1. Health Production /Demand for Health Care
At beginning of this course go over first stage assignment. This class is still about 10 minutes too short, need to add more or add on a couple of discussion questions.

2. Outline Link between Income Inequality and Health
Demand for Health Care
Price Elasticity of Demand for Health Care
Income
Health Insurance
Etc.

3. 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

4. Health Production Continued Income Inequality -- Theory
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).
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).

5. Health Production Continued Income Inequality -- Theory
Relative deprivation a cause of ill health.
Psychosocial stress is the main pathway through which inequality affects health.
Those societies that are more equal, have the precondition for the existence of stress-reducing networks of friendships.
Those societies that are unequal run under more stressful strategies such as dominance, conflict and submission.

6. Health Production Continued Income Inequality -- Theory
Relative Income Hypothesis: Relative income determines access to material goods or rank not absolute amount of money matters
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.

7. Health Production Continued Income Inequality -- Theory
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.

8. Health Production Continued Income Inequality -- Evidence
Studies have taken many forms.
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.

9. Health Production Continued Income Inequality -- Evidence
Individual Data
Variation in income levels, but need to be able to follow the same group of people over time.
Not many studies with long panel data sets.
Mortality
long time series
need large sample sizes since a rare event

10. 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.

11. 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.
Best data available.
Find a positive relation between income inequality and infant mortality – but mainly driven by the US.
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.

12. 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)

13. Health Production Continued Income Inequality -- Evidence
Empirical Evidence Within-Country Cont.
Controlling for race breaks relationship
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
Could be due to poor quality health care. Is this something to do with how health care is funded?

14. Health Production Continued Income Inequality -- Evidence
No relationship found in Canada or Australia (where race not an issue)
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
there are other factors that are associated with income inequality that could be driving things. Omitted variable bias.

15. 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 within-country studies.
Have problems developing good inequality measures.

16. 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.

17. 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.

18. 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).

19. 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).
For example public park is not as attractive to rich if homeless are sleeping on benches.

20. Health Production Continued Inequality (Political)
Political Inequality Evidence:
Alesina et al. looked at racial divisions in the US.
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.

21. 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 rank.

22. 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

23. 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.
Change in prices cause a movement along the demand curve.
Law of Demand: Inverse relationship between price and quantity.
Price of Physician Services D
Quantity of Physician Services

24. Demand for Health Services Fuzzy (Thick) Demand Curve
Relationship between medical care and health improvement is not exact.
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.
Physicians, not consumers choose medical services and this affects the quantity of care you may demand.

25. Demand for Health Services Fuzzy (Thick) Demand Curve
Difficult to accurately delineate the relationship between price and quantity demanded of medical care.
Prices differ and amount of care for a given prices differs for difference people.
Hard to control and measure quality.

26. Demand for Health Services Fuzzy Demand Curve
Price of Physician Services
For a given price may observe variation in quantity of medical services.
For a given quantity of services, may see various prices.
Quantity of Physician Services

27. Demand for Health Services Effect of Price of health care
Own Price Elasticity:
Perfectly Inelastic (E=0);
Large change in price no change in quantity demanded.
Price HS
Perfectly Elastic ( E=∞):
Small change in price large change in quantity)
- A good is elastic if E<-1
Quantity HS

28. Demand for Health Care Empirical Estimates
Own Price Elasticity:
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.

29. 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
Quantity of Physician Services Q1 Q2

30. 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.

31. 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
Without any health insurance Amy pays 100 dollars for 5 health care visits. This is her effective price, the price she pays out of pocket. Now with co-insurance 50 is no longer her effective price, 25 dollars is. So if we use the effective price, we can find her demand by using the out-of-pocket demand curve.
But we can also use the demand curve with insurance to figure out her reactions to market prices, since that is what we will be looking at. To mod
With health insuance, and the lower price she would demand 7 health care visits.
Demand increased by one unit 50
Consumer Pays with insurance
.5*50
Dwo 5
Quantity of Physician Services 6

32. Demand for Health Services Health Insurance: Coinsurance
Price of Physician Services
Dwo: Demand without insurance
Dwi: Demand with insurance
Model by using market price
Insurance makes her demand more health care,
makes demand less elastic: for the same increase in price will reduce demand less with insurance.
Dwi
Without any health insurance Amy pays 100 dollars for 5 health care visits. This is her effective price, the price she pays out of pocket. Now with co-insurance 50 is no longer her effective price, 25 dollars is. So if we use the effective price, we can find her demand by using the out-of-pocket demand curve.
But we can also use the demand curve with insurance to figure out her reactions to market prices, since that is what we will be looking at. To mod
With health insuance, and the lower price she would demand 7 health care visits. A 50
.5*50
Dwo 5
Quantity of Physician Services 6

33. Demand for Health Services Health Insurance: Indemnity
Pay $30 instead of 60 for a doctors visit.-demand more health care
-elasticity does not change.
Price of Physician Services
Dwo
$30
Dwi 60
Quantity of Physician Services 5 6

34. Demand for Health Services Health Insurance: Deductible
Purpose of deductible is to lower cost for insurance company
Reduce administrative costs because lower number of small claims.
May lower demand for medical care
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.

35. 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.

36. Demand for Health Services Education
Relationship could be positive or negative
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.

37. Demand for Health Services Age, Health Status, Sex, Quality
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.

38. Demand for Health Services Prices of Substitutes and Complements
Substitute: Herbal and Non-Western Medicine
Price of substitute rises demand more medical care.
Complements: Drugs, if can’t afford the drugs may not bother to go to doctor.
Price of a complement rises demand less medical care.

39. 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