Three types of markets are present in the medical care sector, as shown in figure 3-1 the

patient’s demand for a medical treatment ( for a particular diagnostic category ) is expressed
by going to a physician whose determination of how to treat the patient is based on both
economic and non-economic factors. The Physician’s selection of one or more of several
institutional settings-hospitals, outpatient facilities, nursing of homes, the physician’ office,
or even home care-is based on the relative prices ( net of the patient’ insurance) of each of
those settings, the relative cost of each to the physician, and the efficacy of each in
treatment. The demand for institutional care will depend on patient demand factors,
physician considerations, and the relative price and efficacy of treatment in the different
institutional settings. These institutional settings may thus be seen both as complements to
and substitutes for one another.

A change in the demand for different institutional settings that is the result of, for example, a
change in the age of the population, will be reflected in institutional demands for manpower
and other factor inputs. These comprise the second set of markets to be analyzed. Such
institutional demands side of the health manpower (and input) markets. The demand for a
particular health manpower category, for example, will depend upon factors relating to the
patient’s (and /or their physicians) demand for the institutional settings in which that
manpower group is employed and the wages of the group, holding constant the relationship of
their wages to those of other health workers and their relative marginal productivities.

The Demand for an education by prospective health professionals will depend upon the
demand for health professionals in the market just described. The demand for a health
professional education, which is the amount that a person is willing to pay in terms of tuition
and forgone income, is determined by the expected income and wages that might be earned
and by noneconomic motivating factors.

The supply side of each of these markets works as follows. The supply of health professional
educational institutions (in terms, for example, of institutional capacity and faculty) and the
demands for such educations determine the number of graduates and the tuition rate to be
charged. The supply of health manpower at any given time is determined by the number of
graduates (the time required to educate each category of health manpower varies) plus the
existing stock of health manpower (less deaths and retirements). The supply of each category of
health manpower in conjunction with the demands for such manpower determines incomes
and wages as well as employment (the participation rate). The outcomes of the health
manpower (and other output) markets (wages and employment) affect the supply of services
offered in different institutional settings. The cost of providing care in a given institutional
setting rise as the wages for a given manpower group increase and as more members of that
manpower category are used to provide care. In each institutional setting, the costs of
providing care together with the demands for care will determine how much care is provided;
this is the outcome of the institutional markets. Total expenditures for personal medical care
consist, then, of the prices of each institutional setting multiplied by the quantity of care
provided in each setting ( total expenditures may be categorized according to the portion paid
by the insurer, government, or patient).

To summarize the demand side of each of these separate markets, the demand for institutional
care is derived from the initial demands for medical treatments. The demand for health
manpower (inputs) is similarly derived from the demand for institutional care, and the demand
for health professional education is derived from the demand for each health manpower
profession. Similarly, the supply of medical service is based upon the availability of the supplies
in each of these other markets and upon their costs.

The effects of alternative public policies on the final market – that is, on the price and
availability of medical services – can be predicted (using the tools of supply and demand
analysis) on the basis of an understanding of the different medical care markets and their
interrelationships.

Our ability to forecast the likely consequences of changes in demand or supply conditions in
medical care also requires an accurate overview of the medical care sector. Figure 3-2 describes
the same markets discussed above by means of a different set of diagrams showing each of the
separate markets within the institutional, manpower, and educational markets in terms of a
traditional supply and demand relationship.

How much the demand for medical care will increase will depend, in part, on the importance of
price to increased utilization (i.e., the price elasticity of demand for medical care). (While an
increase in insurance in insurance that lowers the out of pocket price would be a shift in
demand. See the appendix in the Chapter on the Demand for Medical Care).

If the supply side of the market is relatively inelastic- that is, if it takes a relatively large price
increase to bring about an increase in output – then demand programs will result in large price
increases and small output decrease. Consequently, it will cost a great deal of money to achieve
an increase in output. For Example, according to figure 3-3, an increase in demand will affect
prices and quantity of services differently depending upon the elasticity of supply. If supply is
relatively elastic (S2), then an increase in demand, from D1 to D2, will be accompanied by a
price increase, but it will be much less (P2) than if supply were inelastic (S1), in which case the
new price would be (P1). Similarly, a much greater increase in services provided will occur
under conditions of elastic supply (Q2 versus Q1). If the increase in demand were to occur as a
result of a government subsidy program and if supply were inelastic (S1), the increased
government expenditures for the program would pay for higher price (P1) and less output (Q1)
than if supply were more elastic (S2).

The model of medical care presented above will also be used to discuss alternative approaches
to its redistribution. Even though inefficiencies continue to exist in the medical care market,
society may decide to increase the consumption of medical care to the population groups. Such
an overview suggests that it is possible to achieve an increase in consumption of medical care
service either by shifting the demands for care or by increasing the quantity of a particular input
on the supply side. Each of these policies will result in an increase in the quantity of medical
care service consumed, as shown in figure 3-4. For Example, to increase the quantity of medical
care services consumed from Q0 to Q1 (based upon a normative judgment that it is desirable to
do so), either the demand for medical care can be increased from S1 to S2. Either of these
policies will achieve the objective of increasing the use of medical care from Q0 to Q1.
However, these alternative redistributive policies will differ in their costs and their effect on
other population groups.

Demand and supply subsidies can be general, as when everyone in the population has access to
that subsidy, or they can be targeted, such as providing the demand subsidy to only those with
low incomes areas. The cost of general versus targeted subsidies will differ as would the
number of low – income persons receiving those subsidies under each approach.