Lecture Health economics - Chapter 4: Demand for medical services (Part 2)

This chapter presents the following content: Empirical estimates of demand from the literature, practice problems, the RAND health insurance experiment, example: interpreting results from a regression on abortion demand.

Demand for Medical Services

Part 2

Health EconomicsProfessor Vivian Ho

Fall 2009

These notes draw from material in Santerre & Neun, Health Economics, Theories, Insights and Industry Studies Southwestern Cengate 2010

Example: Interpreting results from a

regression on abortion demand

Estimating Demand for Medical Care

Quantity demanded = f( … )

 out-of-pocket price

 time costs

 profile

 state of health

 quality of care

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

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

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

National health expenditures ($b) $74.9 $253.4 $1,353.2 $2,241.2

Total Expenditures and % Paid Out-of-Pocket, 2007

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

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

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

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

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

International Estimates of Income

Elasticity

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

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

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

The Sample

• 5,809 individuals, under 65

Charlston SC, Georgetown County SC, Franklin County MA)

• Cost : $80 million

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

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

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

Table 3.3 Sample Means for Annual Use of

Medical Services per Capita

* 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

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 +

Results (cont.)

O As coinsurance ‘s, probability of ANY use ‘s

Results (cont.)

medical care becomes more price inelastic

The data confirms the theory

Own Price Elasticity of Demand

All Care Outpatient Care Copay 0-25% - 0.10 - 0.13

Copay 25-95% - 0.14 - 0.21

Results (cont.)

on average

Free fee-for-service (FFS) versus HMO

coverage

No difference in physician visits found

But only 7.1% of HMO patients admitted

to hospital, versus 11.2% of FFS patients

The experiment verifies that coinsurance demand for medical care

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

Was it worth it?

Rand Health Insurance Experiment cost $80 million

Initial results published in 1981

knowledge for business

knowledge for business

In the next 2 years, # of insurance companies with first-dollar coinsurance for hospital care

increased from 30% to 63%

# of insurance companies w/ annual deductible of

$200 + per person ‘d from 4% to 21%

Estimated cost saving from ‘d demand for medical care = $7 billion

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