Health Economics And Policy International Edition 4th Edition By James W. Henderson - Test Bank

Chapter 5: The Demand for Health and Medical Care

This chapter introduces Michael Grossman’s (1972) characterization of medical care demand as a derived demand.  Following this of medical care as an input in the production function of health, the determinants of health status are discussed.  The alternative approach, viewing medical care as a final product, is also presented.  Using the latter approach, the factors influencing the demand for medical care are addressed.  Empirical issues in measuring medical care demand by estimating demand functions and calculating elasticities are also presented.

Chapter Outline

a. The demand for health

1. The production of health

2. Measures of health status

a) Mortality

b) Morbidity

c) Quality of life

3. Determinants of health status

a) Income and education

b) Environmental and life-style factors

c) Genetic factors

4. The relationship between social class and health

5. The role of public health and nutrition

b. The demand for medical care

1. Medical care as an investment

2. Factors influencing demand

a) Patient factors

b) Physician factors

3. Measuring demand

a) Estimating demand functions

b) Calculating elasticities

c) The Rand health insurance study

c. Summary and conclusions

Profile: Paul J. Feldstein

Issues in Medical Care Delivery

• The Income/Health Gradient

• Genetic Discrimination

• 50 Years at the CDC

• Treatment Alternatives for Peptic Ulcers

• Self-Referral: The Real Culprit in High Spending?

Chapter Objectives

Compare and contrast the two ways suggested by Grossman to view medical care—as an input in the production function for health and as an output produced by medical providers.

1. Describe the various measures of health status.

2. Understand the importance of factors other than medical care in determining health status.

3. Recognize the role of the public health service in promoting a healthy environment.

4. Summarize the main factors determining the demand for medical care.

5. Describe the potential for and importance of physician-induced demand.

6. Summarize the empirical literature measuring the demand for medical care.

Opening Video

The Enemy is Us

John Q. (2001)

Distributed by New Line Cinema

Produced by Mark Burg and Oren Koules

Directed by Nick Cassavetes

Written by James Kearns

Cast:

Denzel Washington as John Q. Archibald, father whose son requires a heart transplant

Kimberly Elise as Denise Archibald, wife and mother

Daniel E. Smith as Michael Archibald, son in need of a heart transplant

Jay Leno as himself

Gloria Allred as herself

Hillary Clinton as herself

Larry King as himself

Arianna Huffington as herself

Bill Maher as himself

Synopsis:

John Q. Archibald, head of a hard-working blue collar family, finds himself in a difficult situation when his son, Michael, collapses at a baseball game.  They learn that Michael will need a heart transplant and their health insurance will not cover the procedure.  Desperate to get his son on the transplant list and exhausting all options, he takes everyone in the emergency room hostage and demands that the transplant proceed.

Film Clip:

Scene 20-21, “Surrender” and “Three Months Later,” starting at 1:45:30 to 1:46:30 (1 minute)

Several television news programs discuss the upcoming verdict in the criminal case where John took hostages in order to get his son on the transplant list. The scene then switches to the courtroom on the day of the jury’s verdict.

Discussion:

Jay Leno stated that John Q had a faith-based health care plan – one where “you just pray and the government does nothing about it.”  Bill Maher adds that “The enemy is us.  We are the ones who shot down national healthcare.  We are the ones who don’t want our taxes raised.  Look in the mirror.”  Is the government responsible for providing coverage for individuals who find themselves underinsured?  Were Americans justified in rejecting a government-run health care system?  Is a government-run system the only alternative available to cover everyone?

Teaching Suggestions

• The research by Michael Grossman [“On the Concept of Health Capital and the Demand for Health,” Journal of Political Economy 80(2), March/April 1972, 223-255] is important in the development of the economic framework for the study of the demand for health and medical care.  Take some time discussing this contribution.  You may even want your more advanced students to read the article.

• A good way to organize discussion of the materials in the first part of the chapter is to consider two related issues: 1) What is the most efficient way to produce and distribute health? and 2) What is the incremental contribution of medical care to the production of health?

• Students who are unfamiliar with health issues are generally surprised with the discussion of the “Top Ten Causes of Death.”  Take every advantage to surprise, shock, and inform them.

• In your discussion on the determinants of health status, those of you who like to emphasize the importance of life-style considerations may want to present a wonderful piece by Victor Fuchs [“Some Economic Aspects of Mortality in Developed Countries,” in Mark Perlman, ed., The Economics of Health and Medical Care, London: Macmillan, 1974, 174-193].  Using a simplistic approach, he contrasts mortality in Nevada and Utah emphasizing that health habits promote good health.

