Determine price elasticity of demand for medical care—of interest to health insurers among others Assess differences in use among various population subgroups—interest in studying health disparities Different levels of future demand imply different levels of future capacity, e.g., medical school capacity

(x 1 -x 2 )/(x 1 + x 2 )/2/(p 1 -p 2 )/(p 1 +p 2 )/2 =((x 1 -x 2 )(p 1 + p 2 ))/((p 1 - p 2 )(x 1 +x 2 )) (3.2) Why arc elasticities convenient to calculate

Substitutes and complements Substitutes and complements in elasticity terms: ε ij = (Δx i /Δp j )/(p j /x i ). If expression is positive good i and j are substitutes, if it is negative, they are complements; if it is 0, good i and j are independent.

Ambulatory care and inpatient care: complements or substitutes? Over-the-counter drugs and physician visits: complements or substitutes?

Fixed dollar subsidy (“indemnity”): what it is and how it affects demand curve for medical care—see next slide Explain why the demand curve shifts how it does when a fixed dollar subsidy is offered In what sense is a fixed dollar subsidy efficiency enhancing?

* Ad valorem subsidy: Definition * Rationale for ad valorem subsidy * How ad valorem subsidy affects incentives * Efficiency and ad valorem subsidy * If there is efficiency loss, why are ad valorem subsidies offered and so widespread? * Fraction of bill paid by patient consumer is called coinsurance: as the coinsurance rate decreases, demand curve for medical care becomes less elastic. Why?

What a deductible is Rationale for deductibles High deductible health insurance plans and rationale for such plans Show effects of deductibles on demand for medical care: see next slide

Fig Effect of a Deductible on the Consumer's Demand Curve

What is a copay? Rationale of copays Compare copays with coinsurance Effects of copays (say in amount of $y) on demand for medical care: see next slide

Full price of an office visit, p f p f. = cp + wt (3.3) where c=coinsurance rate, p=the physician’s fee, w=value of the person’s (patient’s) time per unit of time (time price), t=total patient time consumed by a visit. w is the value of person’s time performing other activities, e.g., foregone earnings, value of time spent in parenting. For some individuals, especially those with an insurance policy with a low c, wt could be a more important determinant of the full price than p is.

Observational data Data from randomized control trials (RCTs) Advantages and disadvantages of RCTs and why they are relatively rarely used in social sciences as contrasted with medical research studies Advantages and disadvantages of observational data Natural experiments and field experiments

Research issues: (1) How does cost sharing affect demand for personal health care services? (2) How does cost sharing affect demand for particular services, e.g., hospital care, dental services? (3) Does use of personal health care services improve health? (4) How does a change from fee-for-service payment to capitation affect demand for personal health care services? Rationale for studying HIE 30+ years after HIE completed

* Enrolled 2,000 non-elderly (<63) families for from 3- 5 years * Families randomly assigned to 1 of 14 insurance plans differing in cost sharing rates and in maximum dollar expenditures per year (MDE or stop loss) * At enrollment, families exchanged their existing health insurance policy for HIE plan—held harmless for medical expenditure higher than they would have experienced if they had not enrolled in HIE * Some participants randomly assigned to capitation plan * Participation in HIE voluntary for families

Compute arc elasticities of demand from Table 3.2. Discuss public policy implications of results Are there any limitations of results that you would point out to public policymakers (The fact that the results are old does not count.)

For 94 percent of persons in HIE, not with low income and not in poor health at baseline, having health insurance coverage had no effect on health. This result is highly provocative, but why might the finding be misleading or even wrong?

What is capitation and how does it affect patient and provider incentives? HIE assigned 1,149 persons who had been enrolled in fee-for-service health plans to capitated plan in Seattle WA; also 773 persons who had been enrolled in this health plan selected as controls Rationale for “treatment” and “control” groups Key findings

There are many empirical studies based on observational data. E.g., studies of demand for prescription drugs (formularies, 3-tier cost sharing) Evidence from low-income countries, e.g., Vietnam

Household income Health Family size and composition Educational attainment Race/ethnicity

Consumer surplus defined Why economists calculate consumer surplus Start with discrete case: why consider area above P=MC line to be consumer surplus What happens to consumer surplus if MC increases and conversely Continuous case

Figure 3.5a. Consumer Surplus: Discrete Care

Figure 3.5b. Consumer Surplus (CS) and Welfare Loss (WL): Continuous Care $ CS WL E F D A O B Quantity

Relation of consumer surplus to welfare analysis Applications of welfare analysis Underlying assumptions and why some object to conducting welfare analysis as done by economists