2. Some Basics Demand

3. Why demand? We want to look at what consumers do. Demand is related to total expenditures What happens to total expenditures if price increases? A> It depends on the elasticity Visits Money Price 40 30 20 10 Total Exp. Money price demand

4. What determines elasticity? Back to Indifference Curves What happens to quantity demanded as price changes? Let’s hold utility constant. visits Spam pvpv visits v1v2v3

5. What determines elasticity? (2) What happens to quantity demanded as price changes? Let’s hold utility constant. visits Spam pvpv visits v1v2v3 no change! Why? Discuss

6. Elastic and inelastic demand So, we derive demand curves. Some are MORE responsive to price than others. Visits Money Price 40 30 20 10 Elastic Inelastic

7. Income elasticity What is income elasticity? %ΔQ/%ΔY What does this have to do with total expenditures? Income Quantity 40 30 20 10 Inelastic

8. Demand for Health Care General models suffice … BUT We want to look at the role of time and the role of insurance. WHY? Because often out-of-pocket costs are the smallest parts of the price of health care.

9. Time Costs Suppose a visit costs $50. BUT, parking and travel costs $10. Visit takes 1 hour @ $15 – Why? Visits Money Price Full Price 80 60 40 20 40 60 80 Money price demand Full price demand

10. Time Costs So, which curve is the one that applies. Suppose money costs fall to 0. What happens to quantity demanded? Visits Money Price Full Price 80 60 40 20 40 60 80 Money price demand Full price demand Suppose that a clinic opens up nearby? What happens? KEY !!! Must look at blue line, because it adds time and $ costs.

11. What’s This? Insurance Suppose a visit costs $60. BUT, insurance pays 50%. Visits Money Price Effective Price 80 60 40 20 40 60 80 Money price demand Effective demand

12. Fundamental Problems with Demand Estimation for Health Care Measuring quantity, price, income. Quantity first. It is typically very difficult to define quantity. We usually look at the stuff that is easiest to measure. Things like visits, days of service, and the like.

13. Problems w/ Demand Estimation The problem here is that the measures may not be meaningful. 5 days of inpatient care for observation is obviously not the same as 5 days of inpatient care for brain surgery. We could argue that 5 visits reflects more treatment than 4 visits, but it could simply indicate that the first 4 visits were not effective.

14. Episodes Episodes represent what may be a more theoretically desirable measure of output in a number of ways. An episode starts when someone starts to need treatment, and ends when they no longer need it. For example, an episode may include a few visits to the doctor, some inpatient hospitalization, and maybe some follow-up clinic visits.