International econometric comparisons

• Only 1 study found national income elasticity < 1 Suggests healthcare is a luxury good

Cross-section

Time-series

Panel data

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

Abel-S

mith

196

7

Kleim

an 1

974

Newho

use

1977

Max

well 1

981

Parkin

198

7

Gertle

r 199

0

Getze

n 19

90

Schieb

er 1

990

Gerth

am 1

992

Getze

n 19

92

Foge

l 199

9

inc

om

e e

las

tic

ity

Healthcare spending correlates with GDP

Figure borrowed from John Appleby

Spending increases over time

• Over time, healthcare spending (% GDP) has increased as real GDP increased

Figure borrowed from John Appleby

Methodogical problems• Healthcare spending not quantities

– Spending may reflect prices or wages

• PPP vs exchange rates• Other causal relationships

– Increased health expenditure => improved health status => higher income

– Both expenditure and income may correlate with something else e.g. education

• Other factors may still be important• Need for a multilevel analysis

Yet at different levels…

• A national luxury yet an individual necessity?

0

0.5

1

1.5

2

2.5

3

3.5

Insuredindividuals

UninsuredindividualsPhysician

IndividualsDental

IndividualsNursinghomes

Regions Nations

Inco

me

elas

tici

ty

3.Is health care different?

Can we apply the same principles to standard textbook commodities to

health care?Elasticity of demand

Ferrari 350 metallic red vs. Relieving that Toothache

Keep that in mind

Health care

Yes – in ways that generate market failure which are important for formulating public policy

Derived demandExternalitiesInformational asymmetriesUncertainty – both for need for and the

effectiveness

Elasticity of Demand and Health Promotion

Can be useful for a range of policy decisions in health care and health promotion

E.g. use of taxes to raise the price of cigarettes and discourage smoking

Outcomes – will require large tax increases -increase in revenue -reduce smoking in relatively young smokers -regressive taxation for the poor Low elasticity of demand - Essential goods or an addiction High taxes on health-damaging goods Subsidies to encourage healthy lifestyles

Income Elasticity of Demand

A good is said to be elastic if the proportion of income spent on it rises with income.

Income elasticity:

Positive: if income rises more is bought normal goods

Negative: reverse inferior goodsBut you do not indulge yourself with an extra tooth ache relief; sure another midnight blue Ferrari will do

Elasticity and Prices of Health Care

Charging for health services- if demand is inelastic such charges will be to raise revenue with little effect on use.-if more elastic then charges may deter people from using effective and useful careHealth care is more complicated Fees to deter people from making unnecessary use of services Deterrent effect of charges makes no difference

Demand for Health care

Income elastic

Luxury item but not unnecessary

Richer countries spend more on health care

Those on low incomes are often those with the greatest needs

Elasticity at different price levels + for different groups need to be understood

Defining health care as a luxury good is simplistic

Health care vs. Ferrari 350Standard textbook commodity vs. healthcareEquityProduction efficiencyEfficient use of resourcesDiversityEquipment, expensive consumables, care and human skillsHighly automated + craftsmanshipProvided in different settings

Cost of health care

The opportunity cost – input & best alternative use of resources

Price distorted

Complicated issues with patented devices & drugs

Rationalisation & priority setting

Balancing equity & efficiency

Need and capacity to benefit

Reclassifying health care