University of South Carolina, Arnold School of Public Health, Dept. of Health Administration, HSPM J712

Notes on the Demand for Health Care

Demand

An important distinction is between Need and Demand
 
Need
Demand
Someone's subjective idea 
(may be based on a formula applied objectively, but the choice to use the formula was someone's subjective idea. 
Money is not a factor.
Objectively observable as behavior in the market. 
Money is a key factor.  "Demand" is also called "effective demand," because it's expressed only by spending money.

Example of "need":  Hill-Burton hospital-building-subsidy program used 4.5 bed/1000 pop formula (more in rural areas).  On the other hand, DHEC's "need" formula for hospital beds is based on historical ratios of utilization to population.  This makes it a demand measure.

Health plans that focus on need and ignore demand will face under- or over-utilization of service capacity.  If one believes quantity demanded is too little (e.g. indigents) or too much (e.g. overuse of emergency room) relative to need, then quantity demanded must be manipulated,
 by changing price or other costs to buyer, or
 by changing demand through marketing or de-marketing.

Demand is a relationship between price and quantity.  We can study
   how high the demand is -- the position of the demand curve -- and
   how elastic (responsive to price changes) demand is -- the steepness and shape of the curve.
 

Elasticity

This concept is used in some of the articles which follow.  There are two interactive lectures about this.  Here are some details on the concept.

Elasticity of demand is a measure of the responsiveness of the demanded quantity to price changes.

The elasticity of demand for something is:

For instance, If price goes up 1% and as a result sales fall 2%, the elasticity is -2%/1%=-2.
Elasticity, as a measure of responsiveness to price change, is an alternative to the slope, which would be

Example of calculation (from Phil Jacobs' book):
Health Dept. charge per shot Shots done per month
$3 1200
$3.25 1150

Slope of demand for tests is
-50 tests / $0.25 = -200 tests per $ of price change.


I used 1175 and $3.125 in the elasticity formula.  These are averages of the before and after quantity and price levels.  1175 = (1150+1200)/2.  $3.125 = ($3.00 + $3.25)/2.  The elasticity calculated this way is called the arc elasticity.

Notice how the slope has units (tests per dollar), but the elasticity does not.  The elasticity has no units because the numerator is tests/tests and the denominator is $/$.  All the units cancel out, leaving a unitless number.  This means you get the same answer regardless of what units you use.  This lets you compare elasticities of totally different products, like medical care, petroleum, and videocassette rentals.

One interpretation of elasticity of demand:
It's the percentage change in quantity demanded that comes from a 1% change in the price.

Here's another way to interpret elasticity of demand:
 Suppose you raise the price of something you're selling.  Will you make more money?  The answer depends on the elasticity of demand.
 
 
Elasticity (absolute value, ignoring the minus sign) If price goes up Demand is categorized as:
> 1 spending goes down. Elastic
= 1 spending stays the same. Unitary elasticity
< 1 spending goes up. Inelastic

What are examples of products or services whose demand is elastic?  Inelastic?

Hot tip:  If you want to impress economists, say:  "That depends on the elasticity, doesn't it?"

The small elasticities observed for medical care demand imply that higher med care prices will cause people to cut back some, but they will not much, so the total amount spent on care will go up.

Elasticity can be used for other things besides quantities and prices.   The elasticity of health status with respect to medical care expenditure is the percentage difference in health status divided by the percentage difference in medical care expenditure.  The cause (e.g. expenditure change) is in the denominator.  The effect (health status change) is in the numerator.

The advantage of elasticity over slope is that, as mentined, elasticities are numbers with no units.
A disadvantage of elasticity is the other side of its advantage:  The unitless number obscures the problems with measuring the quantities in the equation, such as health status.
 

The Position of the Medical Care Demand Curve

Demand for medical care is derived from demand for health.
Patient does not necessarily demand particular services.
Physician "combines inputs to provide treatment" -- chooses particular services.

What determines how high demand is (i.e. how much medical care will be bought at various prices):
 
 
Physical condition 
Social factors
affect need for care as perceived by individual and society
Income 
Insurance
affects how much the person can pay

Physical and cultural/demographic factors can vary regionally or even locally.

Regarding income:  The usual finding is that medical spending goes up as income goes up, but less than proportionally. In other words, the income elasticity of med care demand is between 0 and 1.

Insurance and the Demand for Health Care

Insurance plays a major role in shaping health care, unlike most goods and services.  If we define insurance broadly, there are three kinds of insurance:
  1. Voluntary insurance purchase -- many of us buy insurance to assure us access to services that we could not afford to pay for directly.
  2. Rule of rescue -- we don't like to see people suffer or die needlessly.  We expect providers to give service to people in immediate need even if they don't pay.
  3. Government insurance extends the rule of rescue to general health care for the elderly and some of the poor.
(Irony about rule-of-rescue emergency care:  Prices charged do affect incentive to seek care among people who can afford to pay.  And you can pay to get priority:  In a discretionary situation, choosing to go by ambulance gets you to the front of the line.)


http://hspm.sph.sc.edu/Courses/Econ/DemandNotes.html

The views and opinions expressed in this page are strictly those of the page author. The contents of this page have not been reviewed or approved by the University of South Carolina.
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