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THE QUANTITY OF MEDICAL CARE DEMANDED
Part I: Basic Demand Concepts Definition - The demand analysis seeks to identify factors that are most influential in determining how much health care that consumers are willing and able to purchase at given prices. Purpose – A better understanding of the demand relations provides insights into the various health care issues to be explored in health care economics.
Points of clarification 1. 2. 3. The demand for medical care is “derived” from consumers’ demand for health (or stock of health). It is not synonymous to an act of purchase or an utilization of health service. A purchase or utilization is “realized demand. ” Health care is different and the differences pose a “shopping problem” for patients/consumers.
Is Health Care Different? Viewed from the perspective of demand, health care differs from ordinary consumer goods in several important respects: 1. Uncertainty 2. Idiosyncratic patient needs 3. Asymmetry of information 4. The inseparability of diagnose and treatment and the resulting dual role of physicians 5. Complex price structure of health care
1. Uncertainty q q One never knows when he/she will get sick and how bad the condition might be when sick. Uncertainty refers to the random nature of the incidence of illness and the inherent variations in treatment outcome. “… the special economic problems of medical care can be explained as adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment. ” Kenneth Arrow
Consequences of Uncertainty
2. Idiosyncratic patient needs q q No two patients are exactly alike; Every patient must be treated individually (no assembly-line production) Tailor-made services cost more
3. Asymmetry of information q q Buyers and sellers need good information about prices and quality of products for the market to function well Information is scarce in health care Health professionals know more than patients about diseases and healing processes Consumers/patients must divulge information to assist in the diagnostic process
4. Physicians as a service provider q Physician care – The product and the activity of production are identical § q q In most instances, the provider has just one chance to do it right and the customer cannot test the product before deciding to buy or not Advertising and overt price competition are virtually nonexistent Patients have a shopping problem
5. Complex price structure of health care q q q In addition to the numerous prices charged for a myriad of services and procedures, the price of health care is complicated by insurance and price‑like incentives such as deductibles and co -payments Lack of price transparency Price is not measured solely in the amount of money must be paid. Other measures of prices include: § Price of time § Pain and suffering § Price of compliance
Medical Care and Utility • Medical care is an input in producing health ® Subject to law of diminishing marginal productivity • Health yields utility to the consumer ® Subject to law of diminishing marginal utility
Medical Care and Utility We can generally graph the relation between medical care and utility as follows: Utility Medical Care
Consumer’s Optimal Choice of Health Define : MU = marginal utility of medical care P = price q = quantity of medical services z = quantity of all other goods ¡ ¡ tradeoffs Given the consumer’s income, she chooses q and z to maximize utility. Utility maximization rule : MUq MUZ Pq Pz
Consumer’s Optimal Choice of Health ¡ Total utility reaches its peak when the marginal utility gained from the last $ spent on each product is equalized i. e. The consumer equalizes “the bang for the buck” across all goods
Proof ¡ Suppose that instead : MUq MUZ > Pq Pz Þ Last $ spent on medical care generates more U than last $ spent on other goods Þ Consumer could U by purchasing more medical care (q), and less other goods (z) X Then MUq would fall, MUz would rise, until the 2 ratios are equalized
Deriving a Demand Curve for Physician Visits Note : Now let q represent physician visits ¡ Suppose Pq rises. This will lead to : MUq MUz < Pq Pz l Consumer can l Pq U by purchasing less q, and more z lower demand for q
Deriving a Demand Curve for Physician Visits ¡ Downward sloping demand curve for physician visits Price P 1 P 0 q 1 q 0 • Price changes lead to movements along D curve
Deriving a Demand Curve for Physician Visits (cont. ) ¡ Consumer’s purchase of medical care is a “derived demand” • i. e. , “no direct” utility from visiting the doctor • U derived from health resulting from dr. visit: U = U(h, z) h = h(q, …)
Other Economic Factors Affecting Demand 1. Income ¡ If income increases, then at any given price, consumer is willing and able to purchase more q Price D 1 DO P 0 q 1 Physician Visits
Other Economic Factors Affecting Demand 2. Complements - 2 or more goods which are consumed together ¡ ¡ e. g. left shoes and right shoes e. g. laser printers and toner cartridges e. g. alcohol and cigarettes? e. g. contact lenses and optometrist visits
Other Economic Factors Affecting Demand 2. Complements ¡ ¡ e. g. contact lenses and optometrist visits If contact lenses become cheaper, demand for optometrist visits ___ Price of complement falls D 0 D 1 Optometrist Visits
Other Economic Factors Affecting Demand 3. Substitutes - other goods which satisfy the same wants, or provide same characteristics ¡ ¡ ¡ e. g. Coke and Pepsi e. g. Physicians and Nurse practitioners? e. g. generic and brand name drugs
Other Economic Factors Affecting Demand 3. Substitutes - other goods which satisfy the same wants, or provide same characteristics ¡ ¡ e. g. generic and brand name drugs If generic drugs in price, D for brand name ___ Price Demand for brand name drug falls D 1 D 0 Brand name drugs
Elasticities Price A relatively flat demand curve implies that a small increase in price leads to a large fall in # visits demanded # Visits
Elasticities Price A relatively steep demand curve implies that a small increase in price leads to a small fall in # visits demanded # Visits
Elasticities (cont. ) ¡ Own-Price Elasticity of Demand: ¡ Example: If the elasticity of demand for physician visits is. 6, a 10% increase in price leads to a 6% decrease in the number of visits demanded. ¡ Elasticities are scale-free l We can compare the ED for physician visits vs. nursing home days, even though they are consumed in different units.
More price elastic demand leads to a flatter demand curve. Price Relatively elastic Relatively inelastic # Visits
Elasticities (cont. ) ¡ Income elasticity of demand: ¡ Example: If the elasticity of demand for physician visits is. 1, a 10% increase in income leads to a 1% increase in the number of visits demanded. ¡ For most types of medical care, EY should be positive.
Except in special cases, the ED is different on different points of the demand curve P 4 ED = -1 2 ED = 0 4 Demand curve: Q = 8 – 2 P 8 Q
Insurance Price P c. P q qc # Visits • No insurance : consumer faces price P, makes q visits • W/ coinsurance : consumer faces price c. P, wants to make qc visits
Insurance (cont. ) Price P c. P q qc # Visits Þ Coinsurance leads to a demand of qc visits at price P, shared by consumer and insurance company Þ Demand curve rotates clock wise