The Demand for Medical Care

1. The Demand for Medical Care Lecture 4 Asst. Prof. Dr. İlker Daştan HEALTH ECONOMICS

2. Indifference Curves • U(X,H) where H = g(m) • Diminishing marginal productivity of m in producing H • g’(m) • Figure 4.1a shows utility maximization • Presence of XB : U(XA, XB,H) --> doesn’t change the general shape • Figure 4.1b is translated into monetary terms (you can only spend on medical care)

4. Impact of Illness • On PP curve: • Illness shrinks PP curve inward, shape (curvature) depends on medical care technology for this illness • Makes sense to speak of specific illnesses and technologies • New maximization is by giving up some X to obtain more H • On Indifference map: • All utility curves change • MRSH X = MUX / MUH decreases • Consumer prefers medical care more now

6. Income shift • If illness hampers one’s earning capacity then less of both X and m • Income and health are positively correlated • Medical care is a normal good

8. Towards a demand curve for health • See expansion paths in Figure 4.3

10. Towards a demand curve for health • Engel curves • High income generally leads to better insurance (more utilization) and better health in general • Some may take the fast lane • Change in income does not drastically alter the amount of medical care consumed • Sanitation effect: rapid improvement in health due to higher income (an external effect of income) • Environmental hazards: opposite • Fast lane: poor lifestyle choices (an internal effect) • Health spa: opposite

12. Indifference curves, consumer optimization • Demand curves are observable, indifference curves are not

15. Illness and demand • Indifference curves become steeper • Demand curve shifts to the right and becomes more inelastic

17. Demand curve for many medical services • Health can be affected by many types of medical care • These types could be complements and substitutes • H=g(m1, m2, …, mn) • Own marginal productivity • ∂mi/∂pj > 0 => substitutes • ∂mi/∂pj < 0 => complements • Are hospital care and ambulatory care (outpatient) substitutes or complements? • Are preventive care and acute care substitutes or complements? • Optimal health insurance design (it may be penny wise but pound foolish to deny coverage of preventive care)

18. Society’s demand • Horizontal aggregation • As individuals’ illnesses change, society’s demand curve also does

20. Demand and Willingness to Pay (WTP) • Demand curve can also be interpreted as how much consumers are willing to pay for the next unit at that quantity (marginal value) • Inverse demand curve or value curve • Downward sloping because (either one is sufficient): • Declining marginal productivity of m • Intensive margin (individual demand) • Extensive margin (societal demand) • Decreasing marginal utility of health • Empirical separation of g’(m) and u’(H) would be necessary

21. Consumer Surplus • Total value to consumers is total area under the demand curve minus the area under the cost curve • See Figure 4.8 & Table 4.1 • Two ideas: • We can predict the quantity consumed: As long as MU>MC, consumption increases • Total consumer surplus is area under demand curve minus cost

24. Effect of Insurance on Demand Curve • Health insurance lowers prices for medical care. • Hence medical care use should increase ceteris paribus • But this is a side effect, purpose of health insurance is to reduce financial risk • Insurance can be designed or structured in different ways

25. Copayment • Consumer shares health expenses. Three conventional types (or combinations across medical services) • Fixed dollar consumer co-pay • $25 for office visit • The demand curve remains the same as uninsured • A proportional coinsurance rate • E.g. 40% of dental expenses or 20% of surgery • A flat indemnity payment, a.k.a., Fee For Service • Doctors and other health care providers receive a fee for each service such as an office visit, test, procedure • Patients frequently pay providers directly for services, then submit claims to their insurance company for reimbursement. • Declining in use • Most flexible you can choose while traveling or some doctor out of network • But expensive because of higher premia

26. Elasticities • Scale free • Elasticity increases as we move up the straight line downward sloping demand curve • See Figure C, where an outward shift in demand makes the demand curve more inelastic • See Figure D which shows that not every outward shift decreases elasticity (two constant elasticity demand curves with elasticities of -1) • Show elasticitieswrt p and C are equal, illustrate substitutes and complements (Apdx)

