Chapter 9 Consumer Choice and Demand

1. Chapter 9 Consumer Choice and Demand Applying the standard budget constraint model Two additional demand shifters-time and coinsurance Issues in measuring health care demand Empirical measurements of demand elasticities Impact of insurance on aggregated expenditure Other variables affecting demand

2. Applying the standard budget constraint • Figure 9-1 demand for health capital determines the optimal amount of the home goods and health capital investment(consumers is rational and perfectly informed) • The consumer’s equilibrium (see Figure 9-3)MRS (want to trade)=price ratio (be able to trade) • Demand shifters Figure 9-3 => 9-4 (Demand curve derived from the standard budget constraint changes) • Price elasticity: Ep=(dQ/Q)/(dP/P)=(dQ/dP)*(P/Q) • Income elasticity: Ey=(dQ/Q)/(dY/Y)=(dQ/dY)*(Y/Q) • Health status and demand Figure 9-5 Changed Preferences due to illness

3. (1) Additional demand shifters-time • Time cost: the time spent acquiring services • A example if money price increase $5 (Figure 9-6):1. one hour of time valued at $10 (30 min travel+20 min wait+10 min doctor visit)2. one visit priced at $253. travel and parking costs at $5Ep (full price)=(-1/5.5)/(5/42.5)=-1.545 Epm(money price)=(-1/5.5)/(5/27.5)=-1 • The money price elasticity is smaller than the full price elasticity by the same proportion as the money price is smaller than full pricePm/(Pm+Pt)=27.5/42.5=0.647Epm/Ep=-1/-1.545=0.647 • Table 9-1 Acton’s time valuation Equation (1975, 1976)1. the importance of time (Et=-0.958)2. outpatient visits and physician visits are substitutes (Et=0.64)[t:own-time price for outpatient visits] • Subsequent work usually supports an important role of time

4. (2) Additional demand shifters-coinsurance • Figure 9-7: The effect of a coinsurance rate on health care demand 1. Insurance will increase demand for health care (Q1->Q”1)2. Insurance will make demand for health care less elastic • Figure 9-8 Market effect (a upward-sloping supply curve)Health Expenditure increases from P0V0 to P1V1

5. Issues in measuring health care demand • Q: why do the reported elasticity vary so often? • Individual and market demand function:Individual: the total quantity of visitmarket aggregate: the number of visit per capita • Measurement and definitions1.quantities of services in dollar; quantity of visits, patient days, or cases treated2. the price of services • Differences in the study populations: Minnesota VS Florida • Data Resource: Insurance claim VS health interview • Experimental and not experimental data

6. Empirical Measurements of demand Elasticities-price elasticity • Table 9-2 Price Elasticities from selected studies: most reported elasticities range between 0.0 and -1.0e.g. market aggregate • Table 9-3 Firm (physician)-specific Price elasticites are higher the degree of market competition • few substitutes for physician care, but many substitutes among individual physicians

7. Empirical Measurements of demand Elasticities-income elasticity • Normal VS inferior; necessary VS luxury • From table 9-4, health care are considered as “necessary goods” • luxury goods in most cross-national studies • Q: why is it inconsistent with individual and national data?A: Getzen (2000): national data shows technologies and economic well-being

8. Empirical Measurements of demand Elasticities-insurance elasticity • A fixed coinsurance rate: the same as the price elasticitynet price=r*P • Adverse selection problem from non-experimental data • Rand experimental data (1974): price and insurance do matter considerably.

9. Other variables affecting demand • Ethnicity and gender1.Blacks tend to consumer less2.Females consumers difference in life stage • Urban Versus Rural less care in rural: tastes, health status or longer travel distance? • Education1.efficient health producer or lower time preference2.confounding factor: income • Age • Health status: Wedig (1988) smaller price elasticity for sicker people • Uncertainty: higher precautionary demand for elderly