Unformatted text preview: Demand for Health Care Demand for Health Care
Class 5 Loyola University Chicago Prof. Tim Classen January 28, 2011 Class Outline
Estimates of Elasticities of Demand for Health Care Read Chapters 5 & 7 in the text (We’ll get back to Chapter 4 next week) 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? What quantity? 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 Still used extensively. Still relevant? ...
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