Transcript HEALTH CARE AND EFC

Health Economics & Policy
3rd Edition
James W. Henderson
Chapter 5
Demand for Health and Medical
Care
Production of Health
Production Functions
 Health Status Measurement
 Health Status Determinants

Production Function for
Health

Health = H(medical care, other inputs, time)
HS
Medical Care Spending
Health Status Measurements
Mortality
 Morbidity
 Quality of life

Top 10 Causes of Death
Cause of Death
All Causes
1. Diseases of the Heart
2. Malignant Neoplasms
3. Cerebrovascular
Diseases
4. Unintended Injuries
1980
Number Percent
1,989.8
100.0
761.1
38.3
416.5
20.9
170.2
8.6
105.7
5.3
5. Chronic Obstructive
Pulmonary Diseases
6. Pneumonia and
Influenza
7. Diabetes Mellitus
56.1
2.8
54.6
2.7
34.9
1.8
8. Chronic Liver Disease
and Cirrhosis
9. Atherosclerosis
30.6
1.5
29.4
1.5
Cause of Death
All Causes
1. Diseases of the Heart
2. Malignant Neoplasms
3. Cerebrovascular
Diseases
4. Chronic Obstructive
Pulmonary Diseases
5. Unintended Injuries
2000
Number
Percent
2,403.4
100.0
710.8
29.6
553.1
23.0
167.7
7.0
122.0
5.1
97.9
4.1
7. Diabetes Mellitus
69.3
2.9
6. Pneumonia and
Influenza
8. Alzheimer’s disease
65.3
2.7
49.6
2.1
9. Nephritis, nephritic
37.3
syndromes, and nephrosis
10. Suicide
26.9
1.4
10. Septicemia
31.2
Source: Health, United States, 2002 with Chartbook on Trends in the Health of Americans, Table 32.
1.6
1.3
Work Days Lost and Activity
Impairmants
Condition
Acute Respiratory Infection
Arthropathies
Asthma
Back Problems
Cardiac Dysrythmias
Cerebrovascular Disease
Chronic Obstructive Pulmonary Disease
Congestive Heart Failure
Diabetes
Hypertension
Ischemic Heart Disease
Mood Disorders
Motor Vehicle Accidents
Peripheral Vascular Disorders
Respiratory Malignancies
Source: Druss et al., 2002.
Work Days
Lost
(Millions)
69.2
67.2
31.4
83.0
7.2
8.2
57.5
1.1
27.5
12.0
21.8
78.2
70.0
12.8
2.5
Rank
4
5
7
1
12
13
6
15
8
11
9
2
3
10
14
Activity
Impairments
(Thousands)
1,949.6
3,070.5
690.4
1,380.9
528.7
1,084.1
889.3
494.6
1,954.0
544.3
638.3
1,400.9
808.6
591.4
121.5
Rank
3
1
9
5
13
6
7
14
2
12
10
4
8
11
15
Health Status Determinants
Income and education
 Environmental and lifestyle factors
 Genetic factors
 The role of public health

Demand for Medical Care
Derived demand
 Demand function
 Effect of health insurance
 Physician induced demand

Need v. Willingness to Pay
D2
D1
Price of
Medical Care
D0
P0
Quantity of Medical Care
0
QM
Q0
Q1
Q2
Demand Function
QMC = M(HS, DC, ES, PF)
Health status
 Demographic characteristics
 Economic standing
 Physician factors

Effect of Insurance on
Demand
D50
D0
D100
P0
½ P0
0
Q0
Q1
Q2
Physician Induced Demand
Physician as agent
 Demand creation

Demand Inducement
S0
Price of
Physicians’
Services
S1
P1
c
P0
a
P2
b
D1
D0
0
Q0
Q2
Q1
Quantity of Physicians’ Services
Measuring Demand
Price elasticity of demand
 Income elasticity of demand
 The Rand health insurance experiment

Select Studies on Elasticity of
Demand
Study
Price Elasticities
Davis and Russell (1972)
Rosett and Huang (1973)
Newhouse and Phelps
(1976)
Manning et al. (1987)
Wedig (1988)
Newhouse et al. (1993)
Eichner (1998)
Dependent Variable
Outpatient Visits
Hospital Admissions
Hospital and Physician
Spending
Hospital Length of Stay
Physicians’ Office Visits
Overall Spending
Hospital Care
Preventive Care
Level of Care
Medical Care
Medical Care
Income Elasticities
Rossett and Huang (1973) Household Medical
Spending
Newhouse (1977)
Per Capita Medical
Spending
Parkin, McGuire, and
Per Capita Medical
Yule (1987)
Spending
Gerdtham and Jonsson
Per Capita Medical
(1991)
Spending
Moore, Newman, and
Short-Run Per Capita
Fheili (1992)
Spending
Long-Run Per Capita
Spending
Murray, Govindaraj, and Total Health
Musgrove (1994)
Expenditures
Elasticity
-1.00
-0.32 to -0.46
-0.35 to -1.50
-0.06 to -0.29
-0.08 to -0.10
-0.22
-0.14
-0.43
-0.16 to -0.23
-0.22
-0.62 to –0.75
0.25 to 0.45
1.15 to 1.31
0.80 to 1.57
1.24 to 1.43
0.31 to 0.86
1.12 to 3.22
1.43
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
RAND Experiment
Spending
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
RAND Experiment
Health 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)

RAND Experiment
Conclusions

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
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
