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Unformatted text preview: Demand for Health Care Demand for Health Care
Class 4 Loyola University Chicago Prof. Tim Classen January 26, 2011 Class Outline
Economic Model of Health Care Demand Influences on H.C. Demand Estimates of Elasticities of Demand for Health Care Read Chapters 5 & 7 in the text (We’ll get back to Chapter 4 next week) Model of Health Demand Model of Health Demand
Economists model health as the output from multiple inputs (i.e., health care, food consumption, behaviors) Utility = U(X,H) measures utility from given level of consumption (X) and health H=f(medical care, disease, Xbad . . . ) Diminishing marginal returns to Medical Care Health depreciates over time Implications Implications Utility is derived from health which is produced by Medical Care (M) and X. Thus, demand for M depends on the prices of M and X. The marginal utility of medical care can be divided as: Demand for Medical Care is thus derived demand But how to measure improvement in health from medical care? A) Change in utility from an improvement in health and B) Improvement in health from an increase in medical care Measures of pain, numerical measures of health (BP, cholesterol, blood sugar), survival rates Production Possibilities Production Possibilities and Budget Sets Production of Health results in fewer Goods Health = f(MC,X) MUMC=MUH*(ΔH/ΔMC) H0 U1 Medical Care AOG0 AOG MUH falls as health rises due to diminishing marginal utility MC0 ΔH/ΔMC falls as care increases due to diminishing marginal Health H0 = f(MC0,AOG0) f(MC
Slope=-MUAOG/MUmc Slope=-pAOG/pmc U1 AOG0 AOG Optimal consumption choice
Medical Care Optimal consumption MU
pAOG pMC =
AOG slope of the budget line:- pAOG pMC MUMC MUAOG
AOG or p q Marginal utility per dollar spent must be the same for medical care and AOG MUMC pMC = slope of MUAOG IC = MRS = MUMC MC qAOG AOG Response to price changes Response to price changes in medical care
Medical Care I/P 1 I/P2
1 2 ILL Those with illness will reduce medical care by less (in %) than those without illness in response to price change Non-ILL have steeper I.C. due to low MUmc Not ILL MC MC MC3 MC4 AOG2 AOG1 AOG Optimization generates Optimization generates demand curve for Medical Care
Price Demand of Non-ILL P2 P1 Demand of ILL MC4 MC3 2 1 Medical Care Influences on Demand Influences on Demand for Medical Care Price of Medical Care (Duh!) affects quantity of health care demanded (Demand Curve) Illness Level & Age Insurance Status & Generosity of policy Income & Education Time cost of travel to doctor + waiting Price of complements & substitutes Related to health insurance & employment Reverse causality (poor health causes lower edu)? Are hospital and ambulatory care complements or substitutes? Preventive vs. acute care? Example of Effect of Insurance Example of Effect of Insurance on Demand for Health Care
Price $100 Demand Demand w/insurance Qd = 20 – (P/5) or P = 100 – 5Qd Assume 20% copay so at price of $50, patient pays $10/visit $50 $10 10 18 20 Quantity of Physician Visits Demand for health care less Demand for health care less elastic with insurance
Price $100 Demand Elasticity = -1 Demand w/insurance Qd = 20 – (P/5) or P = 100 – 5Qd $50 Elasticity = -1/9 $10 10 18 20 Quantity of Physician Visits Estimates of the Demand for Estimates of the Demand for Medical Care Why is it hard to estimate how the quantity of medical care demanded will change in response to price changes? What price should we use? List price? Copays? Whatquantity? Difficult in cross section of people (observational) Simultaneous determination of demand and supply Price will affect demand for medical care, but higher prices will also attract more supply What will alter supply, but not be related to demand? Panel data can help, but “natural experiment” is highly desirable – insurance plans are form of supply (RAND) Demand Elasticity and Demand Elasticity and Price Discrimination Economic theory predicts higher prices charged to consumers with lower elasticities of demand Not always the case in health care (e.g., emergency room admissions, charity care) Some evidence of price discrimination When demand is inelastic, price increases raise total revenues No resale, ability to identify groups, differing elasticities So, if demand for health care is inelastic, why aren’t prices raised more Raises questions about profit maximization Ethics, altruism, charity care, price controls Estimates of the Demand for Medical Care We’ve seen that there are different demand curves based on presence of illness Early estimates of price elasticity of demand were quite large (>1), but randomized experiments find much smaller elasticities So how to measure illness in data? Might be misleading to estimate demand relationship w/out illness control Problems with observational studies Selection bias in who buys full coverage insurance RAND HIS Experiment RAND HIS Experiment Unique attempt to identify: Subjects assigned to different plans, 35 years Effect of health insurance on medical care usage And, effect of medical care on health Full coverage resulted in most use But health outcomes didn’t vary much by use levels Can’t vary actual care due to ethics Compensation for differences in cost (income effect) So is marginal productivity low or zero? Depends on group of interest “Cause no harm” and elective surgeries Estimates from Rand HIS Estimates from Rand HIS Random assignment to health insurance plans in 1971 Nearly 6,000 enrollees Full (0%), 25% copay, 50% copay, 50% for dental/mental health (25% o/wise), catastrophic (up to 515% of income ($1k cap) w/ 95% copay) and $150 deductible (outpatient) FFS plans and one HMO with no costsharing Participation incentive paid equal to maximum risk faced (income effect, not price effect) Estimates from Rand HIS Estimates from Rand HIS Measure quantity of medical care by spending & # of episodes Those on 0% copay had 4.5 annual visits and $750 of spending vs. 2.7 visits and $520 of spending for 95% copay Demand elasticities for any medical care (episodes) were 0.1 for low copay (025%) and 0.14 for higher copay (>25%) Big catchup in dental care in first year for low copay people Elasticities from Rand HIS Elasticities from Rand HIS Effect of Insurance on Effect of Insurance on Spending
Based on Rand HIS results, uninsured under age 65 spend $1,330 annually on medical care relative to $2,300 for fully insured (75% more) Previous studies indicated much more responsiveness to price so predicted gap was much bigger ...
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This note was uploaded on 04/14/2011 for the course ECON 329 taught by Professor Classen during the Spring '11 term at Loyola Chicago.
- Spring '11