L5 Demand For Health and Health Care 3 extraBP PDF

CAS EC 387 Introduction to Health Economics
L5: Empirical demand studies
Department of Economics
Spring 2020
Boston University () Demand for Health Care Spring 2020 1 / 41

Demand for Care with Insurance Coverage
Insurance terms
Premium
Coinsurance
Deductible
Co-payment
Purpose is to counteract moral hazard by making consumes aware of

the cost

Coinsurance
Coinsurance makes demand more inelastic – demand curve rotates

clockwise
Demand w/o insurance is Q0 at price P0 . Coinsurance rate c < 1

makes demand higher at every price level P0 : consumer pays cP0 and
demands Q1
Extra cost is P0 (Q1 Q0 )
Welfare gains and losses – individual does not internalize full cost
Insurance subsidizes care covered by insurance

Deductible
Indemnity insurance – …xed reimbursement pre-established in contract

(e.g., hospital stays)
Payment limit (compare deductible)
Most insurance policies are mixed – a deductible, co-payment, and

indemnity plan
Consumer payment ceilings like stop loss and the doughnut hole

Empirical Studies
Observational data
Data from randomized control trials (RCTs)
Natural experiments and …eld experiments
RAND HIE
Extensive literature that estimates various formulations of the

Grossman model

Elasticities I
Elasticity
The (point) elasticity between two variables x and y is de…ned:
∆y x
εy ,x =
∆x y
Measures responsiveness of y to x
Demand elasticity
Let xi be demand for good i, let pi be price of good i, and let pj be
the price of a good j. Then the demand elasticity is:
∆xi (pi , pj ) xi (pi , pj )

εij =
∆pj pj

Elasticities II
If i = j, εij is the own-price elasticity. If i 6= j, εij is the cross-price

elasticity
A good is elastic if jεij j > 1 and inelastic if jεij j < 1
Income elasticity
Let xi be demand for good i and let w be wealth. Then the income
elasticity is:
∆xi (p, w ) w
ηi =
∆w xi (p, w )
Ordinary goods and inferior goods
If η i < 1, i is a necessary good, if η i > 1, i is a luxury good

Regression Analysis I
Multiple regression analysis
Standard technique to estimate correlation between observables
Given a set of assumptions, ordinary least squares (OLS) are

e¢ cient for this purpose
Suppose we want to estimate a demand function using n observations

of quantities Q and prices P
A formal relationship is:
Qi = β0 + β1 Pi + εi for i = 1, ..., n
Here, β = ( β0 , β1 ) are coe¢ cients, and ε is an error term accounting

for the stochastic relationship between Q and P

Regression Analysis II
OLS is a procedure to …nd the values of the coe¢ cients β that best
match the observed data
The OLS estimator minimizes the sum of the squared errors – it is the
best (linear) …t to the data
Using the demand data, suppose we obtain the regression equation:
Q = 117.12 2.208P
We can test hypotheses about the coe¢ cients:
H0 : β1 < 0 and HA = 0
Note that regression says nothing about causation between variables,

only correlation

Regression Analysis III
Our demand regression does not say that a higher price causes or
results in lower demand – only that they move in opposite directions
To capture causal e¤ects we have to look elsewhere (e.g., economic

theory)
Is the simple demand model good? How can it be improved?
Suppose more than one dependent variable – multiple regression:
Qi = β0 + β1 Pi + β2 INCi + β3 FAMi + εi
Major advantage of the regression framework - allows us to control

for various e¤ects (holding them constant)

Regression Analysis IV
Interpretation of coe¢ cients
A dummy variable D (an indicator variable) only takes a few values:

D 2 f0, 1, 2, .., n g
Useful when analyzing categorical data – such as gender and ethnicity
Specify a base case against which all other classes are compared
Note that some variables can modeled both as continuous or discrete

(e.g., income, age, or education)

Regression Analysis V
Example cholesterol levels

Suppose that we hypothesize that gender, age and income matters:
Ci = β0 + β1 FEMi + β2 AGEi + β3 MINCi + β4 HINCi + εi
Here FEM, MINC , and HINC are discrete variables and AGE is
continuous
The base-case is man with low income – predicted cholesterol level is:
C = β0 + β2 AGE
Similarly, the predicted level for a woman with high income is:
C = β0 + β1 + β2 AGE + β4

Regression Analysis VI
What could be a reasonable hypothesis about β4 ?
Note that we can gain information by categorizing a continuous

variable
In OLS, the error is assumed uncorrelated with the regressors

Regression Analysis VII
In practice, this assumption is often not satis…ed:

omitted variables (e.g., time preference, dynamics)
misspeci…cation (functional forms)
measurement errors (abound in health studies)
selection bias (is the sample representative?)
jointly determined variables (e.g., education and health investment)
These lead to correlation between the regressors and the error – biased
estimates of the regression coe¢ cients (dynamic considerations)
Often di¢ cult to control for these factors

