Health Production /Demand
for Health Care
Outline
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Link between Income Inequality and Health
Demand for Health Care
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Price Elasticity of Demand for Health Care
Income
Health Insurance
Etc.
Health Production Continued
Income Inequality -- Theory
Why is income inequality associated with
health? (mechanisms – theory)
 Evolutionary history predisposes us toward
fairness, and sickens us when we live in
unequal environments.
 Relative deprivation a cause of ill health
 Relative Income Hypothesis
Health Production Continued
Income Inequality -- Theory
1. Evolutionary history predisposes us toward
fairness, and sickens us when we live in
unequal environments.
Came from a society were the most egalitarian
tended to do better (hunters and gathers).
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Food could not be kept and could be hard to get so
needed to share
Have only moved away from that sort of society
for a relatively short time period (10,000 –
20,000 years).
Health Production Continued
Income Inequality -- Theory
2. Relative deprivation a cause of ill health.
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Psychosocial stress is the main pathway
through which inequality affects health.
Those societies that are more equal, have
the precondition for the existence of stressreducing networks of friendships.
Those societies that are unequal run under
more stressful strategies such as dominance,
conflict and submission.
Health Production Continued
Income Inequality -- Theory
3. Relative Income Hypothesis: Relative
income determines access to material
goods or rank not absolute amount of
money matters
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Lots of people with less money than
someone living in downtown NY but they
live in a much better house.
It is relatively poor people live in worse
neighborhoods for pollution. Even if the
town is expensive and they have to pay a
lot for their property.
Health Production Continued
Income Inequality -- Theory
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Rank at work is important for determining
control others have over our lives.
If health is lower for those whose income is
relatively low, then higher inequality makes
the poor even poorer in relative terms.
Health Production Continued
Income Inequality -- Evidence
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Studies have taken many forms.
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Across countries analysis. (i.e comparing
countries)
 A big problem is data comparability (income
inequality measure) even in developed countries
Within countries but across states
 Maybe be less variations in inequality within a
country so harder to find effects (US an
exception)
 This is aggregate data by state so is hiding
variation in income at the individual level.
Health Production Continued
Income Inequality -- Evidence
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Individual Data
 Variation in income levels, but need to be able to
follow the same group of people over time.
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Not many studies with long panel data sets.
Mortality
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long time series
need large sample sizes since a rare event
Health Production Continued
Income Inequality -- Evidence
Empirical Evidence:
 Cross-Country Comparisons:
 Wilkinsons (1992,1994,1996) over time
 France and Greece narrowed income distributions
by reducing relative poverty, increased life
expectancies
 Ireland and England income inequality widened,
life expectancy decreased
 When countries are poor absolute income matters
 For wealthier countries chronic diseases become
more important, it is social disadvantage (such as
through income inequality) that affects health.
 He believes social disadvantage promotes stress
which leads to chronic illness.
Health Production Continued
Income Inequality -- Evidence
Empirical Evidence Cross-Country Cont.
 Most convincing study Judge et al. (1997)
 Examined life expectancy and infant mortality for
high income countries.
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Best data available.
Find a positive relation between income inequality and
infant mortality – but mainly driven by the US.
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Other things may be going on in US i.e. race
relations.
Overall, is mixed evidence from cross-country
analysis, may be due to data problems.
Health Production Continued
Income Inequality -- Evidence
Empirical Evidence Within-Country
 Figure 6 from Deaton 2003 shows strong
relationship between income inequality and mortality
in US.
 Some studies say that in 1990, the lose of life from
income inequality “is comparable to the combined
loss of life from lung cancer, diabetes, motor vehicle
crashes, HIV infection, suicide, and homicide in
1995” (Kawachi et al. 1997)
Health Production Continued
Income Inequality -- Evidence
Empirical Evidence Within-Country Cont.
 Controlling for race breaks relationship
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Inequality looks like more of a race effect
Hard to disentangle these.
In areas with a larger % of blacks the death
rates for whites and blacks is higher
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Could be due to poor quality health care. Is this
something to do with how health care is funded?
