Demand for Health Care
• Purpose of demand analysis for health care is
to determine those factors that on average
most effect utilization of medical services
– To forecast future medical care demand
– To decide how to change medical care demand if desired
• Demand vs. Need
– Typically government policy for new health care services
looks to community “need” based on population indices
– Ignoring demand factors will lead to surpluses & shortages
– e.g. Medicaid HMO doctors, level 1 ICUs, walk-in clinics
Health Care Demand Model
• Qd = F( out of pocket price, income, time
costs, prices of substitutes & complements,
tastes, health status (age, education, gender,
lifestyle, insurance type, MDs, govt. regs and
quality of care)
• Influence of factors on demand measured by
elasticity = % change in Qd/ % change in factor
• Method: random trials vs. “natural
experiments”
• Individual provider demand will be more
elastic than market demand
• Firm Ed = (market Ed)/(Firm Market Share),e.g. Firm
Ed = (-.4/.25) = -1.6
• Firm evidence: MD practice Ed = -3, Hospital = -1 &
Health Insurance Plan = -2 to -8
• Total Price = $ + Time Costs (travel, wait, use)
– Larger time costs make demand inelastic
– Programs to aid particular groups must consider
time costs
• Access to “free” care will have less demand for those
with high time costs (workers, caregivers)
• Rationing by wait vs. rationing by lottery
Market Elasticity Evidence
• Price
– Hospital Days = -.2 to -.7
– Hospital admissions = -.1 to -.5
– Doctor visits -.1 to -.35
• Travel time costs
– Public outpatient clinic = -.6 to -1
– Private doctor office = -.2 to -.3
• Waiting time costs
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Public outpatient clinic = -.1
Private doctor office = -.05
Income elasticity = +1
Nursing home costs = -.8 to -2.4
Dental services = -.4 to -.7
Rx drugs = -.4
Abortion demand = -.8 (for out of pocket costs)
Note: items with low out of pocket costs, high need and few substitutes are inelastic
vs. high out of pocket costs, low need and many substitutes, e.g., hospitals & MD visits
vs. dental and nursing home care.
Using elasticities
• Assume price elasticity is -.1 & insurance
decreases the out of pocket cost by 80%.
How much will demand increase?
• Ed = -.1 = (%change Qd)/(%change Price)
• Ed = -.1 = (%change Qd)/(-80%)
• %change Qd = +8%
The Role of Physicians
• Doctors act as managers/agents for patients who
lack info as to appropriate kind of care
• Care choice influenced by:
– Medical need
– Cost to patient, i.e., insurance coverage (even if higher cost overall, cost to
patient key. Great insurance leads to expensive care)
– Where hospital privileges are (might not be lowest cost hospital)
– Kind of utilization review at hospital (stringent vs. lenient)
– Fear of malpractice
– Financial benefit to MD (supplier induced demand)
– Insurance company incentives/disincentives
• Fee for service vs. capitation, holdbacks, benchmarks to norms, excessive
referral penalties
• Difficult for insurers to assess appropriateness of care
• MD demand inducement limited by
– Insurer utilization review, penalties & mandatory
second-opinions
– Time costs that accrue to patients
• If MDs are able to induce demand, efforts to
contain costs by decreasing fees will fail
• Evidence: specialists can induce demand,
particularly if they profit from the use of
ancillary services (or is it better knowledge of
benefits?)