utility function and NOT that it generates health days which earn income as in the pure investment model. That is to say the cost of health care is larger relative to the monetary return on investment. The return is “psychic” in that it is the reduced disutility received from fewer sick days.

16. Grossman Model
Additional factors that affect health in pure consumption model
Age
Wages
Education

17. Age Optimal Health stock demanded still falls with rise in d
Demand for health care (investment in health) still rises with age.

18. Health and Wealth

19. Wage
Since health enters the utility function, health is positively related to wealth in the
consumption model provided it is a superior good. That is, an increase in wealth with no
change in the wage rate or the marginal cost of gross investment causes the quantity of
health capital demanded to rise. This effect is absent from the investment model because
the marginal efficiency of health capital and the market rate of interest do not depend
on wealth.26

20. Education

21. Research
Studies using the Grossman model
Critiques of the Model

22. All Death is Suicide
Since health capital is one component of human capital, a person inherits an initial stock of health that depreciates with age - at an increasing rate at least after some stage in the life cycle - and can be increased by investment. Death occurs when the stock falls below a certain level, and one of the novel features of the model is that individuals "choose" their length of life.

23. Consumer Utility Theory
Utility maximization
Income as the Budget Constraint
Change in Relative Prices
Income and Substitution effects

24. Consumer Utility Theory
Utility Maximization
Time as the Budget Constraint
The importance of Time
Labor Leisure trade-off

25. Practice

26. The Demand for Health Care
Derived from Consumer Utility Maximization
Price elasticity of demand for medical care
Insert tables on price elasticity

27. Elasticity
Elasticity is a general concept that can be used to quantify the response in one variable when another variable changes.

28. Price Elasticity of Demand

29. Margin Extensive versus Intensive. Prescription drugs
Getting prescriptions vs number of prescriptions

30. Taken from http://www. fda

31. Taken from http://www. fda

32. Negative inputs into health production function
Lifestyle
Chemical dependency
Rational Addiction

33. Demand for Unhealthy Goods
Chart on alcohol drugs, etc
Rational Addiction

36. Time
Time cost and time price elasticities.

37. Income Elasticity
Is medical care normal or superior good? (luxury good?)
Normal good: income elasticity less than 1.
Superior good income elasticity greater than 1.

40. From Finkelstein, A. , Luttmer, E. F. P. , & Notowidigdo, M. (2008)
From Finkelstein, A., Luttmer, E. F. P., & Notowidigdo, M. (2008). What Good Is Wealth Without Health? The Effect of Health on the Marginal Utility of Consumption. Unpublished manuscript.
Finkelstein, A., Luttmer, E. F. P., & Notowidigdo, M. (2008). What Good Is Wealth Without Health? The Effect of Health on the Marginal Utility of Consumption.Unpublished manuscript.

41.
Bayesian analysis of testing

42. Costs?
Expenditures = Price X Quantity

43. Can we rein in the growth of health care expenditures?
Not Likely.
We might not be able to reduce expenditures, but we can improve outcomes.

44. The Race to Death Cancer Heart Disease Stroke Diabetes Car Accident
Curing cancer doesn’t do anything for longevity. Adds to health expenditures. Cure heart disease and you increase longevity, but you will die of something so we will not lower expenditures.
Diabetes
Car Accident

45. X The Race to Death Cancer Heart Disease Stroke Diabetes Car Accident
Curing cancer doesn’t do anything for longevity. Adds to health expenditures. Cure heart disease and you increase longevity, but you will die of something so we will not lower expenditures.
Diabetes
Car Accident

46. X The Race to Death Cancer Heart Disease Stroke Diabetes Car Accident
Curing heart disease adds longevity, but doesn’t necessarily reduce expenditures because diabetes and cancer are around the corner. Cure heart disease and you increase longevity, but you will die of something so we will not lower expenditures.
Diabetes
Car Accident

47. “Cut half of all medical spending”
~Robin Hanson
Easy decision ex-post, more difficult ex-ante.