The RAND HIE I
RAND Health Insurance Experiment

Research issues:
how does cost sharing a¤ect demand for personal health care services?
how does cost sharing a¤ect demand for particular services, e.g.,
hospital care, dental services?
does use of personal health care services improve health?
how does a change from fee-for-service payment to capitation a¤ect
demand for personal health care services?
Study design
enrolled 2, 000 non-elderly (< 63) families for 3 5 years

The RAND HIE II
families randomly assigned to 1 of 14 insurance plans di¤ering in cost

sharing rates and in maximum dollar expenditures per year (MDE or
stop loss)
at enrollment, families exchanged their existing health insurance policy
for HIE plan— held harmless for medical expenditure higher than they
would have experienced if they had not enrolled in HIE
some participants randomly assigned to capitation plan
participation in HIE voluntary for families
How capitation a¤ect patient and provider incentives?
HIE assigned 1, 149 persons who had been enrolled in fee-for-service

health plans to capitated plan in Seattle WA, also 773 persons who
had been enrolled in this health plan selected as controls

RHIE Results I

RHIE Results II

Demand Curve I

Main Conclusions (Gruber) I
The co-insurance rate matters for medical utilization and expenditures
Co-insurance e¤ects are relatively constant across services
Higher co-insurance rates don’t have adverse health consequences for

the average person
Di¤erential e¤ects on the sick and poor
For the typical poor person no evidence that the reduction in

utilization had an adverse impact on health

Main Conclusions (Gruber) II
For 94 percent of persons in HIE, not with low income and not in poor
health at baseline, having health insurance coverage had no e¤ect on
health - provocative result, or is this misleading or even wrong?
In sum: higher co-insurance rates, with an out-of-pocket limit, can

signicantly reduce health care use without sacricing health outcomes
for the typical person
What are some limitations of the RAND study?
How relevant are the results today?

Kenkel (1995) I
Should you eat breakfast?

Starting point: the Alameda Seven – health practices:
eat breakfast
maintain proper weight
regular physical exercise
sleep 7-8 hours
no smoking
no (or moderate) alcohol consumption
no eating between meals
Additive e¤ects

Kenkel (1995) II
Follow up studies - decreasing mortality, better future health
Purpose: study the e¤ects of lifestyle factors on the production of

health, using data from the 1985 US NHIS
Regression framework used to estimate the e¤ects of the

determinants of the health capital
Dependent variable: Self-reported health (1-5 scale), weight, blood

pressure
Independent variables: lifestyle, age, ethnicity, chronic conditions,

schooling

Kenkel (1995) III
Individuals are assumed to choose lifestyle based on perceived health

e¤ects and (other) utility e¤ects subject to …nancial and time budget
constraints
Weight, smoking, heavy drinking, insu¢ cient sleep, stress, chronic

condition, age negatively correlated with health stock
Moderate drinking, exercise, schooling positively correlated with

health stock
Behavior/Age translation: e.g., smoking 20 cigs/day equivalent to

13.3 age increase, exercise 150 min/week, 2.2 decrease in age

Gerdtham and Johannesson (1995) I
Grossman model
Dependent variable: self - reported health status HS (VAS
categorical), time trade-o¤ (QALYs)
Independent variables: Input prices P, income Y , education E , and a

variable summarizing health depreciation A
Data: 2, 200 adults from the Swedish population
Regression model:
HSt = β0 + β1 Pt + β2 Yt + β3 Et + β4 At + εt
Prices of medical care and time preference excluded in estimation

Gerdtham and Johannesson (1995) II
Main results
demand for health and health status increase with income and
education
being obese (BMI > 30), older, male, smoker, and single negatively
correlated with health stock
alcohol positive e¤ect on health
exercise increases health stock
Causality and endogeneity problems give biased estimates – lack of

good instruments
Overall results con…rm predictions from Grossman model

Wagsta¤ (1993)
Dynamic Grossman model
Starting point: few dynamic empirical studies – hence, failure to
account for inherent dynamic element in health investment process
Dynamic model more consistent with theory and the data
Panel data where 1, 700 Danish adults followed over 12 months
Dependent var: health indicators FUNLIM, PAH, SAH
Independent vars: FAMINC, school, gender, age, medical use
Results: largely conform with theory: split sample age (> 41):
income and education both positively correlated with health demand,
gender had no e¤ect
Concludes that empirical support for Grossman’s model stems much

