Lecture 4

1. Lecture 4 Health Production Demand for Health Care (Chapter 9)

2. Outline • Link between Income Inequality and Health • Demand for Health Care • Price Elasticity of Demand for Health Care

3. Health Production ContinuedIncome Inequality Why is income inequality associated with health? (mechanisms – theory) • Evolutionary history predisposes us toward fairness, and sickens us when we live in unequal environments. • Came from a society were the most egalitarian tended to better when we were hunters and gathers. • Food could not be kept and could be hard to get so needed to share • Have only moved away from that sort of society for a relatively short time period (10,000 – 20,000 years).

4. Health Production ContinuedIncome Inequality • Relative deprivation a cause of ill health. • Psychosocial stress is the main pathway through which inequality affects health. • Those societies that are more equal, have the precondition for the existence of stress-reducing networks of friendships. • Those societies that are unequal run under more stressful strategies such as dominance, conflict and submission.

5. Health Production ContinuedIncome Inequality Relative Income Hypothesis: • Relative income determines access to material goods (if there is scare resources). • Lots of people with less money than someone living in downtown NY but they live in a much better house. • It is rank not absolute amount of money that matters • Relatively poor people live in worse neighborhoods for pollution. • Rank at work is important for determining control others have over our lives. • If health is lower for those whose income is relatively low, then higher inequality makes the poor even poorer in relative terms.

6. Health Production ContinuedIncome Inequality • Studies have taken many forms. • Across countries in industrialized and developing countries. • A big problem is data comparability (income inequality measure) even in developed countries • Within countries say across states • Maybe be less variations in inequality within a country so harder to find effects (US and exception) • This is aggregate data by state so is hiding variation in income at the individual level.

7. Health Production ContinuedIncome Inequality • Individual Data • Get all the variation in income levels, but need to be able to follow the same group of people over time. Not many studies with long panel data sets. • If want to look at a very definitive measure of health and one that we would have long time series for, need to look at mortality. But, need large sample sizes to look at mortality (since a rare event in more developed countries)

8. Health Production ContinuedIncome Inequality Empirical Evidence: • Cross-Country Comparisons: • Wilkinsons (1992,1994,1996) looked across countries over time. • showed that countries like France and Greece that narrowed their income distributions by reducing relative poverty, increased life expectancies, it was the opposite of Ireland and England where income inequality widened. • He theorizes that when countries are poor income matters, but as they get wealthier and chronic disease become more important, it is social disadvantage (such as through income inequality) that affects health. • He believes social disadvantage promotes stress which leads to chronic illness.

9. Health Production ContinuedIncome Inequality Empirical Evidence Cross-Country Cont. • Most convincing study Judge et al. (1997) • Examined life expectancy and infant mortality for high income countries. • Best data available. • Find a positive relation between income inequality and infant mortality – but mainly driven by the US. • Other things may be going on in US i.e. race relations. • Overall, is mixed evidence so not convincing arguments, may be due to data problems.

10. Health Production ContinuedIncome Inequality Empirical Evidence Within-Country • Figure 6 from Deaton 2003 shows strong relationship between income inequality and mortality in US. • Some studies say that in 1990, the lose of life from income inequality “is comparable to the combined loss of life from lung cancer, diabetes, motor vehicle crashes, HIV infection, suicide, and homicide in 1995” (Kawachi et al. 1997)

11. Health Production ContinuedIncome Inequality Empirical Evidence Within-Country Cont. • This relationship remains strong in studies until race is controlled for (% black in a state or county). Looks like it is more a race effect than an income inequality effect, but hard to disentangle these. • In areas with a larger % of blacks the death rates for whites and blacks is higher • Could be due to poor quality health care. Is this something to do with how health care is funded?

12. Health Production ContinuedIncome Inequality • No relationship found in Canada or Australia (where race not an issue) • But there may not be enough variation in income inequality • No study on income inequality and health in UK, would be interesting as they have more income inequality. • No clear conclusion that income inequality is a major problem • there are other factors that are associated with income inequality that could be driving things. Omitted variable bias.

13. Health Production ContinuedIncome Inequality Empirical Evidence: Individual • Use mortality and self-reported health measures. • Again mixed results, but seems that results are weaker and more ambiguous than within-country studies. • Have problems developing good inequality measures.

14. Health Production ContinuedIncome Inequality Empirical Evidence: • Only result that seems to hold is that income inequality is associated with homicides (crime). • We see that income inequality is important through its effect on poverty. • This does not mean that social environment does not matter, just that income inequality per se may not be the driving force behind health status.

15. Health Production ContinuedInequality (income) Whitehall Study • Investigated civil servants in Britain in recent years. • Found that morbidity and mortality was related to administrative rank • Sees income as a marker for underlying socioeconomic status – the underlying cause of health discrepancies.

16. Health Production ContinuedInequality (income) Inequality in landholdings • affects nutrition and therefore health. • The landless can’t grow enough food to be well nourished, and they cannot make a large enough wage because are not healthy. • Policy Issue: redistribution of land a big issue in developing countries (Latin American, Nepal). • Criticism, that malnutrition is also a public health problem, due to contaminated food and water.

