demand for medical services part 1
DESCRIPTION
Demand for Medical Services Part 1. Health Economics Professor Vivian Ho Fall 2007. Outline. Theoretical derivation of the demand curve for medical services Economic and noneconomic variables that influence demand Elasticities The impact of health insurance on demand. - PowerPoint PPT PresentationTRANSCRIPT
Demand for Medical ServicesDemand for Medical ServicesPart 1Part 1
Health EconomicsProfessor Vivian Ho
Fall 2007
OutlineOutline
Theoretical derivation of the demand curve for medical services
Economic and noneconomic variables that influence demand
Elasticities The impact of health insurance on
demand
Medical Care and UtilityMedical 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
We can generally graph the relation between medical care and utility as follows:
Utility
Medical Care
Medical Care and UtilityMedical Care and Utility
The graph shows that as the level of medical care rises, each additional unit of medical care yields a smaller increase in utility
Given this fact, how does the consumer decide how much health care to purchase?
Medical Care and UtilityMedical Care and Utility
Define : MU = marginal utility of medical care
P = price
q = quantity of medical services
z = quantity of all other goods
Consumer’s Optimal Choice of Consumer’s Optimal Choice of HealthHealth
tradeoffs
Given the consumer’s income, she chooses q and z to maximize utility.
Utility maximization rule :
MUq MUZ
Pq Pz
Total utility reaches its peak when the marginal utility gained from the last $ spent on each product is equalized
Consumer’s Optimal Choice of Consumer’s Optimal Choice of HealthHealth
i.e. The consumer equalizes “the bang for the buck” across all goods
ProofProof
Suppose 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)
Deriving a Demand Curve for Deriving a Demand Curve for Physician VisitsPhysician Visits
Suppose 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 q
Deriving a Demand Curve for Deriving a Demand Curve for Physician VisitsPhysician Visits
Downward sloping demand curve for physician visits
Price
P1
P0
q0q1
• Price changes lead to movements along D curve
Deriving a Demand Curve for Deriving a Demand Curve for Physician Visits Physician Visits (cont.)(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 Other Economic Factors Affecting DemandAffecting Demand
The 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) constant
Changes in factors other than the price of the good itself lead to shifts in the demand curve
Other Economic Factors Other Economic Factors Affecting DemandAffecting Demand
If income increases, then at any given price, consumer is willing and able to purchase more q
1. Income
q0 q1
Price
P0
DOD1
Physician Visits
Other Economic Factors Other Economic Factors Affecting DemandAffecting Demand
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
2. Complements - 2 or more goods which are consumed together
Other Economic Factors Other Economic Factors Affecting DemandAffecting Demand
e.g. contact lenses and optometrist visits If contact lenses become cheaper, demand for optometrist
visits ___
2. Complements
Price
D0D1
Optometrist Visits
Price of complement falls
Other Economic Factors Other Economic Factors Affecting DemandAffecting Demand
e.g. Coke and Pepsi e.g. Physicians and Nurse practitioners? e.g. generic and brand name drugs
3. Substitutes - other goods which satisfy the same wants, or provide same characteristics
Other Economic Factors Other Economic Factors Affecting DemandAffecting Demand
e.g. generic and brand name drugs If generic drugs in price, D for brand name ___
3. Substitutes - other goods which satisfy the same wants, or provide same characteristics
Price
D1D0
Brand name drugs
Demand for brand name drug falls
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ElasticitiesElasticities
Price
# Visits
A relatively flat demand curve implies that a small increase in price leads to a large fall in # visits demanded
Price
# Visits
In this case demand is considered to be relatively “elastic” with respect to a change in price
ElasticitiesElasticities
Price
# Visits
A relatively steep demand curve implies that a small increase in price leads to a small fall in # visits demanded
ElasticitiesElasticities
Price
# Visits
In this case demand is considered to be relatively “inelastic” relative to a change in price
ElasticitiesElasticities
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 We can compare the ED for physician visits vs.
nursing home days, even though they are consumed in different units
EQP
change in quan tity dem andedchange in priceD
D %%
%%
Elasticities (cont.)Elasticities (cont.)
ED is expected to be negative. Thus, own-price elasticities of demand are often quoted in terms of absolute value
The demand curve is inelastic if 0<|ED|<1
The demand curve is elastic if
1<|ED|<
Elasticities (cont.)Elasticities (cont.)
If 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 curve
%%
QP
PP
QP
PQ
D
Elasticities (cont.)Elasticities (cont.)
Except in special cases, the EExcept in special cases, the EDD is different is different
on different points of the demand curveon different points of the demand curve
P
Q
4
8
Demand curve: Q = 8 – 2P
4
2ED = -1
ED = -
ED = 0
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
EQ
Y
change in quan tity dem anded
change in incom eYD
%
%
%
%
Elasticities (cont.)Elasticities (cont.)
Cross-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 complements
EC is positive for substitutes
% %
% %X
CY
Q change in quantity demanded of good XE
P change in price of good Y
Elasticities (cont.)Elasticities (cont.)
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 QD
If demand for physician services is inelastic, and
the price is raised, then I %QD I < I %P I
ElasticitiesElasticities
QUIZQUIZ
A 1991 study by Frank Chaloupka estimated the price elasticity demand for cigarettes to be:
A. .48
B. .83
C. 1.02
D. 1.33
InsuranceInsurance
The above demand analysis assumed that the patient pays for care out-of-pocket
How 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 $80
InsuranceInsurance
• No insurance : consumer faces price P, makes q visits
Price
P
cP
qcq # Visits
• W/ coinsurance : consumer faces price cP, wants to make qc visits
Insurance (cont.)Insurance (cont.)
Coinsurance leads to a demand of qc visits at price P, shared by consumer and insurance company
Price
P
cP
qcq # Visits
Demand curve rotates clock wise
What if the consumer has full What if the consumer has full coverage?coverage?
• i.e., copayment = 0
Price
# Visits
• Indemnity InsuranceInsurer pays a fixed amount for each
purchased service Insurer pays $150 for each overnight hospital
stay, and patient pays the rest
Price
Visits
D0
D1
$150
• Fixed $ copaymentPatient pays up to $20 per visit, and insurer
pays the rest
Price
Visits
D0
$20
D1
• Deductibles - 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 customer
Lowers administrative costs, because fewer small claims are filed each year
Lowers demand for relatively inexpensive medical services near start of the year
Has much less impact on demand if relatively expensive medical services are required