from allowing lags in health stock adjustments
Sickles and Yazbeck (1998)
Dynamic Grossman model
US data for > 65 year old males
Individuals maximize lifetime expected utility subject to time and

budget constraints and a health production function – incorporates
formal modeling of uncertainty
Panel data. Dep var: weighted health status measures (mobility,

physical and social mobility)
Indep vars: socio economic factors (profession, education) family

status (widow, divorced), ethnicity
Results - health care inputs and health time improve health, health
demand vary with socio-economic factors according to Grossman
prediction - study shows substantial role for dynamics in the health
production
Strauss et al (1993)
International comparison
Focus on Jamaica, also includes Bangladesh, Malaysia, and US –
di¤erent cultural and economic environments
Dependent vars: reported health status/mobility, independent var:

depreciation vars, education, gender, income
Findings:
women report signi…cantly more health problem than men, despite
greater longevity
higher education lowers probability of health problems
it matters where you live (quality/accessibility?)
some evidence that income is positively correlated with health status

Mwabu et al (1993)
Demand for health care in Kenya
Conventional wisdom: medical care in Africa is of poor quality !
underutilization of health care
Cross section data w information on age, education, income, and
medical/physical attributes
Treatment fees, traveling time, measure of care quality (diagnostic
equipment, drug supply)
Four channels of care: government, missions, private, and traditional
Results
drug shortage can be both positively and negatively correlated with
demand for medical care
increasing income leads to increased substitution from informal to
formal care, especially private and mission care
private and mission care are important care givers in rural areas for
wealthier individuals Demand for Health Care
Boston University () Spring 2020 30 / 41
Health and Socioeconomic Status I
The origin of the health gradient (Case et al, 2002)

How do adult health and income co-vary?
Hypothesis: the family long-run income is an important determinant

of children’s health
Parents’income leads to better food, medical care, safer environment.

Also, children inherit biological factors and behavior
Highlights importance of time dependence and health stock
Traces causality from family income to child health

Health and Socioeconomic Status II
The elderly (Adams et al, 2003)

Rich panel data set on US elderly (> 70)
Focus on older population mitigates some income issues
SES and health vary more for mental health/chronic conditions rather
than acute/sudden health problems (Medicare)
Study replicated on UK and Swedish data with similar results
Conclusion: cannot reject hypothesis of no causality from SES to

health

Health and Socioeconomic Status III
Birthweight as health indicator (Meara, 2001)

Health: birth weight, SES: income and education
Control vars:
maternal health habits (smoking, drinking, crack use, prenatal care
recipient)
demographics (marital status)
access (income, education, insurance status, distance to provider)
maternal health status (age, BMI, birth-order)

Health and Socioeconomic Status IV
Findings:
higher education leads to improved health behavior, and improved
health
however, much of the mechanism between SES and health seems to go
through a third variable
Schooling in Africa (Schultz, 1999)

Africa has the lowest levels of health and education in the world
Health and SES positively correlated

one year of extra schooling leads to 5 10% reduction in child
mortality
poor health is a large constraint on productivity (Fogel)

Health and Socioeconomic Status V
returns to education and discount factors (gender di¤erences)
Important to consider the dynamic and long-run interaction between

SES and health
Understanding the causality is important for policy – where to invest

the marginal dollar
Focus on primary education

Other Determinants of Health Care Demand I
Time cost
Recall the consumer’s equilibrium choice between health care and
other goods:
price and income changes a¤ect demand
elasticities
State dependent preferences – demand may depend on health status
Time will a¤ect demand like price or income changes
Example: a patient goes to a physician

visit takes 10 minutes and costs $25
traveling takes 30 minutes and costs $5

Other Determinants of Health Care Demand II
waiting time is 20 minutes
If patient’s value of time is $10/hour , the real cost is

$25 + $5 + $10 = $40
If time cost changes, demand for health care may change even if
health care price remains constant
If the opportunity cost of time is higher for the rich than the poor,
poor people are willing to wait (or travel) longer
Time costs are not zero: expanding capacity may increase health care
visits also among poor (and/or those with subsidized care)

Other Determinants of Health Care Demand III
In countries with nationalized care, time price is an important

rationing device (European countries)
Acton: own time-price elasticity is -0.96 for outpatient visits and

–0.25 for physician visits – time matters

Demand and Income Elasticities for Health Care I
Demand elasticities
Price more complicated – elasticity depends on insurance
Di¤erent samples – regional and temporal variations
Price elasticity typically below unity

physicians and hospitals: 0.35 1.5 (Rosett and Huang)
all expenditures: 0.17 0.22 (Manning et al)
physicians 0.35 (good health) 0.16 (poor health) (Wedig)
hospital studies typically report elasticities from 0.14 0.63
Firm-speci…c elasticities larger: 2.80 5.07 for physician services, and

