1. 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

2. 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”

3. 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

4. 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 – 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.

5. 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%

7. 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

8. 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?)