Household Health Demand

1. Household Health Demand 180.289 Session 200

2. Outline • Household Health Demand • Household Health Input Demand • Health Production Function • Rand Health Insurance Experiment

3. Part 1: Household Health Demand

4. 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

5. 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

6. Part 2 Health Care Demand

7. 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?”

8. 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 Prod. Fn. Health Inputs Health Life Satisfaction

9. Part 3: Household Health Production

10. 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

11. 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 A Production Function

12. 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 Production by both Government and Household

13. Mathematical depiction of government and household roles in health • HiJ =E+G(BJ - fJ )  ZJ +F(AJ - eiJ ) 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 f 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 e iJ is gap between best and actual by ith house in community j X iJ is good purchased by household i

14. 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

15. Part 4 Applications

16. Demand Curve for Health At Price Pm the consumer Buys m1 units of health D1 pm Price m1u Quantity

17. Effect of Insurance on Demand for Health Let “C” be copayment It is the fraction of Full price that is paid If C is 0.25 a price of $100 becomes $25 D2 D1 pm Cpm m1u m1c

18. 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

19. 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”

20. 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 The RAND Health Insurance Study (HIS)

21. Means for Annual Use of Medical Services Per Capita *** p<0.001; * p<0.05; ns – not significant

22. 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