Health Production Continued
Income Inequality -- Evidence
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No relationship found in Canada or Australia
(where race not an issue)
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But there may not be enough variation in income
inequality
No study on income inequality and health in
UK, would be interesting as they have more
income inequality.
No clear conclusion that income inequality is
a major problem
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there are other factors that are associated with
income inequality that could be driving things.
Omitted variable bias.
Health Production Continued
Income Inequality -- Evidence
Empirical Evidence: Individual
 Use mortality and self-reported health
measures.
 Again mixed results, but seems that results
are weaker and more ambiguous than withincountry studies.
 Have problems developing good inequality
measures.
Health Production Continued
Income Inequality -- Evidence
Summary
 Only result that seems to hold is that income
inequality is associated with homicides
(crime).
 We see that income inequality is important
through its effect on poverty.
 This does not mean that social environment
does not matter, just that income inequality
per se may not be the driving force behind
health status.
Health Production Continued
Inequality (Rank)
Whitehall Study
 Investigated civil servants in Britain in recent
years.
 Found that morbidity and mortality was
related to administrative rank
 Sees income as a marker for underlying
socioeconomic status (i.e your rank) – the
underlying cause of health discrepancies.
Health Production Continued
Inequality (landholdings)
Inequality in landholdings in developing
countries
 affects nutrition and therefore health.
 The landless can’t grow enough food to be
well nourished, and they cannot make a large
enough wage because are not healthy.
 Policy Issue: redistribution of land a big issue
in developing countries (Latin American,
Nepal).
Health Production Continued
Inequality (Political)
Political Inequality Theory:
 When preferences of a population are
heterogeneous (wide ranging/different), it is
more difficult for people to agree on the
provision of public goods (i.e. health).
 Average value of public good to members of
a community diminishes with heterogeneous
preferences (heterogeneity due to income,
race, geographic).
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For example public park is not as attractive to rich
if homeless are sleeping on benches.
Health Production Continued
Inequality (Political)
Political Inequality Evidence:
 Alesina et al. looked at racial divisions in the
US.
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Unit of analysis is cities and counties of US.
Look at % of population that is black, and find it is
negatively correlated with share of spending on
“productive” public goods such as health, roads,
and education.
Health Production Continued
Inequality (Political)
Political Inequality Evidence:
Almond, Chay, and Greenstone (2001)
 Use data from Mississippi
 Prior to 1965 hospitals segregated by race
 1964 Civil Rights Act: segregation illegal
 Show that between 1965 and 1971 there was
a large reduction in black post-neo-natal
infant mortality rates (< one month olds),
especially for conditions such a diarrhea and
pneumonia.
Points to possible negative health impacts
from unequal political arrangements or
Demand for Health Services
Demand for health services is a function of
 price of health services
 Income
 Type of insurance
 Level of education
 Age
 Lifestyle (do you smoke, do you exercise)
 Quality of care
 Your health status
 Time costs to reach medical care
 Prices of substitutes and complements
Demand for Health Services
Demand of HS is a derived demand,
because what we really want is the
demand for good health not just a
visit to the doctor.
Price of
Physician
Services
Change in prices cause a
movement along the demand curve.
D
Law of Demand: Inverse
relationship between price and
quantity.
Quantity of
Physician Services
Demand for Health Services
Fuzzy (Thick) Demand Curve
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Relationship between medical care and
health improvement is not exact.
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Uncertainty in what type of care needed to get you
better
Consumer does not have medical knowledge
to know what they need to get better so
depends on physician.
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Physicians, not consumers choose medical
services and this affects the quantity of care you
may demand.
Demand for Health Services
Fuzzy (Thick) Demand Curve
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Difficult to accurately delineate the
relationship between price and quantity
demanded of medical care.
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Prices differ and amount of care for a given prices
differs for difference people.
Hard to control and measure quality.
Demand for Health Services
Fuzzy Demand Curve
Price of
Physician
Services
1. For a given price may observe
variation in quantity of medical
services.
2. For a given quantity of services,
may see various prices.
Quantity of
Physician Services
Demand for Health Services
Effect of Price of health care
Own Price Elasticity:
Price
HS
%Q
d
hs
Perfectly Inelastic (E=0);
%Phs
Large change in price
no change in quantity
demanded.