• In your discussion on the demand for medical care, make use of the many papers, especially those co-authored by Willard Manning, using the results of the RAND Health Insurance Experiment.  Students are sometimes surprised that economic research can incorporate the use of control groups in a meaningful way.

Suggested Approaches to End-of-Chapter Questions

1. Elasticities suggest that:

a. Cigarette consumption will fall by 3-4 percent and spending on cigarettes will rise by 5.6-6.7 percent.

b. Using the income elasticity measure, a 50 percent rise in incomes would lead to a 25 percent rise in cigarette consumption.  Assuming the income elasticity will remain constant over a decade is questionable anyway.  Ignore the advice.

2. Following Arrow’s (1963) approach, demand for medical care is irregular, it is characterized by information problems, and it is subject to widespread uncertainty.  The industry is dominated by not-for-profit providers and financed by third-party payers.

3. The answer to this question will be based on the student’s opinion depending on the way they view the importance of equal availability.  Someone who strongly believes access based on ability to pay is unfair will be against the wealthy spending large sums of money to get better care.  Those who are more interested in individual freedom will think it is an appropriate use of private funds.  Realistically, this happens everywhere, not just in the United States.  Every developed country has a safety valve where those with more money have access to care that is not available to the masses.

4. There is a limit to the amount of money that can be spent to keep someone alive.  If Americans spent the entire GDP for health care, per capita spending could only be around $30,000.  What’s your fair share?  Other related issues include cost effectiveness of the spending and maybe quality of life of the recipient.

5. Flat-of-the-curve spending is spending where marginal cost exceeds marginal benefit.  Providers recommend care which offers little improvement in health status and sometimes even makes the patient worse off.  Patients who bear little of the extra cost of the treatment are not concerned with full cost, so their marginal cost-marginal benefit comparison is made with only their own out-of-pocket in the calculation.  Most less-developed countries spend so little per capita that even modest increases in spending reap sizable benefits.

6. Individual demand is driven by provider recommendations as indicated by principal-agent theory.  Even though patient factors may be secondary, they cannot be considered irrelevant.  Patients do consider the impact of their decisions, even those concerning medical care, on their own welfare.  Simply noting that medical care decisions are often complicated by emotions does not imply that economic models are inapplicable.

7. Health care is an investment to the extent that it enhances a person’s future productivity—market and non-market.  Except for those whose looks are their livelihood, cosmetic surgery is probably pure consumption.

8. The advantage of using income elasticity of demand to classify goods is its objectivity.  The drawbacks include measurement problems.  The studies referenced in this chapter show how estimates vary by study design.  The real question may be: what is gained by such a classification scheme?

9. McKeown’s research discussed beginning on page 139 provides a good outline for answering this question.

10. Note the leading causes of death vary be age cohort in 1995.

Age 1-4Accidents, congenital anomalies, and malignant neoplasms.

Age 5-14Accidents, malignant neoplasms, and homicide and legal

intervention.

Age 15-24Accidents, homicide and legal intervention, and suicide.

Age 25-44HIV infection, accidents, and malignant neoplasms.

Age 45-64Malignant neoplasms, heart diseases, and accidents.

Over 65Heart disease, malignant neoplasms, and cerebrovascular disease.

Members of different age cohorts will try to influence government spending to benefit their members.  Government sponsored research projects are likely to have some political base.

Additional Questions for Discussion and Evaluation

1. What factors would you use to estimate the level of demand for medical care for the typical individual?  How would your choice of variables differ if you were estimating demand for an entire country?

2. Policy makers often use infant mortality rates and life expectancy at birth when evaluating the efficacy of health care systems.  In addition to living and dying, what other aspects of health status are important?  How does the choice of measurement tool change our perspective when evaluating health care systems?

3. The stated premise behind the production function for health is that medical care when combined with other inputs and a person’s own time produces good health.  What is the marginal contribution of medical care to the production of health in the United States?  How would your answer change if you were studying health in a less-developed country?

4. Is medical care a luxury good or a necessity?  Why should it matter to policy makers?  What is the empirical evidence?

5. The RAND Health Insurance Study was set up to examine the effect of economic incentives on medical care demand.  What were the major findings of this study?

6. What is the production function for health?  How would you use the concept of a production function for health to offer suggestions for decreasing medical expenditures?

