Health and Health Care
Demand
The Determinants of Health
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Medical Care and Health
Education and Health
Income and Health
Inequality and Health
Lifestyle and Health
Environment and Health
Grossman
Grossman Model
• Investment in health as a form of human
capital the Grossman model
• Pure Consumption Model
Grossman Model
Age
Wage Effect
Education
Uncertainty
Practice
• What happens to MEI if someone gets
goes to college? What happens to the
optimal health stock H? And what happens
to demand for health inputs?
• What does this mean for expanding health
insurance to less educated?
Practice
• What happens to MEI if someone gets
cancer? What happens to the optimal
health stock H? And what happens to
demand for health inputs?
• Using the Grossman Model what would
you predict the differences would be
between US citizens and A Citizen of SubSaharan Africa (Botswana, Lesotho, etc)
in terms of their demand for HIV
prevention?
The Consumption Model
• Pure Investment model vs. Pure
consumption model
Grossman Model
• Additional factors that affect health in pure
consumption model
– Age
– Wages
– Education
Age
• Optimal Health stock demanded still falls
with rise in d
• Demand for health care (investment in
health) still rises with age.
Health and Wealth
Wage
Education
Research
• Studies using the Grossman model
• Critiques of the Model
All Death is Suicide
Since health capital is one component of human capital, a person inherits an initial
stock of health that depreciates with age - at an increasing rate at least after some
stage in the life cycle - and can be increased by investment. Death occurs when
the stock falls below a certain level, and one of the novel features of the model is
that individuals "choose" their length of life.
Consumer Utility Theory
• Utility maximization
– Income as the Budget Constraint
– Change in Relative Prices
– Income and Substitution effects
Consumer Utility Theory
• Utility Maximization
– Time as the Budget Constraint
– The importance of Time
– Labor Leisure trade-off
Practice
The Demand for Health Care
• Derived from Consumer Utility
Maximization
• Price elasticity of demand for medical care
– Insert tables on price elasticity
Elasticity
• Elasticity is a general concept
that can be used to quantify
the response in one variable
when another variable
changes.
% A
elasticity of A with respect to B 
% B
Price Elasticity of Demand
Margin
• Extensive versus Intensive.
• Prescription drugs
– Getting prescriptions vs number of
prescriptions
Negative inputs into health
production function
• Lifestyle
• Chemical dependency
– Rational Addiction
Demand for Unhealthy Goods
• Chart on alcohol drugs, etc
• Rational Addiction
– http://en.wikipedia.org/wiki/Rational_addiction
Time
• Time cost and time price elasticities.
Income Elasticity
• Is medical care normal or superior good?
(luxury good?)
Total expendit. on health /capita, $ PPP
$8,000
US
$6,000
$4,000
France
$2,000
Korea
$0
$10,000
$20,000
$30,000
GDP Per Capita $PPP
$40,000
$50,000
Total expendit. on health /capita, $ PPP
$8,000
US
$6,000
$4,000
France
$2,000
Korea
$0
$10,000
$20,000
$30,000
GDP Per Capita $PPP
$40,000
$50,000
Finkelstein, A., Luttmer, E. F. P., & Notowidigdo, M. (2008). What Good Is Wealth Without
Health? The Effect of Health on the Marginal Utility of Consumption.Unpublished manuscript.
http://youtu.be/D8VZqxcu0I0
Bayesian analysis of testing
Costs?
Expenditures = Price X Quantity
Can we rein in the growth
of health care expenditures?
Not Likely.
The Race to Death
Cancer
Heart Disease
Stroke
Diabetes
Car Accident
The Race to Death
X
Cancer
Heart Disease
Stroke
Diabetes
Car Accident
The Race to Death
Cancer
X
Heart Disease
Stroke
Diabetes
Car Accident
“Cut half of all medical spending”
~Robin Hanson