Micro Economics Tools for

Health

Arjun Thapa Giri, PhD

Assistant Professor of Economics
Pokhara University
Presentation outline

• Demand, Supply and Pricing System

• Market Equilibrium

• Elasticity of Demand and Supply: Price Elasticity, Cross-

Elasticity, Income Elasticity

 Policy questions???
• What are the most important economic and non economic barriers to
seeking health care?
• Which segments of the population are currently using health services?
• How can the utilization pattern of health services be influenced by the
recent policy: for example free health care policy, demand side
financing, insurance policy, user fee, willingness to pay
• Why do people prefer one health provider rather than another?
• Why low utilization of public health care services?
Main thrust of the study
• What are the difference between Need and healthcare demand?
• What is law of demand? Does this law applies in healthcare market?
• What are the determinants of healthcare demand?
• What is supply? What is law of supply in healthcare?
• What are the determinants of supply?
• What is a market equilibrium?
• Why is demand for healthcare fuzzy?
• What are moral hazards in healthcare?
 Demand for Health Services
Demand of HS is a derived
Price of demand, because what we
Physician really want is the demand for
Services
good health not just a visit to
the doctor.
Change in prices cause a
movement along the demand
curve.
Law of Demand: Inverse
relationship between price and
D quantity.
0 Quantity of
Physician Services
 What is Demand
• It describes the relationship between the
amount of a good that consumers are
willing and able to buy at various prices.
• why we need demand analysis
• To predict likely reactions and individual
behavior, for example, if a charge is
introduced for a drug or a test, what will be
the effect on number of people using the
drug or test ?
• Knowing something about people's demand
for health care.
• It provides evidences for how much a
particular good/services be subsidized.
• It helps analyze consequences of
subsidizing medicine or services when
implemented at scale.
The Demand Curve Demand Curve

• As price changes from PV1 to

PV2 to PV3, with all else
constant, it produces an
increase in the quantity of
visits demanded by the
consumer from V1 to V2 to V3.
• The demand curve
summarizes response to price
changes, holding income and
preference constant.
Hypothetical Demand schedule for HH hospital in Kathmandu
• A demand schedule is a tabular
representation of price of a commodity and
Fee (Price) No. of the quantity demanded.
Outpatient
• For instance doctors fee pre visit ( price of
visits commodity) and number of patient visits
(quantity) per day (quantity).
400 50 • A "demand schedule" shows the various
amounts of a commodity consumers are
300 100 willing and able to purchase at each specific
price during some specified period of time.
100 200 Given table shows a hypothetical demand
schedule.
50 250
- 300
 Demand Curve
• It is a graphical representation of the
relationship between price and quantity
demanded holding all other things
constant
• The law of demand states that as the
price of a good increases, demand
falls, other things remaining same.
• Each point on the demand curve
relates to the quantity demanded at
different price.
• Demand curve normally slopes
downward, because consumer tend to
buy more as the price falls.
Empirical Examples
• The RAND Experiment in USA
This health insurance experiment in the USA was a landmark study in health
economics. The study randomized people to various health insurance plans each
imposing a different dollar charge on the medical services which covered expenses
of most of the medical services. The result clearly showed that utilization responds
to amount paid out-of-pocket. Plans with higher charges resulted in fewer face to
face visits, suggesting negative relationship between price and quantity of medical
services demanded in a year.
• Removal of user fees in Zambia
Zambia announced a policy to abolish user fees at primary care facilities in
designated rural districts, a major policy shift from targeted exemptions to free
primary health care across the country. A survey to review the performance of free
health care following 15 months of implementation found that utilization increased
among the targeted population.
Change in Demand
• When we talk about change in demand, this is typically
demonstrated as a shift or movement along the demand curve.
• The movement along the demand curve is caused by a change in
price of the good.
• A shift in curve results from a change in other variables (taste,
preferences, income, price of other good).
• Example.
• Suppose the health promotion campaign to highlight to the general public
the benefits of the regular dental check-ups (for which people must pay
directly).
• Suppose that price charged for a dental check-up falls from p1 to p2, how
the demand will change?
Determinants of 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
• Your health status
• Time costs to reach medical care
• Prices of substitutes and complements
 Demand for Health Services: Effect of Income

Price of
Physician Increase in income
Services demand more (health an
normal good):
Shifts the curve out away from
the origin and would demand
more health care.