17. Health Production ContinuedInequality (income) Political Inequality Theory: • Whenpreferences of a population are heterogeneous (wide ranging/different), it is more difficult for people to agree on the provision of public goods (i.e. health). • Average value of public good to members of a community diminishes with heterogeneous preferences (heterogeneity due to income, race, geographic)

18. Health Production ContinuedInequality (income) Political Inequality Evidence: • Alesina et al. looked at racial divisions in the US. • Unit of analysis is cities and counties of US. • Look at % of population that is black, and find it is negatively correlated with share of spending on “productive” public goods such as health, roads, and education.

19. Health Production ContinuedInequality (income) Political Inequality Evidence: Almond, Chay, and Greenstone (2001) • Use data from Mississippi and the fact that prior to 1965 hospitals were segregated by race. • 1964 Civil Rights Act made segregation illegal. • Show that between 1965 and 1971 there was a large reduction in black post-neo-natal infant mortality rates (< one month olds), especially for conditions such a diarrhea and pneumonia. Points to possible negative health impacts from unequal political arrangements.

20. Demand for Health Services Demand for health services is a function of • price of health services • Income • Type of insurance • Level of education • Age • Lifestyle (do you smoke, do you exercise) • Quality of care • State of health • Time costs • Prices of substitute and complements

21. Demand for Health Services Demand of HS is a derived demand, because what we really want is the demand for good health. Change in prices cause a movement along the demand curve. Law of Demand: Inverse relationship between price and quantity. Price of Physician Services D Quantity of Physician Services

22. Demand for Health ServicesFuzzy (Thick) Demand Curve • Relationship between medical care and health improvement is not exact. • Uncertainty in what type of care needed to get you better • Consumer does not have medical knowledge to know what they need to get better so depends on physician. • Physicians, not consumers choose medical services. • Difficult to accurately delineate the relationship between price and quantity demanded of medical care. • Hard to control and measure quality.

23. Demand for Health ServicesFuzzy Demand Curve Price of Physician Services • For a given price may observe variation in quantity of medical services. • For a given quantity of services, may see various prices. Quantity of Physician Services

24. Demand for Health ServicesIncome Price of Physician Services Increase in income demand more: Shifts the curve out away from the origin and would demand more health care. D2 D1 Quantity of Physician Services Q1 Q2

25. Demand for Health ServicesHealth Insurance How much you demand may depends on type of insurance • Co-insurance: consumer pays a fixed percent of the cost (say 20%) and the insurance company picks up the rest. • Indemnity Insurance: Pays a fixed amount for each type of services (say $150 if you go to the emergency room). • Deductibiles: consumer must pay out of pocket a fixed amount of health care costs per calendar year before coverage begins.

26. Demand for Health ServicesHealth Insurance: Coinsurance Price of Physician Services Dwo:Demand without insurance Effective Price: Amount paid out of pocket Module using effective price Assume: .5 co-insurance 50 Consumer Pays .5*50 Dwo Quantity of Physician Services 5 6

27. Demand for Health ServicesHealth Insurance: Coinsurance Price of Physician Services • Dwo:Demand without insurance • Dwi: Demand with insurance • Instead module by using market price • Insurance makes her demand more health care, • makes demand less elastic: for the same increase in price will reduce demand less with insurance. Dwi A 50 .5*50 Dwo Quantity of Physician Services 5 6

28. Demand for Health ServicesHealth Insurance: Indemnity Get $30 for a doctors visit. -demand more health care -elasticity does not change. Price of Physician Services Dwo $30 Dwi Quantity of Physician Services

29. Demand for Health ServicesHealth Insurance: Deductible Purpose of deductible is to lower cost for insurance company • Reduce administrative costs because lower number of small claims. • May lower demand for medical care • Depends on cost of the medical episode • Small costs small problem may not demand health care, big costs you are more likely to get the health care. • Time when medical care is demanded • If close to time when deductible is reset, may wait for care • If just after deductible has started more likely to have care • Probability of needing additional medical care in the remainder of the deductible period.

30. Demand for Health ServicesEducation • Relationship could be positive or negative • Educated take more proactive action to keep healthy so need less medical care (produce health care at home) • Want to keep healthy so can work more and earn more, so demand more health care. • Know when they need to get medical care – so demand more medical care. • Empirically not sure of direction, do find that those who have more medical knowledge demand more medical care.

31. Demand for Health ServicesAge, Health Status, Sex, Quality • Very young and the elderly demand more medical care. • People with lower health status (sicker) tend to demand more health • Females tend to demand more health services (child bearing) • If quality of care is higher, tend to demand more health care.

32. Demand for Health ServicesPrices of Substitutes and Complements Substitute: Herbal and Non-Western Medicine.; outpatient and inpatient services. -Price of substitute rises demand more medical care. Complements: Drugs, if can’t afford the drugs may not bother to go to doctor. - Price of a complement rises demand less medical care.

33. Demand for Health ServicesTravel Time Costs Demand will depend on how long it takes to get to the doctor and if there are waiting times. • E.G. Kaiser, will no longer be in North Boulder – those in North Boulder may go less. – depends on type of illness. • Important in developing countries

34. Demand for Health CareEmpirical Estimates Own Price Elasticity: • Estimates tend to be between -0.1 and -0.7 for Primary Care and Hospital Care. • So a 10% increase in price of primary care leads to a 1 to 7 percent decrease in quantity demanded – inelastic. • this is why some argue that you should increase the price. Will not reduce health care so much, and hopefully people will reduce unnecessary visits. • In developing countries increasing the price has been meet with a lot of opposition – not a lot of unneeded visits.