0.74 1.1 for hospitals

Demand and Income Elasticities for Health Care II
Income elasticities
Is health care a necessity or a luxury?
Studies suggest that health care is a necessity (except dental services)
all expenditures: 0.25 0.45 (R&H 1973), 1.2 (Silver 1970)

hospital: 0.02 0.04 (admissions, N&P 76)
physician services: 0.01 0.04 (visits, N&P), 0.22 0.85
(expenditures, A&B 70, Silver)
dental services high: 2.40 3.20 (expenditures, Silver)

Demand and Income Elasticities for Health Care III
Newhouse (1977) cross country study: 1.15 - 1.31 health care is a

luxury
Result supported also in later studies during 90s
Not necessarily inconsistent with individual income elasticities below

unity and aggregate income elasticities above unity

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CAS EC 387 Introduction to Health Economics

L5: Empirical demand studies

Boston University () Demand for Health Care Spring 2020 1 / 41

Purpose is to counteract moral hazard by making consumes aware of

Boston University () Demand for Health Care Spring 2020 2 / 41

Coinsurance makes demand more inelastic – demand curve rotates

Demand w/o insurance is Q0 at price P0 . Coinsurance rate c < 1

Extra cost is P0 (Q1 Q0 )

Insurance subsidizes care covered by insurance

Boston University () Demand for Health Care Spring 2020 3 / 41

Indemnity insurance – …xed reimbursement pre-established in contract

Payment limit (compare deductible)

Most insurance policies are mixed – a deductible, co-payment, and

Boston University () Demand for Health Care Spring 2020 4 / 41

Data from randomized control trials (RCTs)

Natural experiments and …eld experiments

Extensive literature that estimates various formulations of the

Boston University () Demand for Health Care Spring 2020 5 / 41

∆xi (pi , pj ) xi (pi , pj )

Boston University () Demand for Health Care Spring 2020 6 / 41

If i = j, εij is the own-price elasticity. If i 6= j, εij is the cross-price

A good is elastic if jεij j > 1 and inelastic if jεij j < 1

If η i < 1, i is a necessary good, if η i > 1, i is a luxury good

Boston University () Demand for Health Care Spring 2020 7 / 41

Given a set of assumptions, ordinary least squares (OLS) are

Suppose we want to estimate a demand function using n observations

A formal relationship is:

Here, β = ( β0 , β1 ) are coe¢ cients, and ε is an error term accounting

Boston University () Demand for Health Care Spring 2020 8 / 41

Using the demand data, suppose we obtain the regression equation:

We can test hypotheses about the coe¢ cients:

Note that regression says nothing about causation between variables,

Boston University () Demand for Health Care Spring 2020 9 / 41

To capture causal e¤ects we have to look elsewhere (e.g., economic

Is the simple demand model good? How can it be improved?

Suppose more than one dependent variable – multiple regression:

Major advantage of the regression framework - allows us to control

Boston University () Demand for Health Care Spring 2020 10 / 41

Interpretation of coe¢ cients

A dummy variable D (an indicator variable) only takes a few values:

Useful when analyzing categorical data – such as gender and ethnicity

Note that some variables can modeled both as continuous or discrete

Boston University () Demand for Health Care Spring 2020 11 / 41

Example cholesterol levels

Ci = β0 + β1 FEMi + β2 AGEi + β3 MINCi + β4 HINCi + εi

Boston University () Demand for Health Care Spring 2020 12 / 41

What could be a reasonable hypothesis about β4 ?

Note that we can gain information by categorizing a continuous

In OLS, the error is assumed uncorrelated with the regressors

Boston University () Demand for Health Care Spring 2020 13 / 41

In practice, this assumption is often not satis…ed:

Often di¢ cult to control for these factors

Boston University () Demand for Health Care Spring 2020 14 / 41

RAND Health Insurance Experiment

Boston University () Demand for Health Care Spring 2020 15 / 41

families randomly assigned to 1 of 14 insurance plans di¤ering in cost

How capitation a¤ect patient and provider incentives?

HIE assigned 1, 149 persons who had been enrolled in fee-for-service

Boston University () Demand for Health Care Spring 2020 16 / 41

Boston University () Demand for Health Care Spring 2020 17 / 41

Boston University () Demand for Health Care Spring 2020 18 / 41

Boston University () Demand for Health Care Spring 2020 19 / 41

The co-insurance rate matters for medical utilization and expenditures