Health Economics Midterm

Perfectly inelastic demand curve

Its just a straight line in the graph where it shows that no matter how much the price changes (on the y-axis), the quantity of healthcare demanded remains the same.

• Price changes but quantity of healthcare doesn’t

Elastic Demand Curve

As price changes, quantity of healthcare demanded changes by the same amount. The curve is downward sloping. This means that higher prices result in lower quantity of healthcare and lower prices results in higher quantity of healthcare.

*Negative Slope

Which curve is accurate for healthcare?

Demand for healthcare is downward sloping.

• People are price-sensitive when it comes to using healthcare services.

If the demand for healthcare is inelastic

Prices do not matter for obtaining the optimal amount of healthcare.

• For example, everything depends on the doctor’s decision, and money does not matter in that case.

If the demand for healthcare is elastic

prices do matter

High Price Sensitivity

Customers react strongly to small price hikes. If a product becomes slightly more expensive, buyers stop purchasing it, delay the purchase, or switch to a rival brand. Common examples include basic groceries, healthcare, gasoline, and generic household items.

Low Price Sensitivity

Customers care less about price changes. They continue buying the product because of strong brand loyalty, high necessity, or a perception of unique value. A common example includes luxury goods.

How do we know the slope of the demand curve?

• Experiments are the best way to study the relationship between price and healthcare quantity demanded

• Insurance largely define prices, but insurance selection is determined bt healthcare demand and vice versa

• So, we need randomization!

RAND Health Insurance Experiment (Elasticity Example)

Conducted 40 years ago, where they randomly assigned people to different levels of prices (insurance status was randomly assigned). So, people were assigned to different plans and had to pay different prices for the same services.

There were four different plans: one plan with completely free care, and the other three were cost-sharing plans with 25%, 50%, and 90% copayments.

The study found that people who paid nearly full price for their care (90%) had 36% fewer visits than people who paid nothing for their care. The decreases were the same for both acute (37%) and chronic care (34%).

Oregon Medicaid Experiment (Elasticity Example)

This study compared two groups of low-income adults

• People who won a 2008 lottery to receive the opportunity to apply for public health insurance coverage through Medicaid

• People who were lottery entrants who did not win and were not given a chance to apply for Medicaid.

The study found that lottery winners, who are more likely to be Medicaid enrollees, were 24 percentage points more likely to have an outpatient visit over six months and had 36% more visits on average, compared with lottery losers who were unlikely to be on Medicaid.

Evidence from the literature on the inpatient care demand curve

When deciding how much inpatient care to use, people are less sensitive to changes in price compared to outpatient care.

• Orgeon found the curve was inelastic (same amount of care used by lottery winners and non-loterry winners)

• RAND HIE found care was downward sloping but steeper than outpatient care.

Both inpatient and outpatient have the same change in prices, but the inpatient curve shows that healthcare quantity changes less than outpatient demand.

Elasticity of demand formula

The percentage change in quantity of demanded associated with a fixed percentage change in price

e = ((Q2-Q1)/Q1)/ ((P2-P1)/P1)

Arc Elasticity Formula

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

Elasticity = 0

This means it is perfectly inelastic = less price sensitive

Elasticity is between 0 and 1:

There is a somewhat steep downward slopped demand curve and we call tihs good inelastic

Elasticity is less than -2

We call this good elasticity = a much flatter demand curve

Larger absolute elasticity = more price-sensitive

Implications of elasticities

Prices invloves a tradeoff between:

• People getting more care than they need

• People skipping healthcare serbices that they need

Health and utility (or happiness)

Utlity = U(Ht,Zt)

Utility is a function of health level (Ht) and everything else that gives one happiness (Zt)

Z = things that give you enjoyment (spending time with family, gardening, watching sports, hiking, watching TV, etc.).

Producing Health and Home Goods

In order to produce Ht and Zt, you need time and stuff you buy (market inputs) to support health or hobbies.

• If scrap booking is in your Zt basket, then you need to buy supplies to support this hobby. This is what we are talking about when we say market supplies.

Market Input for Health

going to doctors visits or a gym membership

3 Roles of Health in the Grossman Model

Health is a consumption good that is a key determinate of utlity (the more health you have, the higher level of utlity)

Health is also an input in production. Having health allows you to produce more health and to produce more home goods, both of which increase utility

Health is capital good with costs and returns. Health is a form of capital in that remains a resource overtime that one can either accumulate or depreciate. This means that investing health your health today can improve your health level and thus utility in the future.

MEC Curve

tells us about all lifetime returns form a maginal investments in health at any given level of initial health stock.

• If a person with poor health invests, the rate of return will be high

• If a person with good ehalth invests, the rate of return will be lower

Productive Time Curve

Tp = Tw+Tz+Th

Formula: Tp= H-Ts

Means that the worse your health is, the more productive time

• If you have a coma and you get better vs. you have a cold and you recover from that

Non-productive time = sick time

Productive time = getting stuff done (work, leisure, and health)

Tp = Y-Axis

H = X-Axis

Time Constraint Curve

Maximizing the combination of Tw+Tz.

Tw = Y-axis

Tz = X-axis

Tw = time spent working, meaning → increases income and thus how much health/home good consumption one can have

Tz= leisure time → increases utility by allowing time for good consumption

Th= time spent improving health → increases utility by allowing time for health investments, which can improve health in the utility function

Ts= time spent sick → DOES NOT INCREASE UTILITY, but does impose an opportunity cost of not being able to work, enjoy leisure, or improve health

Production of Possibility Frontier (Consumption)

Z = Y-Axis

H= X-Axis

The Productive Time Hypothesis

Straight from the Grossman Model

Health disparities themselves drive SES differences, since poorer health leads to more sick time (Ts) and less work time (Tw) available to earn income.

Greater sick time = Less Productive Time, and less productive time = less work time to produce income

Access to Care Hypothesis

Health disparities occur because some people can afford better insurance/treatment and thus have better access to all of the healthcare services needed to maintain good health

The Thrifty Phenotype Hypothesis

Health Disparities between rich and porr exist because resources (food) deprivation in utero and in early childhood, which are more common in low-income families can lead to genetic changes and other health changes that impact adult

Allostatic Load Hypothesis

Health disparities are brought about by cumulative physiologic tolls exacted on the body over time by stress from unequal positions in society (via income, race, education)

It related to the Grossman model through depreciation of health capital but not from grossman model

The Income Inequality Hypothesis

Health disparities are brought about by income inequality across society, which itself, a variation on the allostatic load hypothesis since societies have greater income inequality are more stressful with low-income

The Efficient Producer Hypothesis

Straight from the Grossman model:

Health disparities between people with different educational attainment exist because better-educated individuals are more efficient producers of health then less well-educated individuals

The Direct Income Hypothesis

Straight from Grossman Model:

Disparities between rich and poor exists because the rich have more resources available to invest in health

Thinking back to the Grossman Model: people who have higher income, have production possibility frontier that is shifted up and to the right and can thus produce higher level of health and higher level of other goods.

Natural Experiment

A causal study uses an enviormental shock to create a natural treatment group and comparison group

• enviormental shock has to be exogenous (not driven by internal forces)

• This eliminates selection bias