2. Demand Some Basics Due Thursday, Sept 27 Problem Set 12

3. Demand for Health Care General models suffice … BUT We want to look at the role of time and the role of insurance. WHY? Because often out-of-pocket costs are the smallest parts of the price of health care. Only about 14% of health expenditures are out of pocket.

4. $30 Time Costs Suppose a visit costs $60. BUT, parking and travel cost $10. Visit takes 1 hour @ $20 Visits Money Price Full Price 80 60 40 20 40 60 80 Money price demand Full price demand 2468101214

5. A two-slide primer on insurance Suppose U = U(W) U > 0- Ordinal U  < 0 – Cardinality needed If E(U) < U, then insurance would be useful. Insurance for health often comes with deductible and coinsurance rate. Discuss Wealth, W Utility, U WIWI WHWH E(U) UIUI UHUH

6. A two-slide primer on insurance If you buy insurance, you pay a certain premium z, for certain. If an insurable event occurs, you get paid f. By inspection, we see that the new E(U) line is higher than the previous E(U). Here, insurance is desirable. Dr. Jensen will spend much more time with this. Wealth, W Utility, U E(U) UIUI UHUH WIWI WHWH zf

7. Insurance Suppose a visit costs $60. But your insurance offers you a 20% copayment Visits Money Price Full Price 80 60 40 20 40 60 80 Money price demand 2468101214

8. XX Deadweight Loss X0X0 Insurance Demand  The insurance  purchase more than w/o insurance. This contractual impact is called “moral hazard.” Visits Money Price Full Price 80 60 40 20 40 60 80 2468101214 180 387 258 13.753

9. Put Together – A Simple Model Goods Where: M = Medical care w/ price p m z = all else w/ price 1 r = insurer’s share of payment; consumer’s coinsurance rate is 1 – r. y = income

10. A Simple Model (2) Time Where: T = Total time t = time cost per unit of medical care T w = Time spent working Income Where: w = wage rate V = dividend income

11. A Simple Model (3) So: Full price of M is [p m (1- r) + wt]. MoneyTime Full Income

12. A Simple Model (4) Maximizing Utility In problem sets, USE this condition to solve!

13. Another perspective First Order Conditions Implies that time cost of z = 0 If we ignore time costs, RHS will be too small. We’ll buy too much M.

14. Some Comparative Statics Remember: = U z. 0 Impact of a Pure income increase V? 0 1 0 Cramer’s Rule

15. Some Comparative Statics Remember: = U z. 0 (1-r) M(1-r) Impact of a price increase? 1 1

16. What do we get? r=insurer’s share

17. Money Price and Full Price? Let F = Full price = [p m (1-r) + wt].

18. If you look at things closely : Where, F = [p m (1-r) + wt]. Compare elasticities.

19. Change in w?

20. What do we get? Price Effect! Negative Income Effect! Positive

21. What do we do with this? Look at share of health care for individual or national budget. s = pq/y. This is an identity, but if we get behavioral, we have: s = p q (p, y) /y. ds/dp = (p/y)(  q/  p) + q/y. = (p/y) (  q/  p)(p/q)(q/p) + q/y = (E p + 1) (q/y). What does this mean? We can show that: (ds/dp)(p/s) = (E p + 1). Figure it out.

22. What about income? ds/dy = (p/y) (  q/  y) - pq/y 2 = (p/y) (  q/  y)(y/q)(q/y) - pq/y 2 = pq/y 2 (E y - 1) and: (ds/dy)(y/s) = E y - 1.

23. Measuring Demand Individual Services Firm services (germane to anti-trust) Market demand -- very difficult to handle. Students will collect some data and say, “I’m estimating a demand (or a supply) regression.”

24. Identification Demand: Q d = a - bP + cN + dY, where N = population, Y = income. Supply: Q s = e + fP First question: Both are related to P. How do you know which one you are estimating? Solve as P =[(a-e)/(b+f) + cN/(b+f) + dY/(b+f)] quantity price D S

25. Identification When we substitute into either: Q d = a - bP + cN + dY or: Q s = e + fP, You get: quantity price D S P =[(a-e)/(b+f) + cN/(b+f) + dY/(b+f)] Or: It’s easy to see that they’re not the same!

26. Identification Ironically, the equation about which we have the least information can be identified. quantity price D1D1 D2D2 D3D3 D4D4 D5D5 Supply!