Health Economics & Policy 3 rd Edition James W. Henderson

1. Health Economics & Policy3rd EditionJames W. Henderson Chapter 5 Demand for Health and Medical Care

2. Production of Health • Production Functions • Health Status Measurement • Health Status Determinants

3. Production Function for Health • Health = H(medical care, other inputs, time) HS Medical Care Spending

4. Health Status Measurements • Mortality • Morbidity • Quality of life

5. Top 10 Causes of Death

6. Work Days Lost and Activity Impairmants

7. Health Status Determinants • Income and education • Environmental and lifestyle factors • Genetic factors • The role of public health

8. Demand for Medical Care • Derived demand • Demand function • Effect of health insurance • Physician induced demand

9. Need v. Willingness to Pay

10. Demand FunctionQMC = M(HS, DC, ES, PF) • Health status • Demographic characteristics • Economic standing • Physician factors

11. Effect of Insurance on Demand

12. Physician Induced Demand • Physician as agent • Demand creation

13. Demand Inducement

14. Measuring Demand • Price elasticity of demand • Income elasticity of demand • The Rand health insurance experiment

15. Select Studies on Elasticity of Demand

16. RAND Experiment – 1971-82 • Randomly assigned 2,000 non-elderly families to insurance plans differing in 2 characteristics: • Coinsurance rate (0 – 95%) • Deductible (5, 10, or 15% of annual income) • Annual spending cap of $1,000 • Examined 2 important measures: • Health spending • Health outcomes

17. RAND ExperimentSpending • Research question: How did assignment to groups affect spending? • Compare the 0% coinsurance group with the 25% group • 0% group spent an average of $1,019 • 25% group spent $826 (19% less) • Economic lesson: increase the price and reduce the amount consumed

18. RAND ExperimentHealth Outcomes • Study question: How did assignment to groups affect outcomes? • Health status assessment prior to the study – allows “before and after” • For average person – no substantial health benefits from free care • Exception: chronically-ill poor (6% of the study population)

19. RAND ExperimentConclusions • Instead of free for all care • Targeted benefits for chronic conditions • Better access to primary care • Exempt low-income from cost sharing • Study changed policy debate • Cost sharing limits demand without substantially harming health

20. Summary and Conclusions • Demand for medical care seems to be relatively insensitive to price changes • Individual income elasticities are relatively low indicating that medical care may be a necessity • Aggregate income elasticities are higher indicating that medical care may be a luxury