NUR 751:Healthcare Economics

for the DNPThe Demand for Healthcare

Dewar, D. (2010). Essentials of health economics. Sudbury, MA: Jones & Bartlett Learning Co.

Tony Umadhay, PhD., CRNA

Barry University

The Demand for Health Care

• The effect of education on the demand for health

care is not predictable

– If education makes a person more efficient in

producing health, an increased awareness of

the value of good nutrition and prevention of

disease will reduce the quantity of health care

required to produce a given stock of health

The Demand for Health Care– Education can also increase the demand for

health itself• The more educated will demand more health,

but less health care, if the effect of education on the productivity of inputs into health outweighs the shift in health care demand

• The effect of age on the demand for health care has been found to vary by type of health care required

• Health insurance influences the demand for health care

Need or Demand

• In analyzing the demand for health care, it is

important to take into account the concept of

need when considering both the characteristics

of health policy and an individual’s consumption

of health care

– Needs and demands can therefore be

regarded as two very different ways of

viewing matters

Information and Imperfect Agent

• Information is itself an economic good• The relationship between doctor and patient is

often presented as a principal-agent problem– The doctor is the agent acting on behalf of a

principal, who is the patient, in making decisions about what health care to purchase• If doctors made these decisions in a

manner fully consistent with patients’ preferences, unaffected by the consequences for themselves, they would be acting as perfect agents

Information and Imperfect Agency

–the hypothesis of supplier-induced demand (SID) purports that doctors engage in some persuasive activity to shift the patients’ demand curve in or out depending on the physicians’ self-interest

–Empirical evidence shows that physicians do respond to financial incentives and they do appear to influence demand and do so partly in response to self interest

Price Elasticity of Demand for Health Care

• Elasticities / Responsiveness• We measure the responsiveness of consumers

demand to changes in the price of a good or service by the price elasticity of demand

• Almost always negative (-)• percentage change in quantity demanded in

response to a percent change in price

• In general, goods and services which are close substitutes have higher price elasticities, and complementary goods and services have lower price elasticities.

Price Elasticity of Demand for Health Care

• The highest price elasticity estimates observed are for those demanding hospital outpatient services and for nursing home services

• The lower number of substitutes for hospitals make the elasticity for hospital services lower than that for physician services– However, once a physician is chosen, this

also limits the number of hospitals that the patient can utilize as well due to the limits on admitting privileges of physicians 

Time Costs and Price Elasticities• The time cost is the value of time used in a given

activity• Estimates of the price elasticity of demand for any

good or service that requires time will tend to be biased if one does not take into account the time and money costs as well

• The time cost of consuming a healthcare service would be the time involved in waiting for the appointment, as well as the travel time– The total cost of services that require time will be higher for

patient with higher wage rates because they have a higher opportunity cost of time

• Any factor that increases the value of time will increase the opportunity cost of time

Aggregate Demand for Health Care

• It is clear that there is a positive relation between income and the demand for health care: the richer the country, the greater the demand for health care

Income Elasticities

• measures the responsiveness of the demand for a good to a change in the income of the people demanding the good

• ratio of the percentage change in demand to the percentage change in income

Healthcare: A Normal, Superior, or Inferior Good?

– If income increases by a given percentage, the quantity of the good consumed increases, but at a lower percentage than associated with the income increase: normal good (0-1)

– If the percentage increase in the quantity consumed is greater than the associated percentage increase in income: superior good (>1)

– demand falls as consumer income increases: inferior good

Healthcare: A Normal, Superior, or Inferior Good?

• The answer to whether health care is a normal, superior, or inferior good, differs depending on whether we look at studies based on individual responses or those utilizing aggregate data– Studies in the 1960s through 1990s provides

estimates of income elasticities for health care based on survey data derived from individual responses

• These studies show consensus that most health care services have coefficients of income elasticity that are positive and in the r range of 0–1, and can be classified as normal goods.

– Studies using macroeconomic data do yield considerably higher income elasticity coefficients for health care

• A wide range of studies have generally found health care to be a superior good

Summary• The demand for health care depends on age, education,

income, and health status • The demand for health care is generally sensitive to price

and income– Price elasticities– Income elasticties– Health care for which substitutes exist have higher

price elasticities than those with fewer substitutes, such as an acute care hospitalization

• The association between income and the amount of health care utilized shows that health care can be a normal good when studies are based on individual responses– Macroeconomic data that compare country-wide

aggregates in income and healthcare spending show that health care is a superior good