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Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Dec 11, 2015

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Page 1: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production /Demand for Health Care

Page 2: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Outline

Link between Income Inequality and Health Demand for Health Care

Price Elasticity of Demand for Health Care Income Health Insurance Etc.

Page 3: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- TheoryWhy is income inequality associated with

health? (mechanisms – theory)

Evolutionary history predisposes us toward fairness, and sickens us when we live in unequal environments.

Relative deprivation a cause of ill health Relative Income Hypothesis

Page 4: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- Theory1. 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 do better (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).

Page 5: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- Theory2. 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.

Page 6: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- Theory3. Relative Income Hypothesis: Relative

income determines access to material goods or rank not absolute amount of money matters

Lots of people with less money than someone living in downtown NY but they live in a much better house.

It is relatively poor people live in worse neighborhoods for pollution. Even if the town is expensive and they have to pay a lot for their property.

Page 7: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- Theory

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.

Page 8: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- Evidence Studies have taken many forms.

Across countries analysis. (i.e comparing countries) A big problem is data comparability (income

inequality measure) even in developed countries Within countries but across states

Maybe be less variations in inequality within a country so harder to find effects (US an exception)

This is aggregate data by state so is hiding variation in income at the individual level.

Page 9: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- Evidence

Individual Data 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.

Mortality long time series need large sample sizes since a rare event

Page 10: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- EvidenceEmpirical Evidence: Cross-Country Comparisons:

Wilkinsons (1992,1994,1996) over time France and Greece narrowed income distributions

by reducing relative poverty, increased life expectancies

Ireland and England income inequality widened, life expectancy decreased

When countries are poor absolute income matters For wealthier countries chronic diseases 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.

Page 11: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- EvidenceEmpirical 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 from cross-country

analysis, may be due to data problems.

Page 12: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- EvidenceEmpirical 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)

Page 13: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- EvidenceEmpirical Evidence Within-Country Cont. Controlling for race breaks relationship

Inequality looks like more of a race effect 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?

Page 14: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- Evidence 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.

Page 15: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- EvidenceEmpirical 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.

Page 16: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedIncome Inequality -- EvidenceSummary 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.

Page 17: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedInequality (Rank)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 (i.e your rank) – the underlying cause of health discrepancies.

Page 18: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedInequality (landholdings)Inequality in landholdings in developing

countries affects nutrition and therefore health. The landless can’t 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).

Page 19: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedInequality (Political)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). For example public park is not as attractive to rich if

homeless are sleeping on benches.

Page 20: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedInequality (Political)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.

Page 21: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Health Production ContinuedInequality (Political)Political Inequality Evidence:Almond, Chay, and Greenstone (2001) Use data from Mississippi Prior to 1965 hospitals segregated by race 1964 Civil Rights Act: segregation illegal Show that between 1965 and 1971 there was

a large reduction in black post-neo-natal infant mortality rates (< one month olds), especially for conditions such a diarrhea and pneumonia.

Points to possible negative health impacts from unequal political arrangements or rank.

Page 22: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesDemand 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

Page 23: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health Services

Quantity of Physician Services

Price of Physician Services

D

Demand of HS is a derived demand, because what we really want is the demand for 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 quantity.

Page 24: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

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 and this affects the quantity of care you may demand.

Page 25: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesFuzzy (Thick) Demand Curve Difficult to accurately delineate the

relationship between price and quantity demanded of medical care. Prices differ and amount of care for a given prices

differs for difference people. Hard to control and measure quality.

Page 26: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesFuzzy Demand Curve

Quantity of Physician Services

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.

Page 27: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesEffect of Price of health careOwn Price Elasticity:

Price HS

Quantity HS

Perfectly Inelastic (E=0);

Large change in price no change in quantity demanded.

Perfectly Elastic ( E=∞):

Small change in price large change in quantity)

- A good is elastic if E<-1

%%

dhs

hs

QP

Page 28: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health CareEmpirical Estimates Own Price Elasticity: %

%

dhs

hs

QP

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.

Page 29: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesEffect of Income

Quantity of Physician Services

Price of Physician Services

D1

D2

Q1

Q2

Increase in income demand more (health an normal good):

Shifts the curve out away from the origin and would demand more health care.

Page 30: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesEffect of Health InsuranceHow 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 for all health care, until reaches a threshold (such as $1000), then is fully reimbursed for expenses above the threshold.

Page 31: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesHealth Insurance: Coinsurance

Dwo.5*50

50

5

Consumer Pays with insurance

Dwo: Demand without insurance

Effective Price: Amount paid out of pocket

Model using DWO curve

Assume: .5 co-insurance

Quantity of Physician Services

Price of Physician Services

6

Consumer pays without insurance

Demand increased by one unit

Page 32: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesHealth Insurance: Coinsurance

Dwo

Dwi

.5*50

50

5

Dwo: Demand without insurance

Dwi: Demand with insurance

Model 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.

Quantity of Physician Services

Price of Physician Services

6

A

Page 33: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesHealth Insurance: Indemnity

Price of Physician Services

Quantity of Physician Services

Pay $30 instead of 60 for a doctors visit.-demand more health care

-elasticity does not change.

$30DwoDwi

5

60

6

Page 34: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesHealth Insurance: DeductiblePurpose of deductible is to lower cost for

insurance company

1. Reduce administrative costs because lower number of small claims.

2. 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.

Page 35: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesHealth Insurance: Deductible Cont. 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. If know definitely will meet deductible, won’t wait

to go to doctor.

Page 36: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

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.

Page 37: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

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.

Page 38: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesPrices 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.

Page 39: Health Production /Demand for Health Care. Outline Link between Income Inequality and Health Demand for Health Care Price Elasticity of Demand for Health.

Demand for Health ServicesTravel Time CostsDemand 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