HEALTH ECONOMICS

PREPARED BY JMBarcelo

OBJECTIVESAt the end of the discussion, students are expected to:

1. Enumerate the characteristics of the Health Care Market

2. Differentiate demand for health from demand for health care

3.Compare Grossman’s Investment Model of Health and Consumption Model of Health

4. Identify factors which affect investment in health

5. Illustrate effects of factors which affects investment in health using Grossman’s Model and Consumption Model

Characteristics of the

Health Care Market

Characteristics of the Health Care Market

1. Uncertainty and Imperfect Information

Inequality of knowledge Risk of lawsuits Choice of medical care Cost of medical care

INSURANCE

Characteristics of the Health Care Market

2. Externality

(effect of transaction on outsiders)

- “spill-over effect”positive (+) externality

negative (- ) externality

Characteristics of the Health Care Market

3. Subject to Government Intervention

- highly regulated- SUBSIDY on heath care and health

insurance

Demand for Health and Health Care

Demand for Health vs. Demand for Health Care

Demand for HEALTH ≠ Demand for Health Care

Demand for Health

Demand for Health Care

Demand for health care is very high because people are willing to pay for it.

Demand for Health vs. Demand for Health Care

HEALTH PRINCIPLESHealth is PRICELESS.Having more does NOT reduce the value

of health.Quality, not Quantity Matters.Health Risks are more Public than

Private.Lifestyle matters more than medicine.

Michael Grossman’s Investment Model of Health

1. Investment in health is a form of human capital. (Gary Becker and Michael Grossman)

(input) (output)

HEALTH CARE STOCK OF HEALTH

* gross investment COST + UPKEEP

* Capital provides services + monetary value + utility

Michael Grossman’s Investment Model of Health

2. Demand for health is affected by

a. cost of health capital and;

b. rate of depreciation of health stock

Marginal Efficiency of Capital (MEC)

measure of how much extra output can be produced with an extra unit of input

C + d

H

COST OF CAPITAL

MEC curve is subject to diminishing marginal

returns

STOCK OF

HEALTHCAPITAL

C + d

H

COST OF CAPITAL

An increase in wage causes shifting of MEC curve.

STOCK OF

HEALTH CAPITAL

Consumption Model of Health

The Consumption Good

Health

B U

E

An individual has chosen the combination of consumer goods and health investment that puts him or her on the highest indifference curve attainable with that budget.

Budget line

Factors Affecting Investment in Health

Consumption Good

Health

BU

E

E

B1

FACTOR: AGEPrinciples: age, resources to obtain/ maintain health, price for most consumer goods

SUBSTITUTION EFFECT CAUSES DECREASED DEMAND FOR CONSUMER GOODS

Other Factors that Affect the Investment in Health

EDUCATION

Education Inputs to Production of Health

Having education increases the demand for health.

Other Factors that Affect the Investment in Health

LIFESTYLE EFFECTS OF WEALTH

Wealth Health

Net Effect: Shifting of MEC Curve to the Left

Other Factors that Affect the Investment in Health

CHEMICAL DEPENDENCY

Chemical Dependency Health

Chemical Dependency causes shifting of MEC curve to the left.