Health Economics- Lecture Ch09

8/3/2019 Health Economics- Lecture Ch09

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Consumer Choice and Demand

Dr. Katherine Sauer Metropolitan State College of Denver

Health Economics


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O verview:

I. Consumer TheoryII. Issues in Measuring Health Care DemandIII. Empirical Measurements of Demand ElasticitiesIV. Impacts of Insurance on Aggregate ExpendituresV. O ther Variables Affecting Demand


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I. Consumer Theory

A. PreferencesConsumers have different preferences for medical carewhen they are sick vs when they are well.


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B . Deriving the Demand Curve

Initially, the price of an office visit is p1.

At that price and for a

given income andgiven set of

preferences, theconsumer chooses V1office visits.


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W hen the price falls toP2, the budget lineshifts out along the Vaxis.

The optimal bundle isnow V2 visits.

W hen the price falls toP3, the optimal bundleis V3.


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W hen incomeincreases, the entire

budget line shifts out.

The optimal number of visits is V3.


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W e can use the price-quantity information to plot thisconsumers demand curve:

W hen incomeincreased, the demandcurve shifted out.

W hat else could shiftdemand?


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II. Issues in measuring health care demand

In this section, the focus is on variables of interest toscience and public policy.


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A. Individual and Market Demand Functions

Demand function for physician visits, V:V =f(P, r, t, P 0 , Y, HS, AGE, ED,)

where P is price per visitr is the patients coinsurance ratet is a time price

P 0 is the price of other goods

Y is a measure of income HS is the patients health status AGE and ED reflect other need and taste factors


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B . Measurement

Investigators often measure the quantity of services indollar expenditures.

O ne problem is that expenditures reflect a complexcombination of price of care, quantities of care, andqualities of care.

Alternative measures include quantity of visits, patientdays, or cases treated, yet these do not necessarilymeasure the intensity of care.


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A related problem is to define the price of services.

Because of the prevalence of health insurance,most patients do not pay the full price for their

treatments.


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C. Differences in Study Populations

Different researchers, naturally, use different samplesor populations.

Elasticities will differ between populations and evenwithin populations at different points in time.

For example, many health economists believe thatincome elasticities for health care have become smaller over the years in the United States, presumably becauseof the effects of programs like Medicare and Medicaid.


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D. Data Sources

A common source of health care data is the insuranceclaim.

Claims data are limited to services covered by

insurance and used by the insured.

Claims data often lack detail on individualscharacteristics, such as education and income.

In contrast, health interview survey data often incorporate personal data, but their accuracy depends on the recallability of the people being interviewed.


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Experimental and Non-experimental Data

Much of health care demand research used non-experimental data.

The researcher could not control the environmentor assure that other extraneous variables were heldconstant.

A useful alternative involving the natural experiment issometimes possible.

For example: a given area changes its healthinsurance plan


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III. Empirical measurements of demand elasticities

A. Price Elasticities


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B. Firm Specific Price Elasticities


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C. Individual Income Elasticities


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D. Income Elasticities Across Countries

Newhouse (1977) found elasticity estimates ranging from1.15 to 1.31.

Parkin et al (1987) found elasticities greater than 1.0.

Gerdtham et al. (1992) and Getzen and Poullier (1992)find similar results.


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E. Insurance Elasticities


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IV. Impacts of insurance on aggregate expenditures

According to the RAND investigators, coinsurance andincome accounted for about one-fifth of the total increasein real health expenditures.

Subsequent research (Peden and Freeland, 1998)determined that about half of the expenditure increasewas due to induced technological innovation.


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V. O ther variables affecting demand

A. Ethnicity and Gender

Many studies of demand examine the influence of race,and find that blacks tend to consume less medical care

than the other large, self-identified groups when other factors are held constant.

Females differ from males most clearly in their time

pattern of medical care usage.- childbearing years: women are relatively heavyusers of health care- healthier in the long run


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B . Rural vs Urban

Studies sometimes find differences in health care usagedue to rural status.

If rural residents use less care, the reasons why are notnecessarily clear.

Rural dwellers may differ culturally, and some analystsargue that this factor is more important to ones

perception of life than ethnicity is.


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C. Education

Education is strongly associated with better health.

If you are a college student, the odds are very good that

you are healthier than your noncollege counterparts.

As in the demand for health capital model, this may be because you are a more efficient producer of health, you

are less likely to smoke, and you are more likely to eat ahealthful diet.


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D. Age, Health Status and Uncertainty

O lder people consume three to four times more healthcare than the younger population.

W edig (1988) finds that the price elasticity of thedecision to seek health care tends to be lower for thosewith poorer health status.

W hen a consumer, uncertain about a future health risk,seeks advice or preventive treatment, we call this a

precautionary demand (Picone, Uribe, and W ilson,1998).


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Parting thought:

A good understanding of demand theory serves as therationale for market-based, consumer-driven

approaches to health system reform.

In 2007, there were nearly 5 million enrollees inconsumer-directed health plans (CDHPs), and their

numbers were increasing rapidly.


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Discussion Questions:

W hy are firm-specific demand price elasticities higher than elasticities for demand in general? W hy does a highelasticity indicate a very competitive market?

The frequencies of health care visits are often used tomeasure service demand. Many, however, criticize the useof this variable. W hat are some pros and cons of using thisvariable?

In clinics that provide free care, price doesnt serve as therationing mechanism. Explain how rationing might work.

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Health Economics- Lecture Ch09