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Household Health Demand
180.289 Session 200
Outline
• Household Health Demand
• Household Health Input Demand
• Health Production Function
• Rand Health Insurance Experiment
Part 1: Household Health Demand
How to trade beer for health?
• There is no store listed in the yellow pages where you can trade beer bottles for health
• IT DOESN’T HAVE TO BE BEER• Why not consider “all the things one must
sacrifice for health”– Beer, cigars, doctor bills, etc.
• Vector of goods X
How to trade beer for health?
• There is no store listed in the yellow pages where you can trade beer bottles for health
• The “trading” actually occurs along the production possibility frontier.
• Why not consider “all the things one must sacrifice for health”– Beer, cigars, money (spent on doctors), etc.
• Vector of goods X
Part 2 Health Care Demand
Application to Health
• The individual is both the consumer and the producer of health
• Step 1) Ask “How much health do I want, given that I will have to give up some things for it?”
• Step 2) Ask, “Given that I want to have this health level, what medical services should I buy?”
Health Demand vs. Health Input Demand
• The two problems are intertwined– Knowing how much health you want tells you
how many inputs to buy– Could ask simply how utility varies with health
inputs and figure out optimal health demand
Life SatisfactionHealth Inputs Health
Prod. Fn.
Part 3: Household Health Production
Health Production Function
• Households “produce” health
• Producing something means combining inputs to make an output
• Health inputs are diet, rest, exercise, safe environments, and medical services
• How these are combined can be expressed mathematically
A Production Function
• Production functions are recipes that say: Combine inputs in this ratio and you will get this many outputs.
• Lemonade Recipe– 1 cup
– 1 spoon
– 1 Lemon
– 4 Ice cubes
– 3 spoons of sugar
– Water
– 5 minutes of time
• Old Fashioned Healthy Pregnancy Recipe– 1 pregnant woman
– 3 measurements of weight gain and fundal height
– 3 measurements of blood sugar and blood pressure
– Advice on signs of labor
– Advice on danger signs
Production by both Government and Household
• For some aspects of health– The government
produces part– The household
produces part
• The more the government does, the less the household has to do and vice versa
• Malaria– Government kills
mosquitoes– Household uses
bednets
• Tradeoffs– The more the
government does its part, the less the household has to do
Mathematical depiction of government and household
roles in health• HiJ =E+G(BJ -J ) ZJ +F(AJ - iJ ) XiJ
HiJ is the health of the i-th household in the J-th area
E is environment
G is Government health production
B J is Best available Public Health Technology in area J
J is gap between Best and Actual in area J
Z is goods purchased by govt of area J
F is household health production
AJ is Best available household technology in community j
iJ is gap between best and actual by ith house in community j
X iJ is good purchased by household i
Crowdout: Government vs. Household
• Many aspects of health system performance are affected by this balance– Financing health care
• Households out of pocket vs. government
– Governing quality– Drawing in supplies of workers– Demand for medical services
Part 4 Applications
Demand Curve for Health
pm
Price
m1u
D1
At Price Pm the consumerBuys m1 units of health
Quantity
Effect of Insurance on Demand for Health
pm
Cpm
m1u m1c
D1
D2
Let “C” be copaymentIt is the fraction ofFull price that is paid
If C is 0.25 a price of$100 becomes $25
Empirical Studies
• How to Test Predictions:– Demand curve for medical care slopes downward
– Education increases demand for medical services
– Income increases demand for medical services
• Empirical Problems– Insurance distorts demand
• If richer people are more likely to have insurance could just be finding effects of insurance
– Income effects on health distort demand• If richer more educated people are more likely to be healthy we
spuriously may find that wealth and education lower demand
Empirical Solutions
• Experimentally control the coinsurance rates to detect the effect of price on income– Letting people self-select their coinsurance rate
would be a mistake. Healthy people would opt for cheaper premiums and lower coinsurance
– Rand HIS study
• Study hypothetical markets– Method called “contingent valuation” or
“willingness to pay”
The RAND Health Insurance Study (HIS)
• 5809 enrollees from 4 cities and 2 rural sites
• Enrollees agreed to participate for 3 or 5 years
• Persons were enrolled in one of six plans
• Full Coverage• 25% co-payment• 50% co-payment• 50% co-payment for
dental and mental and 25% co-payment for other care
• 150/450 deductible• catastrophic cap
Means for Annual Use of Medical Services Per Capita
Plan Visits per Person ***
Expected Outpatient Expenses per Person***
Admissions per Person*
Expected Inpatient Expenses per Person NS
Free 4.55 $340 0.128 409
25% 3.33 $260 0.105 373
50% 3.03 $224 0.092 450
95% 2.73 $203 0.099 315*** p<0.001; * p<0.05; ns – not significant
Summary
• Medical care demand is secondary to the demand for health
• The concept of health capital can be used to study the way in which people anticipate the demand for health
• Empirical studies need to control for self-selection into insurance and self-selected health behaviors to study the demand for health