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Health Economics & Policy 3 rd Edition James W. Henderson

This chapter delves into the demand for health and medical care, exploring production functions, health status measurement, and determinants of health. It examines various health status measurements, including mortality, morbidity, and quality of life, while identifying key health determinants such as income, education, and lifestyle factors. The effect of health insurance on medical care demand is assessed, revealing the concept of physician-induced demand. Additionally, it discusses the RAND health insurance experiment, highlighting price elasticity, spending variations, and the implications for healthcare policy.

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Health Economics & Policy 3 rd Edition James W. Henderson

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  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

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