M2: Demand for health & healthcare
15 important questions on M2: Demand for health & healthcare
What determines our demand for healthcare? Three models:
- Medico-technical model
- Neo-classical model
- Imperfect agency model
Medico-technical model:
- Who determines demand?
- Three assumptions:
- The determinant of healthcare demand:
- Individual demand elastic / inelastic?
- Demand curve?
Assumptions:
- Healthcare providers act as perfect agents on behalf of their patients
- Patients fully comply with the decisions made by their providers
- Providers know with certainty the results of their decisions
Determinant: need
individual demand: completely (price-)inelastic.
- The doctor determines the price of healthcare
Demand curve: the demand curve is vertical
The neo-classical model:
- Who determines demand?
- Three assumptions:
- The determinant of health care demand (+ graphs)
Assumptions:
- Consumers are sovereign and rational
- they maximize utility and prefer more above less
- Consumer have predetermined and ordered preferences.
- Consumers know with certainty the results of their consumption decisions.
Determinants: Needs, wants, budget and prices
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Would the demand for individual provider care be more or less price elastic than the aggregate demand for the same type of care?
Given the RAND findings on price elasticities, would a price increase result in higher, lower or the same total healthcare expenditure?
Why may the RAND experiment not correctly predict the impact of a price increase (e.g. Higher co-payment) on total healthcare demand?
If physicians get paid FFS, the actual price elasticity of demand is likely to be smaller than in the RAND experiment.
What is the classification of goods according to income elasticities?
If IE ≥ 0: normal goods
- If 0 ≤ IE ≤ 1: necessary goods
- If IE ≥ 1: luxury goods
Flat demand curve slope means elastic or inelastic demand? & vertical slope?
Vertical: inelastic (elasticity = 0)
Healthcare prices: Why are out-of-pocket (co-payments) biased?
Underestimate or overestimate the impact?
It underestimates the impact.
What is elasticity of demand?
- P = price
- Q = quantity
In countries with health insurance, income elasticities of healthcare demand are more irrelevant / relevant at the country level than at the individual level? Why?
In low-income countries, individual income elasticities are lower / higher than in high-income countries? Why?
Four critiques on the neo-classical model:
- Consumers often are not sovereign but feel dependent on their physician's judgement.
- Consumers often do not have predetermined and well-ordered preferences with regard to medical care.
- Consumers do not know with certainty the results of their consumption decisions: demand for healthcare IS NOT demand for health.
- Therefore, the demand curve does not necessarily reflect the marginal valuation of health services.
Imperfect agency model:
- Who determines demand?
- Who is the agent and who is the principal?
- Where does this lead to? (3x)
Agent: patient
providers act as an imperfect agent on behalf of their patients: they may have conflicting interests (income, status, leisure)
Problems:
- Patients demand curve may not reflect how they really value health services
- Overprovision (SID) or underprovision of care may occur, depending on physicians' preferences and incentives.
- Different payment systems are likely to generate different outcomes.
How to deal with selection bias? And which problems do we face?
- Correct for relevant background variables problem: omitted variable bias
- Quasi experimental methods: problem: control and experimental groups may not be comparable at baseline
- Randomized controlled experiment: problem: social experiments often face ethical constraints
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