7. When people are sick they often have very little idea of what is wrong with them or what the most promising treatment is.  They may place themselves under a physician’s care in the belief that the physician is better qualified to make decisions regarding the proper course of treatment.  The physician acts as an agent for the patient.  For many treatments the physician offers the only access to the treatment; e.g., prescription drugs and surgery.

a) Are there any reasons that the physician acting as agent for a patient might not choose exactly what a fully informed patient would choose?

b) A number of studies have gathered evidence on physician-induced demand, and most have reported rather small but statistically significant effects.  Isn’t it rather cynical to seriously advance the notion of physician-induced demand?  What factors might control the extent of physician-induced demand?

c) If surgeons really increase the demand for operations, which kinds of operations do you think would be most affected?  How would you decide which were unnecessary?  Can you think of any examples from your own experience or reading?

Multiple Choice

1. Many economists consider medical care a superior good.  Which of the following statements is true regarding a superior good?

a. Consumers want more of a superior good regardless of its price.

b. When the price of a superior good increases, consumers demand more of it.

c. As consumer income increases a larger percentage of it is spent on superior goods.

d. A superior good has an income elasticity of demand greater than one.

e. Both c and d are true of superior goods.

ANS: E

2. A critical assumption in the model of demand and supply is the independence of demand and supply curves.  If the two are not independent, a shift in the supply curve can lead to a shift in the demand curve referred to as

a. supply-side economics.

b. supplier-induced demand.

c. supply shocks.

d. ceteris paribus.

ANS: B

3. The top ten causes of death in the United States in 1998 included all of the following but

a. heart disease.

b. cancer.

c. suicide.

d. AIDS.

ANS: D

4. The diagram depicts the relationship between health status and medical care spending for a particular country.

At the current spending level of S1 on TP1, this society can get a greater improvement in health status by increasing spending to S2 than by shifting TP to TP2. Which of the following statements is true?

a. S1 levels of spending may be described as spending on the flat-of-the-curve.

b. Social pressures will move the health care system to spend S2.

c. All statements are true.

d. All statements are false.

ANS: B

5. Health care that actually harms the patient, such as an adverse reaction to a prescription drug is called

a. morbidity-related response.

b. defensive medicine.

c. adverse selection.

d. iatrogenic disease.

e. moral hazard.

ANS: D

6. The number one cause of death in the United States in 1998 was

a. AIDS.

b. heart disease.

c. cancer.

d. stroke.

e. homicide and accidents.

ANS: B

7. The number one cause of death in the United States among 25 to 44 year olds in 1998 was

a. AIDS.

b. adult-onset diabetes.

c. homicide and accidents.

d. suicide.

e. pneumonia and influenza.

ANS: A

8. If health care spending is already on the flat-of-the-curve, it may not be possible to buy improved health status by increasing spending.  In this situation, the best way to improve health status may be to

a. increase the availability of government health insurance.

b. invest in biotechnology to determine the genetic factors that improve health.

c. improve life-style decisions by reducing smoking, alcohol consumption, and drug use.

d. improve access to medical care.

e. improve overall educational attainment so people can better follow the advice from the medical community.

ANS: C

9. McKeown’s (1976) research attributed the majority of the secular decline in mortality rates in Europe and North America to

a. better nutrition and housing.

b. improved sanitary conditions.

c. clean water and waste disposal.

d. reduced exposure to diseases.

e. better medical care.

ANS: A

10. Factors affecting medical care demand include

a. health status.

b. demographic characteristics.

c. economic standing.

d. physician factors.

e. all of the above.

ANS: E

11. A physician’s ability to induce demand is greatly enhanced when

a. patients pay their own medical bills.

b. patients request follow-up visits.

c. patients have difficulty gathering and processing information.

d. the physician follows strict treatment guidelines.

e. treatment options are limited.

ANS: C

12. The RAND Health Insurance Study

a. examined cross-section data to estimate the demand function for medical care.

b. was the most extensive controlled experiment in health insurance ever conducted in the United States.

c. like most economic studies, was based on individual decisions in voluntarily choosing health insurance coverage.

d. was flawed due to severe self-selection bias.

e. was set up to study medical outcomes when individuals were free to choose the type of health coverage they desired.

ANS: B

13. The diagram depicts the market for physicians’ services that is originally in equilibrium at point a, with demand and supply at D0 and S0.

As physician supply increases from S0 to S1, a concurrent shift in demand moving from D0 to D1

a. may be the result of physician-induced demand.

b. will cause overall spending on physicians’ services to increase.

c. will force physicians to limit the number of patients they see.

d. both a and b.

e. all of the above.

ANS: D

Structured Discussion:

Resolved: Physicians have the power to influence their patients’ demand for health services and the likelihood of their using this power varies inversely with the level of competition in the medical market.

Resolved: Widespread use of state-of-the-art screening and other diagnostic tools and techniques would result in a significant reduction in the rate of growth of health care expenditures.