Health Production

1
Lecture 4

• Health Production
• Demand for Health Care (Chapter 9)

2
Outline

• Link between Income Inequality and Health
• Demand for Health Care
• Price Elasticity of Demand for Health Care

3
Health Production ContinuedIncome Inequality

• Why is income inequality associated with health?
  (mechanisms 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 better when we were 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).

4
Health Production ContinuedIncome Inequality

• 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.

5
Health Production ContinuedIncome Inequality

• Relative Income Hypothesis
• Relative income determines access to material
  goods (if there is scare resources).
• Lots of people with less money than someone
  living in downtown NY but they live in a much
  better house.
• It is rank not absolute amount of money that
  matters
• Relatively poor people live in worse
  neighborhoods for pollution.
• 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.

6
Health Production ContinuedIncome Inequality

• Studies have taken many forms.
• Across countries in industrialized and developing
  countries.
• A big problem is data comparability (income
  inequality measure) even in developed countries
• Within countries say across states
• Maybe be less variations in inequality within a
  country so harder to find effects (US and
  exception)
• This is aggregate data by state so is hiding
  variation in income at the individual level.

7
Health Production ContinuedIncome Inequality

• Individual Data
• Get all the 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.
• If want to look at a very definitive measure of
  health and one that we would have long time
  series for, need to look at mortality. But, need
  large sample sizes to look at mortality (since a
  rare event in more developed countries)

8
Health Production ContinuedIncome Inequality

• Empirical Evidence
• Cross-Country Comparisons
• Wilkinsons (1992,1994,1996) looked across
  countries over time.
• showed that countries like France and Greece that
  narrowed their income distributions by reducing
  relative poverty, increased life expectancies, it
  was the opposite of Ireland and England where
  income inequality widened.
• He theorizes that when countries are poor income
  matters, but as they get wealthier and chronic
  disease 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.

9
Health Production ContinuedIncome Inequality

• 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 so not convincing
  arguments, may be due to data problems.

10
Health Production ContinuedIncome Inequality

• 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)

11
Health Production ContinuedIncome Inequality

• Empirical Evidence Within-Country Cont.
• This relationship remains strong in studies until
  race is controlled for ( black in a state or
  county). Looks like it is more a race effect
  than an income inequality effect, but 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?

12
Health Production ContinuedIncome Inequality

• 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.

13
Health Production ContinuedIncome Inequality

• 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.

14
Health Production ContinuedIncome Inequality

• Empirical Evidence
• 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.

15
Health Production ContinuedInequality (income)

• 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 the underlying cause of
  health discrepancies.

16
Health Production ContinuedInequality (income)

• Inequality in landholdings
• affects nutrition and therefore health.
• The landless cant 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).
• Criticism, that malnutrition is also a public
  health problem, due to contaminated food and
  water.

17
Health Production ContinuedInequality (income)

• 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)

18
Health Production ContinuedInequality (income)

• 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.

19
Health Production ContinuedInequality (income)

• Political Inequality Evidence
• Almond, Chay, and Greenstone (2001)
• Use data from Mississippi and the fact that prior
  to 1965 hospitals were segregated by race.
• 1964 Civil Rights Act made segregation illegal.
• Show that between 1965 and 1971 there was a large
  reduction in black post-neo-natal infant
  mortality rates (lt one month olds), especially
  for conditions such a diarrhea and pneumonia.
• Points to possible negative health impacts from
  unequal political arrangements.

20
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
• State of health
• Time costs
• Prices of substitute and complements

21
Demand for Health Services
Demand of HS is a derived demand, because what we
really want is the demand for good
health. 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
22
Demand for Health ServicesFuzzy (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.
• Difficult to accurately delineate the
  relationship between price and quantity demanded
  of medical care.
• Hard to control and measure quality.

23
Demand for Health ServicesFuzzy Demand Curve
Price of Physician Services

1. For a given price may observe variation in
   quantity of medical services.
2. For a given quantity of services, may see various
   prices.

Quantity of Physician Services
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Demand for Health ServicesIncome
Price of Physician Services
Increase in income demand more Shifts the curve
out away from the origin and would demand more
health care.
D2
D1
Quantity of Physician Services
Q1
Q2
25
Demand for Health ServicesHealth 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 a
  fixed amount of health care costs per calendar
  year before coverage begins.

26
Demand for Health ServicesHealth Insurance
Coinsurance
Price of Physician Services
Dwo Demand without insurance Effective Price
Amount paid out of pocket Module using effective
price Assume .5 co-insurance
50
Consumer Pays
.550
Dwo
Quantity of Physician Services
5
6
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Demand for Health ServicesHealth Insurance
Coinsurance
Price of Physician Services

• Dwo Demand without insurance
• Dwi Demand with insurance
• Instead module 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
A
50
.550
Dwo
Quantity of Physician Services
5
6
28
Demand for Health ServicesHealth Insurance
Indemnity
Get 30 for a doctors visit. -demand more health
care -elasticity does not change.
Price of Physician Services
Dwo
30
Dwi
Quantity of Physician Services
29
Demand for Health ServicesHealth 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.
• 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.

30
Demand for Health ServicesEducation

• 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.

31
Demand for Health ServicesAge, 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.

32
Demand for Health ServicesPrices of Substitutes
and Complements

• Substitute Herbal and Non-Western Medicine.
  outpatient and inpatient services.
• -Price of substitute rises demand more medical
  care.
• Complements Drugs, if cant afford the drugs may
  not bother to go to doctor.
• - Price of a complement rises demand less
  medical care.

33
Demand for Health ServicesTravel 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

34
Demand for Health CareEmpirical 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.