Chapter 9 Consumer Choice and Demand

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Chapter 9 Consumer Choice and Demand

1. Applying the standard budget constraint model
2. Two additional demand shifters-time and
   coinsurance
3. Issues in measuring health care demand
4. Empirical measurements of demand elasticities
5. Impact of insurance on aggregated expenditure
6. Other variables affecting demand

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Applying the standard budget constraint

• Figure 9-1 demand for health capital determines
  the optimal amount of the home goods and health
  capital investment(consumers is rational and
  perfectly informed)
• The consumers equilibrium (see Figure 9-3)MRS
  (want to trade)price ratio (be able to trade)
• Demand shifters Figure 9-3 gt 9-4 (Demand curve
  derived from the standard budget constraint
  changes)
• Price elasticity Ep(dQ/Q)/(dP/P)(dQ/dP)(P/Q)
• Income elasticity Ey(dQ/Q)/(dY/Y)(dQ/dY)(Y/Q)
• Health status and demand Figure 9-5 Changed
  Preferences due to illness

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(1) Additional demand shifters-time

• Time cost the time spent acquiring services
• A example if money price increase 5 (Figure
  9-6)1. one hour of time valued at 10 (30 min
  travel20 min wait10 min doctor visit)2. one
  visit priced at 253. travel and parking costs
  at 5Ep (full price)(-1/5.5)/(5/42.5)-1.545
  Epm(money price)(-1/5.5)/(5/27.5)-1
• The money price elasticity is smaller than the
  full price elasticity by the same proportion as
  the money price is smaller than full
  pricePm/(PmPt)27.5/42.50.647Epm/Ep-1/-1.545
  0.647
• Table 9-1 Actons time valuation Equation (1975,
  1976)1. the importance of time (Et-0.958)2.
  outpatient visits and physician visits are
  substitutes (Et0.64)town-time price for
  outpatient visits
• Subsequent work usually supports an important
  role of time

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(2) Additional demand shifters-coinsurance

• Figure 9-7 The effect of a coinsurance rate on
  health care demand 1. Insurance will increase
  demand for health care (Q1-gtQ1)2. Insurance
  will make demand for health care less elastic
• Figure 9-8 Market effect (a upward-sloping supply
  curve)Health Expenditure increases from P0V0 to
  P1V1

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Issues in measuring health care demand

• Q why do the reported elasticity vary so often?
• Individual and market demand functionIndividual
  the total quantity of visitmarket aggregate
  the number of visit per capita
• Measurement and definitions1.quantities of
  services in dollar quantity of visits, patient
  days, or cases treated2. the price of services
• Differences in the study populations Minnesota
  VS Florida
• Data Resource Insurance claim VS health
  interview
• Experimental and not experimental data

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Empirical Measurements of demand
Elasticities-price elasticity

• Table 9-2 Price Elasticities from selected
  studies most reported elasticities range between
  0.0 and -1.0e.g. market aggregate
• Table 9-3 Firm (physician)-specific Price
  elasticites are higher the degree of market
  competition
• few substitutes for physician care, but many
  substitutes among individual physicians

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Empirical Measurements of demand
Elasticities-income elasticity

• Normal VS inferior necessary VS luxury
• From table 9-4, health care are considered as
  necessary goods
• luxury goods in most cross-national studies
• Q why is it inconsistent with individual and
  national data?A Getzen (2000) national data
  shows technologies and economic well-being

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Empirical Measurements of demand
Elasticities-insurance elasticity

• A fixed coinsurance rate the same as the price
  elasticitynet pricerP
• Adverse selection problem from non-experimental
  data
• Rand experimental data (1974) price and
  insurance do matter considerably.

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Other variables affecting demand

• Ethnicity and gender1.Blacks tend to consumer
  less2.Females consumers difference in life stage
• Urban Versus Rural less care in rural tastes,
  health status or longer travel distance?
• Education1.efficient health producer or lower
  time preference2.confounding factor income
• Age
• Health status Wedig (1988) smaller price
  elasticity for sicker people
• Uncertainty higher precautionary demand for
  elderly