27. Coinsurance rate • Copayment share of C • Price p, effective price C.p • Rotates demand curve around intercept at x-axis of inverse demand curve (where pm=0), makes it less elastic • Need to adjust demand curves inward for insurance premium, but will ignore • C=0 -> elasticity is zero, price is ignored in decision-making • Figure 4.9 • In the extreme case where C=0 (full coverage), demand is a vertical line at point E • When p=a-bQ, slope is –b<0. With coinsurance 0<C<1 • Cp=a-bQ, then slope becomes –b/C < -b < 0 • Elasticities are also related, see footnote 9

29. Indemnity Insurance (Fee for service) • Simply add the fee-for-service for service to willingness to pay, shift demand curve upward • Figure 4.10 • Normally, subtract the income effect of R – the insurance premium- from the demand curve

31. Deductibles • A fixed amount that consumer pays before insurance starts paying • Do not insure small losses, save from insurance premia • Figure 4.11 • Leftmost demand curve (mild illness) –deductible has no effect –like uninsured • Rightmost demand curve (severe illness) deductible has no effect –like insured this time • Middle demand curve –depends on A v B, in the picture mc. For example, B is greater with lower coinsurance rate • Inward shift due to loss of income due to deductible is ignored

33. More on deductible • Every partial payment of insurance deductible leads to a trade in between the current insurance plan with a better one • Apparent price decreases, but the rate of decrease decreases as we approach the end of the deductible year • But the general effect is clear, similar to uninsured for small illnesses and similar to insured for important illnesses

34. Maximum payment limits • Reverse of deductible • Serious illnesses are uninsured, reverse of a deductible • Sometimes there is a maximum limit to payment by the consumer

35. Mixed Bag Insurance • Deductible and coinsurance rate • Indemnity and coinsurance • Medicare Part B • 80% of physician’s bills above a deductible only if the physician fee is not higher than a pre-determined amount (varies by region and service type) • If the fee is higher, Medicare pays 80% of the pre-determined threshold

36. Time and Travel Costs • Travel costs to doctor and time • Value of time for some wage-worker with no sick-pay is trivial: the wage rate per hour • If there is sick-leave, close to zero • If home-maker, then at least as much as their best market opportunity • Sick leave is like insurance for time costs, if more generous then higher medical care demand

37. Delays to appointment • Delays to appointment is very common in the US • Too much delay decreases demand for medical care: • Value of medical care declines • Illnesses may heal on their own • Or may get deadly resulting in dead • Happens in Britain and Canada • Canadians cross border to US

38. Role of Quality in Demand • Quality denotes the efficiency with which medical inputs produce health • Medical care was appropriately selected and applied (technical quality) • Physician • Good school? Board certified? • Time spent with patient • If better trained doctors are really better at providing better health, then they have higher quality • Amenities • Neat office, new magazines to read, working A/C • Hospital: good food and TV reception, friendly staff • See Figure 4.12

40. New York Hospitals • In 1990s NYSDOH started publishing (illness severity adjusted) mortality rates for doctors and hospitals doing open heart surgery • Initially best hospitals had worst rates because they had the sickest patients, but when adjusted, some differences remained • Patients did shift from poorer doctors and hospitals to better ones • 1% decrease in mortality rates led to 7% increase in market share • And $250 increase in price, so, assuming 10 years of expected life span, $2500 buys one more life-year • Remarkably: Overall state mortality improved

41. Beliefs and (Un)informed consumers • Figure 4.12 to be reinterpreted in terms of beliefs • Those who believe that medical care has high efficacy have higher willingness to pay • Some distrust medical care • The Church of Christ, Scientist (a.k.a. Christian Science) • “sickness is the result of fear, ignorance, or sin, and that when the erroneous belief is corrected, the sickness will disappear” • The Watchtower Society (a.k.a. Jehovah's Witnesses): • “This Christian denomination teaches that blood transfusions, even if needed to save a person's life, must not be accepted. This teaching is based upon three passages in the Bible which prohibit the consuming of blood:” • Genesis 9:4: "But flesh (meat) with...blood...ye shall not eat“ • More generally, doctor’s characterization of illness (see root canal example) • Could lead to the problem of induced demand

42. Revisited: Price Index for Health Care • Quality matters • When adjusted for quality, cost of health care is declining in some cases • Heart disease • Depression • “Would you rather have 1950s medicine with 1950 prices?” • CT, MRI, organ transplant, medications for cholesterol, hypertension, cancer therapies, open heart surgery, angioplasty, hip & knee replacement, laser correction of vision… • Molecular and gene therapies