Econ%203451_Demand

Econ%203451_Demand - The Demand for Health Care for Econ...

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Unformatted text preview: The Demand for Health Care for Econ 3451 Health Economics June 11, 2009 The model The Consumer get satisfaction (utility) from health (H) Consumer and other goods (z): and U(H,z) [utility function] Useful to think about health care (q) as an input to Useful input the production of health (H): the H(q, Ho, G, L, S, E,…) [health production function] production q: quantity of health care Ho: present health status (or health endowment) present endowment G: genetic factors (family health history) L: lifestyle (diet, exercise, smoking, alcohol,…) S: socioeconomic factors (age, gender, income, education,...) E: environment (sanitation, hazardous waste, job risk,…) Health production function Health H H(q,…) Why is H > 0 when q = 0? Why does H increase with q? SOME QUESTIONS: Health production function q ∆ H/∆ q Marginal product of health care Why is H(q,…) concave? What would it mean if H peaked and then declined? Why is the slope of H(q,…) the marginal product of q? Why does the marginal product of q decline? q Why would the marginal product be zero if H(q,…) peaked? Derived demand for HC Derived In this framework, people demand health care (q) because In it contributes to health (H), which gives them utility (U). Demand for q is a derived or indirect demand. People indirect generally consume health care not because it provides enjoyment, but rather because they hope that it restores or enhances their health. enhances Demand for health care (q) will depend on other factors in Demand the health production function (Ho, G, L, S, E,…), but also the G, on certain economic variables: on y: income p: full (or gross) price per unit of health care c: coinsurance rate (or fraction paid out-of-pocket) pz price of other goods Formal problem Formal Person is assumed to maximize utility from health (H) and other goods Person maximize (Z), subject to the existing technology of health production and a technology personal budget constraint. (For now, role of insurance is limited to the budget (For coinsurance rate; the insurance premium and consumer’s share of the premium can be introduced later.) premium [problem can also be graphed] Max U(H,z) subject to: H(q, Ho, G, L, S, E) and y = cpq + pzz Solution to this problem is a set of demand functions for health care (q) Solution demand and other goods: and q*(y, c, p, pz, Ho, G, L, S, E) z*(y, c, p, pz, Ho, G, L, S, E) The role of insurance The The demand for health care clearly depends on a variety of things. The Empirical studies have tried to sort out the effects of different factors on the demand for various types of health care (physician services, hospital care, nursing home services, dental care, etc.) care, Need to focus for a moment on the effects of the coinsurance rate (c), or Need the fraction paid out-of-pocket, on the demand for health care (q). To do this, let’s look at a simple linear demand function for health care: linear q = a - bcp a > 0, b > 0 (a and b are both positive constants or “parameters”) 0, (a 0≤c≤1 (the coinsurance rate c is a fraction) The corresponding uninsured (c = 1) demand function would simply be: q = a - bp (Note: c has been set to 1 because the uninsured (Note: person pays the full price p directly out-of-pocket.) person The role of insurance The This model assumes that what matters to the consumer is This matters the net or out-of-pocket price (cp). Anything that causes cp to decline would increase the quantity of care demanded. to More complete insurance coverage (smaller c) would More increase q. increase A lower full price (p) would also increase q. All other determinants of care are implicitly held constant All when we draw the demand curve. when Let’s see how this demand looks when the consumer is: uninsured (c = 1) partially insured (0 < c < 1) fully insured (c = 0) How c affects demand How Demand increases as c declines p a/bc c=0 When c = 1, patient is uninsured and pays the full price (p). As c declines, demand rotates upward. Partially insured patient (c < 1) is willing to accept a higher full price for any given q. This curve is 1/c times higher than uninsured demand curve, so out-ofpocket (or net) price is found by projecting down to the uninsured demand curve. When fully insured (c = 0), the patient will consume the maximum amount (q = a) regardless of the full price. c<1 a/b c=1 q quantity a Insurance in the market Insurance Insurance changes market outcomes p c=0 Supply c<1 More insurance coverage (lower average coinsurance rate c) has a similar effect on market demand. When market supply slopes upward, more insurance increases the full price (p), the market quantity of services (Q), and total payments (pQ). c=1 Q Market quantity What happens to the net price (cp)? Extreme supply conditions Extreme Perfectly elastic supply p c=0 c<1 When supply is “flat” or perfectly elastic, more insurance coverage (lower c) increases Q but not p. Conclusion: Market effects of insurance depend on both demand and supply conditions. Question: Why might some health care vanish without insurance? c=1 Supply Q Market quantity What if supply is fixed? What Perfectly inelastic supply p Supply c<1 When supply is vertical or perfectly inelastic, more insurance coverage (lower c) increases p but not Q. c=1 Q Market quantity Moral hazard Moral Consumers behave differently when insured p c<1 Ex ante moral hazard: insured consumers may take less care to prevent illness, causing demand to increase. Ex post moral hazard; Once they are ill, insured consumers may consume more care due to lower net price. c=1 Q Market quantity For any p, both types of moral hazard increase demand for health care. ÉBut Big Changes in How We Pay for Health Care (US: 1960­2003) 100 By 2003, only about 16 percent 80 of total personal health care expenditures were paid out­of­ pocket. 60 Dentists: 97.1 ­> 44.2 40 Other: 76.5 ­> 31.2 Drugs: 96.0 ­> 29.7 Nursing Homes: 77.9 ­> 27.9 Physicians: 61.6 ­> 10.2 20 Percent Paid Out­of­Pocket 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 Hospitals: 20.8 ­> 3.2 Inflationary Effects Inflationary SUPPLY QUANTITY PRICE A llower fraction paid ower out-of-pocket (coinsurance rate) boosts demand, causing price, quantity, and total spending to rise. spending Falling coinsurance Falling rates have had these effects in nearly every sector… sector… Nearly All Health Care Prices Have Outpaced the Consumer Price Index 450 400 350 300 250 200 150 100 Index Value (1982­84 = 100) 50 0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 Hospitals Drugs Dentists Physicians CPI Except for Hospital Care, Utilization Per Capita Has Also Risen 8 7 6 5 4 3 2 Utilization Per Capita (1960 =1) 1 0 1960 962 964 966 968 970 972 974 976 978 980 982 984 986 988 990 992 994 996 998 000 002 111111111111111111122 Drugs Physicians Dentists Hospitals With Prices & Utilization on the Rise, Per Capita Spending Has Jumped 2000 1800 1600 1400 1200 1000 800 600 Expenditure Per Capita 400 200 0 Hospitals Physicians Drugs Nursing Homes Dental 1960 1970 1980 1990 2003 ...
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This note was uploaded on 10/27/2009 for the course ECON 3451 taught by Professor Heffley during the Summer '09 term at UConn.

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