Chapter 3

Demand for Health Care: A Simple Model

3.1   THE CONCEPT OF DEMAND

3.2   INDIVIDUAL DEMAND: THE PRICE-QUANTITY RELATION

3.2.1          Demand and Quantity Demanded

Since our focus is on health care, the commodity physician care is used as the major example.  Physician care is defined as examinations and treatments administered by physicians to their patients.  It is measured by the number of visits to a physician by a typical consumer.  We specify the time span as being 1 year.

3.2.2          Changes in demand

3.2.2.1    Income

3.2.2.2    Prices of related commodities

3.2.2.3    Tastes, sometimes called wants, a term connoting the intensity of desire for particular commodities.

3.3   DERIVING THE DEMAND RELATIONSHIP

3.3.1          Tastes

Are essentially desires for products.  These desires, or wants, are quantified using an index that we call utility.  Concept used to represent increases in utility from successive quantities of a commodity is called marginal utility.  Decrease in utility of successive quantities of a commodity is called diminishing marginal utility.

3.3.1.1    Health Status: Individual knows what health condition she has.

3.3.1.2    Consumer information: Individual knows how “productive” health care will be in influencing her health.

3.3.1.3    Productivity of health care: Assume marginal productivity of health care in influencing health is constant.

3.3.1.4    Quality is held constant.

3.3.1.5    Other taste-influencing variables: Education, upbringing, marital status, and age, etc…

3.3.2          Income

3.3.3          Prices of other commodities

3.3.4          Behavioral assumption: Utility maximization

3.3.5          Predictions

Health care (Physician visits)                                                       Carrots

Q             TU          MU        MU/P1                  MU/P2                  TU          MU                        MU/P

1              22           22           5.5                          7.3                          6              6                              6

2              42           20           5                              6.7                          11           5                              5

3              60           18           4.5                          6                              15           4                              4

4              76           16           4                              5.3                          18           3                              3

5              90           14           3.5                          4.7                          20           2                              2

6              102         12           3                              4                              21           1                              1

Income = $10

PHC = $4                PC = $1

2 visits = $4.2      = $8

2 carrots = $1.2 =   2

                                  $10

Lower price of visit to $3 → 3 visits and 1 carrot

 

3.4   MARKET DEMAND

Factors influencing individual demand only: prices, income, tastes

“              “                    market           “              “   : number of participants

 

3.5   MEASURING QUANTITY RESPONSIVENESS TO PRICE CHANGES

                Price elasticity of demand

Point elasticity formula

E = (ΔQ/Q)/(ΔP/P)

 where P = original price, Q = original quantity

Arc elasticity of demand

 

E =( (Q2 - Q1)/ ( Q2 + Q1))/ ( P2 - P1)/ ( P2 + P1)

 

3.6   INSURANCE, OUT-OF-POCKET PRICE, AND QUANTITY DEMANDED

 

 

Dn: consumers have no insurance and pay full price (If P is $8, demand 3 units; if P is $10, demand 0 unit)

D50: coinsurance rate is 50% (If P is $8, only pay $4 so demand 6 units)

D20: coinsurance rate is 20% (If P is $10, only pay $2 so demand 8 units)

 

3.7   ELASTICITY OF DEMAND ESTIMATES

Rough estimate of D elasticity when consumers have 0 to 25% coinsurance is -.20