ME33ES MEDICINE AND ECONOMICSDEMAND AND SUPPLY

Summary

• Demand elasticity: smoking, drinking and eating

• Demand elasticity: user charges

• Supply and pay of doctors and supplier-induced demand

DEMAND AND SUPPLY II

Demand elasticity: smoking, drinking and eating

• Role of price in determining smoking, drinking and eating behaviour

• If prices rise, because taxes are raised or minimum prices are imposed, what will be the reduction in smoking, drinking and eating?

• Who will reduce their smoking, drinking and eating and will it be low income groups who are most affected?

DEMAND AND SUPPLY II

• What will happen to government revenue and the profits of tobacco, alcohol and food companies?

• Evidence for tobacco suggests that the price elasticity of demand is about -0.5: e.g. 10% increase in price of cigarettes leads to 5% decrease (hence -ve sign) in demand

• Implies that to achieve a significant reduction in demand would require a large increase in tax and thus price

DEMAND AND SUPPLY II

• Total spending on tobacco goes up and government revenue from taxes goes up

• Most studies suggest demand is more elastic among young smokers who are more recent starters

• Demand is less elastic among older, more addicted smokers

• Effect of taxation of smoking falls more heavily on poor people because it represents a higher proportion of income

DEMAND AND SUPPLY II

• People may seek to avoid increased tax by buying more smuggled cigarettes

• Evidence suggests economic measures to combat smoking may have some but a rather limited effect

• Public health measures, such as smoking bans, may be more effective

DEMAND AND SUPPLY II

• Similar debates about combating drinking and obesity through a combination of economic measures and regulatory or legal measures

• Price elasticity varies between different types of alcohol: Spirits -1.31 Wine -0.75 Beer -0.48

BMA Science and Education Department and the Board of Science (2008) Alcohol misuse: tackling the UK epidemic

DEMAND AND SUPPLY II

• Elasticity is again greater among younger people

• Scottish government sought, unsuccessfully, to introduce a minimum price per unit of alcohol; 40p was suggested figure

DEMAND AND SUPPLY II

• Recent proposals to introduce a minimum price of 0.5p per calorie for food or to tax sugary and fatty foods

http://www.heraldscotland.com/news/home-news/calorie-tax-plan-recipe-for-tackling-obesity-1.1068069

http://www.bbc.co.uk/programmes/b00w4dsy

DEMAND AND SUPPLY II

• A further possible insight from economics is to identify the sources of the ‘problem’ more clearly

Negative spillover effects on the health of others e.g. because of passive smoking?

Lack of information about the consequences for health of smoking, drinking and bad diet?

DEMAND AND SUPPLY II

• But if the health of others is not affected and people know of the consequences of their actions is government intervention justified?

Perceived unfairness of paying for treatment of ill health caused by smoking, drinking and bad diet from public funds?

• Is there already some restriction on NHS treatment of self induced or self aggravated ill health under the guise of ‘incapacity to benefit’?

DEMAND AND SUPPLY II

Demand elasticity: user charges

• Whenever people do not have to meet the full market price of health care at the point of use, there is ‘excess’ or ‘unnecessary’ demand (moral hazard)

• This can be countered by non-price rationing such as requiring patients to wait for care

• Main price mechanism is user charges such as prescription charges for drugs and medicines

DEMAND AND SUPPLY II

• A further argument for user charges is that they raise revenue

• Various studies suggest that user charges do not have a considerable effect in reducing demand

• Price elasticity of demand may be as low as -0.1 to -0.2; 10% increase in user charges reduces demand by 1% to 2%

• However, reduction in demand is greater among low income groups

DEMAND AND SUPPLY II

• Within small overall reduction in demand, there is a substitution of those less in need but more able to pay for those more in need but less able to pay

• Effect of user charges may be to reduce demand by low income groups, not ‘unnecessary’ demand, but demand by those deterred by cost

• In practice, it may be almost impossible to define or identify ‘unnecessary’ demand

DEMAND AND SUPPLY II

• Regarding revenue raising, in developing countries, where user charges are levied on many different types of health care and few groups are exempt, significant amounts of revenue can be raised

• In the UK and other developed countries where there are a small number of user charges and quite complicated exemption systems, administration costs account for a fairly large proportion of revenue raised

DEMAND AND SUPPLY II

• The UK has been in the worst of both worlds where it would have been better to:

- sweep away all user charges, or- make user charges the rule rather than the exception (but at

same time making system more sensitive to ability to pay)

• Pursuing this logic, Wales abolished prescription charges in 2007, Northern Ireland is to do so in 2010 and Scotland in 2011

• Will England follow suit and when?

DEMAND AND SUPPLY II

Supply and pay of doctors and supplier-induced demand

• How much should doctors be paid and how should they be recruited?

• How should doctors be paid?

• In UK, there is much government planning of training, recruitment and pay of doctors

• Unlike almost all other subjects, university numbers are controlled

DEMAND AND SUPPLY II

• Usually justified on grounds of ensuring sufficient training opportunities

• Less justifiable is that the medical profession itself influences the number of entrants since the BMA advises on entry levels into British university medical schools

• Similar argument of maintaining standards is used to justify controls over free international movement of doctors

DEMAND AND SUPPLY II

• Also argument of inhibiting brain drain of doctors from developing countries to developed countries

• However, consequence may be that supply of doctors is less, and their pay more, than it would be in a free market

• Should the training, recruitment and employment of doctors be less regulated?

DEMAND AND SUPPLY II

• Way in which doctors are paid is relevant to likelihood of supplier induced demand (SID)

• SID is power of health care providers to recommend or induce demand for their services beyond point which a fully informed consumer of health care – or perfect agent – would choose

• The consequence of SID is ‘excessive’ consumption and supply of health care

DEMAND AND SUPPLY II

• Numerous studies of SID have involved comparisons of doctors’ behaviour in US and in UK

• In US, many doctors are remunerated by fee-for-service which may provide a clear incentive to provide further services but in UK fee-for-service accounts for small (but growing) proportion of doctors’ pay

• Controlling for differences in age, sex and population, there are significantly higher rates for many common surgical procedures in US compared to UK

DEMAND AND SUPPLY II

• These differences do not seem to be attributable to differences in the incidence or prevalence of disorders

• They are consistent with the presence of SID in the US

• However, there are also other relevant explanations for the observed variations in the provision of care:

- fewer protocols guiding surgical practice in the US- differences in availability or use of particular technologies- differences in national priorities and values