Kinh tế học - Health economics professor vivian ho fall 2009

Demand for Medical ServicesPart 1Health EconomicsProfessor Vivian HoFall 20091OutlineTheoretical derivation of the demand curve for medical servicesEconomic and noneconomic variables that influence demandElasticitiesThe impact of health insurance on demand2 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 utility3We can generally graph the relation between medical care and utility as follows:UtilityMedical CareMedical Care and Utility4The graph shows that as the level of medical care rises, each additional unit of medical care yields a smaller increase in utilityGiven this fact, how does the consumer decide how much health care to purchase?Medical Care and Utility5Define : MU = marginal utility of medical care P = price q = quantity of medical services z = quantity of all other goodsConsumer’s Optimal Choice of HealthtradeoffsGiven the consumer’s income, she chooses q and z to maximize utility.Utility maximization rule : MUq MUZ Pq Pz6Total utility reaches its peak when the marginal utility gained from the last $ spent on each product is equalizedConsumer’s Optimal Choice of Healthi.e. The consumer equalizes “the bang for the buck” across all goods7ProofSuppose that instead : MUq MUZ Pq Pz> Then MUq would fall, MUz would rise, until the 2 ratios are equalized Last $ spent on medical care generates more U than last $ spent on other goods Consumer could U by purchasing more medical care (q), and less other goods (z)8Deriving a Demand Curve for Physician VisitsSuppose Pq rises. This will lead to : MUq MUz Pq Pz<Note : Now let q represent physician visits Consumer can U by purchasing less q, and more z Pq lower demand for q9Deriving a Demand Curve for Physician VisitsDownward sloping demand curve for physician visits PriceP1P0q0q1 Price changes lead to movements along D curve10Deriving 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,)11Other Economic Factors Affecting DemandThe demand curve illustrates the effect of changes in the price of the good on quantity demanded holding all other factors (income, prices of other goods) constantChanges in factors other than the price of the good itself lead to shifts in the demand curve12Other Economic Factors Affecting DemandIf income increases, then at any given price, consumer is willing and able to purchase more q1. Incomeq0q1PriceP0DOD1Physician Visits13Other Economic Factors Affecting Demande.g. left shoes and right shoese.g. laser printers and toner cartridgese.g. alcohol and cigarettes?e.g. contact lenses and optometrist visits2. Complements - 2 or more goods which are consumed together14Other Economic Factors Affecting Demande.g. contact lenses and optometrist visitsIf contact lenses become cheaper, demand for optometrist visits ___2. Complements PriceD0D1Optometrist VisitsPrice of complement falls15Other Economic Factors Affecting Demande.g. Coke and Pepsie.g. Physicians and Nurse practitioners?e.g. generic and brand name drugs3. Substitutes - other goods which satisfy the same wants, or provide same characteristics 16Other Economic Factors Affecting Demande.g. generic and brand name drugsIf generic drugs in price, D for brand name ___3. Substitutes - other goods which satisfy the same wants, or provide same characteristicsPriceD1D0Brand name drugsDemand for brand name drug falls17Open Heart SurgeryDeliveriesKnee SurgeryCarpal TunnelFacelifts“My experience with priceline.com was fantastic. This was truly a great bargain. I saved enough on my knee surgery to get the facelift I always wanted! Thank you, priceline!”Ryan G.Running and looking great!Online Health Care Purchases?18Online Health Care Purchases!19“If you're thinking about a cosmetic procedure -- cosmetic surgery, cosmetic dentistry, laser vision-correction surgery, or podiatric surgery -- then Bid For Surgery can help you find not only the right doctor charging a fair price, but the best total package for your individual medical or dental care.How? By introducing you to many highly-qualified, well-experienced doctors, and having these doctors offer their "bids" for your procedure -- detailed bids that include: their medical education and credentials; their practice history and practice philosophy; patient references and typical outcomes; their associated surgical facilities; their office location, and languages spoken; patient financing (coming soon); and other important information -- including their best price.”Online Health Care Purchases!20ElasticitiesPrice# VisitsA relatively flat demand curve implies that a small increase in price leads to a large fall in # visits demanded21Price# VisitsIn this case demand is considered to be relatively “elastic” with respect to a change in priceElasticities22Price# VisitsA relatively steep demand curve implies that a small increase in price leads to a small fall in # visits demandedElasticities23Price# VisitsIn this case demand is considered to be relatively “inelastic” relative to a change in priceElasticities24Own-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 demandedElasticities are scale-freeWe can compare the ED for physician visits vs. nursing home days, even though they are consumed in different unitsElasticities (cont.)25ED is expected to be negative. Thus, own-price elasticities of demand are often quoted in terms of absolute valueThe demand curve is inelastic if0<|ED|<1The demand curve is elastic if1<|ED|<Elasticities (cont.)26If you are given a formula for a demand curve, you can compute the elasticity of demand for any combination of price and quantity along that demand curveElasticities (cont.)27Except in special cases, the ED is different on different points of the demand curvePQ48Demand curve: Q = 8 – 2P42ED = -1ED = -ED = 028Income 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 demandedFor most types of medical care, EY should be positiveElasticities (cont.)29Cross-price elasticity of demand:Example: If the elasticity of demand for Tylenol with respect to the price of Advil is 1.5, a 10% increase in the price of Advil leads to a 15% increase in the quantity of Tylenol demandedEC is negative for complementsEC is positive for substitutesElasticities (cont.)30 Total revenue will increase if price is raised when demand is inelastic Own price elasticity of demand critical for determining a health care manager’s total revenue TR = PQ D Demand theory tells us that P QDIf demand for physician services is inelastic, and the price is raised, then I %DQD I < I %DP IElasticities31QUIZA 1991 study by Frank Chaloupka estimated the price elasticity demand for cigarettes to be:.48.831.021.3332Insurance The above demand analysis assumed that the patient pays for care out-of-pocketHow does insurance affect the demand for care?1. Coinsurance - Patient pays only a fixed % of the cost of each visit (often C = .20)e.g. If the visit costs $100 : patient pays $20, insurance pays $8033Insurance No insurance : consumer faces price P, makes q visits PricePcPqcq# Visits W/ coinsurance : consumer faces price cP, wants to make qc visits34Insurance (cont.) Coinsurance leads to a demand of qc visits at price P, shared by consumer and insurance companyPricePcPqcq# Visits Demand curve rotates clock wise35What if the consumer has full coverage? i.e., copayment = 0Price# Visits36Indemnity InsuranceInsurer pays a fixed amount for each purchased serviceInsurer pays $150 for each overnight hospital stay, and patient pays the restPriceVisitsD0D1$15037Fixed $ copaymentPatient pays up to $20 per visit, and insurer pays the restPriceVisitsD0$20D138Deductibles - Consumer must pay a fixed amount out of pocket per year before coverage beginse.g. The initial $100 per year in health care expenditures must be paid by the customerLowers administrative costs, because fewer small claims are filed each yearLowers demand for relatively inexpensive medical services near start of the yearHas much less impact on demand if relatively expensive medical services are required39