Perfectly Elastic ( E=∞):
Small change in price large
change in quantity)
- A good is elastic if E<-1
Quantity HS
Demand for Health Care
Empirical Estimates
d
%Qhs
Own Price Elasticity:
%Phs
 Estimates tend to be between -0.1 and -0.7 for Primary
Care and Hospital Care.
 So a 10% increase in price of primary care leads to a 1 to 7
percent decrease in quantity demanded – inelastic.
 This is why some argue that you should increase the price.
Will not reduce health care so much, and hopefully people will
reduce unnecessary visits.
 In developing countries increasing the price has been meet
with a lot of opposition – not a lot of unneeded visits.
Demand for Health Services
Effect of Income
Price of
Physician
Services
Increase in income
demand more (health an
normal good):
Shifts the curve out away
from the origin and would
demand more health care.
D2
D1
Q1 Q2
Quantity of
Physician Services
Demand for Health Services
Effect of Health Insurance
How much you demand may depends on type of
insurance
 Co-insurance: consumer pays a fixed percent of
the cost (say 20%) and the insurance company
picks up the rest.
 Indemnity Insurance: Pays a fixed amount for each
type of services (say $150 if you go to the
emergency room).
 Deductibiles: consumer must pay out of pocket for
all health care, until reaches a threshold (such as
$1000), then is fully reimbursed for expenses above
the threshold.
Demand for Health Services
Health Insurance: Coinsurance
Price of
Physician
Services
Dwo: Demand without insurance
Effective Price: Amount paid out of
pocket
Model using DWO curve
Assume: .5 co-insurance
Consumer pays
without insurance
50
Consumer Pays
with insurance
.5*50
Demand
increased by
one unit
Dwo
5 6
Quantity of
Physician Services
Demand for Health Services
Health Insurance: Coinsurance
Price of
Physician
Services
Dwo: Demand without insurance
Dwi: Demand with insurance
Dwi
Model by using market price
-Insurance makes her demand more
health care,
A
50
.5*50
-makes demand less elastic: for the
same increase in price will reduce
demand less with insurance.
Dwo
5 6
Quantity of
Physician Services
Demand for Health Services
Health Insurance: Indemnity
Pay $30 instead of 60 for a
doctors visit.-demand more
health care
Price of
Physician
Services
-elasticity does not change.
Dwo
$30
Dwi
60
5
6
Quantity of
Physician Services
Demand for Health Services
Health Insurance: Deductible
Purpose of deductible is to lower cost for
insurance company
1. Reduce administrative costs because lower
number of small claims.
2. May lower demand for medical care
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Depends on cost of the medical episode
Small costs small problem may not demand
health care, big costs you are more likely to get
the health care.
Demand for Health Services
Health Insurance: Deductible Cont.
Time when medical care is demanded
 If close to time when deductible is reset, may wait
for care
 If just after deductible has started more likely to
have care
 Probability of needing additional medical care in
the remainder of the deductible period.
 If know definitely will meet deductible, won’t wait
to go to doctor.
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Demand for Health Services
Education
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Relationship could be positive or negative
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Educated take more proactive action to keep
healthy so need less medical care (produce health
care at home)
Want to keep healthy so can work more and earn
more, so demand more health care.
Know when they need to get medical care – so
demand more medical care.
Empirically not sure of direction, do find that
those who have more medical knowledge
demand more medical care.
Demand for Health Services
Age, Health Status, Sex, Quality
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Very young and the elderly demand more
medical care.
People with lower health status (sicker) tend
to demand more health
Females tend to demand more health
services (child bearing)
If quality of care is higher, tend to demand
more health care.
Demand for Health Services
Prices of Substitutes and Complements
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Substitute: Herbal and Non-Western
Medicine
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Price of substitute rises demand more medical
care.
Complements: Drugs, if can’t afford the drugs
may not bother to go to doctor.
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Price of a complement rises demand less medical
care.
Demand for Health Services
Travel Time Costs
Demand will depend on how long it takes to get
to the doctor and if there are waiting times.
 E.G. Kaiser, will no longer be in North
Boulder – those in North Boulder may go
less. – depends on type of illness.
 Important in developing countries