The Economics of Health Care

SS4.2580

Nancy Devlin

25 October 2002

Topic 3. Introduction to markets

The objective of this session is to consider in more detail the determinants of and interactions between supply and demand, and to demonstrate how models of supply and demand can be applied to the analysis of health care markets and selected Government policies.

  • The demand function. Modelling changes in the determinants of demand.
  • Measuring price and income elasticities of demand
  • Research evidence on price and income elasticities.

Applications:

  • The effects of price regulations, subsidies and taxes in markets.
  • Income elasticities at an aggregate level
  • Demonstrating welfare losses from variations in medical practice.

Key reading

Donaldson, C., Gerard, K. (1993) Markets and health care. Ch.2 in: Economics of health care financing: the visible hand. Macmillan. [library shelfmark: 338.433621 DON]

You should have found this chapter extremely easy to read – it largely reinforces material introduced in Topic 1.

Recommended further reading

Phelps, C. (1997) Empirical studies of medical care demand and applications. Chapter 5 in: Health Economics. Addison Wesley. [ordered by not yet available in the library - copy provided]

Folland, S., Goodman, A.C., Stano, M. (2001) Empirical measurements of demand elasticities. pp.176-183 in: The economics of health and health care. 3rd edition. Prentice Hall.[library shelfmark: 338.433621 FOL]

Essential microeconomics concepts, Session 3

  • Price and income elasticity of demand
  • Complements, substitutes and cross-price elasticities.

If necessary, consult a microeconomics textbook on the calculation of elasticity, the interaction of supply and demand in markets, and the effects of taxes. I recommend chapters 4-6 in: Parkin, M., Powell, M., Matthews, K. (2000) Economics. Harlow: Addison Wesley [library shelf-mark: 330 PAR]

Study questions

1. Discuss the various types of waiting times whose cost may affect the demand for health care.

2. For the following pairs of services, which of the two services would you expect to be more income elastic? More price elastic?

a. Surgical services vs. allergist services

b. Heart surgery vs. cosmetic surgery.

[Questions 1 & 2 are from Folland, Goodman and Stano, 2001]

3. It has been observed that countries with higher per capita incomes spend more than proportionately as much on health care. Does this suggest that health care, at the national level, is ‘a luxury good’? How can such a result be reconciled with evidence which suggests individuals’ income elasticities are quite low?

4. Explain how the price elasticity of demand is calculated and discuss the reasons why knowing the price elasticity of demand for health care would be important for health care providers, funders and policy makers.

5. If prices for medical care in private markets are considered to be ‘too high’, the Government might choose either to (a) regulate, by fixing prices below the equilibrium price, or (b) subsidise the consumers’use of these services. Demonstrate the effect of each approach on price and the quantity demanded and supplied.

6. In the Figure, the ‘optimal’ quantity of operations is Q*. Variations in surgical intervention rates exist such that one region consumes Q1 and another (otherwise identical region) Q2.

a. What factors are suggested to explain such variations in practice?

b. On the Figure, label the welfare losses arise from these variations. Explain ‘in words’ what these welfare losses are.

c. What are the solutions to variations in medical practice?

d. Relate your answers to a – c to the reasons for setting up NICE in the UK.