D1 D2
Q1 Q2 Quantity of
Physician Services
Demand for Health Services: Effect of Health
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. – would led to steeper
demand curve: moral hazards - consumers altering their actual demand
• Indemnity Insurance: Pays a fixed amount for each type of services
(say $150 if you go to the emergency room). – would shift the demand
upwards
• Deductibiles: consumer must pay out of pocket for all health care,
until reaches a threshold (such as $1000), then is fully reimbursed for
expenses above the threshold. – would’not increase demand
unnecessarily
Demand for Health Services: Education
• 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.
Demand for Health Services: Age, 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.
Demand for Health Services: Prices of
Substitutes and Complements
• Substitute: Herbal and Non-Western Medicine
• Price of substitute rises demand more medical care.

• Complements: Drugs, if can’t afford the drugs may not bother to go

to doctor.
• Price of a complement rises demand less medical care.
Demand for Health Services: Travel Time
Costs
Demand will depend on how long it takes to get to the doctor
and if there are waiting times.
• Important in developing countries
Moral hazard
Moral hazard – overuse
of healthcare resources
Price due to various reasons

Price without
Po
insurance
Dead weight Lost (DWL)
Price with P1
insurance
D

Qo Q1 Quantity

“Moral Hazard” increase in

consumption due to insurance 19
Consumer Surplus
• A demand curve shows a willingness to
pay.
• It is the difference between the total
amount that consumer are willing and
able to pay for a good (indicated by the
demand curve) and the total amount that
they actually pay (Market price for the
product).
• it is measured by the difference between
price paid and maximum consumer would
have been willing to pay.
Market demand function
• It suggested the following type of demand function for physician visits,
referred to as V:
V =f(P, r, t, P0, Y, HS, AGE, ED,…)
• where P is price per visit,
• r is the patient’s coinsurance rate,
• t is a time price,
• P0 is the price of other goods,
• Y is a measure of income,
• HS is the patient’s health status, and
• AGE and ED stand for variables such as age and education to reflect
other need and taste factors.
 Supply
• In economics, supply curve shows
relationship between price and
quantity supplied.
• It will normally slope upwards
indicating that more will be supplied
if prices rise.
• Supply function:
• S=f(Technological change , Input
Prices, Price of related good, Size of
Industry, Weather)
• Technological improvements that
reduce the marginal cost of providing
medical services
Supply of Medical Care
• An increase in the price of a related good
• Suppose we have two (or more) markets that physicians can supply medical care services
to. Suppose that the price that physicians receive in one market falls, then physicians will
supply more of their services to the market with the higher price
• Decreases in Input prices (lower rents for office space, lower wages
for administrative and nursing staff that work for physicians)
• Increase in the size of the industry, i.e., higher medical school
enrollments, making it easier for foreign trained physicians to get
licensed to practice medicine in Nepal
• Weather, has an effect on the supply of agriculture commodities
(good weather generally increases supply of agricultural output).
Equilibrium

• Equilibrium in a market is achieved

when supply equals demand as shown
in Figure.
• Price and quantity will adjust until the
point is reached where buyers and
sellers are content to exchange a given
quantity (q1) at a given price (p1).
• At price p2, there is excess supply,
however, there is lower demand, and
at price p3, there is excess demand
and lower supply.
• The market mechanism will operate
and equilibrium is reached at price p1
and quantity q1.
 Cont…
Surplus: When price > equilibrium price, then quantity supplied >
quantity demanded.
Suppliers will lower the price to increase sales, thereby moving toward
equilibrium.
Shortage: When price < equilibrium price, then quantity demanded > the
quantity supplied.
Suppliers will raise the price due to too many buyers chasing too few
goods, thereby moving toward equilibrium.
How will demand or supply for a drug
change?
• cheaper generic medicines available in the market

supply
$

demand

quantity
How will this change the demand or supply
for a drug?
• successful advertisement

supply
$

demand

quantity
How will this change the demand or supply
for a drug?
• new technology and a more efficient production line

supply
$

demand

quantity
How will this change the demand or supply
for a drug?
• rising costs of resources used to produce drug X

supply
$

demand

quantity
Thank you
References
• Rexford E. Santere, Stephen P. Neun. Health Economics: Theories, Insights, and Industry Studies.
Irwin Book Team. 1996
• Mills A, Gilson L “Health Economics for developing countries” A survival kit, EPC publication
number 17, summer 1988 (Reprinted August 1992)
• William Jack. Principles of Health Economics for Developing Countries. The World Bank.1999
• Santerre, Neun SP.: Health Economics-Theory and Practice, 1996
• Ministry of Health and Population, Nepal National Health Accounts
• Health economics, third edition, 2003 by Charles E Phelps
• WHO guide to cost effectiveness analysis, 2003, published by WHO, Geneva
• Handbook for the Economic Analysis of Health Sector Projects, 2000 published by Asian
Development Bank, Manila Philippines
• Handbook of Health economics, (2000) edited by Culyer and Newwhouse (Ed). ELSEVIER, New
York