Lecture 5 - Demand for Medical Care Flashcards
What is the Grossman model (theory of demand for medical care)
- people gain utility from health
- people have a stock of health which is part of their human capital
- health stock depreciates with ace
- health stock is increased via consumption of healthcare and investment of time and effort in health-promoting activities. Investment ability and efficiency depend on individual skills and knowledge which are functions of education
- consumption and investment are constrained by time, income and prices
What is derived demand?
Demand for a good or service that is ultimately driven by the demand for another good or service
e.g. demand for healthcare is derived from demand for health
What is the ability to invest time and effort in to health promoting activities dependent on?
Investment ability and efficiency depend on individual skills and knowledge which are functions of education
What constrains health consumption and investment?
Time, income, prices
TIP
What are Grossman’s 5 predictions?
- Individuals will make investments in their health
- Individuals with higher returns of health capital make greater investments in their health
- If wages increase, demand for health stock will increase because the cost of a sick day has increased
- As health stock deteriorates with age, people will spend more time investing in health
- Education may increase demand for healthcare but because educated people are more efficient at investing in health it may reduce demand
What is the traditional model of demand?
There’s an inverse relationship between price and quantity demanded. This means that as the price of a good or service increases, the quantity demanded by consumers will generally decrease, and vice versa
What is an indifference curve?
Shows various combinations of goods. At any point on the curve the combination leaves the consumer satisfied
What is the equation which represents the utility that consumers get from healthcare?
U = U(H, OG)
H - health
OG - other goods
What is the equation to represent budget constraints for healthcare?
BC = (Ph x H) + (POG x OG)
Ph: price of healthcare
H: quantity of healthcare
POG: price of other goods
OG: quantity of other goods
What is utility maximised on the indifference curve?
When the slope of the budget line = the slope of the indifference curve (they are tangental)
Consumers marginal rate of substituting one good for another is equal to their relative prices
If income increases or price falls, what happens to the indifference curve?
It will get higher (move to the top right)
What does the slope of the demand curve mean?
PED - how responsive people are to price
Why is the demand for healthcare more complex than normal goods?
- Some people avoid using healthcare even if they need it
- People don’t get utility directly from healthcare, they get it from improved health status (derived demand)
- Some healthcare is preventative and can benefit other people (positive externalities such as vaccines)
- People don’t pay the full price of healthcare when they have insurance
What are normal goods?
Normal goods are goods for which the demand increases as a consumer’s income increases. In other words, people tend to buy more of a normal good as they have more money to spend.
What are public goods?
Public goods are goods or services that are non-excludable and non-rivalrous in consumption. This means:
- Non-excludable: It’s difficult or impossible to exclude people from consuming the good, even if they haven’t paid for it. Examples include clean air, national defense, or streetlights.
- Non-rivalrous: One person’s consumption of the good doesn’t diminish the availability for others to enjoy it. For instance, if you watch a public firework display, it doesn’t prevent others from enjoying the same spectacle.
When insurance kicks in, what happens to the demand curve?
It increases quantity since the price is now split between insurer and insured
Is quantity infinite under insurance care is free?
No because we only consume healthcare when we need to (not going to the hospital for fun when we are healthy)
What are the 3 problems with insurance?
- Asymmetric information between insurer and insured
- Adverse selection: insured have ‘hidden characteristics’ and the insurer cannot accurately observe the characteristics of the insured. High risk are more likely to take out insurance
- Moral hazard
What are ex-ante and ex-post moral hazard?
Ex-ante: people with insurance may engage in more risky behaviour or take less preventative action
Ex-post: once ill, people with insurance might use more healthcare services
What are 3 solutions to adverse selection?
- Insurers collect more information for more accurate risk-rating
- Offer meny of contracts where individual selects contract most suited to their risk status
- Regulators make insurance mandatory. Requires risk adjustment mechanism so some companies don’t end up with all the high risk people.
What was insurance like in the US before Obamacare?
Insurers could exclude people with ex-existing conditions or make them pay higher premiums
What did Obamacare implement?
- outlawed advantageous selection
- everyone had to enrol
- everyone paid the same premium for a particular policy
- there was a tax penalty for those who did not enrol
- used community rating to the premium was the same for the entire pool
What did Trumpcare implement?
- allowed insurers to charge sick people more, reintroduced risk selection
- experience rating, premium based on individuals’ risk
Why are risk adjustment formulas often imperfect?
- since factors which could impact health expenditure (past utility, smoking, underlying conditions) can be poorly observed
- insurers may see characteristics of insured better than regulators which allows them to engage in cream skimming (choosing healthy low cost customers)
