Demand for Medical Services Part 2

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Demand for Medical ServicesPart 2

• Health EconomicsProfessor Vivian HoFall 2007

These notes draw from material in Santerre
Neun, Health Economics, Theories, Insights and
Industry Studies. Thomson 2004
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Outline

• Empirical estimates of demand from the literature
• Practice problems
• The RAND Health Insurance Experiment
• Example Interpreting results from a regression
  on abortion demand

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Estimating Demand for Medical Care

• Quantity demanded f( )
• out-of-pocket price
• real income
• time costs
• prices of substitutes and complements
• tastes and preferences
• profile
• state of health
• quality of care

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Empirical Evidence

• Demand for primary care services (prevention,
  early detection, treatment of disease) has been
  found to be price inelastic
• Estimates tend to be in the -.1 to -.7 range
• A 10 ? in the out-of-pocket price of hospital or
  physician services leads to a 1 to 7 decrease in
  quantity demanded
• Ceteris paribus, total expenditures on hospital
  and physician services increase with a greater
  out-of-pocket price

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Empirical Evidence (cont.)

• Demand for other types of medical care is
  slightly more price elastic than demand for
  primary care
• Consumers should be more price sensitive as the
  portion of the bill paid out of pocket increases

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Out-of-Pocket Payments in the U.S.

• Hypothesis Consumers are more price
  sensitive if they pay a larger of the health
  care bill
• The fall in the of out-of-pocket payments may
  explain the rapid rise in health care costs

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Out-of-Pocket Payments in the U.S.
Total Expenditures and Paid Out-of-Pocket, 2004

• Hypothesis Consumers are more price
  sensitive if they pay a larger of the health
  care bill
• Higher hospital and physician expenditures may be
  due to the low paid out-of-pocket

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Out-of-Pocket Payments in the U.S. (cont.)

• The previous 2 slides argue that
• ? insurance coverage ? ? expenditures
• But it may be the opposite
• ? expenditures ? ? insurance coverage.
• We cannot identify a causal effect using just
  this data

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Empirical Evidence (cont.)

• Studies which have examined price and quantity
  variation within service types have found that
• The price elasticity of demand for dental
  services for females is -.5 to -.7
• The own-price elasticity of demand for nursing
  home services is between -.73 and -2.4

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Empirical Evidence (cont.)

• At the individual level, the income elasticity of
  demand for medical services is below 1.0
• The travel time elasticity of demand is almost as
  large as the own-price elasticity of demand
• Little consensus on whether hospital care and
  ambulatory physician services are substitutes or
  complements

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International Estimates of Income Elasticity

• Are health care expenditures destined to consume
  a larger portion of GDP as GDP grows?

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Applying Demand Theory to Real Data

• Demand analyses in health care must take
  insurance into account

• Demand analyses are critical in shaping
  managerial and public policy decisions

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The Rand Health Insurance Experiment

• A large, social science experiment to study
  individuals medical care under insurance
• A large sample of families were provided
  differing levels of health insurance coverage
• Researchers then studied their subsequent health
  care use

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The Sample

• 5,809 individuals, under 65
• 6 sites (Dayton OH, Seattle WA, Fitchburg MA,
  Charlston SC, Georgetown County SC, Franklin
  County MA)
• 1974 1977
• Cost 80 million

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Insurance Plans in the Experiment
1. Free fee-for-service (FFS). - i.e., no
coinsurance 2. 25 copayment per physician
visit 3. 50 copayment per physician visit 4.
95 copayment per physician visit
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Insurance Plans in the Experiment
5. Individual deductible - 150 deductible
for physician visits all subsequent visits
free 6. HMO - Not the same as free
fee-for-service - Since HMO receives a fixed
annual fee, it seeks to limit physician visits
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Table 3.3. Sample Means for Annual Use of
Medical Services per Capita
Plans Face-to- Outpatient Inpatient
Total Probability Face
Visits Expenses Dollars Expenses
Using Any
(1984 ) (1984 ) (1984 ) Medical
Service Free 4.55 340
409 749
86.8 25 3.33 260 373 634
78.8 50 3.03 224 450 674
77.2 95 2.73 203 315 518
67.7 Individual deductible 3.02 235
373 608 72.3
The chi-square test was used to test the null
hypothesis of no difference among the five plan
means. In each instance, the chi-square statistic
was significant to at least 5 percent level. The
only exception was for inpatient dollars Source
Willard G. Manning et al. Health Insurance and
the Demand for Medical Care Evidence from a
Randomized Experiment, American Economic Review
77 (June 1987), Table 2
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Results (cont.)

• No statistically significant difference in
  inpatient (hospital) expenses by insurance type
• Does NOT necessarily imply inelastic demand for
  hospital services
• Experiment included 1,000 cap on out-of-pocket
  medical expenses 70 of hospital admissions
  costs 1,000

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Results (cont.)

• As consumers copayments drop, demand for medical
  care becomes more price inelastic
• The data confirms the theory

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Results (cont.)

• HMO patients cost 30 less than FFS patients on
  average
• HMOs do save money relative to FFS

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Health Implications
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Health Implications (cont.)

• Poor adults (lowest 20 of income distribution)
  with high blood pressure experienced clinically
  significant improvement under free FFS plan, but
  not in cost sharing plan

• Similar findings for myopia, dental health
• Free FFS only improves health outcomes in 3
  specific cases versus cost-sharing

• If want to restrain costs and maintain health,
  targeted programs at these 3 health problems is
  more cost-effective than free care for all
  services

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Was it worth it?

• Rand Health Insurance Experiment cost 80 million
• Initial results published in 1981

• Government sponsored studies often yield
  important knowledge for business

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Economically Objective Data on Abortion

• Is the choice of abortion responsive to economic
  factors?

• Medoff ( 1988)
• Sample state-level data from 1980

• Model the demand for abortion as a function of
  price and other relevant factors

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An Economic Analysis of the Demand for Abortion
(Medoff, 1988)
A - 207.780 - 0.924P 0.031Y 4.194SNGL
4.456LFP (1.41) (3.22)
(3.31) (1.74) (2.57)
18.287W 1.207CATH 43.775M (1.74)
(1.50) (2.12) R2 .77 N
50 Where A Number of abortion per 1,000
pregnancies of women of childbearing age (15-45)
P Price of an abortion
Y Average income SNGL
Percentage of woman who are single
LFP Labor force participant rate
W Dummy variable to control for women in
western states CATH Percentage of
Catholic population in each state
M Dummy variable to control for states that
provide Medicaid funding of abortions
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Economically Objective Data on Abortion

• Income variable positive and statistically
  significant
• Implied income elasticity of demand 0.79

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Economically Objective Data on Abortion (cont.)

• SNGL and LFP positive and statistically
  significant
• Single and working women have higher opportunity
  cost of time from raising children

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Conclusions

• Our economic model of demand provides hypotheses
  that we can test with real data
• Although it is difficult to measure the quantity
  of medical services demanded and economic
  variables, both price and income effects are
  important determinants of the demand for medical
  care